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Duke's Fifth Fuel

Conservation investments benefit participants and non-participants alike

Fortnightly Magazine - January 2008

non-participating customers. Many regulators falsely might conclude that asking non-participants to pay more to help others consume less would represent an unjust form of price discrimination.

In fact, non-participants sometimes can pay less under utility-sponsored energy efficiency. The most important determinants are: whether marginal costs exceed average historic costs, the relative size of the program, and whether participants pay at least a portion of the direct costs.

In the event that non-participants would pay more under a utility program in which energy efficiency replaces generation, then societal benefits can help justify the costs. A majority of customers generally will support at least modest cost increases for such societal benefits . 1

Broadly speaking, society would benefit when energy efficiency reduces negative externalities in the forms of cleaner air [specifically, reductions in sulfur dioxide (SO 2), nitrogen oxide (NO X), and other emissions] and climate-change prevention [through reductions in carbon dioxide (CO 2) emissions]. Society also benefits from an improved national-security posture, through reductions in energy imports and improved macroeconomic conditions (see sidebar, “Quantifying Societal Benefits” p.58) .

Comparing Benefit to Cost

Regulators can quantify these marginal benefits to determine if society, and in particular non-participating customers, would be better off under an expanded energy-efficiency program such as Duke’s Save-a-Watt proposal.

Estimates of societal value range between 5.3 cents and 15.7 cents per kilowatt-hour of energy efficiency, based on national-average emission values and half the quantifiable national-security benefits from saving a barrel of crude oil (see Table 1, “Save-a-Watt Costs and Benefits”) . A base-case estimate of 7.15 cents/kWh reflects average annual emissions from Duke Energy Carolinas’(DEC) Cliffside Units 1-4, which likely would be targeted for retirement if Duke’s Save-a-Watt program succeeds. 2

Regulators can determine whether conservation costs are just and reasonable by multiplying the price increase all non-participants would pay by their annual consumption, and comparing that amount to the value of energy-efficiency benefits. These benefits equal the total kWh saved, multiplied by the per-unit value of marginal benefits of energy efficiency—7.15 cents in the Duke base case.

Each utility region must perform its own benefit/cost analysis, and facts and conceptual differences, such as how to define costs, likely would vary. Regardless, the benefits of energy efficiency, which have been mostly underutilized, likely will exceed the corresponding costs, no matter who pays for energy efficiency.

DEC has filed data that make it possible to demonstrate how to do such an analysis for its non-participating customers. For the sake of simplicity, all DEC’s industrial consumers might be treated as non-participants. Their annual consumption is about 50.6 billion kWh/year 3. Duke estimates its proposed Save-a-Watt rate rider would be 0.094 cents/kWh for non-residential consumers—which overstates the amount industrial non-participating customers would pay, because it does not account for the amount per kWh these customers would be allocated for new generation. Nevertheless, applying 0.094 cents to 50.6 billion kWh/year yields $47.6 million as a high estimate of the annual cost of Save-a-Watt for DEC’s industrial consumers.

These same industrial users also would pay their share (about 50.6 billion kWh out