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Duke's Fifth Fuel

Conservation investments benefit participants and non-participants alike

Fortnightly Magazine - January 2008

of 76.6 billion kWh total retail sales) of DEC’s traditional supply-side costs if DEC does not expand energy efficiency and build more new generation. (Recall that the Save-a-Watt rate rider is based on 90 percent of the avoided cost of new generation.)

After excluding rather significant demand-response capacity reductions, DEC’s proposed conservation programs under Save-a-Watt would save about 5.4 billion kWh in their first four years (See Table 2, “Save-a-Watt Projected Savings”) . Assuming a constant rate rider for industrial users, they would pay about $190.3 million over this same four-year period, representing a cost per kWh for industrial users of about 2.51 cents.

Notably, this per-unit cost estimate ignores the benefits associated with demand-side response reductions of capacity requirements, which would equal about 1,594 MW in year four, as well as the offsetting price increases industrial customers would avoid paying for traditional supply-side expansions.

Under base-case assumptions, DEC’s industrial customer non-participants would enjoy benefit-to-cost ratios of about 3-to-1 over the four-year period for the conservation portion of Save-a-Watt (see Table 3, “Benefit/Cost Comparisons for Non-Participating Customers”) .

Fifth Fuel Appeal

In all regulatory jurisdictions, the retail distribution end of the network remains a regulated “natural” monopoly. This means legislators or regulators can look to these regulated assets and services as a direct means to finance energy efficiency when, as is likely, they determine that utility, consumer, and external benefits exceed costs.

Some states are contemplating assessing wires charges, as California does, to finance social programs such as energy efficiency. Other states are considering different means to make energy efficiency profitable to the utility, such as Duke’s proposed Save-a-Watt rate mechanism based on 90 percent of avoided supply costs.

Duke’s Save-a-Watt proposal provides regulatory appeal because total revenue requirements would increase no more than 90 percent of the avoided supply costs. Everything else, such as avoiding negative externalities, is simply regulatory “icing on the cake.”

An analysis of external benefits from energy efficiency demonstrates that all customers likely would gain greater benefits than their respective costs, regardless of whether they participate or not.

Now regulators need to decide if they really want to improve energy efficiency, reduce the threat of climate change, enhance national security and improve air quality. This is an easier choice for regulators given the impressive benefit-to-cost ratios of energy-conservation programs.

 

Endnotes:

1. Aliff, Gregory E., and Terzic, Branko, “ The Greening of Utility Customers ,” Public Utilities Fortnightly , September 2007.

2. For each megawatt hour generated from January 1997 through March 2007, on average the Cliffside plants emitted about 1.37 tons of CO 2; 5.5 pounds of NOX; and 0.01 tons of SO 2. Source: U.S. EPA Clean Air Markets Program Unit Level Emissions.

3. DEC’s FERC Form 1 for 2006.

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