When I became the Consumers’ Counsel for the state of Ohio in April 2004, natural-gas prices were hovering between $7/Mcf and $8/Mcf (thousand cubic feet). In the next year and a half, Ohioans saw...
Hedging Your Bet on Cheap Gas
Portfolio theory points to energy efficiency as invaluable in resource planning.
In the world of ratepayer-funded energy efficiency, every once in a while comes a sea change and prompts a few basic questions: What is the value of ratepayer-funded energy efficiency? What is its role in utility resource planning? How much should we invest in it?
The latest waves spread from the recent seismic shifts in natural gas supply, caused by the discovery of new conventional gas reserves and advances in extraction techniques that have opened vast supplies of shale gas and forced a sharp drop in natural gas commodity prices. Natural gas prices dropped to a historically low level of $2.75 per million Btu in 2012 and, according to recent forecasts by the Energy Information Administration (EIA), are projected to grow by no more than two 2% per year, on average, for the foreseeable future (see Figure 1).
In the context of energy efficiency, low natural gas prices mean lower generation costs - the main component of a utility's avoided power-supply cost, the principal benchmark for economic valuation of ratepayer-funded energy efficiency. A drop in natural gas prices erodes energy efficiency's cost advantage and, in a sense, undermines its basic economic rationale. The recent drops in avoided costs have caused many electric energy-efficiency measures to fail the standard tests of cost-effectiveness. The effects on natural gas efficiency programs have been direct and more pronounced. The drops have prompted several utilities to curtail - or even suspend - their programs and have moved regulators in places such as Washington and British Columbia to consider new economic screening guidelines.
This journal in prior articles has highlighted weaknesses inherent in various standard cost-benefit tests used to calculate a value for energy efficiency, including, among other tests, the Program Administrator Cost (PAC), the Ratepayer Impact Measure (RIM), and the Total Resource Cost (TRC) tests. 1
But an added problem with these tests, central to our inquiry here, is that they provide only a partial accounting of energy efficiencies benefits - with no allowances for its value in risk management. Here we address that missing metric, and how it can be accounted for by portfolio theory. The central point, typically ignored in the valuation of energy efficiency resources, is that once we consider the benefits of the risk mitigation, it turns out that energy efficiency might prove more advantageous than generation in integrated resource planning, even if the efficiency measures might appear at first blush to cost more than generation alternatives.
Too Much of a Good Thing
Gas-fired power generation provides baseload, intermediate, and peaking electric power. It also offers a relatively short construction lead time, and can provide firm back-up to intermittent renewable resources like wind and solar. These features, coupled with the plummeting fuel prices and, in no small measure,