Cost-effectiveness Workshop Two: The Standard Practices Manual Tests

1. Cost-effectiveness Workshop Two: The Standard Practices Manual Tests Energy Division June 29th, 2012

2. Workshop Agenda • Introduction and Overview 9:00 – 9:45am • Consistency across demand-side proceedings 9:45 – 10:30am • Break 10:30 – 10:45am • The Total Resource Cost Test 10:45am – noon • Lunch noon – 1:00pm • Other SPM tests 1:00 – 2:45pm • Break 2:45 – 3:00pm • Using cost-effectiveness results 3:00 – 3:30pm • Other Issues 3:30 – 4:00pm

3. Standard Practices Manual (SPM) Workshop Objectives • To provide parties the opportunity to better understand and comment on specific aspects of the Standard Practice Manual tests used to determine cost-effectiveness. • To determine the extent to which the differences between the different types of demand-side programs require differences in the application of the SPM tests. • To provide parties the opportunity to determine whether modifications to the SPM test structure or inputs are necessary to improve cost-effectiveness analysis of demand-side programs.

4. Summary of Application of the SPM across Demand-side proceedings • The SPM tests were developed to measure the cost-effectiveness of Energy Efficiency programs. • Four tests are used to measure cost-effectiveness from four perspectives: • “Society”: The Total Resource Cost (TRC) test: • Utility: The Program Administrator (PAC) test • Ratepayers: The Ratepayer Impact Measure (RIM) test • Participant: The Participant Test • The SPM also describes a societal cost test (SCT), which is a variation of the TRC that includes “externalities” and uses a social discount rate. The TRC test used in California is actually a hybrid of the TRC and the SCT, in that it includes some externalities.

5. Cost and Benefits Used Blue text indicates optional, hard-to-quantify benefits. Italic text indicates that values may be different for different tests Green text indicates externalities

6. Cost-effectiveness tests for Demand Response

7. Topic 1: Consistency Across Demand-side Proceedings • Discussion objective: Determine which differences are necessary in the cost-effectiveness framework to appropriately address Energy Efficiency, Demand Response, Distributed Generation, Permanent Load Shifting (PLS), and Low Income programs. What are the specific differences in the cost-effectiveness framework that exist among the various proceedings? • Participant Costs • Incentives • Resource Balance Year (discussed yesterday) • Other?

8. Participant Costs • Energy Efficiency: • Net Incremental Costs x Net-to-Gross Ratio • Net = After rebate • Incremental = Difference between baseline and efficient model • Net-to-Gross ratio = Free-ridership/Total participants • Free-ridership = Costs that would have been incurred even if program did not exist • Demand Response (DR): • Event-based DR: Value of Service Loss + Transaction Costs (75% of incentives used as proxy) • Permanent Load Shifting: Total Cost of Installed System – Rebate • Distributed Generation (DG): • Total Cost of Installed System – Federal Tax Benefits – Rebate

9. What are incentives? X “Society” = Utilities + Ratepayers $ $ $ $ $ $ $ $ $ $ $ $ $ $ Incentives (transfer payments) Measure costs (equipment costs, including rebates) Society: The Total Resource Cost (TRC) test

10. Incentives • For Energy Efficiency and Distributed Generation, there are NO incentives (as defined by the SPM). What we generally refer to as incentives are actually rebates for the purchase of equipment. • For Demand Response, incentives are the energy and capacity payments paid to participants for shedding load (reducing demand) during an event. Rebates to DR customers for programmable thermostats and other equipment are considered capital costs.

11. What relationship should the existing EE, DR, DG, and ESAP cost-effectiveness efforts have to one another? • Tom Roberts (DRA) – framework should be consistent so all proceedings approach in the same way; equations can be different when necessary. • Ken Abreu (PG&E) – helpful to have separate proceedings for program-specific details between EE, DR, DG and ESAP. Similar broad structures are okay, but will continue to need to keep efforts separate to flush out the details. • Dave Barker (SDG&E) – capital costs would be the same, with some factors set to zero in the applicable proceedings. Behavior incentives would need a different framework.

12. Should we continue to separately address cost-effectiveness for EE, DR, DG, ESAP, etc. in different proceedings? Can consistency only be accomplished if cost-effectiveness is addressed in one proceeding? • Dave Barker (SDG&E) – advocates for separate proceedings; suggests annual update to avoided cost model. • Bill Marcus (TURN) – Concern that opening new proceedings slows down regulatory process and reduces participation of public interest groups. • Camille Watts-Zagha (DRA) – different proceedings may bring transparency concerns. • Simon Baker (ED) – What problems have there been with meta-proceedings? • Jeff Hirsch – important for the proceedings to have the ability to handle pieces differently. Could use a common framework but each proceeding needs to determine the approach to ensure that values are maintained. • Tom Roberts (DRA) – suggests limited scope proceeding to handle avoided costs and cost-effectiveness. • Andrea Horwatt (SCE) – any modifications need to ensure that differences in value are accounted for. • Dave Barker (SDG&E) – a mega-proceeding would get bogged down in issues because the proceedings have such different interests (e.g., in T&D) • Ron Helgens (PG&E) – one large proceeding could mean more parties and a longer time for decision-making and program implementation.

13. BREAK • Please return at 10:45am

14. Topic 2: The Total Resource Cost (TRC) Test • In recent year, the CPUC has relied heavily on the TRC to determine whether demand-side programs are cost-effective. Many jurisdictions in the U.S. do the same. • Discussion Objectives: • Determine if modifications are needed to correctly account for any existing costs, benefits, or other inputs. • Determine if there are other costs and benefits which should be included in the TRC test. • Determine if continued reliance on the TRC as the primary test of cost-effectiveness is advisable.

15. Three proposals for modifying the cost-effectiveness framework EE, DR and DG projects are often undertaken to achieve non-energy benefits (NEBs) as well as energy savings. Critics of the TRC say that we are not correctly accounting for this and we should remedy this by: Replacing the TRC with the PAC (will be discussed later), Adjusting Participants Costs to account for NEBs, or Adding NEBs to the TRC.

16. Should any of the cost and benefit inputs to the TRC be updated, redefined, or calculated differently? Are we over- or under-estimating some benefits and costs? If so, which ones? Participant Costs • Bill Marcus (TURN) – concern about how early retirement is calculated; may be undervaluing participant costs [NOTE: topic will be discussed in later workshops and/or in comments] Non-energy Benefits (NEBs) Discussion notes here Other? Discussion notes here

17. Participant Costs The total TRC costs are those paid by both the utility and the participants.* Thus all equipment costs, installation, operation and maintenance, cost of removal (less salvage value), and administration costs, no matter who pays for them, are included in this test. “Participant costs” refers to the portion of these costs that are incurred by program participants. Some argue that since participants are incurring some of these costs for reasons other than achieving energy savings (i.e., because they want non-energy benefits), the participant costs should reflect only a portion of actual cost incurred (i.e., “equipment costs” are only those costs that are incurred to achieve energy savings). * plus the increase in supply costs for any periods in which load is increased.

18. Participant Cost Compared Energy Efficiency: Replace on Burnout: Participant Net (after rebate) Incremental Cost x Net-to-Gross Ratio Early Retirement: [Participant Net Incremental Cost + interest costs associated with early retirement] x Net-to-Gross Ratio Direct Install: Participant Co-pay (often zero) Demand Response (DR): Event-based DR: Value of Service Loss + Transaction Costs (75% of incentives used as proxy) Permanent Load Shifting: Total Cost of Installed System – Rebate Distributed Generation (DG): Total Cost of Installed System – Federal Tax Benefits – Rebate

19. EE Participant Cost Attribution Only costs related to the EE project (either full or incremental) should be included. Product or feature choice not related to EE should be removed (not always obvious or easy to determine). In addition, the “net-to-gross” ratio, which measures “free-ridership,” accounts for influences other than desire to achieve energy savings on participants’ decisions. The net-to-gross ratio is also applied on the benefits side to eliminate the energy savings resulting from free-ridership. The cost of any rebates paid to “free riders” is included in the program costs.

20. Net to Gross Survey Results: Reasons for Doing the Project * Multiple responses allowed. from Results of Nonresidential Net-to-Gross CATI Survey Pre-Test, Itron, 2011 20

21. Are we correctly calculating participant costs, especially for programs with large customer costs? Does the net-to-gross formulation provide an accurate accounting of these costs (for EE)? Should we use a similar process for DR/DG? • Dan Hopper (SCE) – There is inconsistency when comparing investments; EE looks at net savings and DG looks at gross savings and costs • Bob Knight (BKi) – participant costs in building performance programs are vastly overstated. We need more/better NTG studies for whole house/building performance programs to account for motivation related to NEBs. 21

22. Are we correctly calculating participant costs, especially for programs with large customer costs? Are there other participant costs that are not being captured? (e.g., for DR, participant costs include value of service loss and transaction costs, which are not included in EE or DG) • Bill Marcus (TURN) – should consider rebound effects; may also want to consider value of service loss in EE. • Jamie Fine (EDF) – review of rebound effects is shown to be small in relation to EE. • Dan Hopper (SCE) – transaction costs for EE need to be accounted for as they are in DR. • Monisha (DRA) – agrees that rebound effects need to be captured. For EE, service loss may not be very useful. • Mona Tierny-Lloyd (EnerNOC) – value of service loss across customers are different • Dan Hopper (SCE) – need clarity RE: program vs. incentive costs

23. Should non-energy benefits (NEBs) be included in the TRC? Participant NEBs accrue to the program participants (such as reduced building operating costs, increased value, comfort, health, and safety). Utility NEBs are realized as indirect costs or savings to the utility (such as bill payment improvements, infrastructure savings, etc.). Societal NEBs represent indirect program effects beyond those realized by ratepayers/utility, and they accrue to society at large (such as job creation, tax receipts growth, labor productivity, housing value, neighborhood stability, and reduced emissions and other environmental benefits).

24. NEBs Included in the Low Income Tests* Utility: • Reduced arrearage cost • Reduced bad debt written off • Fewer shutoffs • Fewer reconnects • Fewer notices • Fewer customer calls • Fewer emergency gas svc calls • CARE subsidy avoided Participant: • Water/sewer savings • Fewer shutoffs • Fewer calls to utility • Fewer reconnects • Property Value benefits • Fewer fires • Moving costs / mobility • Fewer illnesses and lost days from work/school • Net benefits for comfort & noise • Net benefits for additional hardship *Thanks to Brenda Gettig and Kevin McKinley of Sempra for this slide

25. Lara Ettenson (NRDC) – include what is quantifiable in TRC; could consider a percentage adder for non-quantifiable. Kevin (SDG&E & SoCalGas) – concern with the ability to quantify; perhaps move to percentage adder for LI NEBs Bob Knight (BKi) – need to consider what the end goal is (i.e., define goal of test: society vs. TRC). If NEBs are to be considered, a significant amount of search should be done, even if things are difficult to quantify. Bill Marcus (TURN) – much of the high quality studies done for NEBs in low income are not transferrable to middle or high income. Camille (DRA) – should include indoor air quality Is the NEBs research that has been done in the low income proceeding on participant and utility NEBs applicable to other resources? If so, which NEBs should be included?

26. Societal NEBs Job Creation (Do demand side programs create more or higher quality jobs than supply side resources?) Tax receipts growth, labor productivity, housing value, neighborhood stability (Can these be quantified?) Reduced emissions and other environmental benefits (Large body of research – CPUC examining health impacts)

27. Existing Health Impacts Research at CPUC • Literature review : • Health impacts from criteria pollutants • Cost of health impacts • Account for: • Geography • Air basin • County • Municipality • Rural vs. Urban • Time of generation • Population density • Proximity to source • Air movement • Outside factors 27

28. Example: CA PM 2.5 from IOU Natural Gas Generation & Mortality 28

29. Other “wedges” of health impacts 29

30. How should Societal NEBs fit into the cost-effectiveness framework? Floyd (Navigant) – need frame context of how NEBs would be used (e.g., program design or incentives?) Lara Ettenson (NRDC) – should look at use of NEBs as a means to meet policy goals Ron Helgens (PG&E) – does not recommend including NEBs in TRC and proposes a separate test. Should differentiate between NEB avoided costs vs. NEB non-avoided costs Dave Barker (SDG&E) – in natural gas cost-effectiveness, PM10 and NOx are included; will get complicated as you consider in-state vs. out-of-state, CHP. Camille Watts-Zagha (DRA) – risk of double counting when you quantify and then use them in the policy. Kevin McKinley (SDG&E/SCG) – prefers to include easily quantifiable NEBs and keep controversial NEBs out or consider them separately. Jeanne (CPUC) – a true societal cost test may be a more appropriate location for NEBs; need to consider who is actually paying for the costs. Simon Baker (ED) – PU Code focuses on energy-related costs and benefits, with some possible language about environmental benefits. Need to think about EE differently when considering including societal NEBS in TRC since, per PU Code language, costs and benefits currently considered are all energy related. Bill Marcus (TURN) – keeping indirect effects out of economic tests is important. Need to consider the highest quality savings.

31. Are there existing methods to add the avoided costs of embedded energy in water to the TRC? • Method developed for the Water-Energy Pilot? • Others?

32. Cost Effectiveness of Water Use Reduction Measures Which Result in Savings of Embedded Energy in Water Use A procedure was developed in A.07-01-024 (the Water-Energy Pilot Program) and used to examine estimated TRC and PAC values for the range of measures offered in the IOU pilots. Location: ftp://deeresources.com/pub/Water-Energy/ Calculator: WaterMeasures-AvoidedCostCalcs-v4B.zip Documentation: WaterSavingMeasures-Calculator-v3.pdf Patterned around the EE calculator (to calculate TRC/PAC) with additions related to partnerships with water agencies and using water savings • Uses IOU avoided costs for benefits. • Allocates costs between IOU and water agency benefits. • Uses water agency energy use to convert water savings to energy.

33. Water Energy Measure Calculator Overview

34. Water Energy Measure Calculator Overview

35. Water Energy Measure Calculator Issues • Currently, only IOU energy saved is considered – are there situations when this limit is not appropriate? • Currently there is limited data on water agency energy use such that often average water agency use has been utilized – is it necessary to utilize more agency/location specific data and is the very high cost of obtaining this data justified? • Should the energy use for intra-marginal (last source used) or extra-marginal (next source to be used) water source be used rather than the current average energy use for existing water agency mix of sources?

36. What 's the best approach to adding the avoided costs of embedded energy in water to the TRC? • Jeff Hirsch – should not ignore water energy, but need to consider infrastructure improvements versus improvements to flow, which have different impacts. • Bill Marcus (TURN) – how much money is spent on programs geared towards water savings from water agencies? • Consensus that water energy should be addressed but we don’t know how

37. Topic 3: Other SPM Tests • Discussion Objective: Examine the strengths and weaknesses of the different cost-effectiveness tests

38. What are the strengths and weaknesses of the various SPM tests, particularly the TRC and the PAC?

39. What are the pros and cons of using the PAC, rather than the TRC, as the primary test of cost-effectiveness? Jeanne (CPUC) – PAC test is more streamlined approach to determine which programs make sense in terms of how ratepayer funds are used. Suggests using different tests for different purposes (e.g., participant test for program design and PAC for utility budgets) Bill Marcus (TURN) – TRC is useful if using a broad perspective; there is a key program design issue if you tie utility incentives to the PAC test. Matt Evans – suggests using the PAC for utility tracking and reporting and then using evaluation data to feed into a TRC test to guide program and policy design. Jeff Hirsch: problems w/ PAC are we can’t ignore that people are making an investment; program items aren’t always cost-effective in the short-term, but later it may become cost effective. RIM Test Discussion: Aloke Gupta (ED) – suggests fixing the RIM; the current design does not include long-term considerations (e.g., future ratepayer savings due to rate improvements from reduced procurement). Andrea Horwatt (SCE) – agrees with Aloke; savings now results in lower long-term supply costs but that is not reflected in the current test. EE doesn’t look good when you see bigger and bigger rates over time; would look better if long-term savings were considered. Bill Gavelis (PG&E) – suggests use of RIM; design is okay for now. Kevin McKinley (SDG&E/SCG) – CPUC should be looking at the RIM testas short-term review.

40. Would additional cost-effectiveness tests, or alterative forms of the existing tests (e.g., a societal TRC) be useful? • Bill Marcus (TURN) – another way to look at programs: levelized cost of energy, in real/nominal terms. • Alan (Cadmus) – should use different discount rates to reflect different levels of risk for costs and benefits (e.g., different discount rates for fuel and for value of energy savings). • Ron Helgens (PG&E) – process-wise, may be more useful to develop a societal TRC (which includes defining what to include, defining those, analyzing those, etc.). Alternative is to get parties to identify NEBs in current process/proceedings and then to litigate. • Bob Knight (BKi) – rec to focus on near-term and the defensibility of the TRC. • Bill Marcus (TURN) – SCT ok but should have less weight than TRC; must include sensitivity to see the effect of the social discount rate. • Kevin McKinley (SDG&E/SCG) – customers should not subsidize someone else’s EE projects done for NEBs. • Bill Gavelis (PG&E) – will give us a higher number. How does a societal cost test add to the conversation? • Joy – the test could potentially affect the mix of programs and research done

41. BREAK • Please return at 3:00pm

42. How should the cost-effectiveness test results be used to determine demand-side program offerings and incentive levels? • Jessica Aiona (Cadmus) – give different tests different weights; use different tests at different levels (measure, program, portfolio) • Bob Knight (BKi) – having tests at the portfolio level provides utility flexibility and allows for market transformation. Very few states use TRC at program level for EE. • Several people expressed opinion that CPUC should pay more attention to RIM test. • NRDC: Some programs should be separated from the cost-effectiveness requirements.

43. Other Issues Net to Gross Discussion: • Lara Ettenson (NRDC) – whole house NTG studies should be done. • Ed Vine – NTG in CA so far = free ridership, but other states look at participant and non-participant spillover. • Bob Knight (BKi) – NTG studies to date are not specific enough. • Charlie Buck (CCSE) – where does ME&O fit in with NTG? Thought given to cost effectiveness of local government programs? • Lara Ettenson (NRDC) – rec not having a different cost effectiveness for local governments – advocates for consistency in tests • Ann (C&C of SF) – cost effectiveness for local governments is long-term; same cost effectiveness methodology is used; current framework does not offer local governments flexibility in application. Long-term cost-effectiveness issues: • Jeff Hirsch – should invest for future streams of savings. Apply TRC at all different program levels. • Ed Vine – should fund more innovative/experimental things like with research design; current cost-effectiveness may not be the correct framework for innovation. • Lara Ettenson (NRDC) – need to understand the broader perspective of what decisions for cost-effectiveness framework will actually impact. • Ann (C&C SF) – issues with missed opportunities with EE&DR upgrades on the same site .