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Total Resource Cost Effectiveness Test

Utility Brown Bag Series

by

Tom Eckman, NWPCCKen Keating, BPA

October 4, 2006

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The Plan’s Definition of Resource Cost-Effectiveness Comes From the Regional

Act

• "Cost-effective,” means that a measure or resource must be forecast:

– to be reliable and available within the time it is needed

– to meet or reduce the electric power demand of the consumers at an estimated incremental system cost no greater than that of the least-cost similarly reliable and available alternative measure or resource, or any combination thereof.

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Under the Act the term "system cost" means:

• An estimate of all direct costs of a measure or resource over its effective life, including:– the cost of distribution and transmission to the

consumer– waste disposal costs– end-of-cycle costs– fuel costs (including projected increases)– and such quantifiable environmental costs and

benefits as are directly attributable to such measure or resource

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The Act’s Definition of Cost-Effectiveness

• Seeks to minimize the total cost of meeting the region’s need for the services provided by electricity, i.e., its goal is economic efficiency.

• Does not address the distribution of these costs among parties in the region

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Alternative Cost-Effectiveness Tests

• Participant Cost Test (PTC)– Costs and benefits to the program participant

• Total Resource Cost (TRC)– All Quantifiable costs & benefits regardless of who accrues them.

Includes participant and others’ costs

• Utility Cost Test (UTC)– Quantifiable costs & benefits that accrue only to the utility system.

Specifically excludes participant costs

• Rate Impact Measure (RIM)

– Net change in electricity utility revenue requirements.• Is a measure of “equity”, not “cost-effectiveness”Is a measure of “equity”, not “cost-effectiveness”• Attempts to measure rate impact on all utility customers especially those

that do not directly participate in the conservation program• Treats “lost revenues” (lower participant bills) as a cost

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Common Metrics for TRC Cost-Effectiveness

=Discounted Present Value of Benefits ($)Discounted Present Value of Benefits ($)

Discounted Present Value of Costs ($)Discounted Present Value of Costs ($)

=Discounted Present Value Costs Annualized over Life ($)Discounted Present Value Costs Annualized over Life ($)

Annual kWh Saved at Bus Bar (kWh)Annual kWh Saved at Bus Bar (kWh)

Benefit/Cost RatioBenefit/Cost Ratio

Net Present ValueNet Present Value

Levelized Cost Levelized Cost (for comparison to other resources)(for comparison to other resources)

= Discounted PV of Benefits – Discounted PV of Costs ($)Discounted PV of Benefits – Discounted PV of Costs ($)

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Each Conservation Measure Has a Different “Cost-Effectiveness” Limit Based on

When It’s Savings Occur

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Space Heating Savings Central AC SavingsCentral AC Market Price Space Heating Market Price

Weighted Average Value of Space Heating Savings = $41/MWh

Weighted Average Value of Space Cooling Savings = $78/MWh

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Plan Uses Total Resource Cost (& Benefits) Perspective

• Best meets the requirements of the Regional Act• Considers all quantifiable costs & benefits regardless of

who accrues them• Ensures that conservation expenditures are good for the

power system, the customer and society• Allows conservation to be compared to other resources

considered for development by including all quantifiable costs & benefits

• Was strongly recommended by utilities in first Council Plan

• Plan conservation targets would be significantly higher if Council had used only “Utility Cost”

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Why Council Uses TRC (1)Avoids Potential Double Counting of the Savings

• Utility invest $2500 in efficient motor to acquire 5000 kWh/yr savings– Levelized Cost = 3.4 cents/kWh– B/C = 1.32

• Customer matches $2500 utility investment to save the same 5000 kWh/yr– Simple payback = 10 years, motor last 20 years

• Total of all direct cost is $5000 for 5000 kWh/yr of savings– Levelized cost = 6.8 cents/kWh– B/C ratio = 0.66

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Why Council Uses TRC (2)Directs Funds Toward Measures That Optimize Total Utility

and Customer Investments

• Utility invest $600 toward cost of $6000 solar PV system that saves 1200 kWh/yr– Alternatively utility and consumer could:

• Invest $160 in 40 CFLs to save 1200 kWh, reducing cost $440

• Invest $600 to buy 150 CFLs, saving 5000 kWh, quadrupling savings

• Especially important when budgets are limited

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Care Must Be Used in Applying The Plan’s Cost-Effectiveness Results “Prescriptively”

• Not all measures are in the Plan– Plan contains over 1000 applications of specific EE

technologies– NOT an exhaustive list of all possible measures & applications

• Plan assumes administrative costs = 20% of capital – Administrative cost vary widely by measure & by program

design• Measure cost-effectiveness in Plan is an estimate

– Measures in Chapter 3 are based on a single estimate of “avoided costs” for the next 20 years

– But Plan targets are based on full portfolio model analysis, about 750 estimates of “avoided costs”

– Measure costs and savings are a single point estimate, but vary widely in practice

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“Cost-Effectiveness” of Conservation Varies by Perspective

Energy Star Clothes Washer (MEF 2.2) with Electric Water Heating and Electric Dryer

• Present Value Capital Cost = $44/MWh– Value to Bulk Power System

= $53/MWh (B/C = 1.17)– Value to “Power System” (includes value to bulk

power and local distribution system value)= $66/MWh (B/C = 1.47)

– Value to Region/Society (includes detergent & water savings, plus carbon credit)= $123/MWh (B/C = 2.8)