Decoupling & Demand Side Management in Colorado

Utility revenue decoupling is often seen as an enabling policy supporting “demand side management” (DSM) programs.  DSM is a catch-all term for the things you can do behind the meter that reduce the amount of energy (kWh) a utility needs to produce or the amount of capacity (kW) it needs to have available.  DSM includes investments improving the energy efficiency of buildings and their heating and cooling systems, lighting, and appliances.  It can also include “demand response” (DR) which is a dispatchable decline in energy consumption — like the ability of a utility to ask every Walmart in New England to turn down their lights or air conditioning at the same time on a moment’s notice — in order to avoid needing to build seldom used peaking power plants.

For reasons that will be obvious if you’ve read our previous posts on revenue decoupling, getting utilities to invest in these kinds of measures can be challenging, so long as their revenues are directly tied to the amount of electricity they sell.  Revenue decoupling can fix that problem.  However, reducing customer demand for energy on a larger scale, especially during times of peak demand, can seriously detract from the utility’s ability to deploy capital (on which they earn a return) for the construction of additional generating capacity.  That conflict of interests is harder to address.

But it’s worth working on, because as we’ll see below, DSM is cheap and very low risk — it’s great for rate payers, and it’s great for the economy as a whole.  It can reduce our economic sensitivity to volatile fuel prices, and often shifts investment away from low-value environmentally damaging commodities like natural gas and coal, toward skilled labor and high performance building systems and industrial components.

The rest of this post is based on the testimony that Clean Energy Action prepared for Xcel Energy’s 14AL-0660E rate case proceeding, before revenue decoupling was split off.  Much of it applies specifically to Xcel in Colorado.  However, the overall issues addressed are applicable in many traditional regulated, vertically integrated monopoly utility settings.

Why can’t we scale up DSM?

There are several barriers to Xcel profitably and cost-effectively scaling up their current DSM programs.  Removing these impediments is necessary if DSM is to realize its full potential for reducing GHG emissions from Colorado’s electricity sector.  Revenue decoupling can address some, but not all of them.

  1. There are the lost revenues from energy saved, which impacts the utility’s fixed cost recovery.  If the incentive payment that they earn by meeting DSM targets is too small to compensate for those lost revenues, then the net financial impact of investing in DSM is still negative — i.e. the utility will see investing in DSM as a losing proposition.  Xcel currently gets a “disincentive offset” to make up for lost revenues, but they say that this doesn’t entirely offset their lost revenues.
  2. Even if the performance incentive is big enough to make DSM an attractive investment, the PUC currently caps the incentive at $30M per year (including the $5M “disincentive offset”), meaning that even if there’s a larger pool of cost-effective energy efficiency measures to invest in, the utility has no reason to go above and beyond and save more energy once they’ve maxed out the incentive.
  3. If this cap were removed, the utility would still have a finite approved DSM budget.  With an unlimited performance incentive and a finite DSM budget, the utility would have an incentive to buy as much efficiency as possible, within their approved budget, which would encourage cost-effectiveness, but wouldn’t necessarily mean all the available cost-effective DSM was being acquired.
  4. Given that the utility has an annual obligation under the current DSM legislation to save a particular amount of energy (400 GWh), they have an incentive to “bank” some opportunities, and save them for later, lest they make it more difficult for themselves to satisfy their regulatory mandate in later years by buying all the easy stuff up front.
  5. It is of course the possible that beyond a certain point there simply aren’t any more scalable, cost-effective efficiency investments to be made.
  6. Finally and most seriously, declining electricity demand would pose a threat to the “used and useful” status of existing generation assets and to the utility’s future capital investment program, which is how they make basically all of their money right now.

Revenue decoupling can play an important role in overcoming some, but not all, of these limitations.  With decoupling in place, we’d expect that the utility would be willing and able to earn the entire $30M performance incentive (which they have yet to do in any year) so long as it didn’t make regulatory compliance in future years more challenging by prematurely exhausting some of the easy DSM opportunities.

Continue reading Decoupling & Demand Side Management in Colorado

Utilities Decoupling to Cover Their… Assets

Last month, Xcel Energy subsidiary Public Service Company of Colorado (PSCo) filed a rate case at the Colorado Public Utilities Commission (Docket: 14AL-0660E).  A lot of the case — the part that’s gotten most of the press — is about PSCo recovering the costs of retiring and retrofitting coal plants as agreed to under the Clean Air Clean Jobs Act (CACJA) of 2010.  However, there’s a piece of the case that could have much wider implications.  Way down deep in the last piece of direct testimony, PSCo witness Scott B. Brockett:

…provides support and recommendations regarding the initiation of a decoupling mechanism for residential and small commercial customers.

This recommendation has captivated all of us here at CEA because it could open the door to Xcel adopting a radically different business model, and becoming much more of an energy services utility (PDF), fit for the 21st century.

To explain why, we’re going to have to delve a ways into the weeds of the energy wonkosphere.

Continue reading Utilities Decoupling to Cover Their… Assets

Colorado Wildfire Climate Change Fail

The past couple of years have been rough on Colorado, in terms of climate change related disasters.  First a couple of record setting wildfire years, and then floods of “biblical” proportions.  At a gut level we know we have to respond, but our public discourse is having trouble addressing the root cause directly.  Instead we’re dancing around the issue, and failing to either adapt adequately to our new reality or to mitigate further climate change.

Adaptation?

Bills related to both the wildfires and last fall’s floods have been wending their way through our state legislature, and last week legislators and the governor held a press conference to highlight some of them, and a lot of the resulting commentary seemed to focus on the safety and well being of the firefighters and other emergency services workers that risk their lives on our behalf.  Largely absent from the discussion were the strong measures that the Governor’s wildfire task force put forward in the fall. They included:

  • Creating a wildfire risk map, and rating all properties on a scale of 1 to 10,  requiring that risk designation to be disclosed before any property sale, and making it available to insurance companies for use in setting their rates.
  • Charging those living in the “wildland urban interface” a fee based on their risk exposure, that would be used to defer some of the additional public costs incurred in protecting their private property.
  • Creating fire-resistant building codes for high risk areas, affecting both the materials used in construction, and requirements for defensible space around buildings.

Make no mistake: these are climate change adaptation measures, and Colorado has rejected them.

Colorado Waldo Canyon Fire [Image 19 of 24]

As the Denver Post reported in September: developers didn’t like the idea of increased construction costs; the real-estate industry didn’t like the idea of making a lucrative market much less attractive; homeowners in high risk areas certainly didn’t like the idea of paying for the risks they’ve taken on, or making those risks transparent to potential buyers of their property.

Would the discussion be any different if people understood that the wildfire frequency and intensity is likely to just keep increasing as climate change marches on?  This is about as close as the article from September gets to mentioning climate change:

Colorado terrain ravaged by wildfire has quadrupled from 200,000 acres in the 1990s to nearly 900,000 acres in the 2000s.  “Scientists tell us this pattern isn’t going to change,” Hickenlooper said.

Why is the “pattern” there in the first place?  What kind of scientists was the Governor was talking to?  None of the press articles linked to from this post mention climate change even once, despite universally pointing out the trend.  For example: As Colorado wildfires continue to worsen, only moderate laws proposed.  And why are they worsening?  No comment.  Even the wildfire task force’s report mentions climate change only once in 80 pages.

https://www.flickr.com/photos/usdagov/8637927246/

The only big risk factor we’ve talked about directly is where we choose to build our homes.  This is an important discussion too.  The overall wildfire risk — at least to human lives and property — is something like:

(human risk) = (area burned) x (pop. density in high risk areas)

Climate change will in large part determine how much of our state burns each year, but we have a choice about how many people and how much property to put in areas subject to burning.  Reducing our exposure to the increasing wildfire risk is an adaptation to climate change — an alteration of our behavior, in light of the expected risks going forward.  For the moment at least, we seem unwilling to listen to the warnings.

But hey, at least the state had a conversation, and decided not to do anything.

Cause and Effect

So what are the causes?  According to the US Forest Service, the enormous bark beetle kill is due in part to warmer winters, resulting from climate change.  These forests filled with dead trees are warm and dry for longer each year, lengthening the western US fire season by about 2 months.  So it’s perhaps unsurprising that the number of large wild fires per year has already increased from 140 in the 1980s, to 250 in the first decade of the 2000s.  This infographic from the Union of Concerned Scientists is a good cartoon summary:

(see this paper for the references behind the infographic)

The third panel is probably the scariest for Colorado.  The dark red swath covering most of the western half of the state means that we expect more than six times as much land to burn each year in the near future, with just 1°C (1.8°F) of additional warming — and as Kevin Anderson and many others have pointed out, it is virtually certain that we will see another 1°C of warming… if not 3°C, or even more.

So our elected representatives are right to be concerned about increased risk from wildfires, and about the safety of the firefighters who try to protect us from those fires.  But we’re still missing the point:  We control our exposure to risk locally, and we control the magnitude of that risk globally.

Mitigation?

Policies aimed at avoiding or reducing climate change (like putting a price on carbon) are mitigation efforts.   We’re not talking about them much, even in the context of an obviously climate mediated risk like wildfires.  This is bad.  If we can’t have a conversation about what’s increasing the wildfire risks, how can we hope to respond appropriately?  Is our refusal to respond to change related to our refusal to accept the cause of the change?  Or is it more a kind of landscape amnesia — an inability to even see the change?  Are we going to forget what normal fire seasons looked like, in the same way that we’ve started to forget what a normal winter feels like:

Cold

Double Climate #Fail

Right now we’re managing to fail doubly with respect to climate change.  We are both unwilling to adapt to the foreseeable risks, and unwilling to even mention that these risks are linked to our greenhouse gas emissions, let alone talk about what we might do to mitigate those emissions and the risks that they create.

If we really care about our firefighters, if we really are intent on avoiding ever more costly and tragic conflagrations in our state, we need to both adapt and mitigate.  We need to start building for a warmer world now, and we need to stop warming the world as quickly as possible.

If you agree, look up the contact information for your Colorado state legislators and let them know.