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

Facing the Risk in Fossil Fueled Electricity

I recently wrote about how our risk tolerance/aversion powerfully affects our estimation of the social cost of carbon, but obviously that’s not the only place that risk shows up in our energy systems.  Fossil fuel based electricity is also exposed to a much more prosaic kind of risk: the possibility that fuel prices will increase over time.

Building a new coal or gas plant is a wager that fuel will continue to be available at a reasonable price over the lifetime of the plant, a lifetime measured in decades.  Unfortunately, nobody has a particularly good record with long term energy system predictions so this is a fairly risky bet, unless you can get somebody to sign a long term fuel contract with a known price.  That doesn’t really get rid of the risk, it just shifts it onto your fuel supplier.  They take on the risk that they won’t make as much money as they could have, if they’d been able to sell the fuel at (higher) market rates.  If the consumer is worried about rising prices, and the producer is worried about falling prices, then sometimes this can be a mutually beneficial arrangement.  This is called “hedging”.

Continue reading Facing the Risk in Fossil Fueled Electricity

NRDC plan to cap GHG emissions from power sector using the Clean Air Act.

The NRDC has a plan that would allow the EPA to regulate GHG emissions from existing power plants, without either capitulating to the power sector, or banning coal outright immediately (which would be politically… uh, difficult).  The trick is to use fleet-based target, as we do with vehicle emissions standards.  The natural (regulatory) unit is the state, so each state could have its own carbon intensity targets or degression pathway, tailored to its initial generation mix.  The carbon intensity would decline over time, eventually squeezing coal out of the mix, and could allow energy efficiency improvements to count toward the goal, at least initially.  It really amounts to a kind of back-door cap-and-trade for the power sector, and it can be implemented by Obama, all on his lonesome, without any help from the intransigent congress.  The hard part here will be setting stringent enough long term targets.  40% reduction by 2025?  90% reduction by 2050?

Ripe For Retirement: The Case for Closing America’s Costliest Coal Plants

The Union of Concerned Scientists has gone through the catalog of America’s coal plants, and found hundreds of mostly small, old, polluting, inefficient generating units that just aren’t worth operating any more, even on a purely economic basis.  They looked at several different sets of assumptions, including different natural gas prices going forward, a price on carbon, whether or not the competing natural gas fired generation would need to built new, or whether it existed already with its capital costs paid off, and whether or not the production tax credit for wind ends up being renewed.  In all of the scenarios considered, they found substantial coal fired generation that should be shut down on purely economic grounds, above and beyond the 288 generating units that are already slated for retirement in the next few years.  They also found that some companies — especially those in traditionally regulated monopoly utility markets in the Southeast — are particularly reluctant to retire uneconomic plants, perhaps because they can effectively pass on their costs to ratepayers, who remain none the wiser.

Minneapolis eyes way to push utilities to be greener

Minneapolis is Xcel’s home town, and a much bigger market than Boulder. The city is now talking about allowing their franchise agreement to lapse, in order to pursue more aggressive renewable energy policies than state law will allow if they’re served by the monopoly utility.  The article gives a nod to Boulder’s votes over the last two years to explore the alternatives to franchise agreements, including the formation of a municipal utility.  It’s great to see another much larger city looking at its options, and as far as pushing the overall utility business model to change, it’s great to see this happening within Xcel’s service territory.  There’s a threshold out there somewhere, beyond which the current arrangement is no longer stable, and even the utility will start begging for something different.  The faster we can get there, the better.

Designing Feed-in Tariffs

NREL took a nice long look at different ways to design feed-in tariffs (PDF) in July of 2010, based on the past decade’s worth of experience, both in the EU and several US states.  It’s 144 pages long and aimed at policymakers… so, not exactly light reading.  But if you really want to know how these things work (or fail), it’s great.

The Zero Carbon Compendium 2010

The UK has one of the world’s most aggressive building energy efficiency targets: all new homes to be zero carbon by 2016, and all new buildings to be zero carbon by 2019.  They’ve got a ways to go toward realizing this goal, but they’re doing what they can to learn from other countries in the meantime.  The Zero Carbon Compendium 2010 is a compilation of zero carbon building strategies and progress being made by nations all over the world.  A good look at what was already possible a couple of years ago… and it’s a lot more than we’re talking about doing here today.