PG&E spends $275 million a year on energy efficiency investments that reduce demand by 100 MW. It also spends $65 million a year on demand response to reduce peak loads by 400 MW. If we assume that energy efficiency investments are effective an average of 12 years the incremental cost of those investments is $66 per MWH (6.6 cents per kWh). For demand response the incremental cost, which should match the market value, is $163 per kilowatt-year (or $13.60 per kW-month). Both of these values are reasonable investments for long-term resources.
Yet, PG&E argues in the PCIA exit fee proceeding and its annual ERRA generation cost proceeding that the appropriate market valuation for its resources are the short-term fire sale values that it realizes in the daily markets. According to PG&E, customers do not realize any additional value from holding these resources beyond what those resources can be bought and sold for the CAISO markets and in bilateral short-term deals.
So we are left with the obvious question: Why is PG&E continuing to invest in energy efficiency and demand response if the utility states that it can meet all of its needs in the short-term markets? This hypocrisy is probably best explained by PG&E manipulating the regulatory process. PG&E’s proposed “market valuation” sets the exit fee for community choice aggregation (CCA) at a high level. Instead, that market valuation should reflect how much CCAs have saved bundled customers in avoided procurement, and what PG&E pays for adding new resources.
Two board member of the Valley Climate Action Center, Gerry Braun and Richard Bourne wrote two articles on making building energy use in Davis sustainable and resilient. VCAC board members, including myself, had input into these articles. They reflect a vision of getting to a zero-net carbon (ZNC) footprint while being economically viable. Both were published in the Davis Enterprise.
The authors of a study questioning the net benefits of the Weatherization Assistance Program critique the use of non-energy benefits to swing the program assessment to a net positive results. (The authors have responded to some critiques here.) Given the recent revelation that asthma is more likely to be caused by early childhood care decisions, that particular benefit may be quite vulnerable. The biased representation of other benefits undermines the DOE study as well.
I’ve posted some of my own comments on the Energy Institute blog.
A study just released from the E2e Project finds that the investment costs in residential energy efficiency greatly exceed the realized benefits. Earlier the same research program found that even if the energy efficiency measure packages, costing up to $5,000, were given away for free, only 6% of low income homeowners would participate. This is one of the first projects to track from start to finish a full set of energy efficiency projects. Much controversy has swirled around the accuracy of the engineering calculations used to estimate energy savings, and whether market barriers are impeding participation in what appears to be obvious cost saving actions. This study calls into question the premise of “costlessly” promoting energy efficiency actions.
The Project is run jointly by the University of California’s Energy Institute at Haas, the University of Chicago’s EPIC, and MIT.
Severin Borenstein at the Energy Institute at Haas blogged about the debate over moving to residential fixed charges, and it has started a lively discussion. I added my comment on the issue, which I repost here.
The question of recovery of “fixed” costs through a fixed monthly charge raises a more fundamental question: Should we revisit the question of whether utilities should be at risk for recovery of their investments? As is stands now if a utility overinvests in local distribution it faces almost no risk in recovering those costs. As we’ve seen recently demand has trended well below forecasts since 2006 and there’s no indication that the trend will reverse soon. I’ve testified in both the PG&E and SCE rate cases about how this has led to substantial stranded capacity. Up to now the utilities have done little to correct their investment forecasting methods and continue to ask for authority to make substantial “traditional” investment. Shareholders suffer few consequences from having too much distribution investment–this creates a one-sided incentive and it’s no surprise that they add yet more poles and wire. Imposing a fixed charge instead of including it as a variable charge only reinforces that incentive. At least a variable charge gives them some incentive to avoid a mismatch of revenues and costs in the short run, and they need to think about price effects in the long run. But that’s not perfect.
When demand was always growing, the issue of risk-sharing seemed secondary, but now it should be moving front and center. This will only become more salient as we move towards ZNE buildings. What mechanism can we give the utilities so that they more properly balance their investment decisions? Is it time to reconsider the model of transferring risk from shareholders to ratepayers? What are the business models that might best align utility incentives with where we want to go?
The lesson of the last three decades has been that moving away from direct regulation and providing other outside incentives has been more effective. Probably the biggest single innovation that has been most effective has been imposing more risk on the providers in the market.
California has devoted as many resources as any state to trying to get the regulatory structure right–and to most of its participants, it’s not working at the moment. Thus the discussion of whether fixed charges are appropriate need to be in the context of what is the appropriate risk sharing that utility shareholders should bear.
This is not a one-side discussion about how groups of ratepayers should share the relative risk among themselves for the total utility revenue requirement. That’s exactly the argument that the utilities want us to have. We need to move the argument to the larger question of how should the revenue requirement risk be shared between ratepayers and shareholders. The answer to that question then informs us about what portion of the costs might be considered unavoidable revenue responsibility for the ratepayers (or billpayers as I recently heard at the CAISO Symposium) and what portion shareholders will need to work at recovering in the future. As such the discussion has two sides to it now and revenue requirements aren’t a simple given handed down from on high.
Koichiro Ito again has used a discrete event to develop a “control” for an economic experiment. In this case, he has studied PG&E’s 20/20 rebate program in 2004. The “event” he uses is the eligibility date for the program–he uses new customers who connected to service just before and after that date. He finds that the program had almost no effect on coastal customers but that it was effective in reducing energy use for low-income inland consumers.
Ito was able to use two key facts in his latter study: 1) the 2001 California electricity crisis caused rates to rise rapidly and 2) the SCE and SDG&E service areas are closely interlocked across similar communities in southern Orange County. He was able to run an after-the-fact experiment with two treatment groups that had similar socio-economics and were exposed to the same media market. It’s as if two groups of customers were presented with two different sets of rates from the same utility–a truly unique situation that probably can’t be duplicated. He found that the tiered rates induced no more change in energy use than simple average rates.
These well-done studies can cause policymakers to ask whether complicated proposals that seem to mitigate various concerns are truly effective. In these two cases, the answers are largely “no”.