Understanding Cost-Effectiveness of Energy Effi …

Understanding Cost-Effectiveness of Energy Efficiency Programs:

Best Practices, Technical Methods, and Emerging Issues for Policy-Makers

A RESOURCE OF THE NATIONAL ACTION PLAN FOR ENERGY EFFICIENCY

NOVEMBER 2008

About This Document

This paper, Understanding Cost-Effectiveness of Energy Efficiency Pro grams, is provided to assist utility regulators, gas and electric utilities, and others in meeting the 10 implementation goals of the National Action Plan for Energy Efficiency's Vision to achieve all cost-effective energy efficiency by 2025.

This paper reviews the issues and approaches involved in considering and adopting cost-effectiveness tests for energy efficiency, including discussing each perspective represented by the five standard costeffectiveness tests and clarifying key terms.

The intended audience for the paper is any stakeholder interested in learning more about how to evaluate energy efficiency through the use of cost-effectiveness tests. All stakeholders, including public utility com missions, city councils, and utilities, can use this paper to understand the key issues and terminology, as well as the various perspectives each cost-effectiveness test provides, and how the cost-effectiveness tests can be implemented to capture additional energy efficiency.

Understanding Cost-Effectiveness of Energy Efficiency Programs:

Best Practices, Technical Methods, and Emerging Issues for Policy-Makers

A RESOURCE OF THE NATIONAL ACTION PLAN FOR ENERGY EFFICIENCY

NOVEMBER 2008

The Leadership Group of the National Action Plan for Energy Efficiency is committed to taking action to increase investment in cost-effective energy efficiency. Understanding CostEffectiveness of Energy Efficiency Programs: Best Practices, Technical Methods, and Emerging Issues for Policy-Makers was developed under the guidance of and with input from the Leadership Group. The document does not necessarily represent a consensus view and does not represent an endorsement by the organizations of Leadership Group members.

Understanding Cost-Effectiveness of Energy Efficiency Programs: Best Practices, Technical Methods, and Emerging Issues for Policy-Makers is a product of the National Action Plan for Energy Efficiency and does not reflect the views, policies, or otherwise of the federal government. The role of the U.S. Department of Energy and U.S. Environmental Protection Agency is limited to facilitation of the Action Plan.

If this document is referenced, it should be cited as:

National Action Plan for Energy Efficiency (2008). Understanding Cost-Effectiveness of Energy Efficiency Programs: Best Practices, Technical Methods, and Emerging Issues for PolicyMakers. Energy and Environmental Economics, Inc. and Regulatory Assistance Project.

For More Information

Regarding Understanding Cost-Effectiveness of Energy Efficiency Programs: Best Practices, Technical Methods, and Emerging Issues for Policy-Makers, please contact:

Katrina Pielli U.S. Environmental Protection Agency

Office of Air and Radiation Climate Protection Partnerships Division

Tel: (202) 343-9610 E-mail: pielli.katrina@

Regarding the National Action Plan for Energy Efficiency, please contact:

Stacy Angel U.S. Environmental Protection Agency Office of Air and Radiation Climate Protection Partnerships Division Tel: (202) 343-9606 E-mail: angel.stacy@

Larry Mansueti U.S. Department of Energy Office of Electricity Delivery and Energy Reliability Tel: (202) 586-2588 E-mail: lawrence.mansueti@hq.

or visit eeactionplan

Table of Contents

List of Figures ...............................................................................................................................iii List of Tables.................................................................................................................................iii List of Abbreviations and Acronyms.............................................................................................. v Acknowledgements...................................................................................................................... vi

Executive Summary ................................................................................................ ES-1

1: Introduction ........................................................................................................ 1-1

1.1 Background on Cost-effectiveness Tests....................................................................1-1 1.2 About the Paper ..........................................................................................................1-2 1.3 Structure of the Paper .................................................................................................1-3 1.4 Development of the Paper...........................................................................................1-4 1.5 Notes ...........................................................................................................................1-4

2: Getting Started: Overview of the Cost-Effectiveness Tests ........................... 2-1

2.1 Structure of the Cost-Effectiveness Tests ...................................................................2-1 2.2 The Five Cost-Effectiveness Tests and Their Origins .................................................2-2 2.3 Cost-Effectiveness Test Results in Best Practice Programs.......................................2-2 2.4 Notes ...........................................................................................................................2-3

3: Cost-Effectiveness Test Review--Interpreting the Results............................ 3-1

3.1 Example: Southern California Edison Residential Energy Efficiency Program ...........3-1 3.2 Considerations When Using Cost-Effectiveness Tests ...............................................3-9 3.3 Notes .........................................................................................................................3-12

4: Key Drivers in the Cost-Effectiveness Calculation ......................................... 4-1

4.1 Framework for Cost-Effectiveness Evaluation ............................................................4-1 4.2 Choosing Which Benefits to Include............................................................................4-2 4.3 Level of Complexity When Forecasting Avoided Costs...............................................4-3 4.4 Forecasts of Avoided Costs ........................................................................................4-3 4.5 Area- and Time-Specific Marginal Costs.....................................................................4-6 4.6 Net Present Value and Discount Rates.......................................................................4-7 4.7 Establishing the Net-to-Gross Ratio ............................................................................4-9 4.8 Codes and Standards ...............................................................................................4-10 4.9 Non-Energy Benefits and Costs ................................................................................4-10 4.10 Incentive Mechanisms...............................................................................................4-11

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4.11 Greenhouse Gas Emissions......................................................................................4-12 4.12 Renewable Portfolio Standards.................................................................................4-13 4.13 Defining Incremental Cost .........................................................................................4-14 4.14 Notes .........................................................................................................................4-16

5: Guidelines for Policy-Makers ............................................................................ 5-1

5.1 Emphasizing Cost-Effectiveness Tests .......................................................................5-1 5.2 Picking Appropriate Costs, Benefits, and Methodology ..............................................5-5

6: Detailed Cost-Effectiveness Test Comparison--How Is Each CostEffectiveness Test Used?.................................................................................. 6-1

6.1 Participant Cost Test ...................................................................................................6-1 6.2 Program Administrator Cost Test ................................................................................6-2 6.3 Ratepayer Impact Measure .........................................................................................6-4 6.4 Total Resource Cost Test............................................................................................6-5 6.5 Societal Cost Test .......................................................................................................6-7 6.6 Notes ...........................................................................................................................6-9

Appendix A: National Action Plan for Energy Efficiency Leadership Group...... A-1

Appendix B: Glossary.............................................................................................. B-1

Appendix C: Cost-Effectiveness Tables of Best Practice Programs ................... C-1

Southern California Edison Residential Incentive Program .................................................. C-1 Avista Regular Income Programs ......................................................................................... C-5 Puget Sound Energy Commercial/Industrial Retrofit Program.............................................. C-8 National Grid MassSAVE Program ..................................................................................... C-12

Appendix D: References.......................................................................................... D-1

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Understanding Cost-Effectiveness of Energy Efficiency Programs

List of Figures

Figure 1-1. Ten Implementation Goals of the National Action Plan for Energy Efficiency Vision for 2025: A Framework for Change ............................................................1-3

Figure 3-1. Hypothetical Cost-Effectiveness at Measure, Program, and Portfolio Levels..........3-9 Figure 3-2. Timeline of Distributional Impacts When PCT > 1 and RIM < 1 ............................3-11 Figure 4-1. Implication of Time-of-Use on Avoided Costs .........................................................4-7 Figure 4-2. Comparison of Marginal CO2 Emission Rates for a Summer Day in California

and Wisconsin .....................................................................................................4-13 Figure 4-3. Natural Gas, Energy Efficiency, and Renewable Supply Curves for California .....4-14

List of Tables

Table 1-1. Cost-Effectiveness Tests in Use by Different States as Primary or Secondary Consideration ........................................................................................................1-2

Table 2-1. Basic Approach for Calculating and Representing Cost-Effectiveness Tests...........2-1 Table 2-2. The Five Principal Cost-Effectiveness Tests Used in Energy Efficiency ..................2-2 Table 2-3. Summary of Cost-effectiveness Test Results for Four Energy Efficiency

Programs...............................................................................................................2-3 Table 3-1. Summary of Benefits and Costs Included in Each Cost-Effectiveness Test.............3-2 Table 3-2. Summary of Benefits and Costs Included in Each Cost-Effectiveness Test.............3-3 Table 3-3. SCE Residential Energy Efficiency Incentive Program Benefits...............................3-4 Table 3-4. SCE Residential Energy Efficiency Incentive Program Costs...................................3-4 Table 3-5. Summary of Cost-Effectiveness Test Results ($Million) ...........................................3-5 Table 3-6. Participant Cost Test for SCE Residential Energy Efficiency Program ....................3-5 Table 3-7. Program Administrator Cost Test for SCE Residential Efficiency Program ..............3-6 Table 3-8. Ratepayer Impact Measure for SCE Residential Energy Efficiency Program...........3-7 Table 3-9. Total Resource Cost Test for SCE Residential Energy Efficiency Program .............3-8 Table 3-10. Societal Cost Test for SCE Residential Energy Efficiency Program.......................3-8 Table 4-1. Universe of Energy and Capacity Benefits for Electricity and Natural Gas ..............4-2 Table 4-2. Approaches to Valuing Avoided Energy and Capacity Costs by Utility Type............4-4 Table 4-3. The Use of Discount Rates in Cost-Effectiveness Tests ..........................................4-8 Table 4-4. Defining Customer Decision Types Targeted by Energy Efficiency Measures.......4-15 Table 4-5. Defining Costs and Impacts of Energy Efficiency Measures ..................................4-16 Table 5-1. Primary Cost-Effectiveness Test Used by Different States ......................................5-1

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Table 5-2. Cost-Effectiveness Tests in Use by Different States as Primary or Secondary Consideration ........................................................................................................5-2

Table 5-3. Use of Cost-Effectiveness Tests by States...............................................................5-4 Table 6-1. Benefits and Costs Included in the Participant Cost Test.........................................6-1 Table 6-2. Benefits and Costs Included in the Program Administrator Test ..............................6-3 Table 6-3. Benefits and Costs Included in the Rate Impact Measure Test................................6-4 Table 6-4. Benefits and Costs Included in the Total Resource Cost Test .................................6-6 Table 6-5. Benefits and Costs Included in the Societal Cost Test .............................................6-7 Table C-1. SCE Program Costs................................................................................................ C-2 Table C-2. SCE Program Benefits ............................................................................................ C-3 Table C-3. SCE Program Cost-Effectiveness Test Results ...................................................... C-4 Table C-4. Avista Program Costs ............................................................................................. C-5 Table C-5. Avista Program Benefits.......................................................................................... C-6 Table C-6. Avista Program Cost-Effectiveness Test Results.................................................... C-7 Table C-7. PSE Program Costs ................................................................................................ C-9 Table C-8. PSE Program Benefits .......................................................................................... C-10 Table C-9. PSE Program Cost-Effectiveness Test Results .................................................... C-11 Table C-10. National Grid Program Costs .............................................................................. C-13 Table C-11. National Grid Program Benefits .......................................................................... C-14 Table C-12. National Grid Program Cost-Effectiveness Test Results..................................... C-15

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Understanding Cost-Effectiveness of Energy Efficiency Programs

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