Evaluation and Financial Incentives for Utility DSM (Energy Efficiency) Programs

Carmen Best California Public Utilities Commission

June 21, 2011 Asia-Pacific Dialogue on Clean Energy Governance and Regulation
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U.S. Energy Use Grows While California Usage Remains Flat

14,000 12,000 10,000 kWh/person 8,000 6,000 California 4,000 2,000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 United States

Per Capita Electricity Sales (not including self-generation) (kWh/person)

California w/out stds

Energy Efficiency as a Resource

Californias Energy Action Plan establishes energy efficiency and other demand side resources as first priority resources Regulatory tools to maximize this resource Decoupling Policy direction and setting goals Funding Incentives for performance (EE only) Quantifying the resource Evaluation Measurement and Verification Quantify in integrated resource planning
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California Energy Efficiency Regulation

State of California Governor and Legislature California Energy Commission (CEC) California Public Utilities Commission (CPUC) Regulates utility investment in voluntary energy efficiency programs (i.e., above code minimum) - Four investor owned utilities - About 80% of the electric consumption in the state.
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Establishes mandatory standards

- Building Codes - Appliance Standards Administers Research Development and Deployment funds through Public Interest Energy Research (PIER) program

Funding Sources for Mainstream Utility Energy Efficiency Programs

Average Annual EE Budget by Funding Source (Total ~ $1 billion)
Gas PPP
17% $175

Electric PGC

25%

$256

CPUC pools all funding sources into one overall (costeffective) portfolio Gas PPP funds lost to budget transfer for FY 11-12

Energy Procurement
-

57%

$576

200

400

600

800

$ Millions
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CPUC Oversight of Energy Efficiency Programs Investor Owned Utilities administer energy
efficiency programs with CPUC approval and oversight CPUC roles:
Establishes policy guidance specific to:
Energy efficiency savings goals California Energy Efficiency Strategic Plan Risk Reward Incentive Mechanism (RRIM)

Approve portfolio budget applications (currently on a 3-year cycle); Oversee Evaluation, Measurement & Verification

Types of Value Added from Evaluation

Assessing program impacts

Evaluate progress against savings goals adopted by the Commission Assessing cost effectiveness of investments Updating savings estimates for future program cycles Improving accuracy of demand forecast

Improving program efficacy

Improving program processes and implementation Developing feedback on new programs or measures

Providing market feedback

Assessing the potential for remaining energy savings Monitoring changing market conditions
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Energy Efficiency Savings Goals (GWh)

Savings accrued by 2008 were estimated at ~ 3% of electricity sales Reducing forecast energy need by ~ 6%

Historically the IOUs have not exceeded goals on an evaluated basis

Reported v. Evaluated GWh Savings
200 150 % Goal 100 50 0

Possible Reasons: Goals and potential have not been updated Challenges to updating pre-eval. assumptions Evaluation results reflect new information

2002-2003
Reported

2004-2005
Evaluated

2006-2008

Source: 2006-2008 Energy Efficiency Evaluation Report, July 2010; table 3 9

Impact Evaluation is a key tool for Quantifying the Resource

Evaluated savings represent updates to planning assumptions based on field assessment including: Verification of claimed measure installations. In situ savings based on field conditions of measures compared to the baseline. Influence of the program in leading to the measure installation or action taken (program attribution).
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Risk Reward Incentive Mechanism (RRIM) Rationale

Authorized in late 2007 for post-2005 programs After decoupling, incentives can address disincentives to energy efficiency (EE) under cost-ofservice regulation of IOUs Enables the IOUs to earn rewards on EE investments in amounts comparable to what they would otherwise earn for their shareholders on steel-in-the-ground supply-side investments Balances utility bias towards supply-side since utilities can generate earnings when they invest in supplyside resources, but not when procuring more costeffective EE Incentives are potentially large enough to ensure that utility managers and investors view EE as part of utility operations that can generate meaningful 11 earnings

Risk Reward Incentive Mechanism (RRIM) 2006-2008 Original Structure

Earnings capped at $450 million Reward (% of PEB) ER = 12%

Minimum Performance
0% 65%

ER = 9%

Tiered Earning Rate based on progress toward goal

% of CPUC goals

85% (per unit below CPUC goal) Penalty

100%

5/kWh, $25/kW, 45 /therm below goals, or payback of negative net benefits (costeffectiveness guarantee), whichever is greater. Earnings = ER x PEB

Penalty capped at $450 million.

Annual Earnings -Verify Installation - Verify Cost - 35% hold back

Final True Up -Full Evaluation Results

PEB= Performance Earnings Basis ER= Earnings Rate (or Shared- Savings Rate)

Incentives and Evaluation - Lessons Learned

Large incentives created extreme focus on the precision of quantifying the energy savings, taking resources and focus from other valuable evaluation. The strict boundaries of the incentive structure did not allow for uncertainties in savings estimates from before and after field evaluation. Staff produced reliable results following Commission direction but the results were ultimately not used for determining the incentive payments. The Commission has encouraged the development of energy efficiency programs that reach long term strategic objectives and judging performance on the basis of energy savings alone does not reflect this policy change.

Risk Reward Incentives Awarded To Date 2006-2008 Portfolio

Earned 47% of the maximum possible
100% 80% 60% 40% 20% 0%

2009 Bridge Year

PG&E

SCE SDG&E SCG

Utilities are currently filing applications for 2009 incentives Earnings are to be based on the logic for awards in 2006-2008.

2010-2012
- Proposed Decision (PD) addressing RRIM reforms has been suspended pending further review
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Incentive Strategy Proposed in (Withdrawn) 2010-2012 RRIM Reform PD

Continue to .. . Relate incentive earnings to performance, and Measure performance in terms of avoided cost savings from EE measures But change the RRIM significantly by . . . Basing savings on CPUC-approved ex ante (forecast) values applied to installed measures, which de-links the ex post evaluation of savings from the incentive earnings determination, and Eliminating penalty component and reducing earnings potential to reflect the lack of risk.
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