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Integrated Resource Planning and Efficiency: A Regulatory Perspective Energy Efficiency and Sustainable Energy Board Integrated Resource Planning and Efficiency: A Regulatory Perspective Energy Efficiency and Sustainable Energy Board Concord, NH 20 November 2009 Frederick Weston The Regulatory Assistance Project 50 State Street, Suite 3 Montpelier, Vermont USA 05602 Tel: 802. 223. 8199 Fax: 802. 223. 8172 27 Penny Lane Cedar Crest, New Mexico USA 87008 Tel: 505. 286. 4486 E-Fax: 773. 347. 1512 110 B Water St. Hallowell, Maine USA 04347 Tel: 207. 623. 8393 Fax: 207. 623. 8369

How We Got Here: The Changing Technology and Economics of Electricity Ø As early How We Got Here: The Changing Technology and Economics of Electricity Ø As early as the 1960 s, arguments in favor of competitive provision of generation were heard Ø Although less than 2% of the nation’s electricity is generated by burning oil, the energy crisis in the 70 s nevertheless affected thinking about resource selection and risk – Especially in New England, where more than 10% of the electricity comes from oil-fired generation Ø Alternative energy resources: PURPA, 1978 Ø 1970 s: Gas shortages – FERC price ceilings, little new exploration and investment, and energy crisis generally Ø The nuclear cost overruns in the ’ 70 s and ’ 80 s showed that the economies of scale were not forever increasing – This was also found to be true of large conventional units • Thermal efficiency of delivered k. Wh around 30% – This meant that planning, which had assumed ever-increasing economies of scale, had to change 2

The ’ 80 s and ’ 90 s Ø Significant price increases associated with The ’ 80 s and ’ 90 s Ø Significant price increases associated with rising oil prices and the costs of nuclear units – Bankruptcies, public outrage, and environmental activism Ø PURPA, Fuel Use Act, Natural Gas Policy Act – Assumed future shortages of gas – Prohibited use of gas for electricity generation • • Inadvertently made coal the only viable supply alternative This provision was repealed in 1987 – These acts initiated the nearly two decades long process of gas deregulation Ø State regulatory responses – Increased investment in renewables under PURPA – Integrated resource planning and the development of comprehensive end-use energy efficiency programs Ø Significant new investment in natural gas-fired generation – Combined cycle units: waste heat from gas-fired turbines used to create steam to turn second set of turbines • Thermal efficiencies well over 50% Ø Other technological changes – Wind turbines, micro-turbines, reciprocating engines whose costs began to compete with central generation • Size doesn’t matter (as much)

A Policy Response: IRP Ø Object: to minimize the total societal cost of energy A Policy Response: IRP Ø Object: to minimize the total societal cost of energy production and use over the long-term – Evaluation of all potential resources—G, T, D, and demand-side investments—as complements and substitutes – Twenty- to thirty-year planning horizons, sophisticated computer modeling, application of asset and risk management tools – Environmental and other external costs and benefits recognized – Regulatory mechanisms to overcome utility and customer barriers to demand-side efficiency – Innovative rate structures Ø Was put into effect in a number of states in the northeast, mid-west, and west – Demonstrated that investment in comprehensive end-use energy efficiency was the most cost-effective resource available 4

IRP in Law Ø A IRP in Law Ø A "least cost integrated plan" for a regulated electric or gas utility is a plan for meeting the public's need for energy services, after safety concerns are addressed, at the lowest present value life cycle cost, including environmental and economic costs, through a strategy combining investments and expenditures on energy supply, transmission and distribution capacity, transmission and distribution efficiency, and comprehensive energy efficiency programs. – Title 30, Vermont Statutes Annotated, § 218 c (a)(1) Ø Northwest Power and Conservation Planning Act, 1980 5

IRP Forces Us to Evaluate the Wider Array of Resources Ø Generation – – IRP Forces Us to Evaluate the Wider Array of Resources Ø Generation – – Conventional thermal Nuclear, hydro Renewables New technologies Ø Transmission and distribution Ø Distributed and demand response resources – Customer-sited • Short-term load management (LM) • Distributed generation, combined heat and power, small-scale renewables (net metering) • Long-term end-use energy efficiency (EE) • Consumer response to prices and other demand response programs Ø All of these can be substitutes for each other

Environmental Issues Ø Land use, water use – Siting, thermal needs, etc. Ø Emissions Environmental Issues Ø Land use, water use – Siting, thermal needs, etc. Ø Emissions – Nitrogen oxides, sulfur dioxide, particulate matter, carbon monoxide, volatile organic compounds, unburned hydrocarbons, heavy metals, and carbon dioxide – Climate change Ø Waste: nuclear, coal ash, etc. Ø How are costs not easily quantified best accounted for in the planning exercise? – Unquantified costs are not zero costs

The Essential Question Ø How do we determine what resources we need? – “Need” The Essential Question Ø How do we determine what resources we need? – “Need” is an economic concept – If something is less costly than the alternative, it’s needed Ø Always ask “Compared to what? ” 8

The Gay Nineties: Restructuring Ø Early ’ 90 s: Recession – Demand falls, new The Gay Nineties: Restructuring Ø Early ’ 90 s: Recession – Demand falls, new generation less costly than existing, gas prices low – The argument that competition will reduce costs and do a better job than regulation of allocating risk appeals to policymakers Ø Mid- to late ’ 90 s: Restructuring – Monopoly elements of the system—T&D—remain price-regulated – G is unbundled from T&D—divestiture or corporate separation – G is competitively supplied through contracts with load-serving entities and through the short-term wholesale market – The overall system is operated by an independent system operator, to maintain reliability in the short and long terms

The Aughts Ø In restructured states: – Retail competition not working for residential and The Aughts Ø In restructured states: – Retail competition not working for residential and small commercial customers – Default service contracted for on short-term bases – Neither competition nor planning is protecting consumers: at the mercy of the short-term markets • Markets are typically not designed to deliver efficiency or environmental protection – Response: IRP for default service – portfolio management Ø Most states still vertically integrated – Interest in IRP is growing; now the law in 28 states 10

TMI Natural Gas Gen Prevails QFs Energy efficiency $ 1990 Clean Air Acts Gas TMI Natural Gas Gen Prevails QFs Energy efficiency $ 1990 Clean Air Acts Gas Prices Rise The Energy Crisis Technology, Economics, and Politics: a Time Line Future Trends? : Customer Generation IGCC and sequestration New Nuclear New Renewables Climate Change Caps Mercury and PM limits Efficiency Costs stable Smart Grid Regulatory Reform Horizon affected by imminent big supply decisions 2000 2007 Wholesale competition, RTO Retail competition nearby 2030

Potential Energy Savings in New England Potential Energy Savings in New England

Potential Capacity Savings in New England Potential Capacity Savings in New England

PUC Oversight of IRP Ø What is the legal significance of an IRP? What PUC Oversight of IRP Ø What is the legal significance of an IRP? What are the utility’s obligations under the plan? How prescriptive is it? – Laws, rules, in many states (e. g. , CA, CO) call for IRPs to be reviewed by the PUC. They may be approved in whole or in part, and some portions may be rejected. Revisions may be required. – Approval of plans does not guarantee rate recovery for individual investments, although plans may be used as supporting evidence in prudence reviews, rate cases, etc. – Utility actions may be monitored via periodic status reports. Ultimate enforcement occurs in rate cases. Ø How does the plan deal with changes in circumstances? Ø What does planning mean in a restructured state? How should default (basic) service be handled? Ø How do renewable performance standards and efficiency performance standards fit into the process? Ø A utility’s least-cost plan should be its most profitable course of action (NARUC 1989) 14

Case Study: Your Western Neighbor Ø Hydro-Quebec Contract – October 1990: contract approved by Case Study: Your Western Neighbor Ø Hydro-Quebec Contract – October 1990: contract approved by PSB under 30 VSA § 248 • – – §§ 248(b)(2) and (4), in conjunction, require that new investments or contracts be the least-cost resource necessary to meet present and future demand for service August 1991: shortly after NYPA decides not to lock in its own 800 MW contract with HQ, the Vermont utilities lock in their 340 MW contract January 1998: PSB concludes that the lock-in was imprudent and that part of the contract is not usedand-useful. $5. 5 million in rates is disallowed Ø IRP statute, 30 VSA § 218 c adopted in 1991 – (b) Each regulated electric or gas company shall prepare and implement a least cost integrated plan for the provision of energy services to its Vermont customers. Proposed plans shall be submitted to the department of public service and the public service board. The board, after notice and opportunity for hearing, may approve a company's least cost integrated plan if it determines that the company's plan complies with the requirements of subdivision (a)(1) of this section. Ø 2004 Order clarified that approval of the plan is approval of the decision-making process only Ø Utilities are expected to adapt to changing conditions by continuously making operational decisions that result in the least-cost plan. Ø Specific actions and decisions may be subject to prudence reviews, typically in rate cases. Ø Prudence reviews will investigate whether actions were taken in a manner consistent with the process outlined in the IRP 15

Challenges of EE and Other Demand-Side Resources Ø Barriers, market and otherwise – Customer: Challenges of EE and Other Demand-Side Resources Ø Barriers, market and otherwise – Customer: – Utility Ø Responses – Programmatic approaches • Integration with other energy uses – “Whole buildings” or “all-fuels” approaches – Regulatory reforms • Breaking the link between sales and revenues • Performance incentives 16

Cost-Effectiveness Testing Ø How should EE cost-effectiveness be tested? – – – Participant cost Cost-Effectiveness Testing Ø How should EE cost-effectiveness be tested? – – – Participant cost test Rate impact (no losers, non-participant cost) test Utility cost (revenue requirements) test Total resource cost (all ratepayers) test Societal cost test Ø Is C-E testing affected by the manner in which EE is delivered? – Utility or third-party • Vertically integrated utility or wires-only 17

Costs and Benefits Economic Perspective Avoided Costs Participant Test Customer Bill Savings X Costs Costs and Benefits Economic Perspective Avoided Costs Participant Test Customer Bill Savings X Costs Incentive Payments Program Cost Customer Lost Costs Revenue X X Rate Impact Test X X Utility Test X X Total Resource Test X X* X X Societal Test *Including avoided environmental costs X

IRP in the Future Ø Federal carbon regulation is imminent Ø The objective function IRP in the Future Ø Federal carbon regulation is imminent Ø The objective function of IRP will not merely be least cost, but least cost given a constraint on greenhouse gas emissions 19

Interesting Activities in China Ø Efficiency Power Plants (EPPs) – An EPP is a Interesting Activities in China Ø Efficiency Power Plants (EPPs) – An EPP is a bundled set of energy efficiency programs designed to deliver the energy and capacity equivalent of a large conventional power plant – Pilots in six provinces Ø Differential Tariffs – Output-based efficiency standards for eight major industries – Failure to meet standards results in price increases • Double whammy: inefficient users buy more electricity and pay more per k. Wh for it Ø Environmental Dispatch – Clean resources are dispatched before dirtier – SO 2 is the driver – Loading order determined by CEM data, delivered directly to system operators

Some Concluding Thoughts Ø Least-cost planning identifies needed resources Ø Costs of service are Some Concluding Thoughts Ø Least-cost planning identifies needed resources Ø Costs of service are recovered in rates Ø Customer-sited resources create unique financial challenges for utilities no matter who delivers the resources Ø Decoupling eliminates the key financial barrier to utility support for customer-sited resources – Stabilizes utility revenues – Reduces or eliminates a host of risks (and therefore costs) for both utility and customers 21

Questions Ø Email: rweston@raponline. org Ø Web: www. raponline. org Ø RAP is an Questions Ø Email: [email protected] org Ø Web: www. raponline. org Ø RAP is an non-profit, non-governmental organization, founded in 1992. We provide technical and educational assistance to government officials on energy and environmental issues. RAP Principals are former state utility and environmental regulators, consumer advocates, and energy efficiency professionals Ø Funded by US Dept. of Energy and Environmental Protection Agency, the Energy Foundation and other foundations, and international agencies 22