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Total Resource Cost Effectiveness Test Utility Brown Bag Series by Tom Eckman, NWPCC Ken Total Resource Cost Effectiveness Test Utility Brown Bag Series by Tom Eckman, NWPCC Ken Keating, BPA October 4, 2006 1

The Plan’s Definition of Resource Cost. Effectiveness Comes From the Regional Act • The Plan’s Definition of Resource Cost. Effectiveness Comes From the Regional Act • "Cost-effective, ” means that a measure or resource must be forecast: – to be reliable and available within the time it is needed – to meet or reduce the electric power demand of the consumers at an estimated incremental system cost no greater than that of the least-cost similarly reliable and available alternative measure or resource, or any combination thereof. 2

Under the Act the term Under the Act the term "system cost" means: • An estimate of all direct costs of a measure or resource over its effective life, including: – the cost of distribution and transmission to the consumer – waste disposal costs – end-of-cycle costs – fuel costs (including projected increases) – and such quantifiable environmental costs and benefits as are directly attributable to such measure or resource 3

The Act’s Definition of Cost. Effectiveness • Seeks to minimize the total cost of The Act’s Definition of Cost. Effectiveness • Seeks to minimize the total cost of meeting the region’s need for the services provided by electricity, i. e. , its goal is economic efficiency. • Does not address the distribution of these costs among parties in the region 4

Alternative Cost-Effectiveness Tests • Participant Cost Test (PTC) – Costs and benefits to the Alternative Cost-Effectiveness Tests • Participant Cost Test (PTC) – Costs and benefits to the program participant • Total Resource Cost (TRC) – All Quantifiable costs & benefits regardless of who accrues them. Includes participant and others’ costs • Utility Cost Test (UTC) – Quantifiable costs & benefits that accrue only to the utility system. Specifically excludes participant costs • Rate Impact Measure (RIM) – Net change in electricity utility revenue requirements. • Is a measure of “equity”, not “cost-effectiveness” • Attempts to measure rate impact on all utility customers especially those that do not directly participate in the conservation program • Treats “lost revenues” (lower participant bills) as a cost 5

Common Metrics for TRC Cost. Effectiveness Benefit/Cost Ratio = Discounted Present Value of Benefits Common Metrics for TRC Cost. Effectiveness Benefit/Cost Ratio = Discounted Present Value of Benefits ($) Discounted Present Value of Costs ($) Net Present Value = Discounted PV of Benefits – Discounted PV of Costs ($) Levelized Cost (for comparison to other resources) = Discounted Present Value Costs Annualized over Life ($) Annual k. Wh Saved at Bus Bar (k. Wh) 6

Each Conservation Measure Has a Different “Cost. Effectiveness” Limit Based on When It’s Savings Each Conservation Measure Has a Different “Cost. Effectiveness” Limit Based on When It’s Savings Occur Weighted Average Value of Space Heating Savings = $41/MWh Weighted Average Value of Space Cooling Savings = $78/MWh 7

Plan Uses Total Resource Cost (& Benefits) Perspective • Best meets the requirements of Plan Uses Total Resource Cost (& Benefits) Perspective • Best meets the requirements of the Regional Act • Considers all quantifiable costs & benefits regardless of who accrues them • Ensures that conservation expenditures are good for the power system, the customer and society • Allows conservation to be compared to other resources considered for development by including all quantifiable costs & benefits • Was strongly recommended by utilities in first Council Plan • Plan conservation targets would be significantly higher if Council had used only “Utility Cost” 8

Why Council Uses TRC (1) Avoids Potential Double Counting of the Savings • Utility Why Council Uses TRC (1) Avoids Potential Double Counting of the Savings • Utility invest $2500 in efficient motor to acquire 5000 k. Wh/yr savings – Levelized Cost = 3. 4 cents/k. Wh – B/C = 1. 32 • Customer matches $2500 utility investment to save the same 5000 k. Wh/yr – Simple payback = 10 years, motor last 20 years • Total of all direct cost is $5000 for 5000 k. Wh/yr of savings – Levelized cost = 6. 8 cents/k. Wh – B/C ratio = 0. 66 9

Why Council Uses TRC (2) Directs Funds Toward Measures That Optimize Total Utility and Why Council Uses TRC (2) Directs Funds Toward Measures That Optimize Total Utility and Customer Investments • Utility invest $600 toward cost of $6000 solar PV system that saves 1200 k. Wh/yr – Alternatively utility and consumer could: • Invest $160 in 40 CFLs to save 1200 k. Wh, reducing cost $440 • Invest $600 to buy 150 CFLs, saving 5000 k. Wh, quadrupling savings • Especially important when budgets are limited 10

Care Must Be Used in Applying The Plan’s Cost-Effectiveness Results “Prescriptively” • Not all Care Must Be Used in Applying The Plan’s Cost-Effectiveness Results “Prescriptively” • Not all measures are in the Plan – Plan contains over 1000 applications of specific EE technologies – NOT an exhaustive list of all possible measures & applications • Plan assumes administrative costs = 20% of capital – Administrative cost vary widely by measure & by program design • Measure cost-effectiveness in Plan is an estimate – Measures in Chapter 3 are based on a single estimate of “avoided costs” for the next 20 years – But Plan targets are based on full portfolio model analysis, about 750 estimates of “avoided costs” – Measure costs and savings are a single point estimate, but vary widely in practice 11

“Cost-Effectiveness” of Conservation Varies by Perspective Energy Star Clothes Washer (MEF 2. 2) with “Cost-Effectiveness” of Conservation Varies by Perspective Energy Star Clothes Washer (MEF 2. 2) with Electric Water Heating and Electric Dryer • Present Value Capital Cost = $44/MWh – Value to Bulk Power System = $53/MWh (B/C = 1. 17) – Value to “Power System” (includes value to bulk power and local distribution system value) = $66/MWh (B/C = 1. 47) – Value to Region/Society (includes detergent & water savings, plus carbon credit) = $123/MWh (B/C = 2. 8) 12