Reducing Global Warming

1
Reducing Global Warming Customers Bills
Through Utility Energy Efficiency

• Jeff Fiedler Devra Wang
• Natural Resources Defense Council
• www.nrdc.org, dwang_at_nrdc.org
• COP-11
• December 7, 2005

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Electricity An Essential Part of Our Lives

• Our energy choices are intertwined with the
  things we care about most
• Our environment, our economy, our health, our
  childrens quality of life

3
Resource Choices Matter
Comparison of Carbon Dioxide Emission Rates of
Electricity Generation Resources
Sources Department of Energy, Environmental
Protection Agency, Energy Information
Administration, California Energy Commission,
Center For Clean Air Policy
4
How Can We Reduce Customer Bills?

• Total bill (use) x (rate)
• Efficiency vs. conservation
• Customers want energy services at lowest cost

5
Energy Efficiency is an Energy Resource
PNW 12 Energy Savings
CA 20 Peak Energy Savings
2,600 aMW Avoided in Last 25 Years
10,000 MW Avoided in Last 25 Years
Sources Northwest Power and Conservation
Council, California Energy Commission
6
The Value of Energy Efficiency

• It is the Cleanest, Cheapest, Fastest Resource
  Available
• 2-3 cents/kWh vs. 5-6 cents/kWh
• Saves billions in energy costs and avoided
  investments
• Reduces air pollution, carbon emissions, and
  water consumption
• It is Abundant
• Huge cost-effective untapped savings
• It Delivers
• Proven reliability
• Reduced price volatility

7
Examples of Energy Efficiency

• CFLs save up to 80 of the energy used by an
  incandescent bulb.
• LED traffic signals use 80 to 90 less energy
  than standard signals.
• LCD computer monitors use 80 less energy than
  CRTs.

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The Demand Side of the Equation Electricity
Source Xenergy, Californias Secret Energy
Surplus The Potential for Energy Efficiency,
September 2002
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The Demand Side Natural Gas
Sources Kema-Xenergy, California Statewide
Residential Sector Energy Efficiency Potential
Study, April 2003 and Kema-Xenergy, California
Statewide Commercial Sector Natural Gas Energy
Efficiency Potential Study, July 2003
10
Achievable, Cost-Effective Savings Potential
The U.S. could cost-effectively save 24 of
projected electric needs and 9 of gas needs over
20 years.
Source ACEEE
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Lowering the Price of Gas

• Energy efficiency and renewable energy can
  lower the wholesale price of gas.
• An aggressive nationwide effort could cut
  wholesale natural gas prices by 20, saving
  consumers 15 billion per year.

Sources Energy and Environmental Analysis ACEEE
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Natural Gas Efficiency Programs
Source ACEEE, Responding to the Natural Gas
Crisis Americas Best Natural Gas Energy
Efficiency Programs, December 2003
13
Electric Efficiency Programs
Sources ACEEE and NRDC
14
CA Sets Nations Most Aggressive Goals
Sources California Energy Commission CPUC
Decision 04-09-060, September 2004
15
Policy Tools for Advocates

• Decoupling
• Cost-recovery
• Best programs / potential studies
• Performance-based incentives
• Codes and standards
• RDD

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Performance-based Incentives

• Need a balanced, performance-based incentive
  system that provides the resource portfolio
  manager with risks and rewards.
• Shared-savings mechanism provides incentive for
  utilities to maximize net benefits to customers.
• It does not fully level the playing field.

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RDD and Efficiency Standards

• RDD
• Energy Efficiency Programs
• Standards

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Problem with Traditional Regulation

• Regulators or directors establish a sales
  forecast, determine an authorized revenue
  requirement (including both fixed and variable
  costs), and set rates by dividing the two.
• Simplified Example
• Sales forecast 10 therms
• Variable cost 40 per therm
• Fixed cost 6.00
• Authorized revenue requirement 4.00 6.00
  10.00
• Rate per therm 1.00 per therm (10.00 / 10
  therms)

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Problem with Traditional Regulation (2)

• BUT, if actual annual sales diverge from the
  forecast, the utility will either under- or
  over-recover the fixed-cost element of its
  revenue requirement.
• Example of Sales Below Forecast
• Actual sales 9 therms
• Variable cost 40 per therm x 9 therms 3.60
  
• Fixed cost 6.00
• Actual total costs 3.60 6.00 9.60
• Actual revenues 9 therms x 1.00 per therm
  9.00
• Utility has under-collected its fixed costs.

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Problem with Traditional Regulation (3)

• Example of Sales Above Forecast
• Actual sales 11 therms
• Variable cost 40 per therm x 11 therms
  4.40
• Fixed cost 6.00
• Actual total costs 4.40 6.00 10.40
• Actual revenues 11 therms x 1 per therm
  11.00
• Utility has over-collected its fixed costs.
• Bottom Line
• Every therm of reduced sales loses 60 in fixed
  cost recovery
• Every therm of increased sales yields a 60
  windfall.

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Disincentives Faced by Public Utilities

• Once board sets utilitys rates, its ability to
  meet financial obligations is entirely dependent
  on meeting or exceeding expected sales volumes
• Public utilities have comparable needs for fixed
  cost recovery
• Often counted on to underwrite crucial city
  services.

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Example Los Angeles DWP

• LADWP is one of the top ten sources of revenue
  for the City of Los Angeles.

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The Solution Eliminating Disincentives

• NRDC and AGA join in supporting mechanisms that
  use modest automatic rate true-ups to ensure that
  a utilitys opportunity to recover authorized
  fixed costs is not held hostage to fluctuations
  in retail gas sales.
• - Joint Statement of the American Gas
  Association and the Natural Resources Defense
  Council, July 2004
• If sales are higher than expected, return
  over-collected revenues to customers, and vice
  versa.
• Maintain volumetric prices to provide customers
  with conservation incentive.

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The Solution Example of True-ups

• Illustration of True-up for Utility
  Over-collection of 0.60
• Sales forecast for the following year 10
  therms
• Variable cost 40 per therm (no change from
  prior year)
• Fixed cost 6.00 (no change from prior year)
• Revenue requirement 4.00 variable cost
  6.00 fixed cost 0.60 over-collection 9.40
• Rate per therm 94 per therm (9.40 / 10
  therms)
• The utilitys rate is adjusted to return the
  0.60 that was over-collected the past year to
  customers.

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Why Not Use

• Lost revenue recovery?
• Utility revenues still linked to sales
• Most profitable energy efficiency programs would
  look good on paper and save nothing in practice
• Fixed charges?
• Customers lose incentive to conserve or invest in
  energy efficiency
• Lumpy investments may be fixed in near-term but
  variable in longer-term

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Status of Decoupling Efforts

• Electric utilities
• Pacific Gas Electric (CA)
• Southern California Edison (CA)
• San Diego Gas Electric (CA)
• PacifiCorp (WA)
• Idaho Power (ID)
• New York

• Gas utilities
• Northwest Natural Gas (OR)
• Pacific Gas Electric (CA)
• San Diego Gas Electric (CA)
• Southern California Gas (CA)
• Southwest Gas (CA)

Proceeding underway
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Conclusions

• We have the policy tools to cut electricity
  natural gas bills quickly and substantially.
• Aligning utility incentives with customer
  interests is essential.
• Accelerate or initiate energy efficiency
  programs immediately.
• Significant efforts in US States to reduce
  global warming emissions, in absence of national
  leadership