Best Practices in Energy Efficiency Program Screening - Synapse ...

Discount Rate: The discount rate used to calculate present values of costs and benefits
has significant implications for the cost-effectiveness of energy efficiency programs.
Many states use the utility weighted average cost of capital for a discount rate.
However, the energy efficiency activities are a low-risk investment for most energy
efficiency program administrators, and thus a lower discount rate would be appropriate.
Cost-Effectiveness Screening Level: Cost effectiveness can be determined at either the
measure level, program level, or at the portfolio or plan-wide level. Of these options,
measure level screening is the strictest application for determining cost-effectiveness,
and often leads to limited programs and savings. We are aware of at least one state that
screens for cost effectiveness at the measure level and is experiencing difficulty
justifying certain measures, including insulation in home energy retrofits. While such
measures provide significant levels of savings, especially when combined with other
measures or efficiency efforts, the program administrators cannot include uneconomic
measures in their efficiency plans, and are therefore compelled to reduce their program
offerings and overall savings.
Measure Life: Implementing energy efficiency programs requires upfront spending, while
the measures installed through the programs produce savings over the course of their
useful lives. Depending on the measure, the useful life can be as long as 20 years or
more. Some states artificially truncate the years of benefits that can be included in costeffectiveness
screening (e.g., only 15 years of savings can be accounted for). Such an
approach skews the cost-benefit analysis because it limits the full amount of benefits
resulting from efficiency efforts.
This report addresses these and other issues, and recommends best practices that
regulators, program administrators, and other efficiency stakeholders can adopt for
appropriate efficiency program screening.
Illustrative Examples
For many of the topics discussed below, we provide an illustrative example that
demonstrates the issue and highlights the effect of applying the recommended best
practice. The illustrative examples are based on an actual efficiency portfolio provided
by an electric utility in New England, including the utility’s efficiency budget, savings,
measure life, avoided costs, and other factors. We reference the same utility in each
example for consistency.
Appendix A includes a description of the programs that are offered by this example
utility. Figure 1.1 below provides a summary of the actual levelized cost of saved energy
for each of these programs, relative to the avoided cost cap that is currently being used
by this utility. Each program’s energy savings are presented in the width of the
program’s bar, and each program’s levelized cost is demonstrated by the bar’s height.
(The costs and avoided costs presented in this figure are limited to those that are
included in the Program Administrator Cost test, i.e., just the electricity-related costs and
benefits.)
As indicated in Figure 1.1, these programs are all well below the avoided cost of
electricity, with the exception of one of the low-income programs. (This low-income
program is cost-effective under the Total Resource Cost test, because of the low-income
other program benefits. We will address this issue in Section 4.1.) The average cost of
the energy efficiency portfolio as a whole is well below the avoided costs, with an
average levelized cost of 3.4 cents per kWh.
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