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

3. Calculation of Avoided Costs
Energy efficiency programs result in several types of avoided costs, and it is important
that all of them are included in the screening analysis and that each of them is calculated
correctly. This section provides an overview of the proper techniques for estimating
avoided costs. Proper estimation of avoided costs requires many important analytical
techniques that are beyond the scope of this study. Readers are encouraged to refer to
the reference documents for more details.
3.1 Introduction
The typical approach for quantifying the benefits of energy efficiency is to forecast longterm
avoided costs, defined as costs that would have been spent if the energy efficiency
savings measure had not been put in place. In addition, the utility may not have to
purchase as much system capacity, make as many upgrades to distribution or
transmission systems, buy as many emissions offsets, or incur as many other costs. All
such cost savings resulting from efficiency are directly counted as avoided cost benefits.
(NAPEE 2007, Section 3).
There are two main categories of avoided costs: energy-related and capacity-related
avoided costs. Energy-related avoided costs involve market prices of energy, losses,
natural gas commodity prices, and other benefits associated with energy production
such as reduced air emissions and water usage. Capacity-related avoided costs involve
infrastructure investments such as power plants, transmission and distribution lines,
pipelines, and liquefied natural gas (LNG) terminals (NAPEE 2007, Section 3).
Nationwide, states use different methodological approaches as the basis for their
avoided costs. Twelve states use essentially fixed values based on an assumed “next
power plan,” eleven states based them on a more sophisticated modeling of average or
marginal system costs, twelve states used some market price based methodology, and
three states used some other methodology (ACEEE 2012, p.32).
3.2 Avoided Energy Costs
When estimating avoided energy costs it is important to consider the relevant market
structure. For those utilities that participate in competitive wholesale markets, a forecast
of market prices should be used to estimate avoided costs. For vertically integrated
utilities that do not participate in competitive wholesale markets, integrated resource
planning approaches should be used to estimate avoided costs.
If energy market prices are used to estimate avoided energy costs, then these market
prices must be forecast for as many years into the future as necessary to cover the
entire study period. (See Section 5.2 for a discussion of the appropriate study period to
use.) In a wholesale electricity market context, the market price is equal to the marginal
cost of operating enough generation units to meet demand in each hour of the year. This
marginal energy cost can vary significantly between peak and off-peak hours and
seasons, and is likely to change over time in response to changing demands, changing
fuel prices, plant retirements and plant additions.
Integrated resource planning approaches typically require developing two long-term,
optimized electricity scenarios, one without energy efficiency programs and one with,
| 22 Best Practices in Energy Efficiency Program Screening | www.nhpci.org