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

and compare the difference in present value revenue requirements between the two
scenarios. It is important that each of the scenarios modeled include an optimized set of
resources; otherwise the avoided costs could be artificially inflated. Ideally, the costs of
each scenario would be estimated using an hourly production cost model in order to get
an accurate indication of the hourly operational costs of the electricity system.
Regardless of whether a market price forecast is used or IRP practices are used, it is
important to reflect the different avoided energy costs that occur at different times of the
day and different times of the year. This is because different types of energy efficiency
resources can reduce demand at different times when prices may be significantly
different. Those resources that reduce demand during primarily peak periods will result
in higher avoided energy costs than those that reduce demand primarily during off-peak
periods.
3.3 Avoided Capacity Costs
As with avoided energy costs, those utilities that participate in competitive wholesale
capacity markets should use a capacity market price forecast, while those that do not
should use integrated resource planning approaches.
Forecasts of avoided capacity costs typically include both a short-run and a long-run
component. The transition point between the two occurs in the resource balance year,
i.e., the first year in which new capacity resources may be needed to meet reliability
requirements and the growth of peak loads.
Over the short-run, while there is sufficient existing capacity resources on the system,
wholesale capacity market prices would be driven by the mix of existing capacity
resources needed to meet the capacity requirement in each year. Over the long run,
when new capacity is needed to meet demand, the capacity market prices would be
driven by new entrants to the wholesale capacity market.
While the new entrant to the capacity market could be any type of generator (baseload,
cycling, peaking), with any type of fuel (gas, coal, oil, wind, solar, nuclear), the new
entrant’s capacity-only cost is likely to be consistent with the cost of a new gas-fired
combustion turbine facility, which is built primarily for the purpose of providing peaking
capacity. For this reason, forecasts of wholesale market capacity prices typically assume
that those prices will trend toward the cost of a new gas-fired combustion turbine by the
resource balance year (Synapse 2011c). The long-run capacity value would be equal to
the combustion turbine’s annualized fixed cost less the net revenues it would earn
through participation in the energy and ancillary services markets, i.e., the residual
capacity value.
When using integrated resource planning methods to estimate avoided capacity costs it
is important to properly identify the year in which new capacity is needed, both in the
scenario with energy efficiency and the scenario without. It is also important to recognize
that there are avoided capacity benefits from energy efficiency resources prior to the
resource balance year.
Regardless of whether a market price forecast is used or IRP practices are used, it is
important to estimate the avoided capacity costs separately from the avoided energy
costs to ensure that there is no double-counting or under-counting of one or the other.
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