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

Utilities typically have to raise capital (mostly with debt and equity) to invest in supplyside
resources, and then they are later allowed to recover the investment plus the cost of
capital through rates over the life of the asset. For energy efficiency investments,
utilities are typically allowed to recover the investment immediately through system
benefit charges, or in a very short amount of time through balancing accounts in rates.
Because of this different approach to cost recovery, efficiency investments are a much
lower financial risk to utilities than supply-side resources.
The discount rate applied to the TRC test and the PAC test should reflect this lower
financial risk of energy efficiency investments. We recommend that states use a generic
market indicator of a low-risk investment, such as the interest rate on long-term US
Treasury bills, when applying the TRC or the PAC test. This rate is widely accepted as
representing low-risk investments, and is straightforward, transparent, and readily
available.
Calculation of Avoided Costs
All of the relevant
avoided costs should be
accounted for, and each
of them should be
calculated correctly.
Energy efficiency programs result in several types of avoided costs,
and each of them should be included in the screening analysis and
calculated correctly. First and foremost, avoided energy and
capacity costs should be based on long-term forecasts that properly
capture the energy and capacity impacts of energy efficiency
resources, account for the structure of the market in which the
relevant utility operates, and capture differences between peak and
off-peak periods.
It is also important to account for the cost of transmission and distribution that is avoided
by energy efficiency. In estimating these costs, program administrators should
distinguish between those transmission and distribution costs that can be deferred or
avoided through energy efficiency and those that cannot. Avoided distribution costs tend
to be higher than avoided transmission costs, but avoided transmission costs are
increasing, particularly in regions of the country that are expecting significant growth in
new transmission investments.
The avoided costs of compliance with environmental regulations should be explicitly
accounted for in the Societal Cost test, the TRC test and the PAC test. The costs of
environmental compliance will eventually be passed on to ratepayers, and those that can
be avoided should be included as part of the avoided costs of energy efficiency. Recent
environmental regulations from the US Environmental Protection Agency are likely to
increase the costs of environmental compliance, and may require the retirement of many
fossil-fired generation units, which will have significant implications for energy efficiency
avoided costs.
Similarly, there are several existing and anticipated initiatives
at the federal, regional and state levels to curtail the emissions
of greenhouse gases (GHG). Energy efficiency is by far the
lowest-cost and most plentiful option for meeting these
initiatives. In order to meet climate change regulations at the
lowest cost, the full avoided cost of complying with current and
future GHG initiatives should be accounted for in screening
energy efficiency programs. In sum, energy efficiency should
be evaluated on an equivalent basis with other options for
| 4 Best Practices in Energy Efficiency Program Screening | www.nhpci.org
In those states and regions
with climate change
requirements, energy
efficiency should be
evaluated on an equivalent
basis with other options for
mitigating greenhouse gases.