Day2- session 3Five Tests for DSM Cost Effectiveness


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End-Use Energy Efficiency: National Plan for Regional Energy Challenge 26 - 27 July, 2010

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Day2- session 3Five Tests for DSM Cost Effectiveness

  1. 1. Euro-MediterraneanEnergy Market Integration Project Germany France Lebanon Five tests for DSM cost effectiveness Tunis, 26 July 2010 Belgium Dr. Albrecht Kaupp Team Leader “The contents of this publication are the sole responsibility of the author and can in no way be taken to reflect the views of the European Union”. This project is funded by the European Union 1
  2. 2. Support for the enhanced integration and the improved security of the Euro-Mediterranean energy marketThis project is fundedby the European Union
  3. 3. A regulator’s basic recommendation A power utility should consider energy efficiency as a RESOURCE and should spent money to PROCURE that resource as they would for other resources.The choice is between a new MW power plant or a NEGAWatt power plant This project is funded by the European Union 3
  4. 4. Power Utilities basic response“We agree as long as DSM projects candeliver as reliably and as predictableMWh saved as we supply MWh generated This project is funded by the European Union 4
  5. 5. How does a utility buy a kWh of solar electricity ? Power industry gridYou are an IPP Your meter 40 $Cents/kWh Feed-in-Tariff The bottom line: An almost risk free investment in this PV power plant should earn you an 8% interest every year for 20 years This project is funded by the European Union
  6. 6. How do you sell a kWh of electricity savedYour 2 kWh/day The new one has an energyfridge goes here star rating of 1.3 kWh/dayIf 1,000,000 are bought then you are operating a NEGAWATT Powerplant supplying (2 - 1.3) x 365 = 255 GWh/ year (saved) This project is funded by the European Union 6
  7. 7. You may sell your kWh (saved) from your NEGAWATT power plant by…..receiving a cash rebate from a power utility (investment subsidy for you and buying kWhS for the power utility )…..a tax incentive by the Government (revenue loss to the treasury)….. Sell the kWh to utilities and others that must buy white certificates for a market price….. but you cannot sell the kWh saved under a feed- in-tariff since you cannot transmit “kWh saved” This project is funded by the European Union 7
  8. 8. Four cost effectiveness tests judge the total effectiveness of these schemes- Participant (Quantifiable benefits and costs to a customerparticipating in the program)- Ratepayer Impact Measure (What happens to allcustomer rates due to changes in utility revenues and operatingcosts by the program)- Total Resource Cost (Net costs of the program based ontotal costs including participants and utility’s costs)- Program Administrator Cost (all programmanagement costs including incentives costs to the participants ) This project is funded by the European Union 8
  9. 9. Only the very naive or very brave will try to solve this left equationThis project is fundedby the European Union 9
  10. 10. National compact fluorescent lamp (CFL) campaigns Baseline ILB CFL 15 Watt 60 Watt, 1000 h life 4000 h life2000 hours/year 2000 hours/year8 $c/kWh, 1 US$ 8 $c/kWh, 6 US$ This project is funded by the European Union 10
  11. 11. US$ costs and savings over 24 months NPV (all costs) = 6 @ 10% per year-$6 0 0 0 6 months1 1 1 1 $ 3.6 3.6 3.6 3.6 NPV (all savings + incentives) = 7.45 @ 10% per year Benefit/Cost = 16.72 / 6 = 2.8 This project is funded by the European Union 11
  12. 12. Participants test conclusions….You invested $6 in one CFL….Financially attractive investment: Benefit/Cost = 2.8....Return on CFL investment about 165 %….Pay back period only 7 months but CFL last 24 months….180 kWh saved by the CFL, before it burns out, are up for sale if you find a buyer….No apparent need for incentives through utilities ! WHY REBATES or INCENTIVES ? This project is funded by the European Union 12
  13. 13. …..Let the debate begin Stay cool and unbiased Define and argue scenarios Be informed Target subsidies to the needy in other words think “BAC”This project is fundedby the European Union 13
  14. 14. …..The “50 kWh metered lifeline tariff ” poor household scenario :Provide CFL’s for free Logical conclusion: Even providing the CFL for free at $ 6 benefits the utility based on a program administrator cost test (PAC)Utility supply costs are 5 $cents/kWhUtility realized revenues are 1 $cents/kWhLoss reduction to Utility 180 x 4 = $ 7.2 per CFLFree CFL distributed (“cash rebate”) $ 6.0 for CFLNet benefit to utility $ 1.2The utility has just bought 180 kWh of saved electricity for 600/180 = 3.3 $Cents/kWh from this consumer group This project is funded by the European Union 14
  15. 15. … The “commerce” scenario Logical conclusion: No power utility will voluntarily promote CFL in this sector under such conditionsUtility supply costs 8 $cents/kWhUtility revenues are 10 $cents/kWhRevenue loss for utility 180 x 10 = $ 18.0 per CFLProfitability loss 180 x (10-8) = $ 3.6 per CFL This project is funded by the European Union 15
  16. 16. The basic problem: „Rate Cases“ Needed income from electricity sales SAR($ / kWh )  Annual sales in kWhIn a “rate case” the power utility reports to a regulator itsexpected kWh sales and required income which includesan acceptable return for the investors. If the regulatorapproves this approach, the power utility would not alwaysbenefit from reduction of kWh sales by a DSM program.Rates are fixed for 3 - 5 years and usually not renegotiable.Intelligent but fair decoupling of tariffs and targeted DSM isrequired to make DSM attractive to a power utility. This project is funded by the European Union 16
  17. 17. Rate Impact Measure (RIM)A power utility has settled its rate case of annual requiredrevenues of $ 500 Million from expected sales of $ 10Million MWh of electricity. The regulator approved SAR istherefore 5 Cents/kWh for the next 3-5 years.A national CFL campaign manages a penetration of 5CFL each for 100,000 business. Estimated 90,000 MWhof electricity are not bought and the utility looses $ 9Million revenues from this sector annually . This project is funded by the European Union 17
  18. 18. Required income split upThe utility reports its split up for the required income of$ 500 Million as follows - 30% fixed cost ($ 150 Million) - 70% variable costs ($ 350 Million). Fixed Cost (30%) Variable Cost (70%) Interest Fuels Debt service Consumables Depreciation Repair and maintenance Taxes, Royalties Technical losses Public relations Staff cost Lease, insurance Pension fund Dividends This project is funded by the European Union 18
  19. 19. The rate increase asked by the utility $350 Million 9.91 New cos t  $150 Million   $496.85 Million 10 $496.85 Million New SAR   5.013 Cents / kWh 9.91 Million MWhThe range of variations between 0% and 100% fixed cost0% fixed costs: 5.00 Cents/ kWh ( 0% tariff increase)100% fixed costs: 5.045 Cents/ kWh (1% tariff increase) This project is funded by the European Union 19
  20. 20. Most sensitive cases and concerns Power utilities which have high fixed costs and no fuel costssuch as RE power plants and distribution companies aremostly vulnerable to reduced sales through DSM. Too generous rebates and other financial or fiscal incentivesresulting in “paying for the same kWh saved twice”. Utilities misunderstanding tariff decoupling and increasingfixed monthly service fee or demand charge. Utilities reducing their natural business risk by blamingsuccessful DSM for revenues losses even if variation in coldand hot days have caused the consumption to go down. This project is funded by the European Union 20
  21. 21. The dream approachA Government or power utility should tender a nationalenergy efficiency program (NEEAP) as a completepackage. Many variations are possible and could berefined:“We offer $ 500 million over 5 years to the bidder withthe lowest average $/MWh (saved) “ or“We offer 90% of the kWh supply cost of our nextplanned 300 MW peak load expansion in 2015 to abidder who could avoid this investment as reliably andon time as the peak capacity expansion. This project is funded by the European Union 21
  22. 22. The problem with this dreamWriting an offer for this tender is more costly,more complicated and requires more data input,many more field surveys, monitoring andexperience than preparing the engineeringprocurement offer for a 300 MW “peaker” Let us sponsor such an attempt and call it “Public tendering of NEEAP’s”This project is fundedby the European Union 22
  23. 23. First signs of climate change and adaptation This project is funded by the European Union 23
  24. 24. Energy modesty as inconvenient truth Best case future scenario India and China 2060 This scenario may require CHINA two resource worlds INDIAHUMAN DEVELOPMENT INDEX,a measure of human well-being, reaches Earth I Earth IIits maximum plateau at about 4000 kWhof annual electricity use per capita.Poverty alleviation is therefore stronglylinked to increased electricityconsumption up to a certain level.
  25. 25. Convergence and Contraction by ALLShadow of possible scenarios The one Earth scenario of convergence and contraction of the energy consumption among industrialized and industrializing Countries
  26. 26. “Everything should be made as simple as possible, but not simpler” (ALBERT EINSTEIN) THE ENDThis project is fundedby the European Union 26