United States
, Environmental Protection Air and Radiation EPA/400/1 -91/006.B
Agency -, (ANR^445) April 1991
SrEPA Acid Rain Advisory
Committee Meeting:
January 28-29,1991
Energy Conservation
and Renewables
Issue Papers
HEADQUARTERS LIBRARY
ENVIRONMENTAL PROTECTION AGENCY
, D.C. 20460
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LEAST CQST PLANNING ISSUE PAPER
SUBCOMMITTEE ON CONSERVATION AND RENEWABLE ENERGY
,..." . ACID RAIN ADVISORY COMMITTEE
January 28-29, 1991 '''..
Background; One of the requirements for receiving
allowances-from the. Conservation and Renewable Energy Reserve is
that the applicant utility must have in place a "least cost plan"
for meeting future electric; needs. "The genesis of this provision
is a movement initiated during the 1980s to formalize the
resource planning process undertaken by electric utilities and
ensure commissions and consumers that the full range of options -
-demand-side as.well asvsupply-side were being considered to
meet the power needs ofratepayers. The products of this
movement have become;known as "Least Cost Plans", VLeast Cost
Utility Plans?1, "integrated, Resource Plans" and the like. There
are as many definitions of these ..plans as states that have ;
adopted'them. While the precise-definitions and provisions
vary, the common.threads seem to be:;
6 The utility must outline a plan for meeting future
demand at lowest system cost.
o In so doing, the utility must explicitly consider both
' '. supply-side and demand-side resources.
o;..:... The plan must be submitted to the utility's regulatory
commission (or ratemaking authority) for review and
public comment.
A survey conducted in 1988 by the Electric Power Research
Institute concluded that least cost plans are under consideration
or'have been adopted in at least 43 states, a survey commissioned
by the National Association of State Utility Consumer Advocates %
(NASUCA) in 1989 determined that 14 states had adopted or were
considering least, cost plans* The discrepancy is based on
definitions of least cost, plans and survey techniques'. See
Cynthia Mitchell,. "Lagging in Least-Cost Planning-- Not As Far
Along As We Thought," Electricity Journal. December 1989, p. 24-
31. For- results of the individual surveys see Electric Power
Research Institute, "Status of Least-Cost Planning in the United
States," (Pub. EM-6133, Project 2982-2, prepared for EPRI by
Barakat, Howard and Chamber1in) 1988; and C. Mitchell and J.
Wellinghoff,. LCUP Consumer Participation Manual. 1989 (copies
available, through NASUCA, Washington, DC).
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Legislative Languaget (Title IV, Sec 404(f)(2)(B)(iii))
"(I) Such electric utility has adopted and is
implementing a least cost energy conservation and
electric power plan which evaluates a range of
resources, including new power supplies, energy
conservation, and renewable energy resources, in order
to meet expected future demand at the lowest system
cost.
i* (IX) The qualified energy conservation measures
or qualified renewable energy, or both, are consistent
with that plan.
"(Ill) Electric utilities subject to the
jurisdiction of a State regulatory authority must have
such plan approved by such authority. For,electric
. utilities not subject to the jurisdiction of a State
regulatory authority such plan shall be approved by the
entity with ratemaking authority for such utility."
""" *
«
General Principles; As stated in the legislation, the least
cost plan must be designed to meet electricity demand at lowest
system cost; a range of resources, including conservation and
renewable energy, must be evaluated in determining what least
cost is; and the process should undergo regulatory scrutiny by
the appropriate ratemaking body.
The "lowest system cost11 criteria implies that utilities
applying the "no losers test", which focuses on comparisons of
rate impacts of different resource options, rather than overall
system cost impacts, will not qualify for allowances from the
C/RE Reserve. .
Issues for Discussion:
o Should EPA explicitly require that public hearings before
the ratemaking authority take place? Does this happen
everywhere anyway?
o ,/iHow many utilities currently apply the "no losers test"? To
. what extent can EPA (in cooperation with NARUC, DOE and
others) assist in regulatory reform proceedings to ensure
that these utilities modify their least cost planning
, criteria and meet the qualifications necessary for
application for allowances from the reserve?
o Should EPA be specific about the breadth and depth required
in utility evaluation of conservation and renewable energy
resources?
o Should EPA mandate or encourage that environmental costs be
incorporated into least cost plans? Sec. 808 of Title VIII
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commissions a study to. be completed by May .1992 .on the
.environmental costs of electric generation resource types:.,
"(b) RATE INCENTIVES STUDY; Within 18 months
after enactment, the Federal Energy Regulatory,
.Commission, in.consultation, with the.Environmental
Protection Agency, shall complete.a study which ,
calculates the net environmental benefits; of renewable. \
energy, compared.to nonrenewable energy, and assigns; .
numerical values to them. The study, shall include -t but
notKbe limited to, environmental .impacts on air,, water,,
land use, water use, human health, and waste disposal.
*{C) MODEL REGULATIONS. In conjunction with
,' the study in subsection (b),' the Commission shall
'.propose one or more models for incorporating the net
environmental benefits into the regulatory treatment of
-. renewable energy in order to provide-economic
'compensation for those benefits. ; ? . '-. ., ?
"(d) REPORT. The Commission shall transmit the
study and the model regulations to Congress, along with
: ' any recommendations oh the- best ways to reward
renewable energy technologies'for their environmental
; benefits, in a report no later .than, 24 months after ,.
~-, enactment." .
-". 4* ' * ' - ' ' ' ' ' ' . i '
When completed, this study is likely to provide more .widespread
quantitative support for initiatives underway in some states
already, although the timing may not lend'itself to EPA mandates
at this stage of the -Conservation and Renewable Energy Reserve
rulemaking. . .'"-* . ,
.Charge of the Subcommittee! It is the responsibility of the
Subcommittee to draft criteria, and potentially language, to be
used in the Conservation and Renewable Energy rule for defining
least cost plan. . These criteria (and/or this language) will be
presented to the full ARAC on January 29 for review, discussion,
and agreement.
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NET INCOME NEUTRALITY ISSUE PAPER
SUBCOMMITTEE ON CONSERVATION AND RENEWABLE ENERGY
ACID RAIN ADVISORY COMMITTEE
January 28-29, 1991 . -
Background: One of the requirements for application for
conservation allowances' from the Conservation and Renewable
Energy Reserve, is that utilities have rates which guarantee that
they make as much money on energy saved as energy sold. ;
Historically a disincentive has been in place for pursuit-of
demand side energy efficiency improvements by utilities.-
Efficiency.improvements reduce sales, and thus decrease profits.
John Rowe, President and CEO of New England Electric System
(NEES), summarizes the traditional utility disincentives for .,
conservation: - ' . , " :
1. Slow and uncertain recovery - of costs; . . . . '- ,
2. Lost base revenues; . . '''-..- '-*/
3. Lack of direct profit opportunity; '".'*'..
4. .Conservation expenditures beyond the "no losers", test
'increase electricity, rates; , . -.. - . '-'
5. Few businesses or bureaucracies wish to shrink their
opportunities. .. ' . _ - * ;. . '..
6. It is difficult to explain [conservation and load :
management];to customers and employees if it is not
profitable.1-
. ' h; '" -..-. v .-..,''-.
NEES and the New- England commissions to which it is accountable
(as well as a number .of other utilities and commissions) have
created a regulatory system which eliminates these disincentives,
and in fact allows the, utility to profit from: conservation. The
net income neutrality (NIN) provision was included as a . "' /.-
prerequisite for application for the reserve;in the same spirit:
that is, to ensure that utilities are not harmed financially, by
conservation investments. ,The authors of the-provision,,.-.1? " ' ,
Representative Edward Markey of Massachusetts and. Representative
Carlos Moorhead of.California stated, "We believe that utilities
must be allowed to profit- from conservation so that they will -
aggressively pursue all cost-effective means of improving their
customers' energy efficiency." .
Legislative Language: (Title IV, Sec 404(f)(2)(B)(iv))
"In the case of qualified energy conservation measures
1 John W. Rowe, "Making Conservation pay: The NEES
Experience'," The Electricity:-Journal. December 1990, p.20,
.,'--.' f.''**. -" '' .* "' . :
? House Report 101-490, Part 1, at 675 (1990).'
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undertaken by a State regulated electric utility, the
Secretary of Energy certifies that the State regulatory
authority with jurisdiction over the electric rates of such
electric utility has established rates and charges which
ensure that the net income of such electric utility after
implementation of specific cost effective energy
conservation measure is at least as high as such net income,
would have been if the energy conservation measures had not
been implemented. Upon the date of any such certification
by the Secretary of Energy; all allowances which, but for
this paragraph, would have been allocated under subparagraph
(A) before such date, shall be allocated to the electric
utility. This clause is not a requirement for qualified
renewable energy." .
* ' .
General Principles; A couple of general principles govern
the concept of net income neutrality and implementation of
utility conservation programs:
(1) eliminate the disincentives
(2) create the incentive.
First is the decoupling of utility profits from sales.
Under standard practices, the more electricity a utility sells,
the more money it makes. This poses a major disincentive for any
action which would reduce sales, i.e. conservation programs.
Unless this decoupling takes place, or unless explicit mechanisms
are included for full cost recovery of conservation expenditures,
a disincentive for conservation will exist. If full cost
recovery is astutely adopted this disincentive can be effectively
eliminated.
Second is the creation of an incentive to pursue demand side
programs ~ this in the form of explicitly linking profits .to
conservation. Such profit-enhancing programs currently exist in
six .states (California, Massachusetts, Nevada, New Hampshire, New
York, and Rhode Island) with a number of others expected to
follow in the near future. These mechanisms may be constructed
in a variety of ways. In fact, flexibility has been the
watchword of most of the utility commissions that have incentive
programs so far.
Recent Experience; As stated above, a number of utilities
and commissions have instituted provisions guaranteeing net
income neutrality. The New England Electric System provides an
illustrative example of how one utility has put these provisions
into practice. The key elements of their program are:
o Value guaranteed to the customers:- ratepayers do
not bear costs for conservation efforts which
exceed the value of achieved .electricity savings.
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Shared savings for the company: the amount of
money the company earns is a share of the value
created --, profits only increase if customer
belief its increase. (see figure 1).
Payment only for performance: the company, earns
only to the extent that real installations are
achieved. ....
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Agreement" on the technical parameters for one
year: the value calculations are open for review,
are agreed upon for one year and are then updated
based on real experience.
RGURE1: C&LM Incentive
Distribution Costs
Una Losses,
Generating Costs
N6ES
Contractors
Total Value of
Avoided Costs
Program Cost
Net Value
The NEES incentive structure is based on the difference between the value of
conservation and its cost. The incentive allocates over 80% of net value to customers.
(Source: John Rove, "Making Conservation Pay,.11
Electricity Journal. December 1990, p. 22.)
The commissions in Rhode Island,''Massachusetts, and New
Hampshire established rules governing the NEES program in
slightly different.ways, although the basic premises remain
consistent. The success of the program is demonstrated, though>
by the increasing contributions to NEES1s bottom line as the
program matures, and perhaps most noteworthy, NEES's'projections
John Rowe, "Making Conservation Pay," p. 21.
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that demand will fall by nearly 2% between 1990 and 1991 as a
result of Increased conservation efforts.
The NEES program is simply one example of how net income
neutrality provisions seem to be benefiting ratepayers and
shareholders. There are certainly many ways of structuring
programs to achieve similar success. The discretion over
specific mechanisms is best left for utility/commission
negotiations; . '
Issues for Discussion;
o How can the provision be structured to encourage maximum
state participation, while safeguarding the spirit in which
it was written? Given that the legislative intent of the
conservation and renewable energy .reserve seems to be to
make conservation profitable so that utilities more
aggressively pursue demand side options, what
mechanisms/language will encourage this versus what
mechanisms/language will not? What elements are absolutely
essential to guaranteeing net income neutrality?
o Do the states seem ready and willing to move forward on the
regulatory reforms necessary to guarantee Net Income
Neutrality? What activities by EPA (perhaps in cooperation
with NARUC, DOE or others) will facilitate this movement?
Would workshops and seminars be helpful? Would the leaders
in the northeast and west be interested in contributing to
workshops targeting other regions?
o How does the rigor of this provision relate to EPA's
oversight role in the application and verification
procedures that follow? In general, the ARAC has expressed
that, where possible, EPA should leave specific program
discretion, evaluation and oversight to the states. A clear
net income neutrality provision may facilitate this. If an
unambiguous net income neutrality provision were in place ~
one in which increased utility profits and subsequent
ratepayer impacts were on the line it is likely that the
state-level scrutiny over specific conservation programs
would be fairly stringent. If state-level scrutiny were
stringent then less federal oversight on details of specific
programs would be necessary, ensuring greater flexibility in
conservation program implementation and evaluation.
If, on the other hand, the net income neutrality provision
is fairly "loose", there may be less state-level oversight
and may be greater opportunites for utility cream-skimming.
In order to ensure that allowances in the reserve are
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* Ibid. .
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allocated appropriately, EPA may need to be more
" prescriptive about conservation ..measures, particularly with
regard.to quantification of savings during application and
verification phases. This tradeoff warrants Subcommittee
discussion.
Charge of the Subcommittee! it is the responsibility of the
Subcommittee, members to draft criteria, and potentially language,
to be used in the conservation and Renewable Energy rule in .
defining net income neutrality. These criteria (and/or this
language) will be-presented to the full ARAC on January 29 for
review,<discussion, and .agreement.
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v ISSUES FOR FUTURE DISCUSSION . 1 - ' >
SUBCOMMITTEE ON CONSERVATION AND RENEWABLE ENERGY
J ^ - ACID RAIN ADVISORY COMMITTEE
January 28-29, 1991
: The following issues pertinent to the Conservation - and v ,;
Renewable Energy Reserve rule need to be discussed in detail by;
the .Subcommittee during the next several months: ' ' ' *
(1) Allowance Application and.Award Procedures ""
(2) Verification Procedures -
(3) Guidance on Conservation Measures "
.-.""" ' '
(4) Renewable.Energy Technology Guidelines
(5) Miscellaneous - .
If-time allows during the January meeting, discussions on
'some of these issues can be initiated. Issue papers will be
, prepared and distributed prior to upcoming ARAC meetings, ''"'
according to a schedule agreed'upon by the Subcommittee members.
To ensure that the issue papers fully explore each subject, it
.would, be helpful for members to read through .the items noted and
..identify omissions. Please, bring these omissions to, the
attention .of Cathy Zoi so they.can be added to the items to be
discussed. v - . '''-, -."'. '
'(1) Allowance Application and Award Procedures
o 'First-come, first-served provisions '
o One-time, up-front application^(for the, duration of the
program or reserve) vs. annual application
o One-time, up-front distribution of allowances vs.
. : annual (year-end) distribution of allowances
; , o Application for measures that become active some time
in the ,future (accounting for lead times)
o Over-application for the 300,000 allowances:
- . --'.. '' * - ''lottery? .' ' ' -. ' . .,,.'
- . pro-rata reduction in allowances'awarded?
.. ; - EPA evaluation of applications?
>". ; -!-. . 'need'-based distribution? '
o Guidance/specifications for estimates of -energy to be
saved or generated in forward-looking-year(s) (if
' applicable) ,.
- o , Forms and paperwork: integration of above issues with
permits and compliance plans
o [additional items welcome] . .
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(2) -Verification Procedures
o Reliance on and coordination with state authorities
o Timing of verification submissions: annually? within a
certain time period of calendar-year end?
o Relationship to allowance awards - resolution of
discrepancies
o . Guidance/specifications for estimates of energy saved
or generated; acceptable methodologies /
o Forms and paperwork: integration of above issues with
permits and compliance plans
o [additional items welcome]
(3) Guidance on ConservationMeasures
o Applicability or non-applicability of supply-side
efficiency improvements .
o Applicability or non-applicability of fuel switching
programs
o Guidance/specifications to be provided by EPA on other
demand side measures and programs
o [additional items welcome]
(4.) Renewable Energy Technology Guidelines -
o Generation from hybrids .'...'-:.
solar/natural gas ;
- coal/biomass co-firing-
o . - [additional items welcome] ....
(5) Miscellaneous
o Criteria which constitute "owns or operates" (in the
context that a reserve applicant "must own or operate"
,a fossil steam plant >25 MW)
o [additional items welcome] .
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ABAC Conservation and Renewables Subcommittee:
Issues Discussed at December 14 Meeting.
Qualifying Technologies
o Several, participants supported broad outlines rather than
prescriptive requirements in the provisions of; the regulations
that specify qualified technologies. . The,consensus was that
there is a need to; be flexible while still maintaining an
accountable system. / . ,.-v* ' ' ;-,
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o In general, there is a need to work with State PUCs to see
what is acceptable. ' .-..-
o The statute seems to give...EPA- discretion' to define the types
of DSM and renewable technologies that qualify (the law says
"as defined.by Administrator").
Supply-Side vs.^ Demand-side Energy Efficiency '
6 Participants discussed whether allowances should be allocated
to utilities for supply side energy efficiency technologies
(e.g., heat rate improvements, .transmission improvements),
rather than solely for .demand-side -measures. A related
question was whether interfuel substitution (e.g., gas for
electric heating), should be /considered a supply-side
efficiency measure? . '".''' " ;
In support of this approach, some participants felt that
* overall plant efficiency improvements might "provide more
.benefits than demand-side measures. These participants
. felt that a PUC should have the discretion to allow these
types of measures to be included in a least*cost plan.
- On the other hand, if you include supply-side measures,
do you make it too easy to get allowances? Aren't
general efficiency improvements already encouraged by the.
emissions cap and general incentives ...to conserve'
allowances? : . . ; .'
Several meeting participants argued that the energy
conservation allowance provisions were specifically
included as an incentive for demand-side programs, which
have traditionally faced regulatory barriers. For
. example, one participant noted that the requirement for
"no impact on net income" was included as an incentive
for PUCs to change their treatment, of DSM programs.
(However, another participant countered that in some
cases,, utilities also have disincentives for supply-side
efficiency improvements.) ' .
David Nemtzow, a member of Rep.. Markey's staff noted that
-* .the statute permits system-wide improvements (including
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supply-side). However, the real question is what is the
most appropriate use of the provisions? He noted that it
is on the demand-side where the greatest intervention is
required.
o Participants suggested that EPA investigate whether the Agency
has the flexibility to encourage DSM as a preference, but to
secondarily allow utilities to petition for. allowances for
supply-side efficiency measures. .
1 '
Definition of "Least Cost Planning11 and "no impacts on net income"
o How should the regulations define Least Cost Planning and "no
impacts on net income?"
Only a few States currently treat DSM programs in a
manner that causes no impacts on net income. Does this
mean that only a few states may reap the benefits of
bonus allowances for renewable energy and DSM programs?
Should a major goal be to encourage PUCs to alter their
regulatory and accounting treatment of DSM programs? If
so, should we say this explicitly?
The statute says least cost plans must be approved by
State authorities, but only 14 or 15 have what some
subcommittee members suggested were "real" least cost
plans (an EPRI study was also referenced that says that
least cost planning mechanisms are in place in -44
states).
Utilities will have different criteria for DSM cost
effectiveness. in California, the PUC allows each
utility to use a different methodology for treatment of
DSM programs. This approach recognizes the need for
flexibility, since what works for one utility may not
work for another.
How flexible should we be in defining "no impact on net
income"? For example, one participant noted that his
utility gets income benefits from conservation simply
through fuel cost savings, because the marginal savings
from reduced fuel costs are sometimes higher than the
marginal revenue from electricity sales!
o .Cross-subsidies is an issue that must be addressed in any
requirements for "no net impact on income."
Timing Issues
o
Should utilities be
From the utility perspective, if allowances aren't
When should allowances be awarded?
allowed to qualify up-front?
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. . . .. . .
"' : awarded up-front, it may be difficult to plan because
. they won't know*.the future effects on cash flow or
. whether they will even be awarded allowances from the
reserve., .-'.'. ' ' ."''"'"'''
- On the other hand, there are .relatively few.allowances
available in the, special reserve. If utilities" are
. allowed to qualify up-front, most of the allowances may
go to utilities in the relatively few States where the
regulatory climate already encourages DSM.programs. Is
: --this consistent with the goals of the program? Does.EPA
have the,-:-flexibility to spread allowances over a.number
of programs, rather-than award them on a strict ".first
come, first served" basis? , .
o According-to:the statute, allowances may not be awarded for
DSM measures or renewable energy that was "operational" before
January 1, 1992. .. Suppose a renewable energy project was
. largely completed before 1992 but was not.operational? If it
then comes on line after 1992, does it qualify for allowances?
"v . * . t _ , t
o Should.allowances.awarded for.a DSM program cover the entire
8 year period, or does ah additional increment of .electricity
have to be saved each year to earn allowances for.that year?
(Consensus on' the intent of the statute was .that since
emissions/would be avoided over 8 years, the allowances should
be awarded over 8/years).
Verification/Quantification of Electricity Saved and Emissions
Avoided. '.'- ' ' \, ' ; / '' : . . -..,'\,"'
o Where utilities have been awarded allowances for DSM programs,
how/'dp. you verify, and quantify the energy savings .and
emissions avoided? .
o . How do you ensure accountability if there is a front-end award
of allowances? ; -. ' r : .
o How should verification and quantification be tied to the
overall permiting and compliance provisions of the Acid Rain
; law? ' , ' ... '- " . . ..'... ' ' '-
o Should energy conservation be evaluated on a gross basis? Net
basis?,. What about naturallyvoccurring conservation? Load
management activities? ; :':. . ."'...
Issue to Be Addressed in Future Meetings
o How^should the regulations treat electric.power committments
,( from Independent Pbw.er5 Producers that are qualifying
. facilities.under PURPA? .
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