Energy Efficiency Lecture
Business of Energy Seminar
December 2014
DEPARTMENT NAME HERE
Today’s Agenda
•
•
•
•
Energy Efficiency 101
Business Model 1: Ratepayer funded programs
Business Model 2: Rate design and On-Bill Financing
Business Model 3: ESCO model and Off-Bill Financing
Energy Efficiency 101
What is wrong with this house?
Electricity: Segments in Vertical Chain
Regulated Electric Utility (franchise monopoly)
Generation
•
•
•
•
Nuclear
(>1000MW)
Hydroelectric (100
MW – 10,000
MW)
Fossil-fuel
(>1000 MW)
Gas Turbine
(<200 MW)
Distribution
•
•
Transmission
•
•
•
High voltage: 120kV+
Long distance
Low energy loss due to
low resistance
Medium voltage:
2kV – 35 kV
Medium to short
distance
Retail
•
•
•
•
Residential
Commercial
Industrial
Municipal services
5
Why Electricity is Different
1. Electricity has the following unique challenges:
1.
2.
3.
High demand volatility
Negligible storage capacity requiring “just-in-time” delivery
No viable substitutes resulting in price inelastic demand curve
2. Deregulated power industry susceptible to significant market
clearing price fluctuations due to supply or demand shocks
without sufficient reserve capacity
1 Source:
David Besanko, powerpoint presentation “The California Power Crisis: Day One” MECN430, Winter 2006
6
Electricity Demand Volatility
Total California Load Profile for Hot Day, 19991
1 Source:
Electricity demand trends:
• Spikes during working
hours due to
commercial
consumption
• Peaks during hottest
time of the day
• Residential
consumption is
dominant in evenings
• Industrial and
agricultural
consumption are flat
Lawrence Berkeley National Laboratory, taken from http://www.mpoweruk.com/electricity_demand.htm, 4.26.2014
7
Defining Demand Management
Program
Load Impact
Energy Efficiency and
Conservation
Shift down
Demand Response
Shave down
Distributed generation
Shift down or shave down
(depends on intermittency of
resource)
Energy Storage
Smooth
Pricing Programs (Timeof-use, etc)
Smooth and/or shift down
Graph
Tools for Demand Management
Energy Efficiency Program Types
Time of Sale
•Customer gets $ to install equipment that is more efficient than they would have otherwise
purchased.
•Ex: CFL rebate
New Construction
•Developers get $ and support to install more efficient equipment and construction practices
•Ex: Building shell and mechanical
Retrofit
Early Replacement
Direct Install
•Customers get financial incentive and support to upgrade existing equipment
•Ex: Air sealing and insulation
•Customer gets $ to replace equipment early
•Ex: Refrigerators
•Customers get free equipment and products installed at no cost
•Ex: Apartment upgrades
4 Decades of Energy Efficiency in CA
The
Rosenfeld
Curve
Energy Savings and State TRMs
Low-flow
showerhead, 25
therms
Furnace, 100
therms
LED
streetlight,
300 kWh
Pasta cooker,
1300 therms
Business Model 1:
Ratepayer funded
programs
Utility Energy Efficiency Market Drivers &
Barriers








PUC regulations
Resource planning
Customer satisfaction
Corporate strategy
Company KPIs
Funding stability
Political factors
Codes & standards
Why would a utility
willingly (or even
unwillingly) want to sell
less of their product?
The answer:
&
1
The Regulatory Compact
• An investor owned utility (IOU)
should provide returns to
investors. It is also generally a
natural monopoly.
• Because of this monopoly, the
IOU is regulated by a state
utility commission that
authorizes rate increases and
sets a fair return on investment
to ensure ratepayers receive a
fair price.
The process of an
IOU petitioning
their regulators to
charge their
customers is called
a rate case.
Policy Framework #2 –Required EE Goals
EE Programs can be
funded through a rate
case or through line
items on the
customer’s bill called
a benefits charge, a
tariff, or a surcharge
Policy Framework #3 – Decoupling
Decoupling gives
IOUs revenues
based factors
such as capital
expenditures
and number of
customers, not
electric/gas
sales.
Policy Framework #4 – EE Performance
Incentives
Approaches include:
• Earn % of program
costs for achieving
goal
• Earn share of
achieved savings
• Earn % of NPV of
avoided costs
• Rate of return for
achieving savings
Other Drivers – Electric prices
Can look at rate
impacts and bill
impacts.
Budget Scope – Midwest and California
2013 Electric Efficiency Budgets
$1,600,000,000
$1,400,000,000
$1,200,000,000
$1,000,000,000
$800,000,000
$600,000,000
$400,000,000
$200,000,000
$CA IA
IL
IN
KS KY MI MN MO ND NE OH SD WI
IOU Procurement
• Who administers an EE program is always a big deal
– IOUs generally need to maintain close relationship with
customers. JD Powers scores matter.
• Who implements an EE program is usually less of an
issue
– California has a requirement that 20%+ of portfolio budgets
are bid to non-IOU companies
– Illinois and other Midwest states tend to bid out much larger
portions of their portfolio – e.g., Nicor programs are 99%
implementer run
• IOUs issue RFP, Implementers submit bids, bids are
scored and info requested, and implementers are called
for in-person oral presentations.
Competitive Landscape
•
•
•
•
•
•
•
•
Utility companies (ComEd, Nicor Gas, etc)
CLEAResult
Nexant
ICF
Conservation Services Group (CSG)
MEEA and other NGOs
Others
Business opportunities from creating better technologies, better
marketing or customer experience, new (riskier) contract models
Business Model 2: Rate
design and On-bill
Financing
Unregulated Lemonade
$0.50/ cup of lemonade and 1,000 cups sold this
year.
Revenue
$500
Costs
$300
Taxes
$0
Profits
$200
Regulated Lemonade
How does the management of this lemonade stand
arrive at a rate of $0.12 per cup?
Expenses
$100
Allowed Returns
$15 to spend anywhere
Taxes
$0
Revenue
Requirement
$115
Sales this year
1000 cups sold
$/cup of lemonade
$0.12/cup
Revenue
requirement
calculation
Rate case
price
calculation
Some Observations
Plain Lemonade
𝐶𝑢𝑝𝑠 𝑆𝑜𝑙𝑑 × 𝑅𝑎𝑡𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
• Ways company can grow:
1. Sell more cups of lemonade
with lower prices by keeping
production and service costs
low
2. Sell more expensive lemonade
by providing customers with
better customer service
Regulated Lemonade
𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 + 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐶𝑢𝑝𝑠 𝑆𝑜𝑙𝑑 × 𝑅𝑎𝑡𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
• Ways company can grow:
What happens if there are less sales than estimated?
Decoupling attempts to fix this issue.
© CLEAResult, 2014
1. Sell more cups of lemonade with lower
prices by keeping production and service
costs low
2. Sell more expensive lemonade by
providing customers with better customer
service
3. Convince regulator of the need for more
major expenses, e.g., poles, smart grid.
4. Convince regulator of a higher return
required given associated investor risk
27
How Rate Regulation Works: A Real Example
How does the management of a utility company
arrive at the electric rate you pay each month?
Expenses
$100M
Allowed Returns
$10M to investors
Taxes
$5M
Revenue
Requirement
$115M
Sales this year
1B kWh sold
$/kWh price
$0.115/kWh
Revenue
requirement
calculation
Rate case
price
calculation
Rates & Charges
Alternative Rate Structures –
Consumption & Demand
Name
Description
Seasonally
Differentiated
Rates constant for months of similar costs
Time-of-Use
Rates vary by time of day. Usually commercial customers.
Block Charges
Rates increase/decrease in stairstep fashion.
Critical Peak Pricing
Rates are set until a high temperature (or other) event meets set criteria for higher
Peak Price rate.
Real-time Pricing
Rates change from hour-to-hour according to market prices.
Standby rates for
Distributed Gen (incl
Net Metering)
Rates designed specifically for customers with rooftop solar or other distributed
generation capacity. Covers cost of the utility distribution system, utility generation,
and compensates customer for own generation.
Customer Charge
$15.06
Customer Charge
$15.06
Off-Peak
$0.08
First 500 kWh
$0.08
On-Peak
$0.15
Additional kWh
$0.15
On-bill Financing
Competitive Landscape
• Utility companies (ComEd, Nicor Gas, etc)
• Retail providers in deregulated markets (Constellation, Integrys,
etc)
• Business opportunities from understanding rates and on-bill
financing options and creating programs and products to support
Business Model 3: ESCOs
and Off-bill Financing
A Perspective from the Chinese Market
US ESCO Market in International Context
Energy Performance Contracting
•
There are three common models
used by ESCOs in China:
– shared savings (50%)
– guaranteed savings (35%)
– the energy management
outsourcing model or chauffer
model. (15%)
Industry
Building
Transportation
Energy Performance Contract Projects in Different Sectors
Energy Performance Contracting -History
•
1992-1994. Global Environmental Funding and World Bank did a study for
“Carbon Dioxide Emission Control Issue in China”. They also discussed the
potential of Energy Performance Contract in Chinese market.
•
Dec. 1998. Phase one began. Three pilot ESCOs are founded. To the end of
Phase one in Jun.2006, they completed 475 projects for 405 customers. Saving
1,510,000 ton standard coal per year, 5,320,000 ton CO2 per year.
•
2003. Phase two began. (1) EMCA was founded, which is an energy efficiency
commission that works on supporting customers and ESCOs. (2) Using
$22,000,000 funding provided by WB, China government increases ESCOs’
credit level and give them financing support.
•
Jun. 2010. Phase two completed. Which means that Energy Efficiency Program
has completed its trial period in China.
Financing Options
Competitive Landscape
• Internationally:
– Johnson Controls
– Schneider Electric
• Locally:
– Effortless Energy
– Same international ESCOs operate in IL
In Conclusion….
Big Picture Issues
• Who administers an EE program
• How Utilities make money (ratemaking) and how they make
money on EE (decoupling, incentive mechanisms)
• New contract structures for EE
• Who owns EE program data (Smart meters)
• Who owns EE savings (Industrial opt-out, carbon markets)
• Simplifications on how EE is verified (Smart meters)
• Paradigm shifts in how EE is funded (Carbon markets)
• Paradigm shifts in how EE is justified (EE as
a supply-side resource)
• How codes impact savings (federal/state)