Financial Analysis of Financial Analysis of Incentive Mechanisms to Promote Incentive Mechanisms to Promote Energy Efficiency: Energy Efficiency: Case Study of a Prototypical Southwest Utility Case Study of a Prototypical Southwest Utility Peter Cappers, Chuck Goldman, Michele Chait, George Edgar, Jeff Schlegel, Wayne Shirley Lawrence Berkeley National Laboratory - Report Summary – March 2009 Environmental Energy Technologies Division • Energy Analysis Department - 1 -
Project Approach & Objectives Project Approach & Objectives • Background : Current environment is one of substantially increased interest in energy efficiency and demand response - Policymakers want and are proposing very aggressive demand- side savings goals in many parts of the country, while a national EE resource standard is currently in proposed federal legislation - Policymakers want to increase utilities’ motivation to achieve these goals • Goal : Facilitate dialogue on various utility EE business models (i.e., shareholder incentive mechanisms and/or decoupling) by conducting quantitative financial analysis • Approach : Analyze impacts of various utility performance incentives and ratemaking mechanisms on stakeholders (e.g., shareholders, ratepayers) when a prototypical, vertically integrated utility based in the Southwest implements alternative energy efficiency portfolios with varying savings goals Environmental Energy Technologies Division • Energy Analysis Department - 2 -
Project Approach & Objectives (2) Project Approach & Objectives (2) • Analysis illustrates the different financial implications on stakeholders when identical levels of EE savings are achieved under different business models • Caveats - We do NOT account for any potential link between the type and/or size of shareholder incentive mechanism and utility’s motivation to achieve and/or increase EE goals or portfolio size - We do NOT analyze other potential non-financial motivators of utility behavior and support for EE (e.g., PUC orders, customer relations) - We do NOT perform a comparative analysis of the relative merits of utility vs. non-utility administration of energy efficiency programs Environmental Energy Technologies Division • Energy Analysis Department - 3 -
Analysis Method Analysis Method Scenario Scenario • Used an adapted Model Inputs Model Inputs Model Outputs Model Outputs Model Outputs Analysis Analysis version of NAPEE Utility Shareholder Metrics Utility Shareholder Metrics Utility Shareholder Metrics Utility Characterization Utility Characterization Business-As-Usual Business-As-Usual Summarizes achieved affects of EE Summarizes achieved affects of EE Summarizes achieved affects of EE Input initial retail elect. sales, peak Input initial retail elect. sales, peak Calculate year-by-year elect sales, Calculate year-by-year elect sales, Benefits Calculator, and DR programs as well as and DR programs as well as and DR programs as well as demand, retail rates, emission demand, retail rates, emission peak demand, emission levels, peak demand, emission levels, decoupling and/or shareholder decoupling and/or shareholder decoupling and/or shareholder levels, financials, etc. and annual levels, financials, etc. and annual financials, etc. without effects of financials, etc. without effects of incentive mechanisms on earnings incentive mechanisms on earnings incentive mechanisms on earnings a pro-forma rates of change rates of change future EE and DR portfolios future EE and DR portfolios and return on equity and return on equity and return on equity DSR Characterization DSR Characterization With DSR With DSR Utility Ratepayer Metrics Utility Ratepayer Metrics Utility Ratepayer Metrics financial model Input year-by-year energy Input year-by-year energy Calculate year-by-year elect sales, Calculate year-by-year elect sales, Summarizes achieved affects of EE Summarizes achieved affects of EE Summarizes achieved affects of EE savings, demand savings, costs, savings, demand savings, costs, peak demand, emission levels, peak demand, emission levels, and DR programs as well as and DR programs as well as and DR programs as well as and measure lifetime for EE and and measure lifetime for EE and financials, etc. with effects of financials, etc. with effects of decoupling and/or shareholder decoupling and/or shareholder decoupling and/or shareholder • Flowchart DR programs DR programs savings from future EE and DR savings from future EE and DR incentive mechanisms on retail incentive mechanisms on retail incentive mechanisms on retail portfolios included portfolios included rates and electric bills rates and electric bills rates and electric bills illustrates the DSR Costs & DSR Costs & Incentive Incentive Benefits Benefits Mechanisms Mechanisms major steps of the Decoupling Decoupling Decoupling Resource Costs Resource Costs Shared Net Benefits Shared Net Benefits analysis Represents utility and customer Represents utility and customer Mechanism Mechanism Mechanism Allow recovery of fraction of net Allow recovery of fraction of net costs of EE and DR programs costs of EE and DR programs societal benefits societal benefits Sales-Based Sales-Based Sales-Based Resource Benefits Resource Benefits Cost Capitalization Cost Capitalization - Model Inputs Allow utility to annually recover non- Allow utility to annually recover non- Allow utility to annually recover non- Represents forecasted avoided Represents forecasted avoided Capitalize program costs by Capitalize program costs by fuel costs/kWh as set during last fuel costs/kWh as set during last fuel costs/kWh as set during last cost resource savings from EE cost resource savings from EE allowing for a bonus rate of return allowing for a bonus rate of return rate case rate case rate case and DR programs and DR programs on un-depreciated amount on un-depreciated amount - Scenario analysis Revenue-Per-Customer Revenue-Per-Customer Revenue-Per-Customer Performance Target Performance Target Calculate non-fuel allowed revenue- Calculate non-fuel allowed revenue- Calculate non-fuel allowed revenue- of alternative EE Allow recovery of fraction more Allow recovery of fraction more per-customer and collect through per-customer and collect through per-customer and collect through than 100% of allowed program than 100% of allowed program balancing account balancing account balancing account costs costs portfolios and Save-a-Watt (OH) Save-a-Watt (OH) utility business Allow recovery of fraction of gross Allow recovery of fraction of gross societal benefits, and recovery of societal benefits, and recovery of models lost revenue for a portion of lost revenue for a portion of measure lifetime measure lifetime Save-a-Watt (NC) Save-a-Watt (NC) - Model Outputs Allow return on and return of Allow return on and return of avoided energy and capacity costs avoided energy and capacity costs Environmental Energy Technologies Division • Energy Analysis Department - 4 -
Model Inputs Model Inputs Environmental Energy Technologies Division • Energy Analysis Department - 5 -
Developing Prototypical SW Utility Developing Prototypical SW Utility • Examined historical financial, cost and system characteristics of IOUs serving southwestern states • Used characteristics of Arizona Public Service (APS) and Nevada Power (NP) to help develop our prototype SW utility - Also collected data on utility financial, system characteristics and DSM for Pacificorp, Public Service New Mexico (PSNM), Tucson Electric and Rocky Mountain Power • Relied heavily upon publicly available data sources - Annual Financial Reports & 10-K filings - FERC Form 1 - Integrated Resource Plan filings - Demand Side Management program filings • Created “business as usual” (BAU) No EE case for prototypical SW utility - EE cases with varying incentive mechanisms compared to this “BAU No EE” case Environmental Energy Technologies Division • Energy Analysis Department - 6 -
Prototypical SW Utility: Retail Sales and Prototypical SW Utility: Retail Sales and Demand Forecast in Business- -as as- -Usual Case Usual Case Demand Forecast in Business • Retail sales grow @ 2.8% annually • Peak demand grows @ 2.9% annually • Declining load factor at this rapidly growing utility Environmental Energy Technologies Division • Energy Analysis Department - 7 -
Prototypical SW Utility: Revenue Requirement and Prototypical SW Utility: Revenue Requirement and Retail Rates in Business- -As As- -Usual Case Usual Case Retail Rates in Business Utility Budget 2008 Level 2017 Level 2027 Level Annual Growth • Both fuel and Category ($B) ($B) ($B) Rate (%) non-fuel costs are growing T&D Capital $0.3 $0.5 $0.7 5.0% faster than sales Expenditure • Utility unable to Rate Base $4.3 $6.7 $11.1 5.1% achieve Operations and authorized ROE $0.4 $0.8 $2.0 8.8% Maintenance of 10.75% Fuel & Purchased • Utility files $1.2 $2.3 $4.2 6.7% Power biennial rate cases to mitigate Annual Revenue $2.3 $4.2 $8.1 6.9% earnings erosion Requirement • IRP sets out All-In Retail Rate 9.1 ¢/kWh 13.1 ¢/kWh 18.9 ¢/kWh 3.9% investment schedule for large new generation plant, that EE can help defer • Retail rates double over 20- year time horizon Environmental Energy Technologies Division • Energy Analysis Department - 8 -
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