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On behalf of Itron, Inc

By Judith Watkins,2014-11-25 08:56
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On behalf of Itron, Inc

    On behalf of Itron, Inc., Energy Division submits this report entitled Framework

    For Assessing The Cost-Effectiveness Of The Self-Generation Incentive Program.

    1The administrators of the Self Generation Incentive Program (SGIP) selected

    Itron, Inc. to perform the evaluation tasks required by Decision (D.) 01-03-073. Since 2002, Itron has prepared annual reports which assess program processes, impacts and performance. Itron is scheduled to submit a cost-effectiveness evaluation of the SGIP by mid-year 2005.

    Concurrently, the Energy Division retained a consultant, Energy and Environmental Economics, Inc. (E3), to study and develop recommendations concerning cost-effectiveness assumptions used to evaluate energy efficiency, demand response, and distributed generation projects and programs. E3 submitted a report to the Commission in January 2004, which was subsequently finalized in October 2004. The Commission is reviewing avoided costs in R.04-04-025, where the E3study is under consideration.

    Decision 04-12-045 states that the Commission intends to adopt an overall DG cost-benefit methodology in R.04-03-017, and will consider a variety of cost-effectiveness tests from sources such as the California Standard Practice Manual and the E3 report. Itron plans to utilize tests from these same sources to evaluate SGIP cost-effectiveness until the Commission adopts a preferred methodology. The ALJ rescheduled dates for hearings and supplemental testimony to give parties the opportunity to consider the Itron framework in prepared testimony.

    Energy Division recommends the ALJ allow parties the option to combine comments on the Itron report “Framework For Assessing The Cost-Effectiveness Of The

    Self-Generation Incentive Program” with the testimony due April 1, 2005, or to file

    separate comments on the same day.

     1 SGIP Program Administrators are Pacific Gas and Electric, Southern California Edison, Southern California Gas Company, and the San Diego Regional Energy Office.

    Self-Generation Initiative Program Cost-Effectiveness Framework

    Self-Generation Incentive Program

Framework For Assessing The Cost-Effectiveness

    Of The Self-Generation Incentive Program

    Submitted to:

    California Public Utilities Commission

    Energy Division

    505 Van Ness Avenue

    San Francisco, California 94102

    Contributing Itron Staff:

    Dr. Frederick D. Sebold

    Mr. Patrick Lilly

    Ms. Jennifer Holmes

    Dr. Jean Shelton

    Mr. Kurt Scheuermann

    Self-Generation Initiative Program Cost-Effectiveness Framework

    TABLE OF CONTENTS

    1 INTRODUCTION .................................................................................................... 1

    2 SUMMARY OF COST-EFFECTIVENESS TESTS ................................................. 2

    2.1 The Societal Test ............................................................................................................ 2

    2.2 The Participant Test ...................................................................................................... 3

    2.3 The Nonparticipant (Ratepayers) Test ......................................................................... 3 3 BACKGROUND...................................................................................................... 4

    3.1 Objectives....................................................................................................................... 5

    3.2 Approach ....................................................................................................................... 5

    4 REVIEW OF DG COST-BENEFIT PROPOSALS................................................... 6

    4.1 Introduction ................................................................................................................... 6

    4.2 General Cost-Effectiveness Framework ....................................................................... 6 4.3 Technical Literature on Self-Generation Assessment .................................................. 7 4.4 Avoided Cost Literature ................................................................................................ 8 4.5 Review of Commission Decisions, Comments and Reply Comments .......................... 9

    5 PARTICIPANT TEST .............................................................................................. 9

    5.1 Introduction ................................................................................................................... 9

    5.2 Participant Benefits ..................................................................................................... 10

    5.3 Lower Cost of Electricity............................................................................................. 10 Combined Heat and Power .............................................................................................. 11 Electricity Price Protection .............................................................................................. 11 Reliability and Power Quality .......................................................................................... 11 Consumer Control ........................................................................................................... 12

    Incentives and Tax Credits .............................................................................................. 12 Summary of Participant Benefits ..................................................................................... 12 5.4 Participant Costs ......................................................................................................... 14

    Self-Generation Initiative Program Cost-Effectiveness Framework

    Gross Equipment Costs ................................................................................................... 14 Operating and Maintenance (O&M) Costs ....................................................................... 15 Participant Environmental Costs ...................................................................................... 15 Summary of Participant Costs.......................................................................................... 15 5.5 Participant Test Figures of Merit ............................................................................... 16 6 NONPARTICIPANT TEST .................................................................................... 17

    6.1 Electric Customer Nonparticipant Test ...................................................................... 17 Electric Customer Benefits .............................................................................................. 17 Electric Ratepayer Costs .................................................................................................. 19 Electric Customer Figures of Merit .................................................................................. 19 6.2 Gas Nonparticipant Test ............................................................................................. 20 Gas Ratepayer Benefits ................................................................................................... 20 Gas Ratepayer Costs ........................................................................................................ 21

    6.3 Overall Nonparticipant Test ....................................................................................... 22 7 CONCLUSION ...................................................................................................... 22

    REFERENCES ........................................................................................................ 24

1 Introduction

    2The Self Generation Incentive Program (SGIP) is a statewide program developed by the

    California Public Utilities Commission to provide incentives for the installation of certain renewable and clean distributed generation technologies serving all or a portion of a facility‟s electric needs.

    This report presents the framework Itron, Inc. will utilize to assess the cost-effectiveness of the California Self-Generation Incentive Program (SGIP). The cost-effectiveness study, which we expect to complete by mid-2005, is the latest in a series of reports prepared by Itron as part of our SGIP evaluation effort.

    The general cost-effectiveness framework identifies key benefits and costs associated with the SGIP, and proposes practical means by which the benefits and costs can be valued in dollar terms. As is traditional in the area of energy efficiency and demand control, specific cost-effectiveness frameworks are developed for the different perspectives associated with the market. Specifically, tests are developed from the perspectives of total resource costs, program participants, and non-participating electric and gas ratepayers.

    This cost-effectiveness report incorporates material from two major sources. The first is

    3the California Standard Practice Manual (SPM), which outlines a variety of general cost-

    effectiveness tests to be used to assess ratepayer-funded demand side programs. The cost-effectiveness frameworks proposed in this report comply with the spirit of the SPM, although they are specified in more detail and tailored to the needs of evaluating self-generation programs.

    We also rely on concepts presented in a recent report on avoided costs prepared by

    34Energy and Environmental Economics, Inc. (E) The E3 material is used to support the

     2 Available in the service territories of Pacific Gas & Electric, Southern California Edison, Southern California Gas Company, and San Diego Gas & Electric. 3 California Standard Practice Manual: Economic Analysis of Demand-Side Programs and Projects, Governor‟s

    Office of Planning and Research, July 2002. 4 Energy and Environmental Economics, Inc., Methodology and Forecast of the Long Term Avoided Costs for the

    Evaluation of California Energy Efficiency Programs, prepared for the California Public Utilities Commission,

    October 25, 2004.

    Self-Generation Initiative Program Cost-Effectiveness Framework

    discussion of various types of avoided costs and avoided cost “adders” designed to capture the

    resource benefits of energy market programs. While the avoided cost report was intended primarily to develop avoided costs to be used in the assessment of energy efficiency programs, it deals with concepts that are also useful in the development of a cost-effectiveness framework for self-generation, and provides forecasts of these categories of avoided costs that could be used, with some modifications, in the implementation of the framework.

2 Summary Of Cost-Effectiveness Tests

    We discuss three cost-effectiveness tests, each representing a different perspective. These tests are summarized below, and presented further in Sections 3 through 6.

2.1 The Societal Test

    The Societal Test can be considered a variant of the SPM‟s Total Resource Cost Test. This test

    includes a variety of benefits characterized as avoided costs or avoided cost adders. ; Avoided generation costs,

    ; Avoided transmission and distribution (T&D) costs,

    ; Line loss reductions,

    ; A reliability adder,

    ; An environmental adder,

    ; Waste heat utilization benefits, and

    ; A price elasticity adder.

    3We propose to use values of these benefits derived from a recent study conducted by E

    for the Commission, with the exception of T&D benefits and the environmental adder. Since D.01-03-073 does not allow SGIP projects to enter into contracts for distribution services, the basic cost-effectiveness analysis will be conducted on the assumption that these benefits are zero for the SGIP. The environmental adder will be modified to reflect the relative emissions of the DG technology and the displaced conventional generation, as explained in Section 4.

    Self-Generation Initiative Program Cost-Effectiveness Framework

    Societal costs include four elements:

    1. Gross installed equipment costs

    2. Operating and maintenance costs, including fuel costs where applicable

    3. Environmental costs (considered as part of other benefits and costs, as opposed to being a

    separate category of costs)

    4. Program administration costs.

    Two “figures of merit” are proposed for the Societal Test: a net societal benefits test, and

    a societal benefit-cost ratio.

2.2 The Participant Test

    The Participant Test assesses the program from the perspective of its participants. Participant benefits include the following:

     Reductions in electricity bills

     The value of displaced fuels previously used to create usable heat, where applicable

     Incentives and tax credits

    Participant costs include:

     Installed equipment costs

     O&M Costs (including fuel costs)

     Participant environmental costs

    Again, two indicators of cost-effectiveness are proposed for this test: participant net benefits and a participant benefit-cost ratio.

2.3 The Nonparticipant (Ratepayers) Test

    The Nonparticipant Test, or Ratepayers Test, is constructed from the perspective or nonparticipating customers, or ratepayers. As prescribed in the SPM, the test is constructed

    separately for electricity and natural gas ratepayers.

     For electric ratepayers, benefits consist of avoided system electric costs, while costs include

    lost revenue from bill reductions, any uncovered interconnection costs, and all program costs

    paid for by electric ratepayers. From the perspective of electric nonparticipants, net benefits

    Self-Generation Initiative Program Cost-Effectiveness Framework

    (costs) can be characterized as reductions (increases) in electric revenue requirements, which

    will lead to reductions (increases) in electric rates.

     For gas ratepayers, benefits consist of avoided natural gas fuel costs associated with waste

    heat utilization and increased sales revenue from natural gas fuel used by participants, while

    costs consist of the loss of revenue from the displacement of conventional gas usage, as well

    as program costs paid for by natural gas ratepayers. From the perspective of natural gas

    nonparticipants, net benefits (costs) can be characterized as reductions (increases) in natural

    gas revenue requirements, which will lead to reductions (increases) in natural gas rates.

    As with the other tests, two indicators are proposed: nonparticipant net benefits (net rate impacts) and a nonparticipant benefit-cost ratio. These tests are constructed separately for gas and electricity ratepayers, and then aggregated to provide overall ratepayer perspectives.

3 Background

    California is a national leader in the development of methods to assess the cost-

    5effectiveness of spending public funds for energy efficiency programs since the early 1980s. As

    a result of the state‟s energy crisis in 2001, California began the process of developing a standardized benefit-cost framework for evaluating other energy resource options like distributed generation (DG). These efforts have been facilitated by 1) legislative and regulatory directives to integrate DG into the state‟s distribution planning processes, 2) creation and extension of the state‟s multi-year, ratepayer-funded Self-Generation Incentive Program, and 3) legislative and regulatory directives to develop cost-benefit analysis frameworks for DG and net metering programs.

    Recent efforts in California and elsewhere have focused on developing valuation methods for specific DG projects/systems to support the integration of cost-effective DG solutions in the state‟s electrical system. Rulemaking (R) 99-10-025 established policies and procedures by

    which DG could be integrated into utility planning and operation of the electric grid, and

     5 The Standard Practice Manual, developed by the California Energy Commission and the California Public

    Utilities Commission, specifies several alternative tests for evaluating the cost-effectiveness of demand-side management programs. The first version of the Manual was published in 1983, and revised in 1987 and 2001.

    Self-Generation Initiative Program Cost-Effectiveness Framework

    developed criteria to be employed by the utilities to compare DG alternatives to traditional system expansion.

    The potential benefits of “wide-spread deployment” of DG that were identified in that

    proceeding included peak demand reduction, deferral of distribution system equipment investment and upgrades, increased life of distribution equipment, reduction of utility capital risk, power quality improvements, voltage support, line loss reductions, improvements in reliability, environmental benefits, customer satisfaction, and fuel diversity. However, no specific instructions were given with respect to the technical framework to assess cost-effectiveness or to the specific means by which specific benefits and costs should be valued. Order Instituting Rulemaking R.04-03-017- Regarding Policies, Procedures, and Incentives for

    Distributed Generation and Distributed Energy Resources identified the development of a

    benefit-cost analysis methodology for distributed energy resources (DER) as a priority.

3.1 Objectives

    The objectives of the initial phase of this project are as follows:

     To consider the impacts of the SGIP on the various DG stakeholder groups

     To determine the perspectives from which these impacts should be considered in order to

    support policy decisions relating to the program and the broader DG market,

     To develop a formal framework for assessing the cost-effectiveness of the SGIP from these

    various perspectives

     To propose workable means of valuing benefits and costs for the purpose of implementing

    the framework.

3.2 Approach

    Itron considered a broad range of sources in selecting a cost-effectiveness framework to evaluate the SGIP, which are listed in the Resources section at the end of this report.

     Economic studies of distributed energy resources, with specific emphasis on the assessment

    of DG options, the SPM, and cost-benefit analysis.

     Public comments to the Commission and the California Energy Commission on the

    assessment of DG technologies and market development programs.

    3 The E avoided cost study.

    Self-Generation Initiative Program Cost-Effectiveness Framework

4 Review of DG Cost-Benefit Proposals

4.1 Introduction

    The purpose of this section is to provide context for the discussion of specific issues in later sections. For the purposes of this discussion, we separate the literature into the following categories: general cost-effectiveness frameworks; technical literature on self-generation assessment; avoided cost literature; and Commission decisions, comments and reply comments.

4.2 General Cost-Effectiveness Framework

    The SPM was jointly developed by the California Energy Commission and the California Public Utilities Commission to guide the assessment of energy efficiency programs. The SPM identifies a series of cost-effectiveness tests, each from a somewhat different perspective: a participant test, which evaluates benefits and costs from the perspective of program participants; a ratepayer impact measure test, which assesses the benefits and costs accruing to non-participating ratepayers; a total resource cost test, which addresses program benefits and costs from the perspective of all parties affected directly or indirectly by the program; and a program administrator, which focuses on benefits and costs to the administrator of the program. While the SPM tests have traditionally been used in the assessment of energy efficiency programs, the most recent version of the Manual indicates that the cost-effectiveness tests are meant to apply to a broader range of programs, including “conservation, load management, fuel substitution, load

    6building and self-generation.”

    In selecting an SGIP-specific Itron started with the concepts in the SPM and tailored them for the specific purpose at hand. In general, this involved identifying the specific benefits and costs to be incorporated into each of the tests in order to apply them to self-generation.

     6 SPM, p. 2.

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