Rethinking Cost Effectiveness to Meet the Needs of the Modern Grid

November 4, 2019

Editor’s Note: This post marks the release of the whitepaper: Evolving Cost-Effectiveness Policy and Tools to Enable Modern Energy Efficiency and Demand-Side Management, available for download here. This whitepaper analyzes California’s energy efficiency cost-effectiveness policies and their impact on the State’s long-term goals. Specific recommendations are provided for updates to enable the scaled demand flexibility needed to balance an increasingly clean grid. 

By Adam Scheer, Recurve

Should California encourage private investment in energy efficiency and demand management? 

Seems like a question that we can all agree on, right...right?

In the well-intentioned world of California policy the obvious ‘yes’ has unfortunately become ‘no.’ This verdict is levied through the continued use of the Total Resource Cost (TRC) test, which treats private investment in one’s home or business as though it were a ratepayer surcharge for central generation.

Unlike central generation, however, building performance upgrades almost always have secondary customer benefits, including improved safety, comfort, and indoor air quality among others. Failing to take these benefits into account effectively penalizes efficiency relative to other resources. Even worse, by failing to distinguish between public and private funds, the TRC test discourages private investment into upgrades at a time when leveraging all available resources is crucial to meet energy and carbon goals.

We need to reassess this valuation framework in light of the priorities that are both explicit and implicit in SB 350, AB 802, SB 100 and every other major piece of climate legislation passed in California during the last decade. We will never get the scale called for by these policies when shutting out markets and saying “thanks, but no thanks” to private investment. As long as the current TRC (or societal versions) govern demand-side resources there will be an epic kink in the clean energy cash flow. 

Regrettably, this is not a problem for the future. We’ve already lost pace. Lacking demand flexibility, including integrated approaches to efficiency, demand response, behind-the-meter storage, and beneficial electrification, California has already curtailed more than 825 GWh of renewables in 2019, an amount more than half of all resource efficiency savings achieved during that time. Even with utility-scale energy storage, this problem will evolve from a colossal waste of money to a structural barricade to decarbonization if we don’t soon snap out of our detached valuation debate and find ways to scale behind-the-meter resources. 

This is what a grid without enough demand flexibility looks like:

March 23, 1:15 pm: Negative pricing everywhere
April 15, 12:15 pm: Huge variability across the grid -- a rainbow of congestion and overgeneration

While the grid is becoming a traffic jam, the TRC is pushing portfolios away from comprehensive programs that achieve deep savings and permanent peak load reduction and toward an ever-shrinking bench of widgets, “light touch” interventions, and ephemeral behavioral savings. At a time when our industry needs to be training for a demand flexibility marathon, the TRC suggests giving up jogging and vegetables in favor of ping-pong and beer. 

In the long term, regulators and stakeholders need to work through an updated common valuation policy framework to enable market-based solutions not just program portfolios. The balance between ratepayer dollars and private investment should be central in that conversation. As a starting point, the whitepaper recommends a move to the Program Administrator Cost (PAC) as the primary test, which would simply weigh utility costs against benefits. PAs and implementers would then be encouraged to use ratepayer dollars to leverage private investment and scale successful programs. A PAC framework would put trust in customers to participate in DSM for their own reasons, both energy and non-energy related. 

But other practical steps can be implemented now, without major fundamental policy changes, to help get energy efficiency and demand flexibility on track. 

In current practice, the TRC implicitly assumes that 100% of participant investment is geared toward energy savings. A wealth of research on the benefits of energy efficiency shows this just ain’t true. Understanding their customers, most programs highlight increased comfort, productivity, indoor air quality, and other non-energy benefits (NEBs) as primary selling points. 

But instead of diving down every NEBs rabbit hole, we should shift our focus to the cost side of the equation. For example, multiple studies on home upgrade programs show that customers report roughly half of their program investment is related to non-energy factors. A similar simple adjustment is reasonable and should be made immediately to all participant energy efficiency spending. Over time, the impact evaluation surveys or independent studies can provide more granular data. We already ask customers what they would have done in the absence of the program to determine net-to-gross. It seems reasonable to also ask customers what they valued from their investment, and then remove the costs unrelated to energy.

We also need to modernize the tools we use to calculate and report benefits. We are already measuring 8,760 metered resource curves (flexibility load shapes) of programs. But right now reported cost-effectiveness hinges on a handful of default DEER load shapes. This approach provides no incentive to optimize for the grid and carbon benefits actually delivered in a program. 

The remedy here is also well within reach: California’s Cost-Effectiveness Tool (CET) needs to be updated to allow for metered 8,760 resource curves instead of only permitting old DEER load profiles. The whitepaper has a more detailed discussion of needs and recommendations for cost-effectiveness documentation and tools.

Finally, with the efficiency portfolio in the midst of a rapid transformation, the traditional Potential and Goals process, which is largely rooted in analysis of individual measures and average cases, is no longer adequate. The California Public Utilities Commission kicked off a review of this entire process last week. Pay-for-performance program models based on normalized metered energy consumption (NMEC) and maturing on-bill financing offerings are allowing for more holistic, innovative, and integrated program designs. With NMEC/P4P programs especially, there is now an ability and motivation to identify and recruit high potential customers for specific programs. A customer-focused approach, instead of measure-specific, average case modeling, can help modernize demand flexibility and spotlight potential in an actionable way.

Good people disagree about cost-effectiveness policy. But we’ve got to get back to the table on these issues because the context has changed. For us to have even a fighting chance at our ambitious climate targets, we should be using every program dollar to cultivate as much demand flexibility capital as possible. Our clean energy future depends on it. I’m hopeful that this whitepaper can serve as a foundation for stakeholders to organize and draw from as we look to finally break the fever on the critical issue of cost-effectiveness.

Read the full white paper here.

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