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Alternative Methodologies to Estimate Currentand FutureConsumer Marginal Electricity Prices Lawrence Berkeley National Laboratory January 23, 2002
The Central Air Conditioner (CAC) and Heat Pump (HP) Standards Rulemaking utilized marginal electricity prices derived from the 1997 Residential Energy Consumption Survey (RECS). These marginal electricity prices were projected into the future based on the average electricity price trends from the Energy Information Administration's Annual Energy Outlook (AEO). The resulting estimates of future marginal electricity prices were used to calculate the operating cost savings realized from an increase in the minimum efficiency standard.
The above approach was criticized by several stakeholde;.s who claimed that this approach did not result in the best estimates offuture marginal prices due to the ecent and expected changes in the electric utility industry. Ifanalyses were to be performed vo reassess current and future trends in central airconditioner and heat pump marginal electricity prices, then the following types ofanalyses would need to be conducted: 1) determine whether and hGw electric utility rate structures have changed from 1997 to today (2001) and 2) explore various methocs for forecasting how marginal prices are likely to change in the future. 

### 1)Alternatives for determining marginal price changes from 1997 to today

a. Derivefrom 2001 RECS data Approach: The preferred approach to determining whether prices have changed since 1997 is to calculate updated marginal electricity prices from the 2001 RECS.

Time Estimate: RECS household utility bill data will be available no earlier than late September, 2002. Based on past experiences with deriving marginal prices utilizing the 1997 RECS data, it will take approximately two to three months to derive the updated marginal prices for those RECS households with central air conditioners and heat pumps. The comparative analysis to determine whether there are any significant differences between the marginal prices derived from the 1997 and 2001 RECS should take approximately one month. This does not include the time necessary to integrate new estimates ofmarginal electricity prices into the economic analyses (i.e., life-cycle cost and national energy savings analyses) for the CAC and HP standards rulemaking.
b. Estimatefrom Utility Tariff Data Approach: Collect and analyze residential tariffs from 1997/98 and from 2001 to determine whether marginal prices have significantly changed since 1997. Currently, the Department has avery limited amount ofinformation on residential electric utilitytariffs. Prior to making the decision to utilize the 1997 RECS, a different approach to developing residential marginal prices relying on the collection and analysis ofresidential tariffs was being pursued. Residential tariffs were collected from several
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DRAFT 

### Alternative Methodologies to Estimate Current and Future Consumer Marginal Electricity Prices Lawrence Berkeley National Laboratory January 23, 2002
The Central Air Conditioner (CAC) and Heat Pump (HP) Standards Rulemaking utilized marginal electricity prices derived from the 1997 Residential Energy Consumption Survey (RECS). These marginal electricityprices were projectedinto the future basedonthe average electricitypricetrends from the Energy Information Administration's Annual Energy Outlook (AEO). The resulting estimates of future marginal electricity prices were used to calculate the operating cost savings realized from an increase in the minimum efficiency standard.

The above approach was criticized by several stakeholde, 'S wh(; claimed that this approach did not result in the best estimates offuture marginal prices due t:) the I ecent and expected changes in the electric utility industry. If analyses were to be performeC: YO rea3sess current and future trends in central airconditionerandheatpumpmarginal electricityprices,lh;:n the followingtypes ofanalyses would need to be conducted: 1) determine whether and hew ekctric utility rate structures have changed from 1997 to today (2001) and 2) explore various**m~th(>C:5** for forecasting how marginal prices are likely to change in the future. 

### 1) Alternatives for determining marginal price changes from 1997 to today

a. Derivefrom 2001 RECSdata Approach: The preferred approach to determining whether prices have changed since 1997 is to calculate updated marginal electricity prices from the 2001 RECS.

Time Estimate: RECS household utility bill data will be available no earlier than late September, 2002. Based onpast experiences with deriving marginal prices utilizingthe 1997 RECS data, it will take approximately two to three months to derive the updated marginal prices for those RECS households with central air conditioners and heat pumps. The comparative analysis to determine whetherthere are any significant differences between the marginal prices derived from the 1997 and 2001 RECS should take approximately one month. This does not include the time necessary to integratenewestimates ofmarginal electricityprices into the economic analyses (i.e., life-cycle cost and national energy savings analyses) for the CAC and HP standards rulemaking.


### h. Estimate from Utility Tariff Data Approach: Collectand analyze residentialtariffs from 1997/98 andfrom 2001 to determine whether marginal prices have significantly changed since 1997. Currently, the Departmenthas a very limited amount ofinformation onresidential electric utilitytariffs. Priorto makingthe decisionto utilizethe 1997 RECS, a different approachto developingresidential marginal prices relying on the collection and analysis ofresidential tariffs was beingpursued. Residential tariffs were collected from several

### EE-RM/STD-98-440 -¢ 

### ~ DRAFT electric utilities in 1997 and 1998 as part ofthis exercise. For these same utilities, tariffs for 2001 could be collected to determine ifany changes were apparent in the rate structures consumers faced between 1997/98 and 2001. The magnitude of the change in consumer electricity price structures would provide an indication ofhow marginal electricity prices have changed in recent years
Concerns. Although a comparative analysis seems straight forward, conducting a tariffanalysis is not atrivial matter. The time required to decipher tariffrate structures can be extensive. In addition, there are possible problems with the use ofthe 1997/98 tariff data. Because the tariffapproach for developing residential marginal rates was aborted to pursue the RECS approach, a statistically valid sample may have not been collected in 1997/98. Ifthis were the case, more tariffs from that time period may need to be collected. This would be an extremely difficult exercise, ifnot impossible, as utilities typically do not makepasttariffs readily available. Regarding 200

.residential tariffs, although they are currently being collected as part of the data collection effort for 1 he Commercial Unitary Air Conditioner and Heat Pump Standards Rulemaking, a statistically valid samnple has yettobe collected. In addition, a thorough analysis ofthe 2001 tariffs has yetto be conducted to decipher the tariffs and determine to what extent tariffs are being collected from the same utilities which data were collected in 1997/98.

TimeEstimate: At least four months is needed toperform the required tariffcollection and conduct the necessary comparative analysis assuming that, if required, additional 1997/93 tariffs could be collected relatively easily. Ifthe 1997/98 or 2001 tariffcollection becomes problematic, the tariff collection and comparative analysis could take up to a year to complete. This does not include the time necessary to integrate new estimates ofmarginal electricity prices into the economic analyses (i.e., life-cycle cost and national energy savings analyses) for the CAC and HP standards rulemaking.

c. Estimate from Wholesale ElectricityPriceData Approach. Collect and analyze wholesale electricity price data.Wholesale electricity price data have been collected in two forms: 1)wholesale market price data covering those regions ofthe country that have or had competitive pricing and 2) system lambda data for those regulated utilities that submit data to the Federal Regulatory Energy Commission (FERC) through form 714. Hourly wholesale market price data are or have been available for four different regions of the country: 1)California from Apr 1, 1998 to Dec 31, 2000, 2) New York state from Nov 10, 1999 to the present, 3) New England (including Maine, New Hampshire, Vermont, Connecticut, Rhode Island, and Massachusetts) from May 1, 1999 to the present, and 4) PJM (including Pennsylvania, New Jersey, and Maryland) from Apr 1, 1998 to the present. The electricity price data for each hour represents the market clearing price and is equal to the marginal price of electricity for that hour. System lambda data have been collected for the years 1993 through 2000. Approximately 100 utilities from around the country submit lambda data using FERC form 714. The system lambda data are hourly andrepresent the variable operating and maintenance cost ofelectricity being supplied forthat hour. The system lambda is calculated to minimize the utility's cost of dispatching electricity.

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# Bod-, DRAFT
electric utilities in 1997 and 1998 as part ofthis exercise. For these same utilities, tariffs for 2001 could be collected to determine ifany changes were apparent in the rate structures consumers faced between 1997/98 and 2001. The magnitude ofthe change in consumer electricity price structures would provide an indication ofhow marginal electricity prices have changed in recent years
Concerns: Although a comparative analysis seems straight forward, conducting a tariffanalysis is not a trivial matter. The time required to deciphertariffrate structures can be extensive. In addition, there are possible problems with the use ofthe 1997/98 tariffdata. Because the tariffapproach for developingresidential marginal rates wasaborted topursue the RECS approach, a statistically valid sample may have not been collected in 1997/98. 

### Ifthis were the case, more tariffs from that time period may need to be collected. This would be an extremely difficult exercise, ifnotimpossible, as utilitiestypicallydo notmakepasttariffsreadilyavailable. Regarding200

.**resil~ential** tariffs, although they are currentlybeingcollectedas part ofthe data collectioneffortfor 1he CommercialUnitary Air ConditionerandHeatPump StandardsRulemaking, a statisticallyvalid sampletasyetto becollected. In addition, a thorough analysis ofthe 2001 tariffs has yet to be conducted to de(.ipher the tariffs and determine to whatextenttariffs are being collected from the same utilities VJhich datawere collected in 1997/98.

Time Estimate: At least four months is needed to perform the required**tariffi:ollel~tion** and conduct the necessary comparative analysis assuming that, ifrequired, additional 1997/93 tariffs could be collected relatively easily. Ifthe 1997/98 or 2001 tariffcollection becomes problematic, the tariff collection and comparative analysis could take up to a year to complete. This does not include the time necessary to integrate new estimates ofmarginal electricity prices into the economic analyses (i.e., life-cyclecostandnational energy savings analyses) forthe CAC and HP standardsrulemaking.

c. Estimate from Wholesale Electricity Price Data Approach: Collectand analyze wholesaleelectricityprice data. Wholesale electricitypricedata have been collected in two forms: 1) wholesale market price data covering those regions ofthe country that have or had competitive pricing and 2) system lambda data for those regulated utilities that submit data to the Federal Regulatory Energy Commission (FERC) through form 714. Hourly wholesale market price data are or have been available for four different regions of the country: 1) California from Apr 1, 1998 to Dec 31,2000,2) New York state from Nov 10, 1999 to the present, 3) New England (including Maine, New Hampshire, Vermont, Connecticut, Rhode Island, and Massachusetts) from May 1, 1999 to the present, and 4) PJM (including Pennsylvania, NewJersey, and Maryland) from Apr 1, 1998 to the present. The electricityprice datafor each hour represents the market clearing price and is equal to the marginal price ofelectricity for that hour. System lambdadatahavebeencollectedfortheyears 1993 through2000. Approximately 100utilities from around the country submit lambda data using FERC form 714. The system lambda data are hourlyandrepresentthe variableoperatingandmaintenancecostofelectricitybeingsupplied for that hour. The system lambda is calculated to minimize the utility's cost of dispatching electricity.

2

### EE-RM/STD-98-440, 0-- DRAFT Although not literally the marginal cost, it can be treated as such assuming that the system lambda is based on the minimum cost electricity source available at the time ofdispatch.
As shown above, a comprehensive set of hourly wholesale and system lambda prices have been collected covering most ofthe United States. For those hours ofthe year when air-conditioning is most likely used, the hourly price data can be used to estimate the wholesale marginal price for consumers using air-conditioning. Inconcept, this type ofanalysis is virtuallyidentical tothe analysis conducted by Synapse Energy Economics for the Appliance Standards Awareness Project (ASAP). ASAP subsequently submitted Synapse's analysis as comment to the CAC and HP standards rulemaking. Because hourly price data have been collected spanning eight years, not only could wholesale marginal prices for consumers using air-conditioning be developed, but a trend ofhow those prices varied over time could be determined as well.
Concerns: Although in concept the determination of wholesale marginal prices seems straight forward, it is by no means a trivial exercise. First, at least a month or two would be required to establish definitively the time periods when air-conditioning was used in different regions of the country. Then, hourly wholesale and system lambda prices would need to be carefully assigned to each region being analyzed. Next, after wholesale marginal prices for air-conditioning were fiially calculated, the wholesale prices would need tobe translated into retail rates. Residential tariffswould need to be thoroughly reviewed to be able to transform wholesales prices into reasonable and defensible retail rates. Finally, upon deriving residential rate data, the comparative analysis between the derived rates for 2000 and those marginal rates from 1997 RECS would be need tobe conducted to determine any type oftrend in retail rates. The derived retail rate data for the entire time span (1993

- 2000) could also be used to check the consistency ofthe eight-year price trend with that of the "1997 RECS to 2000 derived rate" price trend.

Time Estimate. We estimate that at least four months to perform the required wholesale marginal price analysis and conduct the necessary comparative analysis. As with thetariff-based analysis, this does not include the time necessary to integrate 2000 average and marginal electricity prices into the economic analyses (i.e., life-cycle cost and national energy savings analyses) for the CAC and HP standards rulemaking. 2) Alternatives for Forecasting Marginal Prices
The AEO forecasts that future average electricity rates will decline inreal dollars. This reduction is in large part due to their assumption that marginal generating costs will be lower under acompetitive pricing regime than under aregulated market. The Department has identified sixdifferent approaches for developing scenarios for considering marginal energy prices.

a. Regulated "average"scenario Currently, most residential tariffs are structured to average out the costs of supplying electricity at the margin. Supplying electricity at the margin during peak conditions is more costly than supplying
3 EE-RM/STD-98-440",

### ?:>O~ DRAFT Although not literally the marginal cost, it can be treated as such assuming that the system lambda is based on the minimum cost electricity source available at the time ofdispatch.

As shown above, a comprehensive set ofhourly wholesale and system lambda prices have been collected covering most ofthe United States. For those hours ofthe year when air-conditioning is most likely used, the hourly price data can be used to estimate the wholesale marginal price for
consumersusingair-conditioning. In concept,thistype ofanalysisis virtuallyidenticalto the analysis conductedby SynapseEnergy Economics for the Appliance Standards Awareness Project (ASAP). ASAP subsequently submitted Synapse's analysis as comment to the CAC and HP standards rulemaking. Because hourly price data have been collected spanning eight years, not only could wholesale marginal prices for consumers using air-conditioning be developed, but a trend ofhow those prices varied over time could be determined as well.

Concerns: Although in concept the determination of wholesale marginal prices**sl~ems ~traight**  forward, it is by no means a trivial exercise. First, at least a month or two would**t~** required to establish definitively the time periods when air-conditioning was used in different regions ofthe country. Then, hourly wholesale and system lambda prices would need to be carefully assigned to each region being analyzed. Next, after wholesale marginal prices for air-conditioning were 111\ally calculated,thewholesalepriceswouldneedtobetranslated into retail rates. Residentialtariffs would need to be thoroughly reviewed to be able to transform wholesales prices into reasonable and defensible retail rates. Finally,uponderivingresidentialrate data, the comparative analysisbetween the derived rates for 2000 and those marginal rates from 1997 RECS would be need to be conducted to determine any type oftrend in retail rates. The derived retail rate data for the entire time span (1993

- 2000) could also be used to check the consistency ofthe eight-year price trend with that of the "1997 RECS to 2000 derived rate" price trend.

Time Estimate: We estimate that at least four months to perform the required wholesale marginal priceanalysis and conductthe necessarycomparativeanalysis. As withthe tariff-based analysis, this does not includethe time necessary to integrate 2000 average and marginal electricityprices into the economic analyses (i.e., life-cycle cost and national energy savings analyses) for the CAC and HP standards rulemaking. 

### 2) Alternatives for Forecasting Marginal Prices
TheAEOforecasts that future average electricity rates will decline in real dollars. This reduction is in large part due to their assumptionthat marginal generating costs will be lowerundera competitive pricingregimethanunderaregulatedmarket. The Departmenthasidentified six different approaches for developing scenarios for considering marginal energy prices.



### a. Regulated "average"scenario Currently, most residential tariffs are structured to average out the costs ofsupplying electricity at the margin. Supplyingelectricityatthe margin duringpeakconditions is more costlythan supplying

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### EE-RM/STD-98-40- 3a DRAFT electricity at off-peak conditions. Under a regulated market, rates are structured to present average rates to consumers so that whatever losses are incurred by the utility during peak periods are offset by positive returns realized during off-peak periods. This situation could continue under a fully deregulated market. For example, this is what is currently being observed in the deregulated communications industry. Although costs ofsupplying communication lines vary on a minute-byminute basis, consumers are still generally billedwith average rates (e.g., 7 ¢per minute)rather than with more complicated rate structures. Under this scenario, forecasted marginal prices would be consistent with the average rates from theAEO forecasts.
b. "Fixedcharge"scenario


### This is similar to the above regulated "average" scenario. But in this case, a deregulated electri utility industry would transfer most distribution and administrative costs into fixed charges, thereby reducing the marginal price paid by residential consumers. Under this scenario, forecasted margina. prices would be lower than the average rates forecasted by theAEO.

c. Time-of-use scenario 

### Currently time-of-use (TOU) rates are uncommon in the residential market. Some utilities have explored using TOU rates for some of their residential customers. For consumers with airconditioning equipment such a rate structure is very likely to raise their marginal electricity price (absent any other changes in utility cost allocation). Ifthe price becomes too high, consumers may mitigate the price impact by operating theirappliance less or shift to other cooling strategies. Under this scenario, forecasted marginal prices are very likely to be higher than the marginal electricity prices used inthe current analysis, although there are likely to be some changes in the typical load shape ofair conditioners.
d. Imbedded risk scenario


### Some believe that under a deregulated industry, utilities will face more risk when building new generation facilities. Thisrisk component, which is not present under a regulated climate, translates to an increased cost ofdoing business that may be eventually passed on to consumers. Such arisk component may result inless overbuilding, butmay alsoincrease thecosts associated withexpanding capacity. Under this scenario, forecasted marginal prices could be higher or lower than the average rates from the AEO forecasts.

e. Extrapolatecurrenttrends


### Under this scenario theresidential pricing trend observed from 1997/98 to2001 tariff-based analysis would simply be extrapolated. This essentially assumes thatthe current effects from deregulating the electric industry will not change significantly in the future. It is unknown as to how this scenario would compare to current AEO forecasts, although this scenario is likely similar to the regulated

4 EE-RM/STD-98-440-

### 3a~ DRAFT electricity at off-peak conditions. Under a regulated market, rates are structured to present average rates to consumers so that whatever losses are incurred by the utility during peak periods are offset by positive returns realized during off-peak periods. This situation could continue under a fully deregulated market. For example, this is what is currently being observed in the deregulated communications industry. Although costs ofsupplying communication lines vary on a minute-byminutebasis, consumers are still generally billedwith averagerates (e.g., 7 ¢ perminute) ratherthan with more complicated rate structures. Under this scenario, forecasted marginal prices would be consistent with the average rates from theAEO forecasts.


### b. "Fixed charge"scenario

This is similar to the above regulated "average" scenario. But in this case, a deregulated electri : utility industry would transfermost distribution and administrative costs into fixed charges, thereb.' reducing the marginal pricepaid by residential consumers. Underthis scenario, forecasted margina· prices would be lower than the average rates forecasted by the AEO.

c. 

### Time-oj-use scenario Currently time-of-use (TOU) rates are uncommon in the residential market. Some utilities have explored using TOU rates for some of their residential customers. For consumers with airconditioning equipment such a rate structure is very likely to raise their marginal electricity price (absent any other changes in utility cost allocation). Ifthe price becomes too high, consumers may mitigatethe price impact by operatingtheirappliance less or shiftto othercooling strategies. Under this scenario, forecasted marginal prices are very likely to be higher than the marginal electricity prices used in the current analysis, although there are likely to be some changes in the typical load shape ofair conditioners.


### d. Imbedded risk scenario
Some believe that under a deregulated industry, utilities will face more risk when building new generation facilities. Thisrisk component, which is not present under a regulated climate, translates to an increased cost ofdoing business that may be eventually passed on to consumers. Such a risk componentmayresultin less overbuilding,butmayalso increasethe costsassociated with expanding capacity. Underthis scenario, forecasted marginal prices could be higher or lower than the average rates from the AEO forecasts.



### e. Extrapolate current trends
Underthis scenariothe residentialpricingtrend observed from 1997/98to 2001 tariff-basedanalysis would simplybe extrapolated. Thisessentiallyassumesthatthecurrenteffectsfrom deregulatingthe electric industry will not change significantly in the future. It is unknown as to how this scenario would compare to currentAEO forecasts, although this scenario is likely similar to the regulated

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### EE-RM/STD-98-440- ' DRAFT "average" scenario. An extrapolation oftherate trend derived fromthe wholesale price-based analysis could also be used as another form ofan extrapolated price scenario.
Concerns: Forecasting whatmight happen to future marginal electricity prices is highly speculative due to the present uncertainty associated with the restructuring ofthe electric utility industry. Ifthe industry continues to move towards deregulation, it is uncertain to what extent competitive pricing will impact consumer marginal electricity pricing.

Time Estimate: In trying to model any ofthe above scenarios, at least a month would be required to develop each scenario and identify the data needs to specify the scenario. Once the data needs are defined, an undetermined amount oftime would be needed to collect the data needed to develop the forecast. DOE would, for example, need to collect information on utility tariffs and recent trends. Dueto the uncertainty associated withthe electric utility industry, this exercise would be more suited for upcoming standards analyses of other products (e.g., commercial unitary air conditioners, transformers, and residential furnaces and boilers).

5 '\ -, , EE-RM/STD-9S-440

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### ~O**~** DRAFT "average" scenario. Anextrapolationoftheratetrendderivedfrom thewholesaleprice-based analysis could also be used as another form ofan extrapolated price scenario.

Concerns: Forecastingwhatmighthappento future marginal electricityprices is highly speculative due to the presentuncertainty associated withthe restructuring ofthe electric utility industry. Ifthe industry continues to move towards deregulation, it is uncertain to what extent competitive pricing will impact consumer marginal electricity pricing.

Time Estimate: In trying to model any ofthe above scenarios, at least a month would be required to develop each scenario and identifythe data needs to specify the scenario. Once the data needs are defined, an undetermined amount oftime would be needed to collect the data needed to develop the forecast. DOE would, for example, need to collect information on utility tariffs and recent trends. Dueto the uncertaintyassociatedwiththe electricutility industry,thisexercisewouldbe more suited for upcoming standards analyses of other products (e.g., commercial unitary air conditioners, transformers, and residential furnaces and boilers).

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