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 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 of future marginal prices due to the ecent and expected changes in the

electric utility industry. If analyses were to be performed vo reassess current and future trends in

central air conditioner and heat pump marginal electricity prices, then the following types of analyses

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. Derive from 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 of marginal 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 a very limited

amount of information on residential electric utility tariffs. Prior to making the decision to utilize the

1997 RECS, a different approach to developing residential marginal prices relying on the collection

and analysis of residential tariffs was being pursued. Residential tariffs were collected from several

1

EE-RM-STD-98-440 COMMENT 302

lEE. -RiST{)-'1~ -4'-/0 #30'L 

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 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 wh(; claimed that this approach did not 

result in the best estimates of future 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 air conditioner and heat pump marginal electricity prices, lh;:n the following types of analyses 

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 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 of marginal electricity prices 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: 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 a very limited 

amount of information on residential electric utility tariffs. Prior to making the decision to utilize the 

1997 RECS, a different approach to developing residential marginal prices relying on the collection 

and analysis of residential tariffs was being pursued. Residential tariffs were collected from several 
EE-RM/STD-98-440 -¢ ~ DRAFT

electric utilities in 1997 and 1998 as part of this exercise. For these same utilities, tariffs for 2001

could be collected to determine if any 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 of how marginal electricity prices have changed in recent years

Concerns. Although a comparative analysis seems straight forward, conducting a tariff analysis is

not a trivial matter. The time required to decipher tariff rate structures can be extensive. In addition,

there are possible problems with the use of the 1997/98 tariff data. Because the tariff approach for

developing residential marginal rates was aborted to pursue the RECS approach, a statistically valid

sample may have not been collected in 1997/98. If this were the case, more tariffs from that time

period may need to be collected. This would be an extremely difficult exercise, if not impossible, as

utilities typically do not make past tariffs 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 yet to be collected.

In addition, a thorough analysis of the 2001 tariffs has yet to 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.

Time Estimate: At least four months is needed to perform the required tariff collection and conduct

the necessary comparative analysis assuming that, if required, additional 1997/93 tariffs could be

collected relatively easily. If the 1997/98 or 2001 tariff collection 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 of marginal 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 Electricity Price Data

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 of the 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 and represent the variable operating and maintenance cost of electricity being supplied for that

hour. The system lambda is calculated to minimize the utility's cost of dispatching electricity.

2

EE-RM-STD-98-440 COMMENT 302

EE-RM/STD-98-440 -11 Bod-, DRAFT 

electric utilities in 1997 and 1998 as part of this exercise. For these same utilities, tariffs for 2001 

could be collected to determine if any 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 of how marginal electricity prices have changed in recent years 

Concerns: Although a comparative analysis seems straight forward, conducting a tariff analysis is 

not a trivial matter. The time required to decipher tariff rate structures can be extensive. In addition, 

there are possible problems with the use of the 1997/98 tariff data. Because the tariff approach for 

developing residential marginal rates was aborted to pursue the RECS approach, a statistically valid 

sample may have not been collected in 1997/98. If this 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 make past tariffs readily available. Regarding 200 . resil~ential 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 sample tas yet to be collected. 

In addition, a thorough analysis of the 2001 tariffs has yet to be conducted to de(.ipher the tariffs and 

determine to what extent tariffs are being collected from the same utilities VJhich data were 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, if required, additional 1997/93 tariffs could be 

collected relatively easily. If the 1997/98 or 2001 tariff collection 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 of marginal 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 Electricity Price Data 

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 of the 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 and represent the variable operating and maintenance cost of electricity being supplied 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 of dispatch.

As shown above, a comprehensive set of hourly wholesale and system lambda prices have been

collected covering most of the United States. For those hours of the 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. In concept, this type of analysis is virtually identical to the 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 of how

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 to be translated into retail rates. Residential tariffs would

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 to be conducted

to determine any type of trend in retail rates. The derived retail rate data for the entire time span

(1993 - 2000) could also be used to check the consistency of the 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 the tariff-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 in real dollars. This reduction is

in large part due to their assumption that marginal generating costs will be lower under a competitive

pricing regime than under a regulated market. The Department has identified 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 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 COMMENT 302

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 of dispatch. 

As shown above, a comprehensive set of hourly wholesale and system lambda prices have been 

collected covering most of the United States. For those hours of the 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. In concept, this type of analysis is virtually identical to the 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 of how 

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 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 111\ally 

calculated, the wholesale prices would need to be translated into retail rates. Residential tariffs would 

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 to be conducted 

to determine any type of trend in retail rates. The derived retail rate data for the entire time span 

(1993 - 2000) could also be used to check the consistency of the 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 the tariff-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 in real dollars. This reduction is 

in large part due to their assumption that marginal generating costs will be lower under a competitive 

pricing regime than under a regulated market. The Department has identified 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 of supplying electricity at 

the margin. Supplying electricity at the margin during peak conditions is more costly than supplying 

3 
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 of supplying communication lines vary on a minute-byminute basis, consumers are still generally billed with 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 the AEO forecasts.

b. "Fixed charge"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 the AEO.

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). If the price becomes too high, consumers may

mitigate the price impact by operating their appliance 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 in the current analysis, although there are likely to be some changes in the typical load

shape of air conditioners.

d. Imbedded risk scenario

Some believe that under a deregulated industry, utilities will face more risk when building new

generation facilities. This risk component, which is not present under a regulated climate, translates

to an increased cost of doing business that may be eventually passed on to consumers. Such a risk

component may result in less overbuilding, but may also increase the costs associated with expanding

capacity. Under this scenario, forecasted marginal prices could be higher or lower than the average

rates from the AEO forecasts.

e. Extrapolate current trends

Under this scenario the residential pricing trend observed from 1997/98 to 2001 tariff-based analysis

would simply be extrapolated. This essentially assumes that the 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 COMMENT 302

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 of supplying communication lines vary on a minute-byminute basis, consumers are still generally billed with 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 the AEO forecasts. 

b. "Fixed charge" 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, thereb.' 

reducing the marginal price paid by residential consumers. Under this 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). If the price becomes too high, consumers may 

mitigate the price impact by operating their appliance 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 in the current analysis, although there are likely to be some changes in the typical load 

shape of air conditioners. 

d. Imbedded risk scenario 

Some believe that under a deregulated industry, utilities will face more risk when building new 

generation facilities. This risk component, which is not present under a regulated climate, translates 

to an increased cost of doing business that may be eventually passed on to consumers. Such a risk 

component may result in less overbuilding, but may also increase the costs associated with expanding 

capacity. Under this scenario, forecasted marginal prices could be higher or lower than the average 

rates from the AEO forecasts. 

e. Extrapolate current trends 

Under this scenario the residential pricing trend observed from 1997/98 to 2001 tariff-based analysis 

would simply be extrapolated. This essentially assumes that the 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- ' DRAFT

"average" scenario. An extrapolation of the rate trend derived from the wholesale price-based analysis

could also be used as another form of an extrapolated price scenario.

Concerns: Forecasting what might happen to future marginal electricity prices is highly speculative

due to the present uncertainty associated with the restructuring of the electric utility industry. If the

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 of the 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 of time 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.

Due to the uncertainty associated with the 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-98-440 COMMENT 302

'\ -, , 

EE-RM/STD-9S-440 - ~O ~ DRAFT 

"average" scenario. An extrapolation of the rate trend derived from the wholesale price-based analysis 

could also be used as another form of an extrapolated price scenario. 

Concerns: Forecasting what might happen to future marginal electricity prices is highly speculative 

due to the present uncertainty associated with the restructuring of the electric utility industry. If the 

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 of the 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 of time 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. 

Due to the uncertainty associated with the 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