Guide to ResourcePlanning with EnergyEfficiencyA RESOURCE OF THE NATIONAL ACTION PLAN FORENERGY EFFICIENCYNOVEMBER 2007About This DocumentThisGuide to Resource Planning with Energy Effi ciencyis provided to assist gas and electric utilities, utility regulators, andothers in the implementation of the recommendations of theNational Action Plan for Energy Effi ciency (Action Plan) andthe pursuit of its longer-term goals.This Guide describes the key issues, best practices, and mainprocess steps for integrating energy effi ciency into resourceplanning.The intended audience for this Guide is any stakeholder interested in learning more about how to promote energy effi ciency resource decisions. Utility resource planners who are earlyin the process of integrating energy effi ciency into resourceplanning may turn to the Guide to address their questionsabout how to proceed. Those overseeing utilities, such aspublic utility commissions and city councils, can use the Guideto help ask the right questions and understand the key issueswhen reviewing utility resource planning decisions.Guide to ResourcePlanning with EnergyEfficiencyA RESOURCE OF THE NATIONAL ACTION PLAN FORENERGY EFFICIENCYNOVEMBER 2007TheGuide to Resource Planning with Energy Effi ciencyis a product of the National Action Plan for Energy Effi ciencyLeadership Group and does not refl ect the views, policies, or otherwise of the federal government. The role of the U.S.Department of Energy and the U.S. Environmental Protection Agency is limited to facilitation of the Action Plan.This document was fi nal as of December 2007 and incorporates minor modifi cations to the original release.If this document is referenced, it should be cited as:National Action Plan for Energy Effi ciency (2007).Guide to Resource Planning with Energy Effi ciency. Prepared by SnullerPrice et al., Energy and Environmental Economics, Inc. <www.epa.gov/eeactionplan>For More InformationRegarding theGuide to Resource Planning with Energy Effi ciency, please contact:Katrina PielliU.S. Environmental Protection AgencyOffi ce of Air and RadiationClimate Protection Partnerships DivisionTel: (202) 343-9610E-mail: pielli.katrina@epa.govRegarding the National Action Plan for Energy Effi ciency, please contact:Stacy AngelU.S. Environmental Protection AgencyOffi ce of Air and RadiationClimate Protection Partnerships DivisionTel: (202) 343-9606E-mail: angel.stacy@epa.govLarry MansuetiU.S. Department of EnergyOffi ce of Electricity Delivery and Energy ReliabilityTel: (202) 586-2588E-mail: lawrence.mansueti@hq.doe.govor visit www.epa.gov/eeactionplan

# Table of Contents

List of Figures

............................................................................................................................... ....................................... i
List of Tables

................................................................................................................ ...................................................... ii List of Abbreviations and Acronyms

............................................................................................. ...................................... iii Acknowledgements

.............................................................................................................. ............................................ vi 

### Executive Summary

**............................................................................................................. ....................**  **ES-1**

**1 : Introduction** 

**............................................................................................................................... .............**  **1-1**

1.1 About the Guide

........................................................................................................... .................................... 1-1

1.2 Structure of the Guide

.................................................................................................... ................................... 1-3

1.3 Development of the Guide

.................................................................................................. .............................. 1-4

1.4 Notes

..................................................................................................................... ........................................... 1-4



### 2 **: Potential Studies**

**.......................................................................................................... ..........................**  **2-1**

2.1 Determining Energy Effi ciency Potential

............................................................................................................. 2-1

2.2 Types of Potential Studies

................................................................................................ .................................. 2-2

2.3 Resources on Energy Effi ciency Potential

............................................................................................................ 2-4

2.4 Notes

..................................................................................................................... ........................................... 2-9



### 3 **: Development of Energy Efficiency Avoided Costs**

**.............................................................................. 3-1** 

3.1 Overview

.................................................................................................................. ......................................... 3-1

3.2 Components of Avoided Costs

.......................................................................................................................... 3-1

3.3 Considerations When Developing Avoided Costs

............................................................................................... 3-2

3.4 Forecasting Methodologies and Data Sources

.................................................................................................... 3-9

3.5 Integration with Supply-Side Capital Planning

.................................................................................................. 3-10

3.6 Resources on Energy Effi ciency Avoided Costs

................................................................................................. 3-13

3.7 Resources on Energy Effi ciency and Greenhouse Gases

.................................................................................... 3-14

3.8 Notes

..................................................................................................................... ......................................... 3-14



### 4 **: Development of Energy Effi ciency Measures** 

**..................................................................................... 4-1** 

4.1 Developing Energy Effi ciency Measures

.............................................................................................................. 4-2

4.2 Resources for Energy Effi ciency Measure Development

...................................................................................... 4-4

4.3 Notes

..................................................................................................................... ........................................... 4-5



### 5 **: Determining Cost-Effectiveness**

**............................................................................................................ 5-1** 

5.1 Overview

.................................................................................................................. ......................................... 5-1

5.2 Use of Discount Rates

.................................................................................................... ................................... 5-4

National Action Plan for Energy Effi ciency

# Table of Contents (continued)

5.3 Resources for Determining Cost-Effectiveness

.................................................................................................... 5-5

5.4 Notes

..................................................................................................................... ........................................... 5-6



### 6 **: Development of Energy Efficiency Programs and Portfolios**

**.............................................................. 6-1** 

6.1 Types of Programs

......................................................................................................... .................................... 6-1

6.2 Criteria to Use in Developing Programs

.............................................................................................................. 6-3

6.3 Resources for Developing Energy Effi ciency Programs and Portfolios

.................................................................. 6-4

6.4 Notes

..................................................................................................................... ........................................... 6-5



### 7 **: Estimating Energy Efficiency Impacts for Resource Planning**

**............................................................. 7-1** 

7.1 Overview

.................................................................................................................. ......................................... 7-1

7.2 Estimation of Energy Effi ciency Reductions

........................................................................................................ 7-1

7.3 Estimation of Peak Capacity Reductions

............................................................................................................. 7-2

7.4 Energy Effi ciency and Greenhouse Gas Emissions

............................................................................................... 7-4

7.5 Incorporating Energy Effi ciency Forecasts into Integrated Planning

..................................................................... 7-8

7.6 Building Codes and Standards

........................................................................................................................... 7-8

7.7 Resources for Forecasting Load

.......................................................................................................................... 7-9

7.8 Notes

..................................................................................................................... ......................................... 7-10



### 8 **: Reporting Energy Efficiency Impacts for Resource Planning**

**.............................................................. 8-1** 

8.1 Reporting Energy Effi ciency Impacts for Resource Planning

................................................................................ 8-1

8.2 Resources for Reporting Energy Effi ciency Impacts

............................................................................................. 8-4

8.3 Notes

..................................................................................................................... ........................................... 8.4



### 9 **: Evaluation and Measurement**

**............................................................................................................... 9-1** 

9.1 Procurement of Energy Effi ciency Services

.......................................................................................................... 9-1

9.2 Resources for Procurement of Energy Effi ciency Services

.................................................................................... 9-5

9.3 Notes

..................................................................................................................... ........................................... 9-6



### 10 **: Evaluation, Measurement, and Verifi cation** 

**.................................................................................... 10-1** 

10.1 Overview

................................................................................................................. ...................................... 10-1

10.2 EM&V Strategies

.......................................................................................................... ................................. 10-3

10.3 Estimating the Net-to-Gross Ratio

.................................................................................................................. 10-4

10.4 Isolating Program Effects

................................................................................................ ............................... 10-5

10.5 Resources on EM&V

........................................................................................................ .............................. 10-5

10.6 Notes

.................................................................................................................... ........................................ 10-9

Guide to Resource Planning with Energy Effi ciency

# Table of Contents (continued)

**11. Best Practices** 

**............................................................................................................ ..........................**  **11-1**

11.1 Overview

................................................................................................................. ...................................... 11-1

11.2 Coordinate Potential Studies and Actual Energy Effi ciency Programs and Portfolios

........................................ 11-2

11.3 Adjust Capacity Value Based on Expected Load Reductions

............................................................................ 11-3

11.4 Use EM&V Results in the Development of Measures and Energy Effi ciency Programs

...................................... 11-4 

### Appendix A **: National Action Plan for Energy Efficiency Leadership Group**

**........................................ A-1**  **Appendix B : Glossary** 

**............................................................................................................................... ..**  **B-1 Appendix C**  **: ISO New England’s Forward Capacity Market**

**.................................................................... C-1**  **Appendix D : References** 

**........................................................................................................................... D-1** 

National Action Plan for Energy Effi ciency

# List of Figures

**Figure ES-1.** Overall Organization of the Guide to Resource Planning with Energy Effi ciency

...................... ES-2 **Figure 1-1.** National Action Plan for Energy Effi ciency Recommendations and Options

................................. 1-2 **Figure 1-2.** Overall Organization of the Guide to Resource Planning with Energy Effi ciency

.......................... 1-3 **Figure 2-1.** Defi nitions of Energy Effi ciency Potential

.................................................................................... 2-2 **Figure 2-2.** Example of Results From a Policy-Focused Energy Effi ciency Potential Study

................................ 2-3 **Figure 2-3.** BPA Study Illustrates When Peak Load Reductions Are Needed to Avoid Transformer Bank Overload

................................................................................................................. ..................... 2-3 **Figure 3-1.** Comparison of Avoided Costs in Texas and California

................................................................. 3-5 **Figure 3-2.** Implication of Time-of-Use Avoided Costs

.................................................................................. 3-5 **Figure 3-3.** Average Avoided Costs for Air Conditioning, Outdoor Lighting, and Refrigeration in California

......... 3-6 **Figure 3-4.** Average Electricity Sector CO 2 

### Emission Rate by Region in 2004

................................................. 3-7 **Figure 3-5.** Generation by Fuel Type and Region in 2004

.............................................................................. 3-8 **Figure 3-6.** Comparison of Marginal CO 2 

### Emission Rates for a Summer Day in California and Wisconsin

............................................................................................................................ 3-8 **Figure 3-7.** Example of the Value of Deferring a Transmission Line

.............................................................. 3-11 **Figure 7-1.** Marginal CO 2 

### Emissions Rate by Hour for California Over a Two-Week Period

............................ 7-6 **Figure 7-2.** Hourly Shape of MWh Savings From Energy Efficiency Measures in California

................................... 7-7 **Figure 7-3.** Hourly Shape of MWh Savings from Energy Effi ciency Measures

................................................. 7-7 **Figure 8-1.** Tracking Energy Effi ciency Resources in Load Forecasts

............................................................... 8-2 **Figure 9-1.** Potential Roles of Third-Party Contractors in Providing Energy Effi ciency Services and Savings

........ 9-3 **Figure 11-1.** Areas to Increase Coordination to Improve Energy Effi ciency in Resource Planning.

................. 11-2 **Figure 11-2.** Transmission Alternative Targets, 2004–2013

......................................................................... 11-3 **Figure C-1.** Demand Resource Show of Interest

............................................................................................ C-4

Guide to Resource Planning with Energy Effi ciency i

# List of Tables

**Table 3-1.** Typical Components of Avoided Costs Energy Effi ciency Program Types

........................................ 3-2
**Table 3-2.** Summary of Approaches to Value Energy and Capacity by Utility Type

.......................................... 3-3
**Table 4-1.** Defi ning Costs and Impacts of Energy Effi ciency Measures

........................................................... 4-3
**Table 5-1.** Questions Addressed by the Various Cost Tests

............................................................................ 5-2
**Table 5-2.** Benefi ts and Costs of Various Test Perspectives

............................................................................. 5-3
**Table 5-3.** The Use of Discount Rates in Cost Tests

........................................................................................ 5-4
**Table 6-1.** Energy Effi ciency Program Types

................................................................................................... 6-2
**Table 7-1.** Illustrative CO 2 

### Emissions Factors for Fossil Fuel Combustion

........................................................ 7-5
**Table 7-2.** Illustrative Upstream CO 2 

### Emission Factors for Fuels Used in Electricity Generation, from Mining, Cleaning, and Transportation in California

.............................................................. 7-5
**Table 8-1.** Example Summary Table for Long-Term Energy Effi ciency Impacts

................................................ 8-3
**Table 9-1.** Functional Overview of Energy Effi ciency Program Management and Delivery

.............................. 9-2
**Table 10-1.** EM&V Resources

...................................................................................................................... 10-8

National Action Plan for Energy Effi ciency ii

# List of Abbreviations and Acronyms

A

**ACEEE** American Council for an Energy-Efficient Economy

**AEE** Association of Energy Engineers

**AEO** (Department of Energy’s Energy Information Agency) Annual Energy Outlook

**AP2** Air Pollution Prevention (forum)

**ASHRAE** American Society of Heating, Refrigerating, and Air Conditioning


# B

**BPA** Bonneville Power Administration

**Btu** British thermal unit


# C

**CEE** Consortium for Energy Efficiency

**CRF** capital recovery factor

**CFL** compact fluorescent light bulb

**CH4** methane

**CO2** carbon dioxide **CO2eq** carbon dioxide equivalent

**CONE** cost of new entrant

**CPUC** California Public Utilities Commission

**CT** combustion turbine


# D

**DEEM** Database of Energy Effi ciency Measures (EPRI)

**DEER** Database of Energy Efficiency Resources (California)

**DOE** U.S. Department of Energy

**DRG** Demand Resources Group **DSM** demand-side management

**ECMB** Energy Conservation Management Board


# E

**EE** energy efficiency

**eGRID** Emissions & Generation Resource Integrate Database (EPA)

**EIA** Energy Information Administration (DOE)

**EM&V** evaluation, measurement, and verification

**EPA** U.S. Environmental Protection Agency

**EPRI** Electric Research Power Institute

**ERCOT** Electric Reliability Council of Texas, Inc.

**ESCO** energy service company

**EVO** efficiency valuation organization


# F

**FCA** forward capacity auction

**FCM** forward capacity market

**FEMP** Federal Energy Management Program

**FERC** Federal Energy Regulatory Commission


# G

**GHG** greenhouse gas
**GWh** gigawatt hour


# H

**HVAC** heating, ventilation, and air conditioning


# I

**ICAP** installed capacity

**ICE** IntercontinentalExchange

**ICR** installed capacity requirement

Guide to Resource Planning with Energy Effi ciency iii

# List of Abbreviations and Acronyms (continued)

**IEA** International Energy Agency

**IECC** International Energy Conservation Code

**IEPEC** International Energy Program Evaluation Conference

**IGCC** integrated gasification combined cycle

**IPMVP** International Performance Measurement and Verification Protocol

**IRP** integrated resource planning

**ISO** independent system operator

**ISO-NE** Independent System Operator—New England


# K

**kW** kilowatt

**kWh** kilowatt hour


# L

**LBNL** Lawrence Berkeley National Laboratory

**LEED** Leadership in Energy and Environmental Design

**LNG** liquefied natural gas

**LOLP** loss of load probability

**LSE** load serving entity


# M

**M&E** monitoring and evaluation

**MCF** thousand cubic feet (of natural gas)

**MMBtu** million British thermal units

**MW** megawatt
**MWh** megawatt hour

**MVA** megavolt ampere 

# N

**N2O** nitrous oxide

**NARUC** National Association of Regulatory Utility Commissioners

**NEEP** Northeast Energy Efficiency Partnerships, Inc.

**NEMS** National Energy Modeling System

**NO X**  

### nitrogen oxide

**NTGR** net-to-gross ratio

**NYMEX** New York Mercantile Exchange

**NY ISO** New York Independent System Operator

**NYSERDA** New York State Energy Research and Development Authority


# P

**PACT** program administrator cost test

**PCT** participant cost test

**PG&E** Pacific Gas and Electric Company

**PJM** Pennsylvania New Jersey Maryland Interconnection Inc.

**PM** particulate matter

**PM10** particulate matter of 10 microns in diameter or smaller

**PUC** public utility commission

**PUCT** Public Utility Commission of Texas


# R

**RFP** request for proposals

**RIM** ratepayer impact measure

National Action Plan for Energy Effi ciency iv

# List of Abbreviations and Acronyms (continued)

S U

**SDG&E** San Diego Gas and Electric **UCAP** unforced capacity

**SEER** Seasonal Energy Efficiency Ratio **UCT** utility cost test

**SCE** Southern California Edison **UNEP** United Nations Environment Programme

**SCT**

**SF6**

**SPC** societal cost test
sulfur hexafluoride standard performance contract 

# W

**WACC**

**WECC** weighted average cost of capital Wisconsin Energy Conservation Corporation 

# T **WGA** Western Governors’ Association

**TOU** time-of-use

**TRC** total resource cost

Guide to Resource Planning with Energy Effi ciency v

# Acknowledgements

This Guide to Resource Planning with Energy Effi ciencyis a key product of the Year Two Work Plan for the National Action Plan for Energy Effi ciency. This work plan was developed based on feedback from Action Plan Leadership Group members and Observers during the fall of 2006. The work plan was further refi ned duringthe March 2007 Leadership Group meeting in Washington, D.C. A full list of Leadership Group members is provided in Appendix A.
With direction and comment by the Action Plan Leadership Group, the Guide’s development was led by Snuller Price, Energy and Environmental Economics, Inc., under contract to the U.S. Environmental Protection Agency(EPA). Chapters 7 and 8 were authored by Chuck Goldman and Nicole Hopper, Lawrence Berkeley NationalLaboratory, under contract to the U.S. Department of Energy (DOE). Additional preparation was performed by Dr. Jim Williams, Amber Mahone, Jack Moore, and Dr. C.K. Woo, all of Energy and Environmental Economics, Inc.
Rich Sedano of the Regulatory Assistance Project and Alison Silverstein of Alison Silverstein Consulting provided their expertise during review and editing of the Guide.

DOE and EPA facilitate the National Action Plan for Energy Effi ciency, including this Guide. Key staff include Larry Mansueti (DOE Offi ce of Electricity Delivery and Energy Reliability); Dan Beckley (DOE Offi ce of Energy Effi ciency and Renewable Energy); and Kathleen Hogan, Katrina Pielli, and Stacy Angel (EPA Climate Protection Partnership Division).
Eastern Research Group, Inc., provided copyediting, graphics, and production services.

National Action Plan for Energy Effi ciency vi

# Executive Summary

**This Guide to Resource Planning with Energy Efficiency describes the key issues, best practices, and main process steps for integrating energy efficiency into electricity resource planning. The Guide is provided to**  **assist in the implementation of the National Action Plan for Energy Effi ciency’s fi**  **ve policy recommenda tions for creating a sustainable, aggressive national commitment to energy effi**  **ciency.**

Improving energy effi ciency in our homes, businesses,schools, governments, and industries—which collectively consume more than 70 percent of the natural gas and electricity used in the country—is one of the most constructive, cost-effective ways to address the challenges of high energy prices, energy security and independence, air pollution, and global climate change. Despite these benefi ts and the success of energy effi ­ ciency programs in some regions of the country, energy effi ciency remains critically underutilized in the nation’s energy portfolio. It is time to take advantage of more than two decades of experience with successful energy effi ciency programs, broaden and expand these efforts, and capture the savings that energy effi ciency offers. Integrating energy effi ciency into resource planning is a key to capturing these benefi ts.
This Guide details how to use a variety of methods to help ensure that energy effi ciency programs provide a resource as dependable and valuable to utilities and their customers as any supply-side resource. The Guide organizes the planning process into ten important steps, each with their own associated technical issues, best practices, and information resources.
Since multiple approaches exist, the best choice is generally the one that works well with existing practices, the institutional structure in place, the experience of the teams doing the analysis and developing the programs, the time and budget available, and the data available. With this in mind, the steps and techniques described in this Guide should be understood as a starting point fortailoring an approach that best fi ts conditions and existing planning processes for a given utility or jurisdiction. Figure ES-1 shows the topics covered in this Guide and their overall relationship in the energy effi ciency planning process. The three main sequential topic areas are energy effi ciency potential studies; portfolio development and reporting; and procurement, measurement, and verification. After addressing these topics, the Guide discusses emerging techniques and best practices.
The key points from this Guide include:

• Energy effi ciency is an important utility resource

which should be incorporated into utility resource planning, along with supply-side resources.

• Energy effi ciency is a quantifi able resource, and this

Guide can help resource planners learn to:

– Predict the energy effi ciency potential within their jurisdiction using a potential study.

– Calculate the economic benefi ts of energy savings through an avoided cost methodology.

– Develop energy effi ciency measures and determine their cost-effectiveness.

– Use the information about energy effi ciencymeasures to develop an energy effi ciency program or portfolio.

– Estimate and report on the impacts of the program for resource planning.

– Effectively implement an energy effi ciency program or portfolio through procurement of energy effi ciency resources from contractors, and track program performance with evaluation, measurement, and verifi cation tools.

National Action Plan for Energy Effi ciency ES-1

## Figure ES-1. Overall Organization of the Guide to Resource Planning with **Energy Effi ciency** 

Potential Studies (Chapter 2) Portfolio Development and Reporting (Chapters 3 to 8) Procurement, Measurement, and Verification (Chapters 9 and 10)

Potential Studies
Chapter 2 Chapter 3 Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8 Chapter 9

Chapter 10

Chapter 11 Development of Avoided Costs Development of EE Measures Procurement of EE Services

DeterminingCostEffectiveness Evaluation,Measurement, and Verification Development of EE Programs and

Portfolios

Estimating EE

Impacts for

Resource Planning

Reporting EE Impacts for

Resource Planning Best Practices Best Practices (Chapter 11)

• Utilities and regulators should aim toward the integration of all of these resource planning functions into a unifi ed whole.
This Guide has been developed to help parties implement the fi ve key policy recommendations of the National Action Plan for Energy Effi ciency. (See page 1-2 for a full listing of options to consider under each Action Plan recommendation.) The Action Plan was released in July 2006 as a call to action to bring diverse stakeholders together at the national, regional, state, or utility level, as appropriate, and foster the discussions, decision-making, and commitments necessary to take investment in energy effi ciency to a new level.
This Guide directly supports the Action Plan recommendations to “recognize energy effi ciency as a high-priority energy resource” and “make a strong, long-term commitment to implement cost-effective energy effi ­ ciency as a resource.” The Guide elaborates upon many of the options identifi ed by the Action Plan, and makesmore concrete many of the tools and techniques needed to implement the Action Plan’s recommendations.

ES-2 Guide to Resource Planning with Energy Effi ciency

# 1: Introduction

**Improving the energy efficiency of homes, businesses, schools, governments, and industries—which consume more than 70 percent of the natural gas and electricity used in the United States—is one of the**  **most constructive, cost-effective ways to address the challenges of high energy prices, energy security and independence, air pollution, and global climate change. Mining this energy efficiency could help us**  **meet on the order of 50 percent or more of the expected growth in U.S. consumption of electricity and natural gas in the coming decades, yielding many billions of dollars in saved energy bills and avoiding**  **significant emissions of greenhouse gases (GHGs) and other air pollutants. 1** 

Recognizing this large untapped opportunity, more than60 leading organizations representing diverse stakeholders from across the country joined together to develop the National Action Plan for Energy Effi ciency. 2 The Action Plan identifi es many of the key barriers contributing to underinvestment in energy effi ciency, outlines fi vekey policy recommendations for achieving all cost-effective energy effi ciency, and provides a number of options to consider in pursuing these recommendations (Figure 1-1). As of November 2007, nearly 120 organizations have endorsed the Action Plan recommendations and made public commitments to implement them in theirareas. Conducting resource planning that includes energy effi ciency is key to making the Action Plan a reality.



# 1.1 About the Guide

This Guide elaborates upon many of the options identifi ed above by the Action Plan, and makes more concrete many of the tools and techniques needed to implement the Action Plan’s recommendations. The Action Plan’s Leadership Group (see Appendix A for a list of group members) identifi ed the area of energy effi ciency in resource planning as one where additional guidance is needed to help parties pursue the recommendations and meet their commitments to energy effi ciency. Specifi cally, this Guide supports the Action Plan recommendations to “recognize energy efficiency as a high-priority energy resource” and “make a strong, long-term commitment to implement cost-effective energy effi ciency as a resource.” The Guide has ten chapters, each of which focuses on an important step in the process and the associatedtechnical issues, best practices, and information resources. When correctly used, the methods described here help ensure that energy effi ciency programs can provide a resource as dependable and valuable to utilities and their customers as any supply-side resource.
Since multiple approaches exist, the best choice is generally the one that works well with existing practices, the institutional structure in place, the experience of the teams doing the analysis and developing the programs, the time and budget available, and not least the data available. With this in mind, the steps and techniquesdescribed in the Guide should be understood as a starting point for tailoring an approach that best fi ts conditions and existing planning processes for a given utility or jurisdiction.



## Guide Objective

After reading this Guide, the reader should be able to use the methods described to help ensure that energy effi ciency programs provide a resource as dependable and valuable to utilities and their customers as any supply-side resource.

This Guide should be of interest to several different typesof readers. First, it aims to help utility resource planners who are early in the process of integrating energy effi ciency into resource planning and have questions

National Action Plan for Energy Effi ciency 1-1

## Figure 1-1. National Action Plan for Energy Effi ciency Recommendations and Options

**Recognize energy efficiency as a high-priority energy resource.**  Options to consider: Establishing policies to establish energy effi ciency as a • priority resource. Integrating energy effi ciency into utility, state, and regional • resource planning activities. Quantifying and establishing the value of energy effi ciency, • considering energy savings, capacity savings, and environmental benefi ts, as appropriate.
**Make a strong, long-term commitment to imple ment cost-effective energy efficiency as a resource.**  Options to consider: Establishing appropriate cost-effectiveness tests for a • portfolio of programs to refl ect the long-term benefi ts of energy effi ciency. Establishing the potential for long-term, cost-effective • energy effi ciency savings by customer class through provenprograms, innovative initiatives, and cutting-edge technologies. Establishing funding requirements for delivering long-term, • cost-effective energy effi ciency.Developing long-term energy saving goals as part of en• ergy planning processes.Developing robust measurement and verifi cation proce• dures.Designating which organization(s) is responsible for admin• istering the energy effi ciency programs. Providing for frequent updates to energy resource plans to • accommodate new information and technology.**Broadly communicate the benefits of and opportu nities for energy effi**  **ciency.** Options to consider: Establishing and educating stakeholders on the business • case for energy effi ciency at the state, utility, and other appropriate level, addressing relevant customer, utility, and societal perspectives. Communicating the role of energy effi ciency in lower• ing customer energy bills and system costs and risks over time. Communicating the role of building codes, appliance • standards, and tax and other incentives. **Provide sufficient, timely, and stable program funding to deliver energy effi**  **ciency where cost-effective.**  Options to consider: Deciding on and committing to a consistent way for • program administrators to recover energy effi ciency costs in a timely manner. Establishing funding mechanisms for energy effi ciency • from among the available options, such as revenue requirement or resource procurement funding, system benefi ts charges, rate-basing, shared-savings, and incentive mechanisms. Establishing funding for multi-year period. • **Modify policies to align utility incentives with the delivery of cost-effective energy effi**  **ciency and modify ratemaking practices to promote**  **energy effi ciency investments.**  Options to consider: Addressing the typical utility throughput incentive and • removing other regulatory and management disincentives to energy effi ciency.Providing utility incentives for the successful manage• ment of energy effi ciency programs. Including the impact on adoption of energy effi ciency • as one of the goals of retail rate design, recognizing that it must be balanced with other objectives.

Source: National Action Plan for Energy Effi ciency Report.

Guide to Resource Planning with Energy Effi ciency 1-2

## Figure 1-2. Overall Organization of the Guide to Resource Planning with **Energy Effi ciency** 

Potential Studies (Chapter 2) Portfolio Development and Reporting (Chapters 3 to 8) Procurement, Measurement, and Verification (Chapters 9 and 10)

Potential Studies
Chapter 2 Chapter 3 Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8 Chapter 9

Chapter 10

Chapter 11 Development of Avoided Costs Development of EE Measures Procurement of EE Services

DeterminingCostEffectiveness Evaluation,Measurement, and Verification Development of EE Programs and

Portfolios

Estimating EE

Impacts for

Resource Planning

Reporting EE Impacts for

Resource Planning Best Practices Best Practices (Chapter 11)

about how to proceed. Second, it is meant to help those overseeing utilities, such as PUCs and city councils, to ask the right questions and understand the key issues when reviewing utility resource planning decisions. Finally, it assists stakeholders who are increasingly concerned with how to promote energy effi ciency in resource decisions, as evidenced by the broad interest and participation in the Action Plan. This document benefi ts all Action Plan participants for its direct application to, and as a useful reference for, their resource planning activities.



# 1.2 Structure of the Guide

The following diagram shows the topics addressed in this Guide and their overall relationship in the energyeffi ciency planning process. The three main sequential topic areas are energy effi ciency potential studies, portfolio development and reporting, and procurement, measurement and verifi cation. This is followed by a discussion of emerging techniques and best practices.

1. Development of energy effi ciency potential studies(Chapter 2). Chapter 2 describes the standard practices employed in potential studies, including methodologies for analyzing technical, economic, and achievable potential. Potential studies are generally the starting place in designing energy effi ciency programs and incorporating them into resource planning. Thereare three main types of potential studies: (1) a highlevel policy study to set program goals and budgets and to make the policy case to initiate or expand an energy effi ciency program; (2) a planning study to identify energy effi ciency alternatives to supply-side

National Action Plan for Energy Effi ciency 1-3investments, including generation, transmission, or distribution; and (3) a detailed program-design study to identify the best mix of energy effi ciency measures to be offered to customers. Each type of potential study is described in the Action Plan’s Guide for Conducting Energy Effi ciency Potential Studies , available at www. epa.gov/eeactionplan.

2. Energy effi ciency portfolio development and reporting(Chapters 3 to 8). Energy effi ciency portfolio development entails generating good ideas about energy effi ciency opportunities, evaluating cost-effectiveness, continuing established programs, offering programs to a full range of customers, and communicatingexpected reductions to energy procurement and planning. These chapters describe the details in developing the energy effi ciency portfolio and reporting on program results.

3. Procurement, measurement, and verifi cation (Chapters 9 and 10). How the energy effi ciency portfolio is implemented is critical to the overall success of the programs. These chapters provide information onprocurement of energy effi ciency services and tracking overall performance through evaluation, measurement, and verifi cation (EM&V). In addition to these three topics, the Guide’s last chapter discusses best practices, including coordination of each resource planning function into an integrated whole.


# 1.3 Development of the Guide

The Guide to Resource Planning with Energy Effi ciency is a product of the Year Two Work Plan for the National Action Plan for Energy Effi ciency. With direction and comment by the Action Plan Leadership Group, the Guide’s development was led by Snuller Price, Energy and Environmental Economics, Inc., under contract tothe U.S. Environmental Protection Agency (EPA). Chapters 7 and 8 were authored by Chuck Goldman and Nicole Hopper, Lawrence Berkeley National Laboratory, under contract to the U.S. Department of Energy (DOE).Additional preparation was performed by Dr. Jim Williams, Amber Mahone, Jack Moore, and Dr. C.K. Woo, all of Energy and Environmental Economics, Inc.



# 1.4 Notes

1. See the National Action Plan for Energy Effi ciency (2006), available at <www.epa.gov/cleanenergy/actionplan/report.htm>.

2. See <www.epa.gov/eeactionplan>.

Guide to Resource Planning with Energy Effi ciency 1-4

# 2: Potential Studies

**Potential studies are often the first step taken in initiating or expanding energy effi ciency programs.**  **This chapter provides an overview of potential studies for use in resource planning. For a more detailed discussion of conducting a potential study, see the Action Plan’s Guide for Conducting Energy Effi**  **ciency Potential Studies (National Action Plan for Energy Effi**  **ciency, 2007a).**



## High-Level Summary Key Questions for Utilities and Regulators

Potential studies are typically the fi rst step taken in initi­ • Does the potential study establish the potential for • ating or expanding energy effi ciency programs. They are long-term, cost-effective energy effi ciency savings by conducted to determine the potential for saving energy customer class? 1 and capacity through energy effi ciency measures. What is this potential study’s goal (promoting effi ciency • Potential studies typically start by determining technical • at the policy/regulatory level, integrating effi ciency into feasibility, then apply different screens such as customer the utility planning process, or designing effi ciency proeligibility, cost-effectiveness, and estimates of program grams)? Does it achieve that goal? uptake (i.e., customer participation) to determine what Are the potential study results realistic, refl ecting what we • the program can be realistically expected to achieve. are likely to achieve through energy effi ciency programs? Potential studies vary in scope and methods according • How do the results of this study compare to the results • to their objectives, of which there are three main kinds: for other jurisdictions? (1) promoting effi ciency at the policy/regulatory level, (2) integrating effi ciency into the utility planning process, and Does the potential study highlight any new opportunities • (3) designing effi ciency programs. to add to the effi ciency portfolio?



# 2.1 Determining Energy Effi ciency Potential

Potential studies are conducted to determine the potential for saving energy (e.g., of electricity, MCF of natural gas) and capacity (e.g., MW, MCF/day) through energy effi ciency measures. Since “energy effi ciency potential” can have different meanings, Figure 2-1 lists the four defi nitions commonly used in resource planning.

These defi nitions mirror the sequential estimates in a typical potential study. The process begins with a technical potential estimate of what kWh and kW savings would be achieved if all technically feasible effi ciency measureswere implemented for all customers. The technical potential is then adjusted by applying a series of screens of real-world constraints. Economic potential is the result ofreducing the technical potential by applying cost-effectiveness and program eligibility criteria. There are several tests for evaluating cost-effectiveness, each refl ecting the different interests in energy effi ciency of various stakeholders. Chapter 5 discusses in more detail how to determine cost-effectiveness. Achievable potential is theresult of estimating how much market barriers and program uptake limits will reduce the economic potential. Examples of these barriers and limits are:

• Customer willingness to adopt effi ciency measures.

• Customer criteria for cost-effectiveness.

• Customer awareness of energy effi ciency opportunities.

• Customer access to information about energy effi ciency.

National Action Plan for Energy Effi ciency 2-1-

-

- 

## Figure 2-1. Definitions of Energy Effi **ciency Potential**

Not technically feasible **Technical Potential**

Not technically feasible Not cost effective **Economic Potential**

Not technically feasible Not cost effective Market and adoption barriers **Achievable Potential**

Not technically feasible Not cost effective Market and adoption barriers Program design, budget, staffing, and time constraints **Program Potential** 

Note: For more complete defi nitions, see National Action Plan for Energy Effi ciency, 2007a, and XENERGY, 2002.

• Rates of equipment turnover.

• Program incentives and activity.

• Availability of energy-efficient equipment in the marketplace.

• “Split incentive” barriers in which the person investing in the equipment is not in a position to receive the savings (e.g., landlords and tenants; institutions with separate operations and capital budgets and bureaucracies).
Finally, the program potential is the effi ciency savingsthat can be realistically realized from the achievable potential, given the budget, staffi ng, and time constraintsfor the effi ciency program. Program potential establishes the total, or gross, savings expected from a program.
As a final step, some potential studies net out “naturally occurring” energy efficiency improvements in order to identify the savings actually attributable to the program. For example, if a refrigerator rebate program pays 10 customers to upgrade to an ENERGY STAR ® model, but two customers would have upgraded even without the program, then the net savings is 80% of the program potential (e.g., the program can take credit for eight out of every 10 participants). The 80% value is commonly known as a “net-to-gross” ratio (NTGR), useful for determining both the cost-effectiveness and achievements attributable to energy effi ciency efforts.



# 2.2 Types of Potential Studies

Potential studies differ in scope and methods as a function of their objectives and who is conducting them. They can be divided into three main types:

1. **Policy studies,** used to promote efficiency in policies and regulations.

2. **Planning studies,** used to integrate energy effi ciency into utility resource planning.

3. **Program-design studies,** used to develop the details of energy effi ciency programs.
Potential studies for policy are typically high-level (i.e., not extremely detailed) studies, primarily designed to develop a policy consensus for initiating new energy effi ciency programs or making changes to existing programs. A policy study might be commissioned by a utility regulator or legislative body that would like more information on the benefi ts of establishing a program, or by third-party energy efficiency advocates who want to bring energy effi ciency

Guide to Resource Planning with Energy Effi ciency 2-2HoursHours 13 2350-2850 10 1850-2350

7 1350-1850 4 850-1350 1

2010 Covington Transformer Bank Loadings by Day and Hour Emergency Unit = 2850 MVA

22 19 MVA 3350-3850 2850-3350 16 13 2350-2850 10 1850-2350 7 1350-1850 4 850-1350 1 

## Figure 2-2. Example of Results From a Policy-Focused Energy Effi **ciency Potential Study** 

5,000 10.0%

4,000 8.0%

3,000 6.0%

2,000 4.0%

1,000 2.0%

0 Business as Usual Advanced Efficiency Efficiency Funding Scenarios Max Efficiency 0.0%

Peak Capacity Reduced Percent of Peak Reduced
Source: XENERGY, 2002.



## Figure 2-3. BPA Study Illustrates When Peak Load Reductions Are Needed to **Avoid Transformer Bank Overload**

2004 Covington Transformer Bank Loadings by Day and Hour Emergency Unit = 2850 MVA

16 19 22

2850-3350 MVA

Note: Thermal overload limit shown in red.
Source: Bonneville Power Administration [BPA] 2007. (In references section)

National Action Plan for Energy Effi ciencyTotal Capacity Saved Through 2011(MW)15-Nov18-Nov21-Nov24-Nov27-Nov30-Nov15-Nov18-Nov21-Nov24-Nov27-Nov30-Nov3-Dec3-Dec6-Dec6-Dec9-Dec9-Dec12-Dec12-Dec15-Dec15-Dec18-Dec18-Dec21-Dec21-Dec24-Dec24-Dec27-Dec27-Dec30-Dec30-Dec2-Jan2-Jan5-Jan5-Jan8-Jan8-Jan11-Jan11-Jan14-Jan14-Jan17-Jan17-Jan20-Jan20-Jan23-Jan23-Jan26-Jan26-Jan29-Jan29-Jan1-Feb1-Feb4-Feb4-Feb7-Feb7-Feb10-Feb10-Feb13-Feb13-FebPercent of 2011 Peak Capacity Reduced

2-3benefits to the attention of regulators and policy-makers. An example is a 2002 Energy Foundation study that played an important role in convincing California legislators to aggressively fund energy efficiency in that state (see Figure 2-2). Policy studies can also be designed jointly by a utility and its regulator to establish prudent spending on energy efficiency and to justify its cost recovery.
Planning studiesof energy effi ciency potential are used by demand-side planners within utilities to incorporate effi ciency into an integrated resource planning (IRP) process. The objective of a planning study is to identifyenergy effi ciency opportunities that are cost-effective alternatives to supply-side resources in generation, transmission, or distribution. This often means developing a case that specifi c effi ciency measures have the potentialto eliminate or defer the need for specifi c new investments in a supply resource plan, which may encompass generation, wires, substation upgrades, or gas pipelines.As an example, in the Bonneville Power Administration’s (BPA’s) Kangley-Echo Lake non-wires alternative planning study, the focus was on identifying energy effi ­ ciency improvements that would allow the deferral of a new transmission line and substation upgrades needed to prevent transformer thermal overloadings. Figure 2-3 illustrates what the peak loading hours were expected to be in 2004 and 2010, and therefore the kW impact shapes of energy effi ciency that would be needed as an alternative to the conventional upgrades (BPA, 2007).

Potential studies for program design can be undertakenby utilities or third parties for the purpose of developing specific measures for the energy effi ciency portfolio. They can also be used for developing customer program features, such as outreach and education, rate incentives, and rebates for customer purchases of energy effi cient equipment. More details about the types of potential studies and the methodologies used can be found in the Guide for Conducting Energy Efficiency Potential Studies (National Action Plan for Energy Efficiency, 2007a) and in Section 2.3.


# 2.3 Resources on Energy Effi ciency Potential

**Title/Description URL Address** 
**Emerging Energy-Saving Technologies and Practices for the Buildings Sector as of 2004.** This study identifi es new research and demonstration projects that could help advance high-priority emerging technologies, as well as new potential technologies and practices for market transformation activities. <http://aceee.org/pubs/a042toc.pdf>

**A Responsible Electricity Future: An Effi cient,**  **Cleaner and Balanced Scenario for the U.S. Electricity System.**  This report develops a scenario for the future evolution of the electric power system in the U.S., including increased investment in energy effi ciencyand in renewable and distributed generating technology, and compares it with the current situation. <www.uspirg.org/uploads/J9/ vu/ J9vuJffJAiEQLJuNjf1BHg/ responsibleelecfuture.pdf>

**Scenarios for a Clean Energy Future, 2000.** This document reflects efforts of the Interlaboratory Working Group, commissioned by DOE, to examine the potential for public policies and programs to foster efficient and clean energy technology solutions. <www.ornl.gov/sci/eere/cef/> **National**

Guide to Resource Planning with Energy Effi ciency 2-4**Title/Description URL Address** 

**National**

**Midwest Screening Market Transformation Opportuni**  **ties: Lessons from the Last Decade, Promising Targets for the Next Decade.**  This report examines past and recent trends in the market transformation fi eld and presents an updated screening analysisand categorization of the most promising opportunities. <www.aceee.org/pubs/u022full.pdf>

**The Technical, Economic and Achievable Potential for Energy Efficiency in the U.S.—**  **A Meta-Analysis of Recent Studies.** This studycompares the findings from 11 studies on the technical, economic, and/or achievable potential for energy efficiency in the U.S. to recent-year actual savings from efficiency programs in leading states. <www.aceee.org/conf/04ss/rnemeta.pdf>

**Examining the Potential for Energy Effi ciency**  **to Address the Natural Gas Crisis in the Midwest.**  The results of this study suggest that a modestly aggressive, but pragmatically achievable energy effi ciency campaign (achieving about a 5% reduction in both electricity and natural gas customer use over 5 years) could produce tens of billions of dollars in net cost savings for residential, commercial, and industrial customers in the Midwest. <www.aceee.org/pubs/u051.htm>

**Repowering the Midwest: The Clean Energy Development Plan for the Heartland.**  This Web site is supported by the Environmental Law andPolicy Center as a source for clean energy information in the Midwest. It provides information on the Clean Energy Development Plan for the Heartland, which proposes policies to implement underutilized energy effi ciency technologies and to aggressively develop renewable energy resources. <www.repowermidwest.org>

National Action Plan for Energy Effi ciency 2-5**Title/Description URL Address** 

**Northeast Economically Achievable Energy Effi** **ciency Po tential in New England.**  This report provides anoverview of areas where energy effi ciency could potentially be increased in the six New England states. <www.neep.org/fi les/Updated_ Achievable_Potential_2005.pdf>

**Electric Energy Efficiency and Renewable En ergy in New England: An Assessment of Exist**  **ing Policies and Prospects for the Future.** This report applies analytical tools, such as economic and environmental modeling, to demonstrate the value of consumer-funded energy effi ciency programs and renewable portfolio standards and addresses market and regulatory barriers. <http://raponline.org/Pubs/ RSWS-EEandREinNE.pdf>

**Northwest NEEP Initiative Review: Commercial/Industrial**  **Sectors Qualitative Assessment and Initiative Ranking.**  Synapse Energy Economics. Submitted to Northeast Energy Efficiency Partnerships, Inc., October 1, 2004.**The Fifth Northwest Electric Power and Conser vation Plan.**  This plan is a blueprint for an adequate, low-cost, low-risk energy future. Technical appendices include conservation cost-effectiveness methodologies. <www.neep.org/html/NEEP_C&IReview. pdf>

<www.nwcouncil.org/energy/powerplan/ plan/Default.htm>

**Southeast Powering the South: A Clean & Affordable**  **Energy Plan for the Southern United States.** Powering the South shows that a clean generation mix can meet the region’s power demands and reduce pollution without raising the average regional cost of electricity and lists the policy initiatives that can make the changes. <www.crest.org/articles/static/1/binaries/ pts_repp_book.pdf>

**Southwest The Potential for More Efficient Electricity Use**  **in the Western U.S.: Energy Effi ciency Task** **Force Draft Report to the Clean and Diversi fi**  **ed Energy Advisory Committee of the West ern Governor’s Association, Draft Report for**  **Peer Review and Public Comment.** This report demonstrates how the adoption of the best practice energy effi ciency policies and programs in all western states could reduce most of the projected load growthduring 2005–2020, reduce overall electricity consumption, and yield economic and environmental benefi ts. <www.westgov.org/wga/publicat/ CDEAC06.pdf>

Guide to Resource Planning with Energy Effi ciency 2-6**Title/Description URL Address** 

**Southwest The New Mother Lode: The Potential for More**  **Efficient Electricity Use in the Southwest.** Thisreport for the Southwest Energy Effi ciency Project examines the potential for, and benefi ts from, increasing the effi ciency of electricity use in the southwest states of Arizona, Colorado, Nevada, New Mexico, Utah, and Wyoming. <www.swenergy.org/nml/index.html>

**Economic Assessment of Implementing the 10/20 Goals and Energy Effi** **ciency Recommen dations.**  This report examines the Grand CanyonVisibility Transport Commission’s air pollution prevention recommendations. It articulates the potential emission reductions, costs, and secondary economicimpacts of meeting the 10/20 goals and implementing the energy effi ciency recommendations given the assumptions and scenarios developed by the Air Pollution Prevention (AP2) forum. <www.wrapair.org/forums/ap2/docs. html>

**California A Balanced Energy Plan for the Interior West.**  This report shows how energy effi ciency, renewable energy, and combined heat and power resources can be integrated into the region’s existing power system to meet growing electric demands in a cost-effective,reliable way that reduces risk and improves environmental quality for the Interior West region of Arizona, Colorado, Montana, New Mexico, Nevada, Utah, and Wyoming.**California’s Secret Energy Surplus: The Po tential for Energy Effi**  **ciency.** This study focuses on assessing electric energy potential in California through the assessment of technical, economic, and achievable potential savings over the next 10 years. http://westernresources.org/energy/bep. html

<www.ef.org/documents/Secret_Surplus. pdf>

**Connecticut Independent Assessment of Conservation and**  **Energy Efficiency Potential for Connecticut and the Southwest Connecticut Region.**  Thisstudy estimates the maximum achievable cost-effective potential for electric energy and peak demand savings from energy effi ciency measures in the geographic region of Connecticut served by United Illuminating Company and Connecticut Light and Power Company. <www.env-ne.org/Publications/CT_EE_ MaxAchievablePotential%20Final%20 Report-June%202004.pdf>

National Action Plan for Energy Effi ciency 2-7**Title/Description URL Address** 
**Georgia Assessment of Energy Efficiency Potential in**  **Georgia.** This report presents a profi le of energy use in Georgia; the potential for, and public benefi ts of, energy effi ciency; and a public policy review. <www.gefa.org/Modules/ ShowDocument.aspx?documentid=46>

**Iowa The Potential for Energy Efficiency in the**  **State of Iowa.** This report uses existing programs,surveys, savings calculators, and economics simulation to estimate the potential for energy savings in Iowa. <www.ornl.gov/sci/btc/apps/ Restructuring/IowaEEPotential.pdf>

**Massachusetts The Remaining Electric Energy Effi**  **ciency Opportunities in Massachusetts.**  This report addresses the remaining electric energy effi ciency opportunities in the residential, commercial, and industrial sectors in Massachusetts. <www.mass.gov/Eoca/docs/doer/pub_ info/e3o.pdf>

**Nevada Nevada Energy Effi**  **ciency Strategy.** Nevada hastaken a number of steps to increase energy effi ciency. This report provides 14 policy options for further increasing the effi ciency of electricity and natural gas and reducing peak power demand. <www.swenergy.org/pubs/Nevada_ Energy_Effi ciency_Strategy.pdf>

**New Jersey New Jersey Energy Efficiency and Distributed**  **Generation Market Assessment.** This study estimates mid- and long-term potential for energy andpeak-demand savings from energy effi ciency measures and for distributed generation in New Jersey. http://www.policy.rutgers.edu/ceeep/ images/Kema%20Report.pdf

**New York Energy Efficiency and Renewable Energy**  **Resource Development Potential in New York State.**  Final Report Volume One: Summary Report. This study examines the long-range potential forenergy effi ciency and renewable energy technologies to displace fossil-fueled electricity generation in New York by looking at the potential available from existing and emerging effi ciency technologies and practices and by estimating renewable electricity generation potential. <//www.nyserda.org/sep/ >EE&ERpotentialVolume1.pdf

**Oregon Energy Efficiency and Conservation Measure** **Resource Assessment for the Residential, Com mercial, Industrial and Agricultural Sectors.**  This report is designed to inform the project development and selection process for a list of potential energy effi ciency and renewable energy measures that could provide electricity savings for Oregon consumers. <www.energytrust.org/library/reports/ Resource_Assesment/ETOResource AssessFinal.pdf>

Guide to Resource Planning with Energy Effi ciency 2-8**Title/Description URL Address** 
**Oregon Natural Gas Efficiency and Conservation Mea**  **sure Resource Assessment for the Residential and Commercial Sectors.**  This is a resource assessment to evaluate potential natural gas conservation measures that can be applied to the residential and commercial building stock serviced by Northwest Natural Gas. <www.energytrust.org/library/reports/ Resource_Assesment/GasRptFinal_ SS103103.pdf>

**Texas Potential for Energy Effi ciency, Demand**  **Response, and Onsite Renewable Energy to Meet Texas’s Growing Electricity Needs.**  This report assesses the potential for energy effi ciency, demand response, and onsite renewable energy resources to meet the immediate and long-term demand growth in Texas. <www.aceee.org/pubs/e073.htm>



# 2.4 Notes

1. This key question is based on the National Action Plan for Energy Effi ciency recommendation to “make a strong, long-term commitment to implement cost-effective energy effi ciency as a resource” and options to consider.

National Action Plan for Energy Effi ciency 2-9

# Development of Energy 

# 3: Efficiency Avoided Costs

**This chapter provides a discussion of how to calculate the economic benefits of energy savings through an avoided cost methodology. This includes discussion of the typical components of avoided costs, consider**  **ations for developing avoided costs, and the forecasting methods required to value the long-term nature of energy effi**  **ciency measures.**



# 3.1 Overview

The typical approach for quantifying the benefi ts of energy effi ciency is to forecast long-term “avoided costs,” defi ned as costs that would have been spent if theenergy effi ciency had not been put in place. For example, if an electric distribution utility expects to purchaseenergy at a cost of $70/MWh on behalf of customers, then $70/MWh is the value of reduced purchases from energy effi ciency. In addition, the utility may not have to purchase as much system capacity (installed or unforced), 2 make as many upgrades to distribution or transmission systems, buy as many emissions offsets, orincur as many other costs. All such cost-saving components due to energy effi ciency are directly counted asavoided cost benefi ts. In addition to the directly counted benefi ts, the state PUCs or governing councils may request that the utility account for indirect cost savings



## High-Level Summary Key Questions for Utilities and Regulators

• Avoided costs are the forecasted economic “benefi ts” of energy savings.

• The avoided costs should be evaluated in enough detail to refl ect any signifi cant cost variations by time and area.

• Avoided costs can include the value of reduced GHG emissions. • How transparent will we require our assumptions to be? Will we rely on proprietary internal forecasts of avoided costs or non-proprietary avoided costs in our energy effi ciency planning? 1

• Do our avoided costs capture the major costs that can be avoided with energy effi ciency?

• Do we want to include the value of GHG reductions in the avoided cost?

• Do we want to use hourly, time-of-use (TOU), or annual average avoided costs for different end-uses?

that are not priced by the market (e.g., reduced CO 2 emissions).


# 3.2 Components of Avoided Costs

There are two main categories of avoided costs: energyrelated avoided costs and capacity-related avoided costs, as discussed in the Action Plan report. “Energy-related avoided costs” refers to market prices of energy, losses, natural gas commodity prices, and other benefits associated with energy production such as reduced air emissions and water usage. “Capacity-related avoided costs” refers to infrastructure investments such as power plants, transmission and distribution lines, pipelines, and liquefi ed natural gas (LNG) terminals. From an environmental point of view, saving energy reduces air emissions includingGHGs, and saving capacity reduces land use and siting issues such as new transmission corridors and power plants.

National Action Plan for Energy Effi ciency 3-1Table 3-1 describes the main components in avoided costs and the primary options for their development. Electricutilities typically include both energy and capacity components of avoided costs. Natural gas utilities will typically include energy, and may or may not include capacity. These components make up the majority of the overall avoided cost. Depending on the utility and the focus of the statePUC or governing council, additional avoided cost components may be included, as shown in Table 3-1. 

# 3.3 Considerations When Developing Avoided Costs

Depending on the utility type and market structure in a region, there are several choices for methodology in developing avoided costs.



## Table 3-1. Typical Components of Avoided Costs Energy Efficiency Program Types

**Avoided Component Description** 
**Electricity energy (with losses)** Market-forecast of electricity procurement, or • Operating cost of power plants if using production simulation. • Loss factors. •
**Electricity capacity (with losses)**  Market-forecast of capacity, or • Assessment of deferred power plant construction based on adjusted • load forecast.
Loss factors. •
**Natural gas commodity (with losses)**  Market-forecast of natural gas procurement with basis adjustment for • delivery to utility city-gate. Loss and compression factors. •
**Natural gas capacity (with storage and compression)**  Assessment of deferred infrastructure including pipelines, storage • facility, and LNG terminals.

**Other Components Description** 
**Ancillary services** Reduced costs of ancillary services associated with reduced energy • and capacity.

**Transmission and distribution capacity**  Deferral value of additional transmission and distribution capacity to • meet customer peak demand growth. For electricity, the transmission and distribution capacity avoided costs • vary by sub-area within the utilities. Capacity costs also vary by hour, coincident with the timing of the local area peak demands. Peak demand is correlated to local climate. For natural gas, the avoided transmission and distribution costs vary by • utility service territory and are typically driven by gas loads in the winter heating season.

Guide to Resource Planning with Energy Effi ciency 3-2

## Table 3-1. Typical Components of Avoided Costs Energy Efficiency Program Types (continued)

**Avoided Component Description** 

**Hedge of fossil fuel prices** • Depending on the approach taken to forecast market prices, this may already be included. For example, natural gas forward prices alreadycontain the risk premium for changes in natural gas prices. Fundamental forecasts based on cost also include the risk premium.

**Price effect of demand reduction**  • Reduction in total spot market purchase costs attributable to reduction in demand curve.

• Depending on the market conditions, the change in wholesale market prices may be large or small.
**Savings in water, fuel oil, or other value streams**  • Depending on region and the types of programs, additional avoided cost streams may be included.



### 3.3.1 **Forecast Approaches** For the purposes of developing avoided costs, there are two primary market structures that result in a different approach to forecasting avoided energy costs—market forecast and production simulation. The choice depends on the assumption that best refl ects actual avoided costs.

1. For utilities that are tightly integrated into the wholesale energy market, such as distribution utilities that buy electricity or natural gas, or vertically integrated electric utilities that are active buyers or sellers of electricity in the wholesale market, a forecast of future market prices establishes avoided costs. This is typically called a “market forecast.” See Section3.4.1, “Market-Based Approaches,” for a more detailed discussion of this approach.

The market price is the preferred approach here because if the utility is buying electricity or natural gas in the market (whether a distribution utility or a vertically integrated utility), fewer purchases due to energy effi ciency result in energy savings valued at market. If the utility is selling excess electricity,energy savings from energy effi ciency enables additional sales, resulting in incremental revenue. In either case, the market price is the per kWh value of energy effi ciency.

2. For self-reliant electric utilities that do not have wholesale market access or actively trade electricity, a “production simulation” forecast that produces the expected production costs may be the best approach. See “Production Simulation Modeling” in Section 3.4.2 for a more detailed discussion of this approach.
Table 3-2 summarizes the approaches for developing avoided costs by utility type.



### 3.3.2 **Proprietary Versus Public Forecasts** The easiest approach for a utility to develop long-term avoided costs may be to simply use their internal forecast of market prices, or to benchmark the avoided costs to the costs of building and operating the next power plant or resource. This results in a proprietary methodology specifi c to the utility. The methodology may be confidential, since utilities actively involved in procuring electricity or natural gas on the market will probably not want to reveal their expectations of future prices publicly.
To develop a more open process for energy effi ciency evaluation and planning, public forecasts of avoided

National Action Plan for Energy Effi ciency 3-3

## Table 3-2. Summary of Approaches to Value Energy and Capacity by Utility Type

**Near Term (Market Data Available) Long Term (No Market Data Available)** 

Distribution electric or natural gas utility Current forward market prices of energy and capacity Long-term forecast of market prices of energy and capacity
Electric vertically integrated utility Current forward market prices of energy and capacity

or Expected production cost of electricity and value of deferring generation projects Long-term forecast of market prices of energy and capacity

or Expected production cost of electricity and value of deferring generation projects

costs can be developed. California, Texas, the Northwest Power and Conservation Council, Ontario, and others use a non-proprietary methodology. An open processallows non-utility stakeholders to evaluate and comment on the methodology, and to have confi dence that the analysis is fair. This approach also makes it possiblefor energy effi ciency contractors to evaluate the costeffectiveness of proposed energy effi ciency upgrades, as is done in California.
Rather than create a forecast, it is common to use a publicly available forecast of electricity or natural gas. The most universal source of forecasts is DOE’s Energy Information Agency Annual Energy Outlook (AEO). This public forecast provides regional long-term forecasts of electricity and natural gas. In addition to the AEO, state energy agencies or regional groups may provide their own independent forecasts, which may include sensitivity analysis.



### 3.3.3 **Simple Versus Complex** Avoided costs for energy effi ciency do not necessarily require signifi cant precision to the fractions of a cent to be useful. With long-term forecasts (up to 30 years), it is inherently impossible to be exact in predicting future market prices and the amount of energy and capacity savings ultimately achieved. Therefore, the methodologyshould be as complex as necessary to get the major decisions correct, but still should be workable and transparent to the stakeholders involved in their calculation. The level of detail and complexity in the methodology will depend on the jurisdiction and its unique circumstances.
In Texas, for instance, avoided costs are assumed to be the estimated cost of a new gas turbine. They do not vary by time or area. The energy avoided cost was initially set in PUCT Section 25.181-5 at $0.0268/kWh saved annually at the customer’s meter. The capacity avoided cost was set at $78.5/kW saved annually at the customer’s meter (PUCT, 2000). Environmental benefi ts of up to 20% above this cost-effectiveness standard canalso be applied to projects in an area not meeting ambient air quality standards.
In California, hourly avoided costs for a typical year (8,760 hourly values) were developed for each of 16 climate zones in the state. This approach adds significant detail tothe area- and time-specific differences in the value of energy savings. This level of detail reflects the state’s extremesummer peak and possible capacity shortfall, thus capturing the capacity value of energy effi ciency.
Figure 3-1 presents a comparison of Texas’s and California’s avoided costs for three types of loads: air conditioning, outdoor lighting, and refrigeration. The calculations for both states are based on the hourly normalized loadshape for air conditioning, outdoor lighting, and refrigeration for one climate zone in California (climate zone 12). Both states place a higher value on energy effi ciency that reduces peak demand (such as effi ciency for air conditioning units, which operate substantially more

Guide to Resource Planning with Energy Effi ciency 3-4

## Figure 3-1. Comparison of Avoided Costs in Texas and California

$140Avoided Cost (Levelized $/MWh) $120

$100

$80

$60

$40

$20

$0 Refrigeration Air Conditioning Outdoor Lighting
Source: Public Utilities Commission of Texas, 2000. Energy & Environmental Economics, Inc. and Rocky Mountain Institute, 2004. 

## Figure 3-2. Implication of Time-of-Use Avoided Costs

$0.15Weighted Average Avoided Cost($/kWh)

Air Conditioning Outdoor Lighting $0.10

$0.05

$0 Refrigeration

Hourly Time-of-use Average Annual Average

Source: Energy & Environmental Economics, Inc. and Rocky Mountain Institute, 2004.

often during peak demand hours) compared to reductions Figure 3-2 shows the differences in results in using hourly, in baseload demand (such as effi ciency for refrigeration TOU, and annual average avoided costs for different endunits, which represent a constant load across time). Since uses based on the California study. Hourly avoided costs the Texas legislation was passed in September 2005, the are defi nitely most detailed, capturing the cost variance state’s avoided cost values have not risen in tandem with within and across major time periods. In contrast, annual higher natural gas prices (as of early August 2007). This average ignores the timing of energy savings.has resulted in lower avoided costs in Texas than in California using the current adopted values.

National Action Plan for Energy Effi ciency 3-5In California, the decision to use hourly avoided costs wasmade in part because the system peak is so closely correlated with air conditioning load that hourly results are necessary to fully capture the value of air conditioning energy efficiency. While a summary to the established TOU periods would provide an avoided cost of approximately $0.10/kWh, the hourly evaluation provides over $0.12/ kWh in benefits for an air conditioning energy effi ciency program. In the cases of other end-uses, such as outdoor lighting efficiency, there is very little difference between hourly and TOU, and in the case of end-uses that operate evenly within a 24-hour period (e.g., refrigeration), there is no difference in method.
Another consideration of time-dependent avoided cost analysis is to correctly evaluate the tradeoffs betweendifferent types of energy effi ciency measures. For example, with an annual average methodology, low-cost lighting such as compact fl uorescent light bulbs (CFLs) or outdoor lighting effi ciency will receive the same value as air conditioning energy effi ciency, even if they do not reduce the peak load signifi cantly. 

### 3.3.4 **Value of Avoided GHG Emissions** Another factor to consider when determining the avoided cost of energy effi ciency programs is whetherto value the commensurate reductions in GHG emissions associated with the effi ciency program and, if so, how. The fi rst step is to determine the quantity of avoided CO 2 emissions from the effi ciency program (see Chapter 7). Once the amount of CO 2 reductions has been determined, its economic value can be calculated and added to the net benefi ts of the energy effi ciency measures used to achieve the reductions.
Currently, some jurisdictions have an explicit monetary CO 2 value to use in cost-benefi t calculations, and some do not. For example, in California, CO 2 is one of the air emissions (along with NO X and PM) included in the California Public Utilities Commission’s (CPUC’s) avoided costs for energy effi ciency. The CO 2 avoided cost adder had an initial value of $8 per ton of carbon dioxide equivalent in 2004, and escalates annually thereafter at 5% per year. As Figure 3-3 shows, the carbon adder in California has a measurable impact on the average avoided cost of effi ciency programs, although relative 

## Figure 3-3. Average Avoided Costs for Air Conditioning, Outdoor Lighting, and **Refrigeration in California**

$140

$120

$100

$80

$60

$40

$20

$0 RefrigerationWeighted Average Avoided Cost(Levelized $/MWh)

Air Conditioning Outdoor Lighting

Generation Transmission and Distribution Carbon Adder

Source: Energy & Environmental Economics, Inc. and Rocky Mountain Institute, 2004.

Guide to Resource Planning with Energy Effi ciency 3-6

## Figure 3-4. Average Electricity Sector CO **2** 

## Emission Rate by Region in 2004lbs. CO 2 /MWh RMPA SPNO MROE SRMW MROW

SPSO HIOA RFCM RFCW SRTV SRSO HIMS ERCT NYLI FRCC AKGD AZNM SRVC SRMV RFCE NYCW NWPP NEWE CAMX NYUP AKMS

Note: Regions are as defi ned on the map.

Source: EPA, 2007a.

to savings from generation, the carbon adder impact remains fairly modest. 3
The GHG profi les of electricity generation in the United States differ greatly by technology, fuel mix, and region. Figure 3-4 shows the variation among the 26 regionsdefi ned in the U.S. EPA’s eGRID emissions tracking database. The highest annual average emission rate in 2004 was 2,036 lbs CO 2 /MWh, and the lowest was 480, with a national average of 1,363.
A very rough estimate of GHG emissions savings from energy effi ciency can be obtained by multiplying the kWh saved by an average emission factor, which can be taken from a data source such as the eGRID regional average emissions factors in Figure 3-5. Alternatively, it can be estimated based on a weighted average of the heat rates and emission factors for the different types of generators in a utility’s generation mix. Such “back of the envelope” methods are not a substitute for using marginal emission rates in formal calculations, but they NEWE

NYUP
RFCE

SRVC RFCW

SRTV

SRSO

FRCC MROE MROW

SPNO SRMW RFCM

SRMV SPSO

ERCT AZNM RMPA

AKMS

AKGD HIOA

HIMS CAMX NWPP
NYLI NYCW

480 1328 1412 1421 1456 1490 1495 1556 1641 1728 1761 1814 1844 1859 1971 2036

U.S. Average 1363 820 879 909 921 922 1096 1135 1146 1254 1257

can be useful for agency staffs and others who wish to check quickly whether results from more sophisticated methods are approximately accurate.
Marginal emissions rates that more accurately refl ect the change in emissions due to energy effi ciency have an hourly profi le that varies by region. For states in which natural gas is both a baseload and peaking fuel,marginal emissions will be higher during peak hours because of the lower thermal effi ciency of peaking plants, and therefore energy effi ciency measures that focus their kWh savings on-peak will have the highest avoided GHG emissions per kWh saved. However, in states in which coal is the dominant fuel, off-peak marginal emission rates may actually be higher than on-peak, if the off-peak generation is coal and on-peak generation is natural gas. An illustration of this is shown in Figure 3-6, which compares reported marginal emission rates for California and Wisconsin.

National Action Plan for Energy Effi ciency 3-7Note: See Figure 3-4 for region defi nitions.

Source: EPA, 2007b. 

## Figure 3-6. Comparison of Marginal CO **2** 

## Emission Rates for a Summer Day in **California and Wisconsin**Marginal CO2Emission Rate(tons CO2/MWh)

0 2 4 Hour

Wisconsin California
Note: The on-peak marginal emissions rates of both states are set by natural gas peaking units. The off-peak rates are quite different, refl ecting the dominance of coal baseload generation in Wisconsin and natural gas combined cycle in California.
Source: California Energy Commission. Erickson, J. et al., 2004.

Guide to Resource Planning with Energy Effi ciency 3-8 Guide to Resource Planning with Energy Effi ciency 3-8 

## Figure 3-5. Generation by Fuel Type and Region in 2004

Coal Oil Gas Nuclear Hydro Biomass Wind Solar Geothermal Other RMPA SPNO MROE SRMW MROW

SPSO HIOA RFCM RFCW SRTV SRSO HIMS ERCT NYLI FRCC AKGD AZNM SRVC SRMV RFCE NYCW NWPP NEWE CAMX NYUP AKMS

0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

# 3.4 Forecasting Methodologies and Data Sources

Since energy effi ciency measures are often long-lasting, the forecasting methods required to evaluate energy effi ciency must span a long time-frame. For example, ifa new residential heating, ventilation, and air conditioning (HVAC) system is expected to operate for 20 years, then a 20-year forecast must be developed to value an HVAC measure. Typically, a minimum length of 20 to 30 years must be developed to include all of the possiblemeasures. A combination of market-based and forecastbased approaches, as described in Section 3.4.1, can be used to estimate avoided costs.



### 3.4.1 **Market-Based Approaches Market Price of Energy** One approach to valuing savings is to use the current market price of energy for future delivery. In most markets, transaction price data can provide the value of energy savings for 4 to 6 years. Beyond the available market period, a forecast approach must be used. The following list shows the common sources of market data that are available.
Electricity markets (available out ~4 years):

• Electricity futures price data from futures exchanges

(e.g., NYMEX and IntercontinentalExchange [ICE]).

• Forward price data from bilateral wholesale electricity

trades (e.g., summaries by Platt’s MW Daily).

• Daily locational marginal prices for next day delivery

(e.g., ERCOT, PJM, ISO-NE, and NY ISO), which provide hourly price “shape” information, but are only available a day ahead.
Natural gas markets (available out ~6 years):

• Futures price data from futures exchanges (e.g., NYMEX futures contract for Henry Hub delivery).

• Basis price data for a delivery point that differs from the

cash market underlying the futures contract (e.g., PG&E Citygate basis data from NYMEX ClearPort trading). 

### Market Prices of CapacitySome U.S. regions (e.g., the Northeast) have capacity markets for electricity that require a utility to purchase capacity to meet its expected peak load. In these markets, generators bid to supply, and utilities bid to purchase, capacity to meet their forecasted peak loadsand reserve margins. These payments support the carrying costs of existing power plants and provide a price signal for power plant investment. Depending on the market, different time-frames will be available. In some regions (e.g., New England), capacity prices are beingdeveloped for several years into the future. In other jurisdictions, capacity auctions establish prices the season prior to delivery. For example, the New York ISO’s ICAP auction establishes capacity prices for the upcoming season in 6-month intervals (NYISO, 2007).
In regions without a capacity market, there can still be a capacity value of energy effi ciency. In this case, the valueof electric capacity is the reduced cost of building or contracting with new power plants to serve peak load.



### 3.4.2 **Modeling Approaches** Beyond the near term for which actual market price data for future delivery may be available, a forecast must be used to quantify long-term avoided costs. There are several main approaches to developing such long-term forecasts.


### Production Simulation ModelingOne approach to valuing electricity energy and capacity is to develop a forecast using production simulation modeling. A production simulation model is a software tool that performs system dispatch decisions to serve load, as driven by the transmission constraints and economics of each type of generation resource. The operating cost of the least effi cient power plant, the “marginal unit,” is used to establish the avoided cost of energy. In addition to the marginal energy cost,the production simulation tools can be used to determine when new power plants and transmission lines are needed, and how additional power plants would change the dispatch of the system. Increasing the load forecast over time allows a forecast of marginal energy costs to be developed.

National Action Plan for Energy Effi ciency 3-9The downside of production simulation models is that they are complex, rely on sophisticated algorithms that can appear as a “black box” to stakeholders, and haveto be updated when market prices of inputs such as natural gas change. They can also have diffi culty predicting market prices, since the marginal energy cost is based onproduction cost, rather than supply and demand interactions in a competitive electricity market. 4
Developing a Long-Term Forecast for Electricity The typical approach to developing a long-term forecast for electricity price is to use the Cost of New Entrant (CONE). In this approach, the avoided cost is set at the “all-in” cost of the next generation resource, which may be a new naturalgas combined-cycle gas turbine, but possibly also a pulverized coal plant or integrated gasification combined cycle (IGCC) plant. The term “all-in” means both the costs of building the power plant (e.g. the capacity costs) and the costs of generating electricity such as fuel, maintenance, and other costs (e.g. energy costs). For regions with an energy market, the idea is that if the market prices rise above this level, they induce entry and competition will drive down prices. For vertically integrated utilities, the “all-in” cost is the cost savings of not having to build and operate the next new power plant. The method works in both cases.
A similar approach is to develop a long-term forecast ofelectricity capacity value using the cost of a new combustion turbine (CT). Since a CT is often the least cost technology to serve peak load, it is often used as the value of peak load relief.
The two approaches are related by the economic tradeoff between a baseload plant (e.g., IGCC) and apeaking plant (e.g., CT). A baseload plant has higher capacity cost but lower fuel cost than a peaking plant. The decision to build a baseload plant refl ects an expectation that the plant’s many operation hours per year will yield fuel cost savings that will more than offset the capacity cost difference between the two plant types. This line of reasoning also explains the use of the capacity cost of a peaking plant to value energy effi ciency’s kW impact, as the plant has lower capacity cost than a baseload plant. 

# 3.5 Integration with Supply-Side Capital Planning

In addition to the avoided costs of displaced electricity and natural gas, integration of energy effi ciency and supply-side capital planning can defer investments in supply-side infrastructure and lead to additional value from energy effi ciency. Through coordination with the supply-side planning process, energy effi ciency programs can target areas where peak loads are forecasted toexceed ratings of existing infrastructure, thereby deferring or eliminating the need to invest. Potential targets include transmission and distribution facilities, power plants, natural gas pipelines, and LNG terminals.
Coordination with the supply-side planning processes isimportant to capture value. Typically, supply-side planners use a set of pre-defi ned reliability criteria, and buildnew supply-side investments when the existing infrastructure is expected not to reliably serve the forecasted peak load. Depending on the type of investment, the reliability criteria may be different. For example, a new electric distribution transformer may be added when the existing substation can no longer serve the forecasted load with the single largest piece of equipment out ofservice (called N-1 criteria). For natural gas infrastructure, the reliability criteria may be based on the pressure available when winter temperatures drop and natural gas usage spikes. In both cases, energy effi ciency can reduce the peak load and delay the need for investment to maintain the target reliability level. However, if thesupply-side planners do not anticipate the load reductions from energy effi ciency, they may proceed with their project and no savings will be achieved.
Calculating the value of deferring supply-side investments is typically done with a differential revenue requirement method, also known as the Present Worth Method. The approach calculates (a) the present value revenue requirement without the investment in energy effi ciency and (b) the present value revenue requirementwith the investment in energy effi ciency. If the supplyside investments can be delayed because of the load

Guide to Resource Planning with Energy Effi ciency 3-10reduction achieved with energy effi ciency, (a) exceeds (b) and the positive difference between (a) and (b) is the savings due to the energy effi ciency investment.
Equation 3.1 can be used to calculate the value of energy efficiency using the Present Worth Method. The present value of deferring capacity in year 1 for 

### Δt years is:

Δt n k n k 

## ( 1 + i 

## ) PW = 

## ∑ t



### − 

## ∑ t t t+ Δt t =0 

## ( 1 + r 

## ) t=0 

## ( 1 + r 

## ) ( eq. 3.1 )
Where: n = planning horizon in years
k = distribution investment in year t

t i = 	infl ation rate net of technological progress
r = 	a utility’s cost of capital (discount rate)



### Δt = 	deferral time, i.e., peak load reduction divided by annual load growth
The decision to invest in supply-side infrastructure is typically made year by year. If the existing infrastructure is suffi cient to reliably supply an area through the annual peak period (summer or winter, depending on the region and fuel type), then it will be suffi cient until the followingyear. The size of supply-side investments and the annual decision of investments make the value of avoiding supply-side investments “blocky” in nature. The value of aone-year deferral is achieved only if enough load reduction is achieved to defer a project for a year. No additional savings are achieved until enough energy effi ciency is implemented for a two-year deferral, and so on.
However, for simplicity in evaluation of energy effi ciency programs, a “marginal avoided capacity cost” is often calculated and expressed as the value per kW of peak reduction. The $/kW marginal cost is calculated by dividing the deferral value by the amount of load reduction required to defer the plan by a year. Equation 3.2 can be used to calculate the marginal avoided capacity cost.

PW deferral value $/kW marginal cost = ( eq. 3.2 ) deferral kW Where: PW deferral value = 	result in Equation 3.1 above


## Figure 3-7. Example of the Value of Deferring a Transmission LineLifecycle Value of Deferral ($1000s) $4,000

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0 Assumptions: Revenue Requirement of Transmission Line Utility Weighted Average Cost of Capital Annual Inflation Rate $10 Million 8.50% 2.50%

0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 Firm Peak Load Reduction (MW)

Actual avoided transmission cost Marginal Cost $/kW

Note: Marginal cost is an approximation that ignores (1) ‘blocky’ nature of avoided transmission cost, and (2) decreasing returns to additional MWs. For illustrative value based on author’s calculations and not an actual system representation.

National Action Plan for Energy Effi ciency 3-11deferral kW = the amount of load reduction needed to get a 1-year deferral (i.e., 

### Δt = 1 in Equation 3.1)
For example, Figure 3-7 shows that the value of deferring a transmission investment is the solid line with the “step” shape calculated using Equation 3.1, under the assumptions that the revenue requirement of this line is $10 million present value, the load growth is 10 MW per year, r = 8.5% WACC, and i = 2.5% infl ation. In addition, we assume that the line can be deferred for 

### Δt = 1 yearfor every 10 MW of peak load reduction from energy effi ciency. Based on Equation 3.2, these assumptions imply a marginal avoided capacity cost of $52.30/kW of load reduction, as shown by the dotted line.
If 30 MW of load reduction is achieved, the transmission line is deferred for 3 years, yielding a total deferral value of is $1,569,000. If only 5 MW of load reduction are achieved, the transmission line is not delayed, resulting in no cost savings. Hence, while it is convenient to use the marginal value and apply avoided cost per kW, it is important to check (1) if suffi cient load reduction can be achieved and (2) if that load reduction is realistic and acceptable to the supply-side planners. The Present Worth method based on Equations 3.1 and 3.2 produces $/kW capacity costs. Sometimes it is more convenient to express the value of load reduction in $/ kW-year estimates. For example, the $/kW-year estimate is useful to gauge the size of an annual incentive to be paid to a customer to reduce load. Equations 3.3 and 3.4 use a capital recovery factor (CRF) to annualize the avoided costs calculated in Equations 3.1 and 3.2. 5
annual value ($/Year) = lifecycle value ($) × CRF
(eq 3.3)
annual marginal value = marginal cost ($/kW) × CRF ($/kW-year) (eq 3.4)

n r ( 1 + r ) Where: CRF = n ( 1 + r ) − 1 n = 	planning horizon in years

r = a utility’s cost of capital (discount rate)



# 3.6 Resources on Energy Efficiency Avoided Costs

**Title/Description URL Address** 

**Sources of Market Value of Energy**  NYMEX Natural Gas Futures prices show current market estimates of natural gas traded at Henry Hub. <www.nymex.com/ng_fut_csf. aspx?product=NG>

Basis Swap Contracts between Henry Hub and other location in the U.S. are also traded at NYMEX. <www.nymex.com/cp_produc. aspx#ngb>

Platt’s MW Daily reports broker quotes of long-term forward electricity transactions. <www.platts.com>

**Sources of Pub licly Available**  **Forecasts** DOE EIA Annual Energy Outlook uses the National Energy Modeling System (NEMS) to publish a publicly available long-term forecast of electricity and natural gas prices. <www.eia.doe.gov/oiaf/aeo/index. html>

Forecasts of fuel prices to electric generation <www.eia.doe.gov/oiaf/aeo/excel/ fi gure65_data.xls>

Guide to Resource Planning with Energy Effi ciency 3-12**Title/Description URL Address** 

**Sources of Pub licly Available**  **Forecasts** Forecast of well-head and Henry Hub Natural Gas prices. <www.eia.doe.gov/oiaf/aeo/excel/ fi gure71_data.xls>

**Integration of Energy Effi**  **ciency and Supply-Side**  **Planning** Expansion of BPA Transmission Planning Capabilities(November 2001) describes an improved transmission planning process for BPA to incorporate energy effi ciency, distributed generation, and demand response. <www.transmission.bpa.gov/ PlanProj/bpa_tbl_planning.pdf>

The Non-Wires Solutions Roundtable is a group organized by the BPA to evaluate issuessurrounding using non-wires solutions, including energy effi ciency, to avoid the need for transmission projects. <www.transmission.bpa.gov/ PlanProj/Non-Wires_Round_Table/ default.cfm?page=news>



# 3.7 Resources on Energy Efficiency and Greenhouse Gases

**Title/Description URL Address** 

**EPA’s eGRID (Emissions and Generation Resource Inte**  **grated Database).** A comprehensive inventory of environmental attributes of all U.S. power plants that provide electricity to the grid, including CO2 emissions data. <www.epa.gov/cleanenergy/egrid/index.htm>

**Power Profi ler.**  <www.epa.gov/cleanenergy/powerprofi ler.htm>

**Personal Greenhouse Gas Emissions Calculator.** <www.epa.gov/climatechange/emissions/ ind_calculator.html>

**Climate Leaders: Indirect Emissions from Purchases/Sales of Electricity and Steam.**  <www.epa.gov/climateleaders/docs/ indirectelectricityguidance.pdf>
**EIA (Energy Information Administration, U.S. Depart ment of Energy).**  Energy-related greenhouse gas emissions data and reporting. <www.eia.doe.gov/environment.html>

**California Climate Action Registry** . California emissions inventories and reporting protocols. <www.climateregistry.org>

**The Climate Registry.** A multi-state and -tribe collaboration aimed at developing and managing a common greenhouse gas emissions reporting system. <www.theclimateregistry.org/>

National Action Plan for Energy Effi ciency 3-13

# 3.8 Notes 3. The calculations for hourly avoided costs are based on the hourly normalized load shape for air conditioning, outdoor lighting, and refrigeration for one climate zone in California (climate zone 12). 1. This key question is based on the National Action Plan for Energy Effi ciency recommendation to “recognize energy effi ciency as a 4. Some commonly used production models include GE MAPSTM, high priority energy resource” and options to consider. PROSYMTM, IPMTM, and PLEXOS for Power SystemsTM.

2. Installed capacity (ICAP), or unforced capacity (UCAP) in some 5. Note that CRF is equivalent to the PMT function in MS Excel. markets, is an obligation of the electric utility (load serving entity,or LSE) to purchase suffi cient capacity to maintain system reliability. The amount of ICAP an LSE must typically procure is equal to the LSE’s forecasted peak load plus a reserve margin. Therefore, reduction in peak load due to energy effi ciency reduces the ICAP obligation.

Guide to Resource Planning with Energy Effi ciency 3-14

# Development of Energy 

# 4: Effi ciency Measures

**This chapter provides a discussion of how to develop energy effi ciency measures.**  **1 Measures are specifi**  **c actions taken to reduce a specific type of load and are the building blocks of a utility’s energy effi**  **ciency portfolio.** 



## High-Level Summary Key Questions for Utilities and Regulators

Specifi c actions to improve energy effi ciency are • called measures

.Measures are the building blocks for energy ef• fi ciency efforts. Measures are typically aggregated together into programsthat focus on deliverymechanisms, market segments, or end uses. Programs are then aggregated into a portfolio at the utility or program administrator level. For planning, the key elements of a measure are its • kWh and kW impacts, and its incremental cost. Measure impacts can be estimated by performing • engineering calculations, often done with building energy simulation software models such as DOE-2, and by referring to existing databases. Estimated impacts are often referred to as deemed savings

. Evaluation, measurement, and verifi cation is • performed to obtain actual impacts, which can be used for performance evaluation and to improve future impact estimates. Are we missing any good energy savings opportuni• ties? 2 Measures are the building blocks for energy effi ciency efforts. Measures are typically aggregatedtogether into programs that focus on delivery mechanisms, market segments, or end uses. Programs are then aggregated into a portfolio at the utility or program administrator level. Have we developed measures and programs that • provide savings to the range of residential, commercial, industrial, agricultural and other energy user types? For example, do we have measures toaddress the harder-to-reach customers such as lowincome and small commercial customers? Measureimpacts can be estimated by performing engineering calculations, often done with building energy simulation software models such as DOE-2, and by referring to existing databases. Estimated impacts are often referred to as deemed savings.
Do we have a mix of measures so that we are able • to reach customers at different stages of the energy effi ciency purchase decision? (New construction, retrofi t, replacement of failed old equipment, early replacement to high effi ciency devices, etc.) Have we considered the way that energy effi ciency • measures can be integrated together into a comprehensive approach that considers the interactions and potential for overlap between measures?

National Action Plan for Energy Effi ciency 4-1

# 4.1 Developing Energy Effi ciency Measures

The building block of a utility’s energy effi ciency portfolio is the measure . A measure is a specifi c action takento reduce a specifi c type of load. For example, replacing T-12 lamps with T-8 lamps is a lighting effi ciency measure, and replacing a SEER 10 air conditioner witha SEER 13 air conditioner is a space conditioning effi ciency measure. A lighting effi ciency program typically consists of many different lighting measures, and a portfolio is the aggregate of all of the programs including lighting, space conditioning, and others.
Developing effi ciency measures involves identifying the loads on the system and determining the cost and impact of the different means available for reducingthem. The importance of developing effi ciency measures in a thorough, bottom-up fashion cannot be overemphasized, although it is sometimes obscured by the availability of large databases of measures—which may or may not be applicable—and by the challengesof data management. Measures, by defi nition, are critical because they are the point at which creative ideas and new technologies can best be incorporated into the effi ciency portfolio.



### 4.1.1 **Measure Costs and Impacts** From the planning standpoint, the key elements of each measure are its load impact and its incremental cost.There are two types of impact: energy and demand. Energy impact is the decrease in kWh due to the measure,and demand impact is the decrease in peak kW. (Chapter 7 details the different ways in which energy and demand impacts are defi ned and calculated.)
Ideally, efficiency improvements would occur the fi rst timean end-user decides to buy a piece of energy-using equipment—appliances for the home, the building design and structure for a new office building, or the manufacturingdevices and processes in a new factory. Quite often, however, energy efficiency measures are applied after the initial purchase. Some occur when an old device reaches the end of its useful life, for example when a water heater wears out. However, some energy efficiency programs offered by a utility seek to motivate energy users to replace ineffi cient devices with high-efficiency devices years earlier than the device’s natural lifetime. Incremental cost depends on themanner in which the measure is implemented. For example, the incremental cost of “early replacement” differsfrom the cost of “failure replacement,” since early replacement incremental costs are the whole amount of the newefficient equipment being purchased and failure replacement incremental costs are only the costs to upgrade fromthe standard device that the customer would have purchased to the effi cient device.
Table 4-1 summarizes the basic method for quantifying the impacts and incremental costs of effi ciency measures for different types of replacement. In the table, “Effi cientDevice” refers to the equipment that replaces an existing less-effi cient piece of equipment. “Standard Device” refers to the equipment that would be used in industry standard practice to replace an existing device. “Old Device” refers to the existing equipment to be replaced. All of the formulas in the table can also be expanded to include an adjustment term, for example a weather adjustment in the case of an air conditioning measure.


### Estimation of Measure Impacts There are three principal methods by which utilities develop and refi ne estimates of the impact of energyeffi ciency measures. These methods are described below, followed by a list of links to some frequently used examples of each method.

• **Engineering calculations and building energy simulation software models.**  Utilities can do their own calculations of the energy and demand impacts for a particular measure, given an existing set of technologies, building stock, load patterns, etc. This is typically done with the help of software tools that model energy consumption under different weather conditions and over the course of a year. Some of the more sophisticated models can be quite complex and require specialized training to use.

• **Energy effi ciency databases.**  Utilities can obtain information from existing databases that contain

Guide to Resource Planning with Energy Effi ciency 4-2

## Table 4-1. Defining Costs and Impacts of Energy Effi ciency Measures

**Type of Measure Incremental Cost**  **($/unit) Impact Measurement (kWh/unit and**  **kW/unit)**
Failure replacement Cost of effi cient device minus cost of standard device Consumption of standard device minus consumption of effi cient device

New construction Cost of effi cient device minus cost of standard device Consumption of standard device minus consumption of effi cient device

Retrofi t Cost of effi cientdevice plus installation costs Consumption of old device minus consumption of effi cient device

Early replacement Present value of (effi cient device plus installationcosts) minus present value of (standard device plus installation costs) During remaining expected life of old device:Consumption of old device minus consumption of effi cient device
After normal replacement time for old device: Consumption of standard device minus consumption of effi cient device
Note: The early replacement case is essentially a combination of retrofi t treatment (for the period when the existing measure would have otherwise remained in service) and the failure replacement treatment for the years after the existing device would have been replaced. “Present value” indicates that the early replacement costs should be discounted to refl ect the time value of money associated with the installation of the effi cient device compared to the installation of the standard device that would have occurred at a later date.

energy consumption data for a wide variety of appliances and effi ciency measures. While these databasescan provide useful information about available measures, the applicability of the data must be carefullyconsidered, particularly for end-uses with weatherdependent consumption. Since the databases are usually specifi c to a certain geographical area or set of climate zones, their impact estimates may not betransferable for use in a different location (for example, it would be inappropriate to apply California’s DEER data to the climate zones of the eastern or southern United States). While corrective adjustments can be made to database impact estimates, they often require an understanding of the underlying methodology. • **EM&V.** EM&V (also known by other names and acronyms, such as monitoring and evaluation, or M&E) is the use of actual data collected from the operation of already installed measures to determine the actual impacts of these measures. The determination may be based on direct metering and other methods (e.g.,statistical inference). EM&V is discussed more thoroughly in Chapter 10 (and in the Action Plan’s Model Energy Effi ciency Program Impact Evaluation Guide [National Action Plan for Energy Effi ciency, 2007b]);in short, it aims to refi ne estimates obtained from existing databases or engineering models, or to develop a new database that is specifi c to a utility’s climate zone and area if one does not already exist.

National Action Plan for Energy Effi ciency 4-3

# 4.2 Resources for Energy Effi ciency Measure Development

**4.2.1 Engineering Software Models** 
**Title/Description URL Address** 

**DOE-2** Industry standard building energy simulation model, developed by LBNL. <http://gundog.lbl.gov/dirsoft/d2whatis.html>

**EnergyPlus** DOE building energy model based on DOE-2 with additional features. <www.eere.energy.gov/buildings/energyplus/>

**Building Energy Soft ware Tools Directory**  Directory of 300+ software tools. <www.eere.energy.gov/buildings/tools_directory/>

**Home Energy Saver** Consumer home energy simulator with simple Web interface. <http://hes.lbl.gov/>



### 4.2.2 **Databases of Programs, Measures, and Impacts Title/Description**  **URL Address**

**Database of Energy Effi**  **ciency Resources (DEER)**  California measures database. <www.energy.ca.gov/deer/>

**EPA Energy Star** Savings calculators for ENERGY STAR certifi ed products. <www.energystar.gov/index.cfm?c=bulk_ purchasing.bus_purchasing>

**EPRI Database of Energy Effi**  **ciency Measures (DEEM)**  Available for purchase. <www.epriweb.com/public/0000000000 01008848.pdf>

**ACEEE Energy Ef fi**  **ciency Program Database**  Programs and measures in 20 states. <www.aceee.org/new/eedb.htm>

**Northwest Power and Conservation**  **Council** BPA qualifi ed measures and impacts. <www.nwcouncil.org/energy/rtf/supportingdata/ default.htm>

Guide to Resource Planning with Energy Effi ciency 4-4

### 4.2.3 **State Programs and Studies Title/Description**  **URL Address**

**California 2005 Measure Cost Study.**  Final Report. CALMAC Study ID: PGE0235.01. This report provides cost information onthe non-weather-sensitive and weathersensitive residential and nonresidential measures and refrigeration measures that are included in the Database for Energy Efficiency Resources (DEER) and used byenergy efficiency program planners in California to estimate potential demand and energy savings and costs. <http://calmac.org/publications/MCS_Final_ Report.pdf>

**New Jersey New Jersey Clean Energy Program** **Protocols to Measure Resource Sav ings.**  These protocols were developed to measure energy capacity and other resource savings. Specifi c protocols are presented for each eligible measure and technology. <www.njcleanenergy.com/fi les/fi le/Protocols_ REVISED_VERSION_1.pdf>

**Texas Deemed Savings, Installation & Ef**  **fi ciency Standards:**  **Residential and Small Commercial Standard Offer**  **Program, and Hard-to-Reach Standard Offer Program.**  This document containsall of the approved energy and peak demand deemed savings values established for energy efficiency programs in Texas. <www.puc.state.tx.us/rules/subrules/ electric/25.184/25.184fi g(d)(1).pdf>

**Vermont Technical Reference User Manual**  **(TRM) No. 4-19. Measure Savings Algorithms and Cost Assumptions**  **Through Portfolio 19.** Vermont provides a set of deemed-savings methods in this manual. <www.effi ciencyvermont.org/>



# 4.3 Notes 2. This key question is based on the National Action Plan for Energy Effi

ciency recommendation to “make a strong, long-term commitment to implement cost-effective energy effi ciency as a resource” 1. Projects, one or more measures at a single facility or site, are also and options to consider. aggregated into programs. Considerations at the measure level are applicable to resource planning.

National Action Plan for Energy Effi ciency 4-5

# Determining 

# 5: Cost-Effectiveness

**This chapter provides a discussion of the various tests used to determine the cost-effectiveness of energy efficiency programs and portfolios. Each test reflects various stakeholder perspectives on the impact of**  **energy efficiency. A discussion on the importance of discount rates is also provided.**



## High-Level Summary Key Questions for Utilities and Regulators

• There are several tests for evaluating energy ef­ • What perspective(s) should we use to determine fi ciency’s cost-effectiveness, each refl ecting a cost-effectiveness? 1 The utility cost test (UCT), different stakeholder perspective on the impact of also called the program administrator cost test, is energy effi ciency. consistent with least cost utility resource planning.

• The utility cost test (UCT), also called the program The UCT compares the utility costs and benefi ts of administrator cost test, is consistent with least cost energy effi ciency. utility resource planning. The UCT compares the • Have we defi ned the appropriate costs and benefi ts utility costs and benefi ts of energy effi ciency. to get the right program trade-offs? Other tests are

• The total resource cost (TRC) test is typically used used to evaluate impacts of energy effi ciency on to defi ne what is cost-effective from a regulatory other stakeholders and include such perspectives as perspective. The TRC test compares all of the direct the impact on retail rates, participating customers, costs that both utilities and customers pay with the and society. regional benefi ts received from energy effi ciency. • Are we using the correct discount rate?

• Other tests are used to evaluate impacts of energy • Do we have a Standard Practice Manual for deeffi ciency on other stakeholders and include such termining cost-effectiveness of energy effi ciency perspectives as the impact on retail rates, partici­ to ensure that the criteria used are transparent to pating customers, and society. stakeholders?



# 5.1 Overview

For this discussion, we use the criteria developed by theCalifornia Energy Commission and CPUC for defi ning cost-effectiveness: the California Standard Practice Manual. 2 This manual publicly and transparently sets the state standard for determining cost-effectiveness,and helps to further the development and use of consistent defi nitions of categories, programs, and program elements. Other states now also refer to the California Standard Practice Manual as the source of their own cost-effectiveness criteria. The benefi t of having such a standard practice manual is that it both encourages transparency and consistency. The California criteria include fi ve major tests. While other jurisdictions may modify cost-effectiveness defi nitions to suit their needs, these fi ve tests are generally inclusive of the different perspectives that most jurisdictions consider.

• **Participant cost test (PCT).** Measures the economic impact to the participating customer of adopting an energy effi ciency measure.

National Action Plan for Energy Effi ciency 5-1• **Ratepayer impact measure (RIM).** Measures the impact on utility operating margin and whether rates would have to increase to maintain the current levels of margin if a customer installed energy effi cient measures.

• **Utility cost test (UCT).** Measures the change in theamount the utility must collect from the customers every year to meet earnings target, e.g. change in revenue requirement. In a number of states, this test is referred to as the program administrator cost test (PACT). In those cases, the definition of the “utility” is expanded to program administrators (utility or third party).

• **Total resource cost test (TRC).** Measures the net direct economic impact to the utility service territory, state, or region. • **Societal cost test (SCT).** Measures the net economic benefi t to the utility service territory, state, or region, as measured by the TRC, plus indirect benefi ts such as environmental benefi ts.
A common misperception is that there is a single best perspective for evaluation of cost-effectiveness. Each test is useful and accurate, but the results of each test are intended to answer a different set of questions. The key questions answered by each cost test are shown in Table 5-1. Note that throughout this discussion we use the term “utility.” In some jurisdictions that term should be expanded to include third-party administrators of the energy effi ciency programs.



## Table 5-1. Questions Addressed by the Various Cost Tests

**Cost Test Questions Addressed** 
**Participant Cost Test** Is it worth it to the customer to install energy effi ciency?
Is the customer likely to want to participate in a utility program that promotes energy effi ciency?

**Ratepayer Impact Measure**  What is the impact of the energy effi ciency project on the utility’s operating margin?
Would the project require an increase in rates to reach the same operating margin?

**Utility Cost Test (Also Called Program**  **Administrator Cost Test)** Do total utility costs increase or decrease?
What is the change in total customer bills required to keep the utility whole (the change in revenue requirement)?

**Total Resource Cost Test** What is the regional benefi t of the energy effi ciency project including the net costs and benefi ts to the utility and its customers? Are all of the benefi ts greater than all of the costs (regardless of who pays the costs and who receives the benefi ts)? Is more or less money required by the region to pay for energy needs?

**Societal Cost Test** What is the overall benefi t to the community of the energy effi ciency project, including indirect benefi ts? Are all of the benefi ts, including indirect benefi ts, greater than all of the costs (regardless of who pays the costs and who receives the benefi ts)?

Guide to Resource Planning with Energy Effi ciency 5-2

## Table 5-2. Benefits and Costs of Various Test Perspectives
**Tests and Perspective Energy Effi ciency Benefi ts**  **Energy Effi ciency Costs**
**Participant Cost Test** Incentives from utility and others, plus reduction in electricity bill Participants’ direct cost of participation

**Ratepayer Impact Measure**  Avoided supply costs (production, transmission, and distribution) based on net energy and load reductions Utility program costs (including administration costs plus incentives to participants) plus net lost utility revenues caused by reduced sales
**Utility Cost Test (Also Called Program Ad**  **ministrator Cost Test)** Same as above Utility program costs (including administration costs plus incentives to participants)

**Total Resources Cost Test**  Same as above plus benefits that do not affect the utility (e.g., water savings, fuel oil savings) Utility program costs (excluding incentives to participants) plus net participant costs (prior to any cost reduction due to incentives from the utility)

**Societal Cost Test** Same as above plus externality benefi ts; excludes some tax credit benefi ts Same as above



## Consideration of Non-Monetary Costs and Benefi ts

The fi ve cost tests presented above do not explicitly recognize changes in customer non-monetary costsand benefi ts such as comfort. Generally, energy effi ciency programs provide the same service (lighting, refrigeration, cooling, heating) as the ineffi cient base units they replace, so there is no appreciable change in non-monetary costs or benefi ts. For other types of programs there can be positive and negative impacts on comfort. For example, the cost of lower comfort during a demand response event that turns off air conditioning should be included. Conversely, thebenefi t of increased comfort of low-income participants with better heating and insulation should be included. Customer value of service studies can be used to monetize the value of customer comfort as well as the value of avoiding an outage. The TRC test, which measures the regional net benefi ts, is the appropriate cost test from a regulatory perspective. All energy effi ciency that passes the TRC will reduce the total costs of energy in a region. Thus, regulators of most states use the TRC as the primary cost test for evaluating their energy efficiency programs. The TRC cost test includes only direct costs and benefi ts, not externalities or non-monetized factors. Regulators who want to consider these factors in the cost test can use the SCT, which doesinclude externalities. The TRC and SCT do not differentiate who pays for the energy effi ciency and who receives the benefi ts. Therefore, the other cost tests are used to evaluate the impact on specifi c stakeholders.
The UCT is the appropriate cost test from a utility resource planning perspective, which typically aims to minimize a utility’s lifecycle revenue requirements.Adoption of an energy effi ciency measure that is costeffective according to the UCT will reduce the utilityrevenue requirement relative to traditional utility procurement. The UCT and TRC cost tests are related, and most measures that are cost-effective from the TRC

National Action Plan for Energy Effi ciency 5-3are also cost-effective from the utility perspective. If two measures have the same net benefi ts from a TRC perspective, but different incentive levels, using the UCT to choose between them will favor the measure with lower incentives, since the costs to the utility are lower to implement this measure.
Table 5-2 lists the specifi c benefi t and cost components in each test for economic screening. Note that the term “net” in Table 5-2 refers to values that are reduced by the net-to-gross ratio (NTGR). Thus, the test focuses on the costs and benefi ts attributable solely to the program activities.


# 5.2 Use of Discount Rates

The choice of discount rate can have a large impact on the cost-effectiveness results for energy effi ciency. Aseach cost-effectiveness test compares the net present value of costs and benefits for a given stakeholder perspective, its computation requires a discount rate assumption.
A discount rate measures the time value of money.When expressed in percent per year (say, 10%), it converts a future year’s monetary amount (say, $1,100) to an equivalent amount in today’s dollars (that is, $1,000= $1,100 ÷ (1 + 0.1)). In the context of an energy effi ciency investment, spending money today to install a measure makes economic sense if the cost today is less than the sum of discounted benefi ts in future years. Thus, the higher the discount rate, the greater the future benefi ts are discounted and the harder it is for an energy effi ciency investment to be cost-effective.
As each perspective portrays a specific stakeholder’s view, each perspective comes with its own discount rate. Thus, the five cost-effectiveness tests listed in Table 5-2 can have different discount rates. Using the appropriate discount rate, the cost-effectiveness tests correctly calculate the net benefits from making an investment in energy effi ciency.
Three kinds of discount rates are used, depending on which test is being calculated. For the PCT, the discount rate of an individual is used. For a household, this is taken to be the consumer lending rate, since this is the debt cost that a private individual would pay to finance an energy efficiency investment. It is typically the highest discount rate used in the cost-effectiveness tests. However, since there are potentially many different participants, with very different borrowing rates, it can be difficult to choose a single appropriate discount rate. Based on the current consumer loan market environment, a typical value may be in the 8% to 10% range; this is notwithstanding that a credit card rate can often exceed 20%. For a business fi rm, the discount rate is the firm’s weighted average cost of capital (WACC). In today’s capital market environment, a typical value would be in the 10% to 12% range; even though it can be as high as 20%, depending on the fi rm’s credit worthiness and debt-equity structure.


## Table 5-3. The Use of Discount Rates in Cost Tests

**Tests and Perspective Discount Rate Used Illustrative**  **Value Present**  **Value of $1 a Year for**  **20 Years Today’s Value**  **of the $1 Received in** 

**Year 20**
**Participant Cost Test** Participant’s discount rate 10% $8.51 $0.15

**Ratepayer Impact Measure** Utility WACC 8.5% $9.46 $0.20
**Utility Cost Test** Utility WACC 8.5% $9.46 $0.20

**Total Resources Cost Test** Utility WACC 8.5% $9.46 $0.20

**Societal Cost Test** Social discount rate 5% $12.46 $0.38

Guide to Resource Planning with Energy Effi ciency 5-4For the SCT, the social discount rate is used. The social discount rate refl ects the benefi t to society over the long term, and takes into account the reduced risk of an investment that is spread across all of society, suchas the entire state, or region. This is typically the lowest discount rate. For example, California uses 3% realdiscount rate (~5% nominal) for evaluation of costeffectiveness of the Title 24 Building Standards.
Finally, for the TRC, RIM, or UCT/PACT, the utility’s WACC is typically used as the discount rate. The WACC takes into account the average cost of borrowing of the utility, and is the same rate used to borrow money for other utility resource investments on the supply-side. The WACC is typically between the participant discount rate and the social discount rate. The correct application of discount rates to the fi ve SPM cost-effectiveness tests is shown in Table 5-3. For example, California currently uses 8.6% for evaluation of the investor-owned utility energy effi ciency programs. Using these illustrative values for each cost test, Table 5-3 shows the value of receiving $1 per year for 20 years from each perspective. This is analogous to the value of not having to purchase $1 of electricity per year. From a participant perspective assuming a 10% discount rate, this stream is worth $8.51; from a utility perspective it is worth $9.46; and from a societal perspective it is worth $12.46. The effect of discount rate increases over time. The value today of the $1 received in the 20th year ranges from $0.15 from the participant perspective to $0.38 in the societal perspective, more than twice as much. Since the present value of a benefi t decreases more over time with higher discount rates, the choice of discount rate has a greater impact on energy effi ciency measures with longer expected useful lives.


# 5.3 Resources for Determining Cost-Effectiveness

**Title/Description URL Address** 

**California The California Standard Practice Manual: Eco**  **nomic Analysis of Demand Side Programs and Projects.**  This manual describes cost-effectiveness procedures for conservation and load management programs from four major perspectives: participant, RIM, PACT, and TRC. A fifth perspective, the societal test, is treated as a variation on the TRC test. <http://calmac.org/publications/MCS_ Final_Report.pdf>
<www.energy.ca.gov/greenbuilding/ documents/background/07-J_CPUC_ STANDARD_PRACTICE_MANUAL. PDF>

**Oregon Cost-Effectiveness Policy and General Methodol**  **ogy for the Energy Trust of Oregon.** This reportdescribes the Energy Trust of Oregon’s policy for analyzing the cost-effectiveness of its energy effi ciency investments. This policy encompasses three generic perspectives: consumer, utility system, and societal. <www.energytrust.org/library/ policies/4.06_CostEffect.pdf>

**All States Tools and Methods for Integrated Resource**  **Planning: Improving Energy Effi ciency and**  **Protecting the Environment.** This report providesinformation on calculating and analyzing the cost-effectiveness of energy conservation measures against supply-side options, as well as methods for IRP. <www.uneprisoe.org/IRPManual/ IRPManual.pdf>

National Action Plan for Energy Effi ciency 5-5

# 5.4 Notes

1. This key question is based on the National Action Plan for EnergyEffi ciency recommendation to “make a strong, long-term commitment to implement cost-effective energy effi ciency as a resource” and options to consider.

2. For more details, including specifi c formulas for each cost test, download the California Standard Practice Manual: <www. energy.ca.gov/greenbuilding/documents/background/07-J_CPUC_ STANDARD_PRACTICE_MANUAL.PDF>.

Guide to Resource Planning with Energy Effi ciency 5-6

# Development of Energy Effi ciency Programs 

# 6: and Portfolios

**This chapter provides a discussion of the types of energy efficiency programs and their characteristics and ob jectives. A brief discussion of the importance of including criteria beyond cost-effectiveness is also provided.** 



## High-Level Summary Key Questions for Utilities and Regulators

• There are different types of energy effi ciency • Have we clearly defi ned the program and portfolio programs, each with their own advantages and criteria? disadvantages.The utility cost test (UCT), also called • Have we developed a program that is cost-effec­ the program administrator cost test, is consistent tive, achieves energy savings, and meets other with least cost utility resource planning. The UCT criteria appropriate for our service territory? 1 Are compares the utility costs and benefi ts of energy we using the correct discount rate? effi ciency. • Does the portfolio of programs reach all of the • More than cost-effectiveness should be considered customer classes and consider all of the energy ef­ when building up an energy effi ciency program: fi ciency opportunities? criteria include energy savings, cost-effectiveness, continuity of programs, service for all customer classes, education, and other factors.



# 6.1 Types of Programs

There are different types of energy effi ciency programs, each of which has its own advantages, disadvantages, and considerations. Table 6-1 summarizes the major different types.
Another way to categorize energy efficiency programs is by their intended objective. The following list summarizes common efficiency program objectives:

• **Resource acquisition.** Primary objective is to directly achieve energy and/or demand savings, and possibly avoid emissions through specifi c actions.

• **Market transformation.** Primary objective is to change the way in which energy effi ciency markets operate (how manufacturers, distributors, retailers, consumers, and others sell and buy energy-related products and services); tends to cause energy and/or demand savings in a more indirect manner. • **Increased stringency of codes and standards.** Primary objective is to defi ne and enforce mandated levels of effi ciency in buildings and products.

• **Education and training.** Primary objective is to inform consumers and providers about energy effi ciency and encourage them to act on that information.

• **Multiple objectives.** Objectives can include some or all of the above-listed objectives.
Other programs often associated with effi ciency, but which are aimed at reducing capacity requirements, notenergy consumption, are load shifting and demand response programs. These programs are intended to modify energy (typically electricity) TOU patterns and may increaseconsumption, decrease consumption, or not affect consumption at all.

National Action Plan for Energy Effi ciency 6-1

## Table 6-1. Energy Efficiency Program Types

**Program Type Characteristics** 
**Energy Audit** An energy audit is a survey or site visit to a customer premise by a knowledgeable contractor or utility representative. The audit is part review of customer equipment,part education of the customer, and part marketing of appropriate energy effi ciency programs to the customer. Best practices in energy audits both increase awareness of how to improve building effi ciency and encourage building-owners to follow through in the implementation of the audit’s recommendations. In EPA and DOE’s program “Home Performance with ENERGY STAR,” specially trained contractors evaluate homes, recommendcomprehensive improvements, and may encourage homeowners to take advantage of federal tax credits for energy effi ciency improvements.
**Rebate Program Cash rebate program:**  Provides customers with a cash rebate toward the purchase of a high-effi ciency appliance or device.
**Upstream rebate program:** provides a rebate to the manufacturer or wholesaler so that they can discount the fi nal price to the customer. Eliminates the need for the customer to apply for the rebate to receive the discount.
**Direct Install Program** Utilities, or utility-hired third-party contractors, directly install energy effi ciency measures for customers. For example, a commercial lighting retrofi t program may directly install new, energy-effi cient lighting. This type of program can improve the quality of the installation and make it easier for customers to participate in the program.

**Education and Training** Efforts to educate and train customers, retailers, architects, contractors, and building **Program** inspectors to identify energy effi ciency opportunities, properly install energy savings measures, and maintain equipment so that it continues to operate as effi ciently as possible.

**Loans and On-Bill Fi nancing or Grants**  Programs to remove the disincentive caused by the initial cost of energy effi ciency

measures.

**Bidding/Standard Performance Contracts**  Allow contractors to develop programs and deliver savings to the program administrator. The contractor can often leverage existing relationships with customers more effectively than a utility or program administrator’s agent.

**Upstream and Mid stream Incentives**  Program administrators provide incentives or assistance to manufacturers, distributors, or dealers to promote energy-effi cient products.

Guide to Resource Planning with Energy Effi ciency 6-2

## Table 6-1. Energy Efficiency Program Types (continued)

**Program Type Characteristics** 
**Failure Replacement Program**  Targets customers to purchase and install high-effi ciency equipment or appliancesat the time that they replace old energy using equipment—for example, encouraging customers to purchase ENERGY STAR–certifi ed equipment. Informing participants of the program when they are replacing equipment can help keep recruitment costs low. This can be done through working with retailers and rebates at the cash register, or working with contractors whose business is in equipment replacement (e.g., HVAC contractors).
**Early Replacement Program**  Replaces existing equipment/appliances that are currently working and in use with more effi cient units. Generally more costly than failure replacement because it requires an incentive closer to the entire cost of the effi cient unit to attract customers.As in failure replacement, targeting the most likely participants can keep recruitment costs low. This can be done by approaching customers with the most opportunity. Commercial lighting retrofi ts are a successful example of this approach.

**New Construction Program**  Targets new construction as the time to install energy effi ciency measures that go above and beyond the building standard.Sometimes called “lost opportunity” programs because many of the energy effi ciency upgrades that must be designed into the building are expensive or impossible to develop once the building is complete (Northwest Power and Conservation Council, 2005). 2

**Commissioning** After an energy effi ciency project or new building is completed, confi rms that the building is operating properly. For example, confi rms that the building shell is tightand the ducts are not crushed or bent. It is possible to reward builders who construct an energy-effi cient home with a cash rebate and/or certifi cation/award.



# 6.2 Criteria to Use in Developing Programs

Developing an energy effi ciency program is not just about maximizing cost-effective energy and capacity savings. There are often additional criteria to consider, such as making sure that there are programs for allclasses and for low-income and hard-to-reach customers, that programs have continuity, and that programs provide for education. There may also be other utility, regional, or policy factors to consider in developing the energy effi ciency program.
Another common example is a focus on initiatives to serve the new construction market to minimize lost opportunities for energy effi ciency. While new buildingsare more effi cient than the existing building stock, failure to capture opportunities at the initial construction stage can result in long-term energy effi ciency losses.
Generally, programs are designed so that they meet some minimum level of aggregate cost-effectiveness at

National Action Plan for Energy Effi ciency 6-3the portfolio level. In the case of requests for proposals (RFPs) for energy effi ciency, cost-effectiveness could be required at the program level, although this requirement is often relaxed for programs that target low-income and underserved market segments.
As the requirements for a satisfactory program and portfolio are driven by jurisdictional policies, there is no single defi nition. However, as an example, we have listed the criteria that the Public Utilities Commission uses inevaluating utility and contractor energy effi ciency programs in California.



### Criteria from CaliforniaThe portfolio must adhere to available funding by utility territory and have a total resources cost (TRC) ratio greater than one, and we ask staff to compile a portfolio of programs that balances the following goals:

• Maximized energy savings. • Strong cost effectiveness.

• Equitable geographic distribution.

• Diversity of target markets.

• Equity by rate class.

• Equity between gas and electric program offerings and energy savings.

• Diversity of program offerings.

• Multiple languages offered to program participants

(CPUC, 2004)


# 6.3 Resources for Developing Energy Effi ciency Programs and Portfolios

**Title/Description URL Address** 

**Electric and Gas Conservation Improvement Program Bi ennial Plan for 2005 and 2006.**  Docket No. E, G002/CIP-04. This plan was submitted to the Minnesota Department of Commerce by Xcel Energy, June 1, 2004. URL not available.

**Portfolio Management: How to Procure Electricity Re sources to Provide Reliable, Low-Cost, and Effi**  **cient Electricity Services to All Retail Customers.**  Biewald, B., T. Woolf, A. Roschelle, and W. Steinhurst (2003). Synapse Energy Economics. October 10. <www.synapse-energy.com/Downloads/SynapseReport.2003-10.RAP.PortfolioManagement.03-24.pdf>

**Interim Opinion: Energy Efficiency Portfolio Plans and Program Funding Levels for 2006–2008—Phase 1 Issues.**  California Public Utilities Commission [CPUC] (2005). Decisions 05-09-043. (See pp. 122-123 and Attachment 6.) September 22. <www.cpuc.ca.gov/PUBLISHED/FINAL_ DECISION/49859.htm>

**Energy Efficiency: Investing in Connecticut’s Future.** <www.env-ne.org/Publications/ECMB%20 Energy Conservation Management Board [ECMB] (2005). Annual%20Legislative%20Report%202005. Prepared for the Connecticut Legislature Energy & Technology pdf> Committee, Environment Committee. March 1.

**The Fifth Northwest Electric Power and Conservation Plan.**  The Northwest Power and Conservation Council (2005). Document 2005-7. May. <www.nwcouncil.org/energy/powerplan/ plan/Default.htm>

Guide to Resource Planning with Energy Effi ciency 6-4

# 6.4 Notes

1. This key question is based on the National Action Plan for EnergyEffi ciency recommendation to “make a strong, long-term commitment to implement cost-effective energy effi ciency as a resource” and options to consider.

2. A lost-opportunity program seeks to take advantage of the limitedtime-frame when some conservation measures can be cost-effectively implemented, due to physical or institutional limitations for implementing energy effi ciency.

National Action Plan for Energy Effi ciency 6-5

# Estimating Energy Effi ciency Impacts for 

# 7: Resource Planning

**Recognizing the demand and capacity impacts of energy efficiency in utility planning creates opportunities to capture additional value from the programs. This chapter provides a discussion of how to estimate and**  **report on the impacts of energy efficiency programs for use in utility planning. In addition, a discussion of how to measure or estimate the greenhouse gas emission reductions is provided.** 



## High-Level Summary Key Questions for Utilities and Regulators

• The recognition of energy effi ciency’s kWh and kW impacts in utility planning provides opportunities to capture additional value from the energy effi ciency activities. More than cost-effectiveness should be considered when building up an energy effi ciencyprogram: criteria include energy savings, costeffectiveness, continuity of programs, service for all customer classes, education, and other factors.

• There are several methods for developing impact estimates, as well as information available from jurisdictions across the United States. • Do the estimates, especially of peak reductions, refl ect the unique characteristics of our region? There are several methods for developing impact estimates, as well as information available from jurisdictions across the United States.

• Do the estimates refl ect expected or overly optimistic levels?



# 7.1 Overview

Energy efficiency delivers value to the utility and its customers through reductions in energy usage and reductions in capacity requirements. Depending upon the regulatory structure and markets in which the utility operates, the value provided from energy and capacity reductions can vary widely. Generally, utilities have analysts that perform energy and capacity forecasts for planning or procurementpurposes, and this Guide is not meant to replicate or supplant that work. Rather, the Guide focuses on forecasting energy efficiency reductions for use in resource planning.



# 7.2 Estimation of Energy Effi ciency Reductions

There are two main approaches for estimating energy effi ciency reductions: top-down or bottom-up. EM&V studies can also be used to refi ne estimates produced from either approach.
The top-down approach is generally less time-consuming than the bottom-up approach that relies on detailed impact data by end-use. For estimating impacts, this approach commonly employs statistical comparison(e.g., regression techniques) of participant and nonparticipant billing data, or pre- and post-measure-installation billing data. Absent detailed information, datafrom other utilities or states can also be used at aggregate levels to develop estimates of energy effi ciency impacts. This type of analysis may be more applicable for jurisdictions that are newly entering or resurrecting energy effi ciency efforts. Potential sources of energy effi ciency impact information are listed in Chapter 4. Of course, for weather-sensitive measures, the validity of transferred information will depend upon the similarity of climate characteristics with the original data source.

National Action Plan for Energy Effi ciency 7-1Bottom-up models construct estimates of energy effi ­ ciency program reductions based on savings from specifi c types of energy effi ciency measures. Engineering modelsare often used in bottom-up analyses to estimate reductions in energy usage based on the performance characteristics of effi cient versus standard measures. The level of effort required to utilize engineering models varies widely. In some cases, the analysis can be based on singleline engineering formulas such as the difference in wattage for equivalent lumen incandescent and CFLs. In other cases, it can be based on complex building simulation models 1 or detailed industrial process simulations. The basic bottom-up energy formula is shown below. This calculation would be performed separately for each type of energy effi ciency measure.
Energy effi ciency annual net energy savings:

NetkWh m,TOU x NTG x Installs = ΔkWh m,TOU m m (eq. 7.1)

Where: NetkWh m,TOU = energy effi ciency energy reductions, by TOU period for measure m, that are at tributable to the utility or third-party energy effi ciency programs under evaluation

ΔkWh m,TOU = annual gross reduction in energy during the TOU period

Installs = number of installations for m measure m

NTGR = net-to-gross ratio of the m measure The program-specifi c NTGR converts the gross annualreductions in energy usage to a net value, thus excluding reductions that would have occurred absent the program. For example, in evaluating a rebate program, the NetkWh should exclude impacts associated withmeasures that would have been installed to meet building code compliance. NTGR is typically viewed as an adjustment to eliminate free rider 2 effects, but should also account for free-driver effects. 3 Energy effi ciency lifecycle net energy savings:
NetkWh_LC m,TOU = x EUL (eq. 7.2) NetkWh m,TOU m Where: NetkWh_LC m,TOU = lifecycle energy effi ciency energy reductions by TOU period measure for m

EUL = expected useful life m of the measure (years)
For jurisdictions with deep energy effi ciency experience,it is common for utilities to begin with engineering estimates and then refi ne the estimates as they gain experience and data on both measure performance and NTGR adjustments from actual measure installations. EM&V studies are primary sources of the information needed for these refi nements.
Whichever method or methods are used to develop the energy reduction forecast, the forecast should be at a level of time granularity that matches the utility’s cost structure. For example, a utility may require forecasts of energy reductions by peak and off-peak periods to match procurement costs.


# 7.3 Estimation of Peak Capacity Reductions

The estimation of peak capacity uses the same methods discussed for energy estimates. However, the term “peak capacity” can have various meanings, even within the same utility. Following are some example defi nitions of peak capacity, with potential applications in parentheses.

• **System coincident peak.** Maximum MW demand at the utility level for a single hour in the year. (Long-run generation planning.)

• **“Summer” peak.** Average demand from 2 p.m. to 5
p.m. during the three contiguous business days with the highest average maximum temperature. (Value of peak load reduction.)

Guide to Resource Planning with Energy Effi ciency 7-2• **Monthly peak.** Average of the demands at the time of the single highest demand for each of the 12 months. (Transmission reservation costs.)

• **Loss of load probability (LOLP)–weighted peak.** LOLP is the probability that generation will be insuffi ­ cient to meet demand at some point over a specifi ed period of time. Demand weighted by relative LOLP values from the utility’s production cost models. TheLOLPs are normalized so that they sum to 1.0. (Allocation of costs to customer classes using regulatory cost of service model.)

• **100-hour coincident peak.** Average of demandsduring the utility’s 100 highest-load hours. (Regulatory cost of service model.)
In addition to the various definitions of peak capacity, there are different ways to count the energy effi ciency impacts. The most straightforward method is to use the expected, or average, impact. However, in some cases, a more conservative measure may be required that de-rates the energy efficiency impacts for any uncertainty in howmuch load reduction might be provided (the “dependable” reductions). Successful integration of energy efficiency into resource planning will require close coordination between the energy efficiency and planning group to ensure that the appropriate capacity values are estimated.
To incorporate energy effi ciency into resource planning, the energy effi ciency peak demand reduction should use a defi nition that corresponds to how the resourceplanners value capacity. Care must be exercised, however, to ensure that other groups within the utility do not use those same estimates if they do not match that group’s application. It is common for numbers to become “set in stone” and misused in applications for which the numbers were not intended. For example, a peak value may be developed for a transmission study that is based on the energy effi ciency reduction during the 12 monthly peaks, but then misused in a generation planning application that is concerned only with the single annual peak.
The analysts can use the same engineering or statisticalmodels that they develop for producing energy reduction estimates (assuming that the models have suffi ­ cient hourly information to match the peak defi nitions). Bottom-up forecasts tend to overestimate reductions. Acommon pitfall is to assume that the largest kW reduction from an energy effi ciency measure is the same as that measure’s peak demand reduction. This largest kW reduction is the non-coincident peak reduction, and a value typically cited in measure databases. The coincidentpeak reduction is generally lower than the non-coincident peak reduction because, for example, the timing of the largest reduction does not match the timing of the utility peak, not all measures will be operating at the time of the peak (people are not home), or equipment is notinstalled or maintained properly. In addition, there are interactive effects that will increase or decrease the reductions depending upon other energy effi ciency measures that the customer may or may not have installed.
Another pitfall is to assume that percentage energy savings is the same as percentage demand savings. For example, in California, SEER was used as the primary measure of air conditioning unit effi ciency. Codes and standards were written to promote high SEER units in the state, with the untested expectation that the more effi cient unit would also help reduce capacity needs. In reality, many manufacturers responded to the SEER metric with high SEER units that had two compressors and could actually cause higher peak demands.
The SEER example also highlights the difference between end use shapes and impact shapes. Utilities often have end use shapes, which are hourly representations of the demand of various classes of equipment, such as indoor lighting, outdoor lighting, refrigeration, heating,air conditioning, and motors. For energy effi ciency planning and evaluation, however, the focus is the impactshape—the hourly demand reductions due to the energy effi ciency measure.
ImpactkW m,h = EndUsekW h – EndUseEEkW m,h (eq. 7.3)
Where: ImpactkW m,h = energy effi ciency impact shape for measure m in hour h

National Action Plan for Energy Effi ciency 7-3EndUsekW h = hourly shape for the end use affected by energy effi ciency (prior to energy effi ciency)

EndUseEEkW m,h = hourly shape for end use after energy effi ciency is installed
A common way to produce a fi rst order estimate of theenergy effi ciency reductions is to multiply the percentage energy reduction provided by the measure by the demand shape.
ImpactkW m,h = EndUsekW h – %EEReduction m (eq. 7.4)

Where: %EEReduction = reduction in usage due to m energy effi ciency ÷ total end use kWh prior to energy effi ciency
This method is fi ne for measures such as high-effi ciencylighting, for which the energy effi ciency reduction occurs evenly across all hours.
In other cases, the reduction shape may not follow the end use shape. For example, increased insulation may reduce usage during moderate times, but not affect usage during the hottest and coldest times. In that case, the impact shape will look less peaky than the end use shape, and Equation 7.3 should be used.
Because of the variety of ways to measure and defi nepeak demand, as well as timing differences across utilities, peak information is generally less transferable than energy impacts. This caution applies to both bottom-up and top-down approaches. The analyst should exercise additional care when using peak demand impacts from other jurisdictions



# 7.4 Energy Efficiency and Greenhouse Gas Emissions

Growing concerns about climate change are leading many utilities and regulatory bodies to develop resource portfolios that reduce GHG emissions. An importantquestion, then, is how to measure or estimate the reductions in GHG emissions from energy effi ciency programs.
In the electricity sector, the most important GHG by far is carbon dioxide (CO 2 ), although relatively small amounts of other GHGs such as methane (CH 4 ), nitrous oxide (N 2 O), and sulfur hexafl uoride (SF 6 ) are also emitted. To put all of these GHGs on a common footing interms of their global warming potential, the unit “carbon dioxide equivalent” (CO 2 eq) is often used. In 2006, energy-related emissions from the United States as a whole were 5,940 million metric tons CO 2 eq, of which 2,357 million metric tons, or about 40%, were from the electricity sector (DOE, 2007).
Energy effi ciency indirectly reduces GHG emissions, since for each kWh not consumed the GHG emissionsassociated with the supply of that electricity are avoided. Energy effi ciency can be a highly cost-effective way to reduce GHG emissions, since the non-GHG-relatedbenefi ts often exceed the costs; incorporating an additional benefi t of avoided GHG emissions improves energy effi ciency’s cost-effectiveness. The calculation of avoided GHG emissions requires two components: the amount of GHG emissions reduced by energy effi ciency and the related per unit value of GHG reductions.



### 7.4.1 **Calculating GHG Savings from Energy Effi**  **ciency** In general, the higher the GHG emissions associatedwith electricity supply, the greater the benefi t of energy effi ciency. For each kWh to be consumed, a larger amount of kWh (up to 110%) must be generated toaccount for transmission and distribution losses, causing a certain amount of GHG emissions. In addition, small amounts of additional GHGs are emitted in the transmission and distribution system (for example, SF 6 isemitted from high-voltage circuit breakers). For generators that burn fossil fuels, the amount of GHGs emitted per kWh generated is the product of two factors: the carbon content of the fuel and the heat rate (thermal effi ciency) of the plant. 4 The carbon content of fuel is primarily a function of the type of fuel, though among a given fuel type such as coal, there can also be some

Guide to Resource Planning with Energy Effi ciency 7-4variation. 5 Table 7-1 shows illustrative CO 2 emission factors for different fuels and heat rates. For actual emissions reporting for a power plant, calculations must be based on actual plant heat rates and the correct emission factors for the specifi c fuel types used, if the plant does not have a continuous emissions monitoring system in place to measure CO 2 emissions directly.
In addition to the GHG emissions from fuel combustion,there are “upstream” emissions associated with the mining, cleaning, and transportation of fuels to the power plant. Table 7-2 shows estimates in one DOE study of average upstream emission factors for coal and natural gas. In this case, a total emission factor can be obtained by adding the upstream and combustion emission factors together (since both are given in units of lbs/MMBtu), then multiplying the combined factor by the heat rate.
Both fossil fuel and non-fossil-fuel generators, including nuclear, hydroelectric, wind, biomass, and solar, haveadditional GHG emissions associated with plant construction and decommissioning, shipment of fuel, and themanufacturing and shipment of the generating equipment. These emissions, plus those from actual operation of the generator over its operating life, are considered the plant’s lifecycle emissions. At present, total lifecycle emissions are not generally included in resource planning,but the lifecycle emissions of different types of generators are often compared in policy discussions.
The method for calculating emissions savings is to combine marginal emission rates with matching kWh savings from efficiency. (“Marginal emission rates” refers to the emissions associated with the marginal generating unit in each hour of the day. Since peaking units are typically less efficient than baseload units, they have higher emissionfactors if they use the same fuel, and the marginal emission rate will be higher during peak hours than during offpeak hours. See Section 3.3.4 for exceptions to this rule.)
The fi rst step in the GHG savings calculation is to obtain the regional emissions profi le. Figure 7-1 shows thesimulated marginal emission rate by hour for a twoweek period for California.
The second step in the calculation is to obtain the hourly profi le of energy savings due to energy effi ciency.This should take into account the time- and location-dependent effect on energy consumption of the different 

## Table 7-1. Illustrative CO 2 

## Emissions Factors for Fossil Fuel Combustion

**Fuel Type Fuel Emissions Factor (lbs**  **CO 2**  **/MMBtu) Heat Rate (Btu/**  **kWh) Generation Emissions Factor**  **(lbs CO 2**  **/MWh)**

**Coal** 210 12,000 9,500 7,000 2,519 1,995 1,470 **Natural gas** 117 12,000 9,500 7,000 1,403 1,111 819 Note: Average values based on high heating value and 100% combustion.

Source: DOE, 2006.



## Table 7-2. Illustrative Upstream CO 2 

## Emission Factors for Fuels Used in Electricity Generation, from Mining, Cleaning, and Transportation in California

**Fuel Type Emissions Factor (lbs/MMBtu) % of Combustion Emissions** 

**Coal** 4.6 2.7 **Natural gas** 11.4 11.9
Source: DOE, 2000.
National Action Plan for Energy Effi ciency 7-5kinds of energy effi ciency measures in the portfolio. For example, the hourly MWh savings from air conditioning, outdoor lighting, and refrigeration effi ciency measures have quite different profi les. An example of this is shown in Figure 7-2 for California, on the same days used in Figure 7-1.
Figure 7-3 shows the three different kinds of effi ciencymeasures superimposed on each other and on the marginal emissions profi le for the same hours of the year. In this case, air conditioning effi ciency measures save kWh during peak hours, when marginal emission rates are highest, and therefore the CO 2 savings per kWh are greatest. On the other hand, outdoor lighting measuressave kWh during off-peak hours, when marginal emission rates are lowest. Refrigeration measures save kWh uniformly across peak and off-peak hours.
The third step in calculating the avoided CO 2 emissions is to multiply the marginal emissions rate (in tons CO 2 per MWh) for each hour by the MWh savings in that hour due to each energy effi ciency measure. This step is shown in Equation 7.5

avoided tons of CO 2 emissions =



# ∑∑ 

# (

tons CO ÷ MWh × 

# ( MWh 

# ) 2 

# ) saved hours measures (e.q. 7.5)
As an example, 100 kWh saved by each of the three energy effi ciency measures discussed above results in a different emissions saving for the California emissions profi le: the avoided CO 2 emissions are 118 pounds for air conditioning effi ciency measures, 93 pounds for refrigeration effi ciency measures, and 86 pounds for outdoor lighting effi ciency measures.
This calculation can be performed by TOU periods if hourly data are not available. The calculation can also be made more accurate by accounting for reductions in the marginal heat rate due to the energy effi ciency measures. However, this effect is likely to be small. 

## Figure 7-1. Marginal CO **2** 

## Emissions Rate by Hour for California Over a **Two-Week Period**

0 50 100 150 200 250 300 350 400

HourMarginal CO2Emissions Rate(tons CO2/MWh)

0.30 0.40 0.50 0.60 0.70 0.80 0.90

Note: The minimum value represents the emissions from baseload generation, which in California consists predominantly of natural gas combined cycle plants. The maximum value represents emissions from peaking units, which consist mainly of natural gas combustion turbines.
Source: California Energy Commission adopted simulation for Title 24 building standards.

Guide to Resource Planning with Energy Effi ciency 7-6

## Figure 7-2. Hourly Shape of MWh Savings From Energy Effi **ciency Measures in California** 
**Air Conditioning Lighting**  **Refrigeration**Energy Comsumptopmby Hour (Normalized)

Hour Hour Hour Note: Results shown for the same two-week period as in Figure 7-1.
Source: Energy & Environmental Economics, Inc. and Rocky Mountain Institute, 2004. 

## Figure 7-3. Hourly Shape of MWh Savings from Energy Effi **ciency Measures**Energy Consumption by Hour (Normalized)

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9Marginal CO2Emissions (tons CO2/MWh)

1 51 101 151 201 251 301 351 401 Hour
Lighting Refrigeration Marginal Emissions Air Conditioning
Source: Energy & Environmental Economics, Inc. and Rocky Mountain Institute, 2004.

National Action Plan for Energy Effi ciency 7-7

# 7.5 Incorporating Energy Effi ciency Forecasts into Integrated Planning

The previous section discusses the estimation of energy,capacity, and GHG reductions for energy effi ciency measures. The analyst, however, must take care in incorporating these results into the planning process, as there are two adjustments that need to be considered:

1. Reductions associated with installations that occur after the peak period (be that summer or winter) should not count for that year.

2. Reductions already included in the status quo load forecast should be explicitly identifi ed to avoid double counting.
The fi rst adjustment is straightforward and easy to incorporate into the planning process; the key is to manage installation forecasts using a time period that ends prior to the peak period. For example, for a summer peakingutility, the second quarter of the year would be the ending period for counting installations for peak reduction
purposes. The second adjustment requires the analyst to have a sound understanding of the data and methods used to develop the base planning forecast. While the details of load forecasting are beyond the scope of this document,double counting can be avoided by (1) removing energy effi ciency impacts from the base forecast prepared by the load forecast group or (2) removing energy and demand impacts from the forecast of energy effi ciency impacts. This “counting” issue is explored further in the next section.


# 7.6 Building Codes and Standards

Building energy codes are an additional, signifi cant source of energy savings that should be integrated inload forecasting and reporting of energy effi ciency savings. The California Energy Commission estimates the cost savings from the Title 24 Building Standards begun in 1978 will total $41 billion by 2011. California is notalone—41 other states have building codes and standards. For residential buildings, most of the states apply the IECC model energy code or an equivalent or more stringent code. For commercial buildings, most states apply ASHRAE 90.1 or IECC. Still other states allow localmunicipal control of the building energy effi ciency standards. 6 The Action Plan Building Codes and StandardsFact Sheet contains more details on benefi ts and implementation of building codes (National Action Plan for Energy Effi ciency, 2007a).
The methodology described in Equation 7.1, above, canbe used to produce a forecast of the energy savings associated with increased stringency in the building codes. These savings are additive to the forecasted savings of the energy effi ciency program and can be reported separately as described in Chapter 8, “Reporting Energy Effi ciency Impacts for Resource Planning.”
As with the forecast of energy effi ciency program savings, savings from a change in building standards are computed relative to a baseline of energy usage that would occur without the change in the standard. In the case of improvements attributable to the building standards change, the term in Equation 7.1 represents the increased stringency in the building codes and the installs term represents the forecasted number of new m buildings where the building code change applies.
For example, if the building code changes the minimum energy effi ciency of a residential air conditioner from SEER 12 to SEER 13, then the Δ 

### kWh m,TOU is the change in energy consumption between these two units and the installs term is the number of new and retrofi t residen­ m tial buildings expected to comply. Once this code change is implemented, a new construction program to provide incentives for effi cient air conditioning would have a new baseline based on SEER 13 effi ciency.
Increasing the effi ciency of the building standards is an effective way to reduce energy usage because the standards apply to all new and retrofi t buildings. Oncethe requirement is in place, there is no need to market a new construction program. Compliance with the standard leads to energy effi ciency improvements that are widespread and persistent. From a program cost standpoint, building standards impose low cost on the

Guide to Resource Planning with Energy Effi ciency 7-8utility and ratepayers, because the additional costs of the buildings are mainly borne by the owner. In orderto prevent onerous requirements on new construction, however, there are generally some controls on the standards that can be implemented. In the California Title 24 process, technical, economic, cost-effectiveness, and feasibility criteria are considered with stakeholders, including builders, architects, consumers, environmental advocates, and others, before any changes are adopted.



# 7.7 Resources for Forecasting Load

**Title/Description URL Address** 
**Building Codes for Energy Efficiency Fact Sheet.** Describes the building codes adopted in each state, along with an estimate of potential benefi ts. <www.epa.gov/eeactionplan>

**ASHRAE 90.1 Standard.** The basis of most states’ commercial building energy codes. <www.ashrae.org/technology/page/548>

**International Energy Conservation Code.** A common basis of most states’ residential building energy standards. <www.energycodes.gov>

**California Title 24 Building Energy Effi ciency Stan**  **dards.** These develop the building standards in California in 3-year program cycles, beginning in 1978. <www.energy.ca.gov/title24/>

**Tools and Methods for Integrated Resource Planning: Improving Energy Effi**  **ciency and Protecting the Environment.**  UNEP Collaborating Centre on Energy and Environment, Riso National Laboratory, 1997. <www.uneprisoe.org/IRPManual/IRPmanual.pdf>

**Inventory of Available Methods and Processes for Assessing the Benefits, Costs, and Impacts**  **of Demand-Side Options: Volume 1—Overview of Methods Models and Techniques.**  1996. <http://dsm.iea.org/Files/Tasks/Task%20IV%20-%20 Development%20of%20Improved%20Methods%20 for%20Integrating%20Demand-Side%20Options%20 into%20Resource%20Planning/Reports/Vol1.doc>

**2004–2005 Database for Energy Effi ciency Re**  **sources (DEER) Updated Study.** <http://eega.cpuc.ca.gov/deer/downloads/reports/ FinalReport_Jan2006-Pdf_Only.zip>

National Action Plan for Energy Effi ciency 7-9

# 7.8 Notes

Building simulation models include DOE-2, BLAST, ADM2, and 1. Micropas. 5. For example, carbon dioxide emission factors for U.S. coal range from an average of 227 lbs/MMBtu for anthracite to 204 lbs/ MMBtu for bituminous. See U.S. DOE, “Carbon Dioxide Emission Factors for Coal,” <www.eia.doe.gov/cneaf/coal/quarterly/co2_ article/co2.html>.

2.

3. A free rider is someone who would have installed a measure in the absence of the program.

A free-driver effect refl ects that someone installs a measure but 6. For status on residential and commercial building codes by state, see the DOE Energy Codes Web site: <www.energycodes.gov/ implement/state_codes/state_status_full.php>.
does not participate in a program.

4. For greater accuracy, incomplete combustion must be taken into account, because it leads to fugitive emissions of methane and nitrous oxide, which are potent GHGs.

Guide to Resource Planning with Energy Effi ciency 7-10

# Reporting Energy Effi ciency Impacts for 

# 8: Resource Planning

**This chapter provides guidance on reporting energy efficiency impacts in resource plan documents, with the goal of making them transparent and useful to a broad audience, as well as improving the ability of**  **utilities to demonstrate their progress toward energy efficiency goals or climate change targets.**



## High-Level Summary Key Questions for Utilities and Regulators

• Resource plan documents are an increasingly im­ • Are energy effi ciency impacts reported clearly portant source of information on energy effi ciency enough that an outsider could easily distinguish impacts that can be used to measure progress energy effi ciency load impacts from load met with toward state, regional, or national energy effi ciency supply resources? What functions are most approgoals or GHG reduction targets.Program adminis­ priate for a program administrator and/or contrators typically procure various types of energy ef­ tractors? (Use this question to guide staffi ng and fi ciency services from contractors (e.g., consultants, contracting needs.) vendors, engineering fi rms, architects, academic • Does the resource plan provide enough information institutions, community-based organizations) as to determine my utility’s progress toward energy part of managing, implementing, and evaluating effi ciency or GHG goals or targets? their portfolio of energy effi ciency programs. • Does the resource plan provide energy effi ciency • Regardless of the methods used to forecast the impacts as share (%) of the growth in total re- energy and capacity impacts of energy effi ciency source requirements and as a share (%) of total programs, they should be reported clearly and resource requirements? consistently.

• Two key concepts—total resource requirements and net resources for load—can help distinguish energy effi ciency impacts in load forecasts.

• A spreadsheet tool to facilitate the reporting and accounting of loads and resources in the resource plan, with adaptable data reporting forms and tables, is available at <http://eetd.lbl.gov/ea/EMS/ rplan-pubs.html>.



# 8.1 Reporting Energy Effi ciency Impacts for Resource Planning

Utility resource plan documents summarize the results of the resource planning process, typically including load and resource forecasts, the relative cost-effectiveness of a series of contending resource portfolios, results of any other tests that the portfolios underwent (e.g., risk analysis), and the preferred portfolio the utility intends to pursue. The resource plan document constitutes the public record of the utility’s planning process and is often the only publicly accessible information on projected energy effi ciency and other resources in a specific utility’s service territory.

National Action Plan for Energy Effi ciency 8-1

## Figure 8-1. Tracking Energy Efficiency Resources in Load Forecasts

Resource plan analysis period

Plan Start Date Plan End DateLoad Forecast Unadjusted load forecast: **total resource requirements** 

**Net**
**resources for load** 

Source: Hopper, N. et al., 2006.

Throughout the United States, there is increasinglybroad interest in projecting and tracking energy effi ciency resources over time. For example, the WesternGovernors’ Association (WGA) has set a goal of meeting 20% of total electricity needs with energy effi ciency by 2020. Other states and regions are beginning to set similar goals, in many cases drawing from the National Action Plan for Energy Effi ciency’s recommendations. Additionally, as governments set mandatory targets forGHG emissions, the need for information on utility energy effi ciency program impacts will intensify. However, a study of recent resource plans in the western UnitedStates conducted by Lawrence Berkeley National Laboratory (LBNL) found that most did not report energy effi ciency impacts clearly enough to support such needs. 1
The LBNL study provided a series of recommendationsfor improving the reporting of energy effi ciency impacts in utility resource plans, and developed a series of spreadsheet forms for utilities to use and adapt for theirresource plans. This tool provides a standardized approach for collecting, entering, and reporting forecasted loads and resources, including energy effi ciency.
The focus is on standardizing and clarifying the contribution of energy efficiency resources to the load forecast, Plan-Period EE Program Impacts Status Quo EE Program Impacts Other EE Impacts (e.g., Codes, Standards) Load Met with Supply-Side Resources (Not to Scale)

both in terms of energy (MWh) and capacity (MW) impacts (see Figure 8-1). Energy efficiency impacts from various sources (e.g., status quo energy effi ciency programs, new programs proposed for implementation, and other energy efficiency impacts such as codes and standards) are each shown as separate components of the load forecast, stacked on top of load met with supply-side resources.
Once this has been accomplished, two load-forecast defi nitions can be defi ned:

• Total resource requirements represents total expected (energy or capacity) demand in the absence of any energy effi ciency measures or strategies. It can also be thought of as the sum of all supply-side and demand-side resources in the utility’s portfolio.

• Net resources for load is the load forecast net of all energy effi ciency impacts. It is the amount of load that is expected to be met with supply-side resources (i.e., the load that actually materializes).
Utilities should report both of these concepts in their resource plans, as well as the relative contribution of each tracked energy effi ciency resource. Doing so clearly distinguishes energy effi ciency impacts from supply resources. The following additional considerations will

Guide to Resource Planning with Energy Effi ciency 8-2ensure that the resource plan document can supportlong-term tracking of energy effi ciency program contributions toward state, regional, or federal goals, as well as their regulatory compliance:

1. Provide information on all demand-side resources (energy effi ciency and other demand-side resources) included in the resource plan, by type of resource. Demand-side management (DSM) savings data should be reported separately for energy effi ciency,demand response, fuel conversion, load management, and any other resources counted among the broader family of DSM.

2. Clearly identify the distinct types of energy effi ciency strategies that are included in the resource plan—i.e., ratepayer-funded energy effi ciency programs and other sources of energy effi ciency such as building energy codes and appliance effi ciency standards. 3. Clearly and separately identify the effects of energyeffi ciency measures to be installed during the resource plan forecast period, as well as the residual effects of status quo energy effi ciency measures.

4. Provide both energy savings (MWh or GWh) and summer coincident peak demand reductions (MW) for energy effi ciency resources.

5. Provide energy effi ciency savings data for all years of the resource plan analysis period.

6. Include key metrics describing the relationship between energy effi ciency resources and key resource issues. Specifi cally, the following are recommended:

– Energy efficiency impacts as a share (percentage) of the growth in total resource requirements —this provides a basis for evaluating the extent to which



## Table 8-1. Example Summary Table for Long-Term Energy Effi ciency Impacts

**Energy Efficiency Strategy Summary Cumulative Impacts of EE Strategies**  **Implemented Starting in 2006 2010**  **2015 2020** 

**GWh MW* GWh MW* GWh MW***
**EE Strategy Impacts** Cumulative EE Strategy Impacts 1 4,579 254 11,953 664 22,914 1,273 Forecast Total Resource Requirements (TRR) 2 106,136 5,307 114,339 5,717 123,176 6,159

EE Strategies as Percent of TRR 4% 5% 10% 12% 19% 21% EE Strategies as Percent of TRR Growth (since 2006) 75% 83% 83% 93% 99% 110%

**Impact of EE Strategies on Forecast Load Growth**

Average Annual growth in TRR (Since 2006) 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Net Resources for Load (NRL) 3 101,558 5,052 102,386 5,053 100,262 4,886 Average Annual Growth in NRL 0.6% 0.5% 0.3% 0.2% 0.1% -0.1% Percentage Reduction in Growth Rate 62% 69% 77% 86% 95% 107%
Notes: MW is the summer-peak capacity. (1) EE strategy savings include EE programs, EE standards, and building codes; are cumulative since 2006; and include losses. (2) Total resource requirements include system losses, but do not include demand reductions from energy effi ciency strategies or reserve margins. (3) Net resources for load includes demand reductions from all EE strategies. Reserve margins are not included.

National Action Plan for Energy Effi ciency 8-3the utility plans to meet projected load growth with energy efficiency resources in a given year or over a defined time period.

– Energy efficiency impacts as a share (percentage) of total resource requirements —this measures how much load is projected to be met with energy efficiency in a given year.


# 8.2. Resources for Reporting Energy Effi ciency Impacts Table 8-1 is an example summary table from the LBNL spreadsheet forms. It includes both of the above metrics, as well as information on load growth with and without energy effi ciency, and could be included in a resource plan as a high-level summary of state and utility energy effi ciency resources.

**Title/Description URL Address** 

**California Regulatory-Energy Effi**  **ciency Filings: Monthly**  **Program Reports.** This Web site contains monthlyprogram reports on energy effi ciency fi led by Southern California Edison. <www.sce.com/AboutSCE/ Regulatory/eefi lings/Monthly/ MonthlyReports.htm>

**Minnesota Electric and Gas Conservation Improvement Pro**  **gram Biennial Plan for 2005 and 2006.** Docket No.E, G002/CIP-04. Submitted to the Minnesota Department of Commerce by Xcel Energy. June 1, 2004. URL not available.

**New York New York Energy $mart Program Cost-Effective**  **ness Assessment.** This report is a benefi t-cost analysis to assess the cost-effectiveness of 18 individual New York Energy $mart public benefi ts programs. <www.nyserda.org/Energy_ Information/ContractorReports/ Cost-Effectiveness_Report_June05. pdf>
**Northwest The Fifth Northwest Electric Power and Con**  **servation Plan.** This plan is a blueprint for an adequate, low-cost, and low-risk energy future.Technical appendices include conservation costeffectiveness methodologies. <www.nwcouncil.org/energy/ powerplan/plan/Default.htm>

**Vermont Efficiency Vermont. 2005 Annual Report.**  The Power of Effi cient Ideas. This summary highlights the 2005 accomplishments of Effi ciency Vermont. <www.effi ciencyvermont.com/stella/ fi lelib/2005%20 SummaryREVISED.pdf>



# 8.3 Notes

1. Energy Effi ciency in Western Utility Resource Plans: Impacts on Regional Resource Assessment and Support for WGA Policies can be downloaded at http://eetd.lbl.gov/ea/EMS/rplan-pubs.html.

Guide to Resource Planning with Energy Effi ciency 8-4

# Evaluation and 

# 9: Measurement

**Program administrators typically procure various types of energy efficiency services from contractors as part of managing, implementing, and evaluating their energy efficiency program portfolio. This chapter**  **provides an overview of considerations for the program administrator related to the scope of contractor responsibilities, methods to stimulate innovative new program concepts and designs, the types of per**  **formance risks borne by contractors, and alternative procurement methods.**



## High-Level Summary Key Questions for Utilities and Regulators

• The utility is the program administrator in manystates; however, in some states, it is the state energy agency or a third party.

• Program administrators typically procure varioustypes of energy effi ciency services from contractors (e.g., consultants, vendors, engineering fi rms, architects, academic institutions, community-based organizations) as part of managing, implementing, and evaluating their portfolio of energy effi ciency programs.

• In order to utilize contractors effectively, a program administrator should consider issues related to the scope of functional responsibilities of contractors,methods to stimulate innovative new program concepts and designs, the types of performance risksto be borne by contractors, and alternative procurement methods (e.g. competitive solicitations involving requests for qualifi cations or requests for proposals, or partnership arrangements with contractors). • Has the energy effi ciency program administrator been clearly designated? 1

• What functions are most appropriate for a programadministrator and/or contractors? (Use this question to guide staffi ng and contracting needs.)

• Does the approach used by a program administrator in procuring energy effi ciency services contribute to the longer term goal of creating a vibrant, private sector energy effi ciency services industry?



# 9.1 Procurement of Energy Effi ciency Services

Administrators of ratepayer-funded energy effi ciency programs, whether they be utilities or other types of entities (e.g., state agencies, private or nonprofi t fi rms),must undertake a number of functional activities to effectively administer, manage, and deliver a portfolio of energy effi ciency programs. Table 9-1 highlights these major functions, including a brief description of the types of activities under each function.
The program administrator may be the utility, the state,or a third party; this Guide uses the term “program administrator” to encompass these different options. Theprogram administrator is ultimately responsible and accountable for the proper use of ratepayer funds and for

National Action Plan for Energy Effi ciency 9-1

## Table 9-1. Functional Overview of Energy Effi ciency Program Management and Delivery

**Function Descriptions** 

**General administration and coordination**  • Financial/budget management: develop/maintain fi nancial accounting systems; propose and manage budget for portfolio of programs

• Contract management: maintain contracts with primary contractors

• Reporting/information management systems: prepare annual reports, highlight accomplishments, maintain information technology system for reporting, tracking to PUC, advisory committees **Program development, planning, and budgeting**  • Facilitate public planning process

• Develop program designs: propose general program descriptions and budgets for regulatory approval

• Program and measure screening: initial screening for cost-effectiveness
**Program administration** Manage and oversee individual programs (e.g., budgets, sub-contractors) • **and management** • Provide detailed program design and propose changes based on experience and market response

• Quality assurance: develop QA standards and tracking mechanisms to ensure effective program delivery (e.g., assuring and validating contractor performance quality)

• Dispute resolution processes **Program delivery and implementation**  • Program marketing/outreach: market individual programs; mass advertising

• Provide program delivery services: energy effi ciency audits, technical/design assistance, fi nancial assistance/incentives, commissioning, contractor certifi ­ cation and training

• Participate in and implement regional and/or national market transformation initiatives

• EM&V of savings: develop EM&V procedures; focus on verifi cation to determine payments to contractors

• Project development: develop individual energy effi ciency projects at customer facilities
**Market assessment and program evaluation**  • Market assessment: characterize specifi c energy effi ciency markets and opportunities

• Assess program impacts

• Process evaluation: review program processes and administration for purposes of improving program effectiveness

Guide to Resource Planning with Energy Effi ciency 9-2achieving objectives and goals established by regulators.The program administrator must decide the most effective way to procure various types of energy effi ciency services, given the core competencies and capabilities of the program administrator and contractors and policy direction from regulators. For example, the programadministrator typically takes sole or primary responsibility for general administration/coordination and program development, planning, and budgeting functions. Forsome functions and activities (e.g., program administration and management, program delivery and implementation, and market assessment and program evaluation), both the program administrator and contractors will beinvolved with some division of assigned roles or responsibility: primary, secondary, or shared.
In thinking about how to utilize contractors effectively,regulators, program administrators and other stakeholders must resolve such issues as:

• The scope of functional responsibilities of contractors(e.g., turnkey program design and delivery vs. implementation services only).

• Procurement approaches that can stimulate innovative new program concepts.

• The types of performance risks that should be borne by contractors (e.g. pay-for-performance based on verifi ed savings).

• Alternative procurement methods (e.g., competitive solicitations involving requests for qualifi cations or requests for proposals, partnership arrangements with contractors).
The decision to outsource should be balanced against theprogram administrator’s staff development and core competencies. Figure 9-1 provides an overview of these issues.
In procuring energy efficiency services, program administrators in a number of states have chosen or been directed by their regulators to issue either “ broad-based ” or “ targeted ” solicitation for program development/ design, management and delivery/implementation. In a “broad-based” solicitation, the program administrator issues a request for proposals with a broad scope in the sense that relatively few limits are placed on eligible markets, program areas, or preferred delivery mechanisms. 2 A “targeted” solicitation often focuses on specifi cprogram areas and/or under-served markets (e.g., multifamily buildings, small commercial, residential renovation and remodeling). 3 Under both options, contractors have primary responsibility for design and implementation of their proposed program concept.
The functional scope of these “broad-based” and targeted solicitations is larger than the traditional competitive solicitation for servicesapproach in which theprogram administrator seeks and selects third-party contractors through a competitive procurement to deliver a well-specifi ed set of implementation services (e.g., energy audits, design assistance, training) for existing energy effi ciency programs. 4 In some cases, these services may also include aspects of program administration and management (e.g., they may provide detailed program design or quality assurance), but usually theprocurement is limited to various implementation services. Those program administrators that participate inregional and/or national market transformation initiatives often develop procurements targeted to “upstream” market players (e.g., lighting manufacturers, retailers) that involve procurement and bulk purchase of large volumes of high-effi ciency products in order to lower retail prices to consumers purchasing at retail stores (e.g., bulk purchase of CFLs).
Energy effi ciency services can also be procured through various types of “ partnership ” arrangements . In thisoption, the program administrator develops a relationship with a third-party “partner” to deliver an element of an energy effi ciency program (or an entire program) whose design has been well-specifi ed by the program administrator. 5 These partnering arrangements allow the program administrator to form a strategic alliancewith an organization that is uniquely suited to manage and deliver energy effi ciency programs. Services for which partnering arrangements are most commoninclude training, education/information, and certifi cation of contractors.
Another approach to acquiring energy effi ciency resources is to use competitive processes to procure

National Action Plan for Energy Effi ciency 9-3

## Figure 9-1. Potential Roles of Third-Party Contractors in Providing Energy **Efficiency Services and Savings**

Program Development Program Administration and Management Program Delivery and Implementation Market Assessment and Program Evaluation

Procurement of EE Services B (co

Targeted s v r

ol

Competitiv

oad-based solicitation ers all market segment

icitation for new prog

e s)

ram concepts

solicitation

Partnership arrangement Competitive solicitation

Procurement of EE Savings DSM

Standard perfor b i dding

mance contract

energy savingsrather than servicesfrom contractors,most of whom are performance contractors (i.e., ESCOs). The program administrator develops and issues an RFP that solicits bids for energy savings projectsto be developed at customer facilities, and contractors (called “DSM bidders” in this context) propose apay-for-performance incentive (e.g. cents/kWh payments over x years) for verifi able energy savings. The program administrator evaluates bids and then selects and negotiates long-term contracts with winning DSM bidders. This approach is referred to as “DSM bidding,” and was implemented by over 40 utilities in the 1990s, either as part of an “all-source” or integrated supply and demand auction, or “DSM bidding only” if limited only to ESCOs and customers offering energy savings projects. Based on experience, many utilities concluded that it was sub-optimal to procure supply and demand resources as part of an “integrated,” all-source RFP because poorly designed integrated bidding programs resulted in high prices for DSM resources. 6 Since the late 1990s, those utilities that were mandated by PUCs or chose to procure “savings” through competitiveprocesses gravitated toward DSM-only bidding procurements. In response to some of the limitations and problems withDSM bidding programs, program administrators in several states (New Jersey, California, New York, and Texas)worked with the ESCO industry to develop another approach to procure energy savings from third-party contractors (or large C/I customers), resulting in the Standard Performance Contract (SPC) program. In an SPC program, the program administrator posts a price per unit saved (e.g. $/kWh, $/therms) with standard program rules, contract, and EM&V protocols. Project sponsors (eithercontractors or customers) that meet the eligibility guidelines apply for the pre-specified incentive payments for projects under development on a fi rst-come, fi rst-served basis. If funds are available, they enter into a standard contract with the program administrator and then developthe project at a commercial or industrial customer’s facilities. Project sponsors are typically paid for delivered savings

Guide to Resource Planning with Energy Effi ciency 9-4over the contract term, which is typically one to three years (Rufo, 1999; Schiller et al., 2000; WECC, 1998).
In the market assessment and program evaluation area, it is quite common for the program administrator to issue a request for qualifi cations to pre-qualify a number of “independent” evaluation consultants that specialize in different aspects of program evaluation. In some states, other entities that are not the program administrator are responsible for managing and/or overseeing some or all of the market assessment and program evaluation activities (e.g., Vermont Department of Public Service; the California PUC manages impact evaluations).



# 9.2 Resources for Procurement of Energy Efficiency Services

**Title/Description URL Address** 
**Role of Third Parties in Energy Effi ciency Pro**  **grams: A Review of Alternative Approaches and Experiences.**  Goldman, C. (2000). Prepared for Connecticut Light and Power, December 2000. **Financing for Assisted Home Performance with Energy Star Request for Proposals.**  NYSERDA (2006). RFQ 925, July 1. URL not available.

<www.nyserda.org/Funding/funding.asp?i=2>

**Request for Proposals for a Vermont Energy Effi**  **ciency Utility.** Vermont Public Service Board (1999). October. <www.state.vt.us/psb/orders/document/EEURFPFINAL. pdf>

**Energy Efficiency Accomplishments of Texas Investor Owned Utilities: Calendar Year 2005.**  Frontier Associates LLC (2006). June 20. <www.texaseffi ciency.com/EUMMOT_REPORT_2005_ Final_062206.pdf>

National Action Plan for Energy Effi ciency 9-5

# 9.3 Notes 4. NYSERDA is an example of an agency that frequently issues competitive solicitations for program delivery. For examples, see <www.nyserda.org/Funding/funding.asp?i=2>. 1. This key question is based on the National Action Plan for Energy Effi ciency recommendation to “make a strong, long-term commit­ 5. Examples include Pacifi c Gas and Electric’s relationship with the ment to implement cost-effective energy effi ciency as a resource” Electric Gas Industries Association, Southern California Edison’s and options to consider. and San Diego Gas and Electric’s partnership with the League of California Homeowners, and NYSERDA’s relationship with the 2. Examples include the California Utilities Summer Reliability Initia- Lighting Research Center.tive RFP for Cross-Cutting Demand Reduction Projects ($6.8 million statewide in 2000), the Third Party Initiatives program ($8.5 6. High DSM prices resulted from strategic bidding of DSM resources million in 1998), and the Southern California Edison Third Party to come in just below the cost of new supply resources. See GoldInitiative ($2.1 million in 2000). man and Kito, 1995.

3. Examples include SDG&E RFPs issued in 2000 for Residential Renovation and Remodeling, Residential New Construction, and Local Government Commission, which were each for about $300,000–$400,000.

Guide to Resource Planning with Energy Effi ciency 9-6

# Evaluation, Measurement, 

# 10: and Verifi cation

**Evaluation, measurement, and verification (EM&V) is the process of determining the effectiveness and im pacts of an energy efficiency program. This chapter provides an overview of EM&V for use in resource plan**  **ning. The lessons learned from EM&V results provide the information needed to improve impact estimates in resource plans prior to implementation, as well as inform future resource plans. For a more detailed dis**  **cussion of EM&V, see the Action Plan’s Model Energy Efficiency Program Impact Evaluation Guide (National Action Plan for Energy Effi**  **ciency, 2007b).**


## High-Level Summary Key Questions for Utilities and Regulators

• EM&V is the process of determining and docu­ • Are our EM&V procedures robust? Do we have the menting the results, benefi ts, and lessons learned appropriate protocols for EM&V? 1 What functions from an energy effi ciency program. This informa­ are most appropriate for a program administrator tion can be used for planning future programs and/or contractors? (Use this question to guide and determining the value and potential of energy staffi ng and contracting needs.) effi ciency in an IRP process. This information can • Is responsibility for conducting EM&V clearly as- also be used for retrospectively determining the signed, and is its independence assured? Have we performance (and payments, incentives, and/or ensured that the EM&V analysis and results will be penalties) of contractors and administrators (such transparent and robust? as utilities) that are responsible for implementing effi ciency programs. EM&V is an essential part of • Do we have the right level of resources allocated to energy effi ciency program design. EM&V?

• A rough rule of thumb is to spend 2% to 5% of • Are retrospective EM&V results being used to imthe energy effi ciency budget on EM&V activities, prove programs and determine cost-effectiveness in though some entities spend outside this range. The the planning phase? specifi c funding level is a function of the scope and purpose of EM&V and the scale of the effi ciency program. It also depends on whether EM&V is conducted at the level of the individual utility or statewide.



# 10.1 Overview

EM&V is the process of determining the effectiveness and impacts of an energy effi ciency program (i.e., agroup of individual projects with similar characteristics that are installed in similar applications). The term “evaluation” refers to any real time and/or retrospective assessment of the performance and implementation of a program. “Measurement and verifi cation” is a subset of evaluation that includes activities undertaken in thecalculation of energy and demand savings from individual sites or projects. Such activities include data collection, direct metering, computer modeling, and othertechniques to verify project-level savings. Entities including utilities, third-party contractors, and private fi rms use EM&V to estimate energy effi ciency on an ex post

National Action Plan for Energy Effi ciency 10-1basis. The lessons learned from EM&V results provide the information needed to improve impact estimates in resource plans prior to implementation.
In contrast to EM&V, which measures the performance of program installations, some program impacts are evaluated using the “deemed savings approach.” Deemed savings are based on stipulated values, which come from historical savings values of typical projects. As with the EM&V approach, the savings determined for a sample of projects is applied to all the projects in the program. However, with the use of deemed savings there are no, or very limited, measurement activities andonly the installation and operation of measures is verifi ed. This approach is only valid for projects with fi xed operating conditions and well-known, documented stipulation values (e.g., energy-effi cient appliances suchas washing machines, computer equipment and refrigerators, lighting retrofi t projects with well-understood operating hours).
As states and regions turn to energy efficiency as a planning resource, the establishment of robust, independent, and transparent EM&V is critical. A model approach for EM&V of energy effi ciency programs is provided in the Action Plan’s Model Energy Effi ciency Program Impact Evaluation Guide , or EM&V Guide (National Action Plan for Energy Effi ciency, 2007b). The objective of the EM&V Guide is to provide a framework which jurisdictions and organizations can use to define their “institution-specific” or “program-/portfolio-specific” evaluation requirements. To this end, the EM&V Guide defi nes a standard evaluation planning and implementation process, describes several standard approaches that can used for calculating savings, defi nes terms, provides advice on key evaluation issues, and lists effi ciency evaluation resources. While each jurisdiction, or entity, will need to defi ne its own policy requirements, the EM&V Guide provides a structure for consistent approaches and defi ­ nitions which would, in particular, ease implementation of “cross-border” GHG energy effi ciency programs. The primary audiences for the EM&V Guide include program designers, evaluators, and policy-makers participating in the energy planning process. EM&V consists of three main types of activities:

1. **Process evaluation:** Used to verify whether the program was (or is being) correctly implemented, and to understand any problems or issues that arose(or may arise) in program implementation. Customer feedback and acceptance information can also be part of process evaluation. All energy effi ciency program categories can have process evaluations.

2. **Impact evaluation:** Used to determine the actual savings achieved by different programs and specifi c measures. Impact evaluation has several functions:

• Evaluating whether a program is achieving its expected impacts (deemed savings).

• Evaluating whether a utility is meeting its benchmarks or goals and paying shareholder incentives (if such incentives are in place).

• Verifying that a contractor is performing well, with payments sometimes linked to verifi ed savings of a
program.

• Updating measure defi nitions used to design
programs.

• Maintaining public confi dence in programs.

3. **Market effects evaluation:** Used to estimate a program’s infl uence on encouraging future energy effi ciency projects because of changes in the energy marketplace. Market effects evaluation can be usedfor all categories of programs, but it is primarily associated with market transformation programs that indirectly achieve impacts.
Broadly speaking, the methodologies for measuring and verifying energy effi ciency projects at individual sites have been increasingly formalized over time through the development of detailed evaluation protocols. For example, the Federal Energy Management Program and ASHRAE have separately developed guidelines for evaluating energy and demand savings from energy effi ciency projects. Similarly, the Effi ciency Valuation Organization (EVO) recently updated their International

Guide to Resource Planning with Energy Effi ciency 10-2Performance Measurement and Verifi cation Protocol (IPMVP), which is widely used for evaluating third-party ESCO projects. 2
At the program level, California utilities follow a detailed series of EM&V protocols offi cially adopted by CPUC. 3 Other states and regions investing in energy effi ciency have developed technical reference manuals describinghow entities operating in their jurisdictions should evaluate savings from rate payer–funded programs. Thesestate and regional manuals adopt many of the approaches previously established in project-level guidelines, butare increasingly being used to evaluate the overall portfolio of utility energy effi ciency programs. 4



# 10.2 EM&V Strategies

A rough rule of thumb for spending on EM&V is 2% to 5% of total energy effi ciency program expenditures, although some entities and jurisdictions spend more than this. California is planning to allocate approximately $110 million to evaluate approximately 200 programs in the 2006–2008 cycle, out of a total $2 billion spent on utility energy effi ciency programs. Other jurisdictions spend a smaller fraction. For example, NYSERDA spends approximately 2%, choosing to allocate more of the energy effi ciency money on programs and less on EM&V. To minimize EM&V costs and focus on running programs, it is important to develop an EM&V strategy prior to program implementation. The key to cost-effective EM&V is focusing evaluation efforts and resources on the largest drivers of overall impacts in the effi ciency portfolio.
Among EM&V approaches, the simplest technique is a commissioning process to verify that installations have been carried out properly in a site visit. 5 Once the measure is verifi ed it may be appropriate to apply a “deemed savings” value for energy savings. At the next level, inspection can be supplemented by spot metering a sample of participants pre- and post-installation. In many cases, inspection requires more expensive techniquessuch as direct metering and computer modeling. Full metering and analysis of metering data can be valuable but typically adds considerably to the cost of EM&V. Where energy effi ciency strategies target whole buildings, the EM&V approach is typically done through billing analysis or a computer simulation. Both options capture effi ciency savings at the building level from an integrated set of measures while accounting for the “interactive effects” between measures. An example of a billing analysis measurement approach is ENERGY STAR’s Portfolio Manager software. It is an online tool that uses built-in regression models to analyze building performance over time compared to a baseline rating. Portfolio Manager has been used by approximately 30,000 buildings to date.
Overall, evaluators recommend that EM&V efforts achieve the highest degree of rigor that is consistent with the program or project budget and objectives. Experience with EM&V suggests that there are diminishing returns beyond some level of rigor, and it is best to follow a rule of thumb like “10% of the effort to achieve verification within 90%.” Thus, one strategy for doing impact assessment is to reduce the propagation of estimation errors by verifying the important but uncertain drivers of the impact. For example, consider a lighting program in which the impact is equal to the number of hours the lighting is in operation multiplied by the change in watts due to more effi cient lamps. If the hours of operation are already well established, one would focus the EM&V effort on measuring the change in watts.
Some common sources of error in developing evaluation impacts include:

• Measurement error (meters are not accurate).

• Non-response bias (systematic difference between people who talk to you and people who do not).

• Model specifi cation error (since you cannot directly measure energy savings, calculation of savings frommetering requires a statistical baseline, whose underlying regression model can be inaccurately specifi ed).

• Invalid measures.

• Internal validity (whether the program actually caused the savings to occur).

National Action Plan for Energy Effi ciency 10-3• Self-selection bias (systematic difference between participants and non-participants).


# 10.3 Estimating the Net-to-Gross Ratio

A key requirement for program-level EM&V is estimating the NTGR. The NTGR accounts for only those energy effi ciency gains that are attributed to, and the direct result of, the energy effi ciency program in question. It gives evaluators an estimate of savings that would have occurred even without program incentives. Establishingthe NTGR correctly is critical to understanding overall program success and identifying ways to improve program performance. If the program is not achieving cost-effective impacts, money spent on the program can be re-allocated for other activities. Calculating the NTGR is facilitated by fi rst having an understanding ofgross energy savings and net energy impacts (descriptions modifi ed from IEA, 2005):

• **Estimation of gross energy savings (more gener ally called impacts).**  “Gross energy impacts” refers to the change in energy consumption and/or demand that results directly from program-related actions taken by energy consumers that are exposed to the program. Estimates of gross energy impacts always involve a comparison of changes in energy use over time among customers who installed measures and some baseline level of usage.

• **Estimation of net energy impacts.** Net energy impacts refer to the percentage of the gross energy impact that is attributable to the program. Estimating net energy impacts primarily involves the application of free ridership and/or spillover considerations. “Free ridership” refers to the portion of energy savings that participants would have achieved in the absence of the program through their own initiatives and expenditures. “Spillover” refers to the adoption of measures by (1) non-participants and (2) participants who did not claim fi nancial or technical assistance for additional installations of measures supported by the program. Other considerations that can be evaluated include the “rebound” effect, transmission and distribution losses (for grid-connected electricity projects) and other broader issues such as energy prices and economic conditions that affect production levels.
It is important to note that gross energy savings can be determined and reported on a project-by-project or program-wide basis, whereas net savings (though they can also be determined on a project-by-project or program-wide basis) are almost always reported on a program-wide basis. This program-wide reporting is done in terms of an NTGR. For example, an NTGR of90% would indicate that, on average, 90% of the indicated gross savings could actually be attributed to the infl uences of the program.
There are three main techniques for developing NTGRs 6 :

• “Self-reporting” is an approach in which participants are asked whether or not they would have carried out the program anyway. Past program evaluations have shown that self-reporting, while simple, gives a low estimate of NTGR. In other words, participants report that they would have performed the measures more than they actually would have in real life. This bias has resulted in post-survey adjustment of some programs in California of about 10%.

• Discrete choice analysis, which focuses on the determinants of consumer behavior, as a way to distinguish customers into three groups: (1) those who would not participate in the program, (2) those who would install the measure without the program, and (3) those who would install the measure because of the program. The customers in group 2 are “free riders,” and should be not counted as the program’s effect on participation.

• Analysis of the pre- and post-measure bills of participants who would install the measure because of the program provides the net savings directly.
If NTGRs are a way to capture free riders, market spillover captures the opposite effect (sometimes called the “freedriver effect”). This refers to consumers who adopt effi ciency measures themselves because they are infl uenced by an effi ciency program, but without being participants

Guide to Resource Planning with Energy Effi ciency 10-4in the program. In making adjustments to gross impacts, both NTGRs and market spillover should be included.


# 10.4 Isolating Program Effects

An important issue in EM&V is isolating the effects for a specific program so that not all programs take credit for the same savings. For example, an education and outreach program designed to teach retailers about energy-effi cient lighting might count the same benefits as the rebates for efficient lighting. For planning purposes, the best solution is often to focus attention on the combined impact, thus avoiding double counting.


# 10.5 Resources on EM&V

**Title/Description URL Address** 
**Applications Team: Energy-Efficient Design Applica tions.**  This site provides numerous resources, ranging from implementation guidelines to checklists and other resources, to help organizations implement an EM&V program. http://ateam.lbl.gov/mv/

**ASHRAE Guideline 14-2002. Measurement of Energy and Demand Savings. American Society of Heating, Refrigerat**  **ing and Air Conditioning Engineers.** June 2002. This guidance describes how to reliably measure energy savings of commercial equipment, using measured pre- and post-retrofi t data. <www.ashrae.org/pressroom/detail/13615>

**California’s 2003 Non-Residential Standard Performance Contract Program EM&V Procedures Manual.**  This manual provides general guidelines for preparing an EM&V plan,choosing an EM&V option and method, defi ning and adjusting baselines, and collecting and submitting EM&V data. <www.pge.com/docs/pdfs/biz/rebates/spc_ contracts/2000_on_peak_incentive/III-m&v. pdf>

**The California Evaluation Framework.** Prepared for theCalifornia Public Utilities Commission and the Project Advisory Group, June 2004. <www.cee1.org/eval/CEF.pdf>

**California Measurement Advisory Council Web Site.**California’s statewide CALMAC evaluation clearinghouse contains resources for deemed savings and project-specifi c EM&V techniques. Large searchable database of EM&V results for California. <www.calmac.org> <www.calmac.org/search.asp>

**The CEE Market Assessment and Program Evaluation (MAPE) Clearinghouse.**  This is a fully searchable Web-based database that contains more than 300 evaluation reports, market characterization studies, and market assessments. <www.cee1.org/eval/clearinghouse.php3>

National Action Plan for Energy Effi ciency 10-5**Title/Description URL Address** 
**Creating an Energy Efficiency and Renewable Energy Set-Aside in the NO**  **X Budget Trading Program: Measuring**  **and Verifying Electricity Savings.** This forthcoming EPA report describes key EM&V resources. Contact EPA; <www.epa.gov/ cleanenergy>

**EE/RE Measurement and Verification and Emissions Quantifi ca­**  <http://epa.gov/cleanenergy/pdf/ **tion: General Considerations.** State Technical Forum on EE/RE: Call keystone/Overview_M_and_V_Dec_ #3—December 16, 2004. This is a PowerPoint presentation comparing 16.pdf> EM&V with emissions quantifi cation procedures. **Evaluation, Measurement and Verifi cation Workshop.**  CPUC held several workshops on EM&V. The primary purpose of these workshopswas to discuss the performance basis, metrics, and protocols for evaluating and measuring energy effi ciency programs, including incentive, training, education, marketing, and outreach programs. <www.cpuc.ca.gov/static/energy/electric/energy+effi ciency/ ee+policy/22b370bc-7b20-4360-aab0­ 093245613a12.htm>

The final decision can be found at:
<www.cpuc.ca.gov/PUBLISHED/FINAL_ DECISION/45783.htm> **California Energy Efficiency Evaluation Protocols: Technical, Methodological, and Reporting Requirements for Evaluation**  **Professionals.** Detailed description of CPUC’s adopted EM&V methods. <www.calmac.org/events/ EvaluatorsProtocols_Final_Adopted viaRuling_06-19-2006.pdf> **Federal Energy Management Program EM&V Resources.** <www1.eere.energy.gov/femp/ fi nancing/superespcs_mvresources. html> **Highly Cost-Effective Savings—Appliance Effi ciency Standards**  **and Utility Programs.** Mahone, D. (2005). Heschong Mahone Group, Inc. This is a presentation made at the 2005 IEPEC Program Evaluation conference. <http://iepec.org/2005Sessions.pdf>

**International Energy Program Evaluation Conference Ab**
**stracts.** This Web site provides abstracts of peer-reviewed evaluation research from past conferences.

**International Performance Measurement and Verifi cation Pro**  **tocol Web Site.** IPMVP Inc. is a nonprofi t organization that developsproducts and services to aid in the EM&V of energy and water savings resulting from energy/water effi ciency projects—both retrofi tsand new construction. The site contains the IPMVP, a series of documents for use in developing an EM&V strategy, monitoring indoor environmental quality, and quantifying emission reductions. <http://iepec.org/2005Sessions.pdf>

<www.evo-world.org/>

Guide to Resource Planning with Energy Effi ciency 10-6**Title/Description URL Address** 
**New York State Energy Research and Development Authority (NYSERDA) Standard Performance Con**  **tracting Program Measurement and Verifi cation**  **Guideline, 2003.** This Web site presents NYSERDA’s New York Energy $mart program application and guidelinesfor contractors for performance-based incentives to implement cost-effective electrical effi ciency improvements or summer demand reduction for eligible customers. <www.nyserda.org/funding/855PON.html>

**The Need for and Approaches to Developing Com mon Protocols to Measure, Verify and Report Energy**  **Efficiency Savings in the Northeast.** Northeast Energy Efficiency Partnerships’ report on EM&V development in New England.
**Oncor Commercial & Industrial Standard Offer Program 2003. Measurement and Verifi** **cation Guide lines.**  These EM&V guidelines include retrofit and newconstruction and default savings values for lighting, motors, and air conditioning equipment. <www.neep.org/fi les/Protocols_report.pdf>

**Standardized Methods for Free-Ridership and Spill-** Contact PA Consulting at: <www.paconsulting. **over Evaluation—Task 5 Final Report.** PA Knowledge com>Limited (2003). Sponsored by National Grid, NSTAR Electric, Northeast Utilities, Unitil, and Cape Light Compact. This report is used by Massachusetts utilities to estimate free ridership and spillover effects. **Technical Reference User Manual (TRM) No. 4-19. Measure Savings Algorithms and Cost Assump**  **tions Through Portfolio 19.** Effi ciency Vermont provides a set of deemed-savings methods in this manual. <www.effi ciencyvermont.org> or Contact Effi ciency Vermont at 1-888-921-5990

**Measurement and Validation Guidelines.** Texas Public Utilities Commission (2005). This report, conducted as part of the Texas PUC Energy Effi ciency Implementation project #30331, includes detailed information about the EM&V requirements of the Commercial and Industrial Standard Offer Program, as well as guidance for project sponsors on how to prepare and execute an EM&V plan. <www.puc.state.tx.us/ electric/ projects/30331/052505/ m%26v%5Fguide%5F052505.pdf>

**Evaluating Energy Efficiency Policy Measures and DSM Programmes. IEA (2005).**  Prepared by Harry Vreuls. <http://dsm.iea.org>

**EERE Program Analysis and Evaluation Management Guide.**  U.S. Department of Energy Office of Energy Effi ciency and Renewable Energy [U.S. DOE EERE] (2003). <www1.eere.energy.gov/ba/pdfs/pm_guide_ chapter_7.pdf>

National Action Plan for Energy Effi ciency 10-7

## Table 10-1. EM&V Resources

**Report Section Includes**  **Purpose in EM&V**

**EM&V Guidelines** IPMVPs •
FEMP • ASHRAE 14-2002 • Provide EM&V standards based on accepted, proven strategies.

**Utility & State Program EM&V** **Guidelines, In cluding Lighting**  **Wattage Tables** California SPC • NYSERDA • State of Hawaii • State of Texas Utility • Programs
Texas Loan Star Pro• gram Provide EM&V standards based on accepted, proven strategies, which may be simplifi ed and specifi ed for certain applications.

**Case Studies** California SPC Program •
FEMP • NYSERDA • Rebuild America • Example applications of EM&V strategies.

**Training Opportu nities**  Building energy simula• tion software System performance • simulation softwareUtility cost manage• ment software Upcoming training classes and tools in topics related to EM&V.

**Software Tools** Tools for data acquisi• tion and management Sources for guidance • on tool selection Available tools that can be used to: model building and systems to estimate savings; track utility costs to verify savings.

**Hardware Tools** Tools for data acquisi• tion and management Sources for guidance • on tool selection Many data logging and measurement equipment are available to measure and record operating parameters.

**Other Resources** Commissioning and • retro-commissioning

resources Other resources • Other resources that could be utilized when preparing for and implementing the EM&V of energy savings.

Source: Federal Energy Management Program, 2005.

Guide to Resource Planning with Energy Effi ciency 10-8

# 10.6 Notes

1. This key question is based on the National Action Plan for Energy Effi ciency recommendation to “make a strong, long-term commitment to implement cost-effective energy effi ciency as a resource” and options to consider.

2. The EVO Web site can be found at <www.evo-world.org>.

3. The California EM&V protocols can be found at <www.calmac.org/events/EvaluatorsProtocols_Final_AdoptedviaRuling_06-19-2006.pdf>.

4. A special case for EM&V is developing in New England. ISO-NE will be managing a capacity market, and the ISO has determined that energy effi ciency will be a biddable resource in this market. Stakeholders are now writing rules governing EM&V that will meet the ISO’s standards for reliability and markets, while also being practical for prospective bidders, such as energy effi ciency program administrators and energy service companies. The fi rst bid will occur later in 2007.

5. Commissioning is discussed at http://epb1.lbl.gov/commissioning/ index.html for residential buildings and at http://imds.lbl.gov/ for commercial buildings.

6. For additional discussion of net-to-gross ratios, see the Action Plan’s Model Energy Effi ciency Program Impact Evaluation Guide (National Action Plan for Energy Effi ciency, 2007b).

National Action Plan for Energy Effi ciency 10-9

# 11: Best Practices

**This chapter summarizes the best practices for integrating energy efficiency into the utility planning process. These best practices center on increased coordination between different energy efficiency planning functions.** 



## High-Level Summary Key Questions for Utilities and Regulators

Coordination between different energy effi ciency • planning functions can improve the accuracy and confi dence of energy effi ciency projections. Areas to improve coordination include: Potential studies and utility energy effi ciency − resource plans should be coordinated or, at a minimum, there should be an understanding of differences.
Supply-side resource investment decisions − should made in coordination with forecasted energy effi ciency impacts.
EM&V results should be used to adjust ex− pected future energy effi ciency measure and program impacts, with improved assumptions on program participation, NTGR, expected useful life and other factors. Is each energy effi ciency function coordinated with • other energy effi ciency planning processes to take advantage of available information? Are EM&V results being used to improve program • designs and accuracy of savings forecasts? Are expected peak load savings incorporated into • estimates of avoided capacity costs?



# 11.1 Overview

As energy effi ciency becomes integrated in resourceplanning, there are a number of areas where coordination of different activities can improve the accuracy of the energy efficiency forecast and overall effectiveness of energy efficiency in resource planning. Improved coordination can also increase the confi dence of energy effi ciency administrators, supply-side planners, and policy-makers that the projected impact of energy effi ciency contained in the resource plans will be achieved. The three main areas where coordination can improve are shown with arrows between different functions of the resource plan in Figure 11-1:

1. Coordination between the development of the potential studies and the development of the actual energy effi ciency programs and portfolios.

2. Linking the forecasted peak load reductions to account for deferral in supply-side requirements when developing avoided costs.

National Action Plan for Energy Effi ciency 11-1

## Figure 11-1. Areas to Increase Coordination to Improve Energy Effi **ciency in Resource Planning** 



# 1

**2 3**  Potential Studies (Chapter 2) Portfolio Development and Reporting (Chapters 3 to 8) Procurement, Measurement, and Verification (Chapters 9 and 10)

Potential Studies
Chapter 2 Chapter 3 Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8 Chapter 9

Chapter 10 Development of Avoided Costs Development of EE Measures Procurement of EE Services

DeterminingCostEffectiveness Evaluation,Measurement, and Verification Development of EE Programs and

Portfolios

Estimating EE

Impacts for

Resource Planning

Reporting EE Impacts for

Resource Planning Best Practices (Chapter 11)

Best Practices

Chapter 11

3. Incorporating results from the EM&V when developing measures and estimating penetration and impacts of energy efficiency programs and portfolios.



# 11.2 Coordinate Potential Studies and Actual Energy Effi ciency Programs and Portfolios

The process of developing potential studies can be removed from the actual implementation of energy effi ciency and the programs that are ultimately offered to customers, and vice versa. The Action Plan identifi esthree types of potential studies; policy-level, planninglevel, and program-design studies (see Chapter 2 of thisreport, as well as the Action Plan’s Guuide for Conducting Energy Effi ciency Potential Studies [National Action Plan for Energy Effi ciency, 2007a]). Both policy-level and planning-level studies are typically done independently of the development of actual programs offered to
customers.While there is value in estimating how much energy effi ciency is possible without many constraints, estimatesof achievable potential can be improved by incorporating historical results of actual programs. For example,evaluating adoption rates and impacts achieved by programs in the fi eld can improve understanding of what is actually achievable, and what constraints are in place. Since potential studies should be informed by data from the fi eld, it is important that these studies be updatedevery few years to refl ect the most current understanding of consumer behavior and program impacts.

Guide to Resource Planning with Energy Effi ciency 11-2At the same time, development of the energy effi ciency program actually offered to customers can be done without reference to prior policy- and planning-levelpotential studies. Thus, this kind of program development may not exploit the detailed information in these studies that evaluate a wide range of energy effi ciency options based on a “bottom-up” approach. Therefore, the broad scope of policy- and planning-level energyeffi ciency studies can help bring new ideas to the development of the energy effi ciency program ultimately offered to customers.


# 11.3 Adjust Capacity Value Based on Expected Load Reductions

Another area where coordination can improve theresource planning process is integration of energy effi ciency and supply-side resource planning. Capacity savings are not captured unless the supply-side plannerdefers or eliminates an investment, either because energy effi ciency offsets growth or the planner has enough confi dence in the projections of energy effi ciency to delay an investment. At the same time, the energy effi ­ ciency planners may under-invest in energy effi ciency, if they do not know the kW impact required to defer the need for new investments.
One example of integration of demand- and supply-side planning is BPA’s non-wires alternative studies. In these evaluations, non-wires alternatives including energy effi ciency are evaluated for new transmission projects to determine whether there is a feasible alternative.For example, in the BPA Kangley-Echo Lake Transmission Line non-wires study, transmission planning provided energy effi ciency planners with specifi c levels of load reductions that were required to keep within the system’s established limits (shown in Figure 11-2).


## Figure 11-2. Transmission Alternative Targets, 2004–2013

800
2004
2005
700 2006
2007
2008
2009 600 2010
2011
2012 500 2013

400

300

200

100MVA Overload

0 1 2 6 5 1 7 6 1 0 1 1 2 6 151 Hours Source: Bonneville Power Administration [BPA] 2007. (In references section)

National Action Plan for Energy Effi ciency 11-3In 2004, approximately 10 hours were expected to be overloaded, with the peak hour expected to exceed ratings by approximately 120 MW, and the fi fth highest hour to exceed ratings by 60 MW. Therefore, in order to provide a reliable alternative, energy effi ciency had to provide suffi cient load reduction in these hours. Over time, as load in the Seattle/Tacoma area increased, more and more reductions were necessary to keep within reliability ratings. In this case, BPA moved ahead with the transmission line, which was energized in late 2003 (BPA, 2007).



# 11.4 Use EM&V Results in the Development of Measures and Energy Effi ciency Programs

A fi nal area where coordination can improve the accuracy of energy effi ciency forecasts is in using the EM&V results to update assumptions in two main areas: • Specifi c measure assumptions such as the achieved energy savings, the expected useful life of the measures, and the number of installations that are completed properly. Incorporating this information from the fi eld makes the forecasts of future energyeffi ciency savings more accurate, and provides information to improve program delivery.

• Program-level EM&V results can provide information on how to market and target new programs. For example, discovery of poor NTGR in a program, which means that customers are not delivering much net savings, indicates that the program budget would be better spent in a different area. This information can be used to eliminate this program and allocate the budget to a better use when doing the program design.

Guide to Resource Planning with Energy Effi ciency 11-4

# National Action Plan Appendix 

# for Energy Effi ciency 

# A: Leadership Group

**Co-Chairs**

Marsha Smith Commissioner, Idaho Public Utilities CommissionPresident, National Association of Regulatory Utility Commissioners
James E. Rogers Chairman, President, and C.E.O. Duke Energy
**Leadership Group**
Barry Abramson Senior Vice President Servidyne Systems, LLC Tracy Babbidge Director, Air Planning Connecticut Department of Environmental Protection Angela S. Beehler Director of Energy Regulation Wal-Mart Stores, Inc.
Jeff Bladen General Manager, Market Strategy PJM Interconnection

Sheila BoeckmanManager of Business Operations and Development Waverly Light and Power

Bruce Braine Vice President, Strategic Policy Analysis American Electric Power Cheryl Buley Commissioner New York State Public Service Commission
Jeff Burks Director of Environmental Sustainability PNM Resources
Kateri Callahan President Alliance to Save Energy
Jorge Carrasco Superintendent Seattle City Light

Lonnie Carter President and C.E.O. Santee Cooper Gary ConnettManager of Resource Planning and Member Services Great River Energy
Larry Downes Chairman and C.E.O. New Jersey Natural Gas (New Jersey Resources Corporation)
Roger Duncan Deputy General Manager, Distributed Energy Services Austin Energy Angelo EspositoSenior Vice President, Energy Services and Technology New York Power Authority

Jeanne Fox President New Jersey Board of Public Utilities Anne George Commissioner Connecticut Department of Public Utility Control

Dian Grueneich Commissioner California Public Utilities Commission

Blair Hamilton Policy DirectorVermont Energy Investment Corporation Leonard Haynes Executive Vice President, Supply Technologies, Renewables, and Demand Side Planning Southern Company Mary Healey Consumer Counsel for the State of Connecticut Connecticut Consumer Counsel Joe Hoagland Vice President, Energy Effi ciency and Demand Response Tennessee Valley Authority Sandy Hochstetter Vice President, Strategic Affairs Arkansas Electric Cooperative Corporation

Helen HowesVice President, Environment, Health and Safety Exelon Bruce Johnson Director, Energy Management Keyspan Mary Kenkel Consultant, Alliance One Duke Energy

Ruth Kiselewich Director, Conservation Programs Baltimore Gas and Electric

Rick Leuthauser Manager of Energy Effi ciency MidAmerican Energy Company
Harris McDowell Senator Delaware General Assembly Mark McGahey Manager Tristate Generation and Transmission Association, Inc.

Ed Melendreras Vice President, Sales and Marketing Entergy Corporation Janine Migden-Ostrander Consumers’ Counsel Offi ce of the Ohio Consumers’ Counsel

Michael Moehn Vice President, Corporate Planning Ameren Services

National Action Plan for Energy Effi ciency Appendix A-1Fred Moore Director Manufacturing & Technology, Energy The Dow Chemical Company Richard Morgan Commissioner District of Columbia Public Service Commission

Brock Nicholson Deputy Director Division of Air Quality North Carolina Air Offi ce

Pat Oshie Commissioner Washington Utilities and Transportation Commission Douglas Petitt Vice President, Government Affairs Vectren Corporation

Bill Prindle Deputy Director American Council for an Energy-Effi cient Economy Phyllis Reha Commissioner Minnesota Public Utilities Commission

Roland Risser Director, Customer Energy Effi ciency Pacifi c Gas and Electric Gene Rodrigues Director, Energy Effi ciency Southern California Edison
Art Rosenfeld Commissioner California Energy Commission Gina Rye Energy Manager Food Lion Jan Schori General Manager Sacramento Municipal Utility District

Ted Schultz Vice President, Energy Effi ciency Duke Energy Larry Shirley Division Director North Carolina Energy Offi ce

Tim Stout Vice President, Energy Effi ciency National Grid

Deb Sundin Director, Business Product Marketing Xcel Energy

Paul Suskie Chairman Arkansas Public Service Commission Dub Taylor DirectorTexas State Energy Conservation Offi ce Paul von PaumgarttenDirector, Energy and Environmental Affairs Johnson Controls

Brenna WalravenExecutive Director, National Property Management USAA Realty Company
Devra Wang Director, California Energy Program Natural Resources Defense Council

J. Mack Wathen Vice President, Regulatory Affairs Pepco Holdings, Inc. Mike Weedall Vice President, Energy Effi ciency Bonneville Power Administration

Zac Yanez Program Manager Puget Sound Henry Yoshimura Manager, Demand Response ISO New England Inc.

Dan Zaweski Assistant Vice President of Energy Effi ciency and Distributed Generation Long Island Power Authority

**Observers**

Keith Bissell Attorney Gas Technology Institute
Rex Boynton President North American Technician Excellence James W. (Jay) Brew Counsel Steel Manufacturers Association Roger Cooper Executive Vice President, Policy and Planning American Gas Association Dan Delurey Executive DirectorDemand Response Coordinating Committee

Reid Detchon Executive Director Energy Future Coalition
Roger Fragua Deputy Director Council of Energy Resource Tribes Jeff Genzer General Counsel National Association of State Energy Offi cials Donald Gilligan President National Association of Energy Service Companies Chuck Gray Executive Director National Association ofRegulatory Utility Commissioners

Steve Hauser President GridWise Alliance

William Hederman Member, IEEE-USA Energy Policy Committee Institute of Electrical and Electronics Engineers
Marc Hoffman Executive Director Consortium for Energy Effi ciency

John Holt Senior Manager of Generation and Fuel National Rural Electric Cooperative Association

Eric Hsieh Manager of Government RelationsNational Electrical Manufacturers Association

Lisa Jacobson Executive Director Business Council for Sustainable Energy

Kate Marks Energy Program Manager National Conference of State Legislatures

Appendix A-2 Guide to Resource Planning with Energy Effi ciencyJoseph Mattingly Vice President, Secretary and General CounselGas Appliance Manufacturers Association

Kenneth Mentzer President and C.E.O. North American Insulation Manufacturers Association

Diane Munns Executive Director, Retail Energy Edison Electric Institute Michelle New Director, Grants and Research National Association of State Energy Offi cials

Ellen Petrill Director, Public/Private Partnerships Electric Power Research Institute

Alan Richardson President and C.E.O. American Public Power Association Andrew Spahn Executive Director National Council on Electricity Policy Rick Tempchin Director, Retail Distribution Policy Edison Electric Institute
Mark Wolfe Executive Director Energy Programs Consortium **Facilitators**

U.S. Department of Energy

U.S. Environmental Protection Agency

National Action Plan for Energy Effi ciency Appendix A-3

## Appendix 

# B: Glossary

**Achievable potential:** The result of estimating how much market barriers and program uptake limits will reduce the economic potential.

**Avoided costs:** The forecasted economic “benefi ts” of energy savings. These are the costs that would have been spent if the energy effi ciency had not been put in place.
**Carbon dioxide equivalent:** A unit used to put all greenhouse gases on a common footing in terms of global warming potential.

**Discount rate:** A measure of the time value of money. The choice of discount rate can have a large impact on the cost-effectiveness results for energy effi ciency. Aseach cost-effectiveness test compares the net present value of costs and benefi ts for a given stakeholder perspective, its computation requires a discount rate assumption.
**Economic potential:** The result of reducing the technical potential by applying cost-effectiveness and program eligibility criteria.
**Energy effi ciency:**  The use of less energy to provide the same or an improved level of service to the energy consumer in an economically effi cient way. “Energy conservation” is a term that has also been used, but it has the connotation of doing without in order to save energy rather than using less energy to perform the same or better function.
**Evaluation, measurement, and verifi cation:**  The process of determining and documenting the results, benefi ts, and lessons learned from an energy effi ciency program. The term “evaluation” refers to any real time and/or retrospective assessment of the performance andimplementation of a program. “Measurement and verifi cation” is a subset of evaluation that includes activities undertaken in the calculation of energy and demand savings from individual sites or projects. **Free driver:** A non-participant who has adopted a particular effi ciency measure or practice as a result of the evaluated program.

**Free rider:** A program participant who would have implemented the program measure or practice in the absence of the program.
**Impact evaluation:** Used to determine the actual savings achieved by different programs and specifi c measures. **Marginal emission rates:** The emissions associated with the marginal generating unit in each hour of the day.

**Market effects evaluation:** Used to estimate a program’s infl uence on encouraging future energy effi ciency projects because of changes in the energymarketplace. All categories of programs can have market effects evaluations; however, these evaluations areprimarily associated with market transformation programs that indirectly achieve impacts.

**Market transformation:** A reduction in market barriers resulting from a market intervention, as evidencedby a set of market effects, that lasts after the intervention has been withdrawn, reduced, or changed.

**Measures:** Installation of equipment, installation of subsystems or systems, or modifi cation of equipment, subsystems, systems, or operations on the customer side of the meter, in order to improve energy effi ciency.

**Net resources for load:** The load forecast net of all energy effi ciency impacts. This is the amount of load that is expected to be met with supply-side resources (i.e., the load that actually materializes).
**Net-to-gross ratio:** A key requirement for program-level evaluation, measurement, and verification. This ratio accounts for only those energy efficiency gains that are attributed to, and the direct result of, the energy effi ciency

National Action Plan for Energy Effi ciency Appendix B-1program in question. It gives evaluators an estimate of savings that would have occurred even without program incentives.
**Participant cost test:** A cost-effectiveness test thatmeasures the economic impact to the participating customer of adopting an energy effi ciency measure.
**Planning study:** A study of energy effi ciency potentialused by demand-side planners within utilities to incorporate effi ciency into an integrated resource planning process. The objective of a planning study is to identify energy effi ciency opportunities that are cost-effective alternatives to supply-side resources in generation, transmission, or distribution.
**Policy study:** A study commissioned by a utility regulator or legislative body that would like more informationon the benefi ts of establishing a program, or by thirdparty energy effi ciency advocates who want to bring energy effi ciency benefi ts to the attention of regulators and policy-makers.

**Portfolio:** Either (a) a collection of similar programs addressing the same market, technology, or mechanisms or (b) the set of all programs conducted by one organization.
**Potential study:** A study conducted to assess market baselines and energy effi ciency savings potentials fordifferent technologies and customer markets. Potential is typically defi ned in terms of technical, economic, achievable, and program potential.

**Process evaluation:** Used to verify whether the energy efficiency program was (or is being) correctly implemented, and to understand any problems or issues that arose(or may arise) in program implementation. All energy effi ciency program categories can have process evaluations.
**Program:** A group of projects, with similar characteristics and installed in similar applications.
**Program administrators:** Typically procure various types of energy efficiency services from contractors (e.g., consultants, vendors, engineering fi rms, architects, academic institutions, community-based organizations), as part of managing, implementing, and evaluating their portfolio of energy effi ciency programs. Program administrators in many states are the utilities; in some states they are state energy agencies or third parties.
**Program design potential study:** Can be undertaken by a utility or third party for the purpose of developing specifi c measures for the energy effi ciency portfolio.
**Program potential:** The effi ciency savings that can be realistically realized from the achievable potential, given the budget, staffi ng, and time constraints for the effi ­ ciency program. Program potential establishes the total, or gross, savings expected from a program.
**Project:** An activity or course of action involving one or more energy efficiency measures, at a single facility or site.
**Ratepayer impact measure:** A cost-effectiveness test that measures the impact on utility operating margin and whether rates would have to increase to maintainthe current levels of margin if a customer installed energy effi cient measures.
**Resource acquisition program:** A program designed to directly achieve energy and or demand savings, and possibly avoided emissions.

**Societal cost test:** A cost-effectiveness test thatmeasures the net economic benefi t to the utility service territory, state, or region, as measured by the totalresource cost test, plus indirect benefi ts such as environmental benefi ts.
**Technical potential:** An estimate of what energy and capacity savings would be achieved if all technically feasible effi ciency measures were implemented for allcustomers. The technical potential is adjusted by applying a series of screens of real-world constraints.

**Total resource cost test:** A cost-effectiveness test that measures the net direct economic impact to the utility service territory, state, or region.
**Total resource requirements:** Represents total expected (energy or capacity) demand in the absence of any energy effi ciency measures or strategies. It can also bethought of as the sum of all supply-side and demandside resources in the utility’s portfolio.

Appendix B-2 Guide to Resource Planning with Energy Effi ciency**Utility cost test:** A cost-effectiveness test that measures the change in the amount the utility must collect from the customers every year to meet earnings target,
e.g. change in revenue requirement. In a number ofstates, this test is referred to as the program administrator’s cost test. In those cases, the defi nition of the “utility” is expanded to program administrators (utility or third party).

National Action Plan for Energy Effi ciency Appendix B-3

## Appendix 

# ISO New England’s 

# C: Forward Capacity Market

**This appendix illustrates a new approach to integrating demand resources into the wholesale market as a capacity resource comparable to traditional generation resources. In 2007, ISO New England received**  **approval to advance this approach in their forward capacity market (FCM). This appendix describes the market design features, how the FCM addresses all resource types, measurement and verifi**  **cation for demand resources, and the strong initial response from demand resources.**  

# C.1 Overview

ISO New England, New England’s electricity systemoperator and wholesale market administrator, is implementing a forward capacity market (FCM) that will, for the fi rst time, permit all demand resources to participate in the wholesale capacity market on a comparable basiswith traditional generation resources. “Demand resources,” as defi ned by ISO New England’s market rules, includes energy effi ciency, load management, real-time demand response, and distributed generation. Enablingdemand resources to directly participate in the wholesale capacity market creates a predictable stream of revenue for the capacity savings produced by demand resources, gives demand resource providers access tocapital to fi nance projects, and enables the implementation of “all-cost-effective” demand resources. The response to this path-breaking development will create many “lessons learned” opportunities for using demand resources as a capacity resource.
Developed through industry and regulatory consensus,the FCM provides an auction structure—called the forward capacity auction (FCA)—through which capacity resources compete to obtain a market-priced capacity payment, in exchange for a commitment to be available in the years ahead to meet the region’s electricity needs.The Federal Energy Regulatory Commission (FERC) approved detailed market rules implementing the FCM ina series of Orders issued in April and June 2007. A pioneering element of the FCM is that demand resourcescan qualify as capacity resources along with conventional generation resources and be eligible to receive capacity payments. The time from December 2006 to May 31, 2010, has been established as a transition period; the fi rst FCA will be conducted in February 2008, with the fi rst commitment period—the period within whichcapacity must be delivered to the New England electricity system—beginning June 1, 2010.


# C.2 Market Design Features

The objective of the FCM is to purchase suffi cient capacity for reliable system operation over time. The FCM is designed to:

• Procure enough capacity to meet New England’s installed capacity requirement (ICR)—i.e., forecasted demand and reserve requirements—3 years in advance.

• Use a competitive FCA process to select the most cost-effective portfolio of generation and demand resources to meet the ICR.

• Provide a long-term (up to 5-year) commitment to new generation and demand resources to encourage new investment.
An annual FCA would be held to procure capacity 3 years in advance of delivery. 1 This 3-year window givesdevelopers enough time to construct/complete auctionclearing projects and to reduce the risk of developing new capacity. All capacity providers receive payments during the annual commitment period based upon a single clearing price set in the FCA. In return, theproviders commit to providing capacity for the duration of the commitment period by producing power (if a generator) or by reducing demand (if a demand resource) during specifi c performance hours (typically peak load hours and shortage hours—hours in which reserves needed for reliable system operation are being

National Action Plan for Energy Effi ciency Appendix C-1depleted). The quantity of capacity purchased through the auction is the ICR, which consists of the ISO’s forecast of peak loads plus adjustments for reservesand other factors. Capacity projects that clear the auction, but are not constructed on time or are otherwise not available during performance hours, are subject to penalties.
The fi rst commitment period begins June 1, 2010. Capacity prices and quantities for the fi rst commitment period will be based on the results of the fi rst FCA, expected to be held in February 2008. Prior to the 2010 commitment period, a transition period (December 1, 2006, through May 31, 2010) has been established to compensate capacity resources for meeting demandrequirements. During the transition period, qualifi ed capacity in New England will receive negotiated payments that start at $3.05/kW-month and increase to $4.10/ kW-month.


# C.3 Leveling the Playing Field Among All Competing Resources

To ensure that energy effi ciency and other demand resources are effectively integrated into the capacity market, rules were established to provide fair competition with generation resources. One way the FCM achieves this is by guaranteeing a set market price determined under auction. This means that energy effi ciency, loadmanagement, real-time demand response, and distributed generation resources receive the same price as fossil fuel, nuclear, hydropower, and renewable generation resources. The effect is to establish the economic value of demand-side initiatives and serve as an incentive for project developers.
Demand resources can participate in the FCM duringboth the transition period and the FCAs. Because demand resources have not historically competed in wholesale markets, ISO New England convened a stakeholder group—the Demand Resources Group (DRG)—to discuss critical issues and to provide recommendations. The DRG consisted of 40 active participants representing: • State regulatory agencies (utility, environmental, energy policy).

• Utility companies (investor-owned and public power).

• Retail suppliers.

• Generators.

• Demand response providers.

• Energy service companies.

• Technology providers.

• Large customers.

• Advocacy groups (consumer, energy effi ciency, environmental).

The DRG addressed:

• The transition period rules for demand resources.

• The treatment and integration of demand resources in the FCM.

• The integration of the current ISO New England Load Response Program resources into the FCM.

• Input to the ICR process, which sets the capacity resource needs for annual FCAs.

• Measurement and verifi cation standards.


# C.4 Measurement and Verifi cation

To participate in the FCM (during the transition period or FCA), each demand resource project is requiredto demonstrate demand reduction performance during specifi c operating hours in a manner that provides electrical capacity to the New England Control Area.To demonstrate a demand resource’s demand reduction value, the demand resource project sponsor must have a measurement and verifi cation (M&V) plan that complies with ISO New England M&V standards. Themeasured and verifi ed electrical energy reductions during performance hours are the basis of FCA payments

Appendix C-2 Guide to Resource Planning with Energy Effi ciencyto demand resource project sponsors participating in the FCM.
To prepare for the fi rst FCA, ISO New England and stakeholders from the DRG developed the ISO New England Manual for Measurement and Verifi cation of Demand Reduction Value from Demand Resources . This document established the M&V standards on subjects including:

• Project information and general assumptions.

• Equipment, measure, and practice detail.

• M&V approach.

• Methodology for establishing baseline conditions.

• Statistical sampling plan.

• Demand reduction value calculations.

• Monitoring parameters and variables.

• Measurement equipment specifi cations.

• Monitoring frequency and duration.

• Data validation, retention, and management.

• Performance reporting.

• Independence and auditing.

• M&V supporting documents.

• Responsible parties.
The development of common M&V standards applicable to all demand resources implemented throughout themulti-state New England region is a signifi cant accomplishment, and is one of the fi rst efforts in the country in which parties from different states worked togetherto develop a common set of M&V requirements. Formerly, individual states developed state-specifi c M&V standards for demand-side management programs implemented by state-regulated utility companies funded through retail rates. In New England, commonM&V standards became necessary because of the creation of a multi-state capacity market in which demand resources implemented in any New England state were eligible to participate. As regional electricity marketsand environmental policies such as carbon trading continue to develop, the need for common M&V standardsapplicable to all demand resources regardless of location will continue to grow.


# C.5 Strong Initial Response to the Forward Capacity Market from Demand Resources

In order to participate in the competitive FCA process, capacity resources must fi rst complete a qualifi cationprocess, demonstrating that they can meet their commitment to provide capacity. The fi rst step for a new resource is to submit a Show of Interest Application (existing resources are automatically entered into the auction, unless they specifi cally opt out under certain conditions set forth in the FCM rules). From these applications, ISO New England staff will evaluate the information and analyze the projects to determine if upgrades are needed to the power grid to support the proposed resources and if they could be completed by the start of the commitment period. ISO New Englandwill conduct further intensive studies later in the process. For power plant proposals, ISO will conduct studies to ensure that resources can connect to the power grid without negatively impacting reliability. For demand resource proposals, ISO New England will ensure that the applicant’s proposal for reducing electricity use andtheir M&V plan meet ISO New England’s M&V standards.
As of the February 28, 2007, deadline, ISO New England has received over 250 Show of Interest Applications for new demand resource capacity, representing a total of 2,449 MW from resources such as energyeffi ciency, load management, real-time demand response, and distributed generation. A diverse pool ofapplications was received from municipalities, government agencies, electric utilities, retail customers, and competitive energy suppliers. Approximately 80% of the new demand resource capacity was proposed by non-utility, “merchant” providers such as energy service

National Action Plan for Energy Effi ciency Appendix C-3

## Figure C-1. Demand Resource Show of Interest
**Demand Resource Type (Total MW)**

**State Real-Time**  **Demand Response**  **Real-Time Emergency**  **Response Critical Peak On Peak**  **Seasonal Peak**  **Grand Total**

Massachusetts 346 279 286 282 29 1,222 Connecticutt 143 141 112 61 120 577 Maine 122 33 27 34 2 217 Rhode Island 68 74 9 36 4 192 New Hampshire 24 41 18 47 4 133

Vermont 17 22 8 61 1 109 **Grand Total 720 590**  **460 521**  **159 2,449** Source: ISO-New England, 2007
Note: Demand resource type defi nitions:

a. **Real-time demand response resources—** designed for measures that can be dispatched (e.g., load management or distributed generation) by the

ISO as needed.

b. **Real-time emergency generation resources—** designed for distributed generation measures whose state air quality permits limit their operation to

limited “emergency” conditions.

c. **Critical peak demand resources—** designed for measures that can be “dispatched” by the project sponsor (e.g., load management or distributed

generation) as needed.

d. **On-peak demand resources—** designed for non-weather-sensitive measures that reduce demand across a fi xed set of on-peak hours, such as

energy-effi cient commercial lighting.

e. **Seasonal peak demand resources—** designed for weather-sensitive measures that reduce load during high-demand conditions, such as energyeffi cient air conditioning.

companies, equipment vendors, competitive energy the wholesale electricity markets in New England and suppliers, and end-use customers, many of which have may serve as a model for the rest of the country. limited or no access to government funding for demand resource projects. Several of the merchant providers 

# C.6 Notes are planning to greatly expand their operations in New England. In order to serve New England with this new 1. During the initial years of FCM implementation, FCAs will be held demand resource capacity, the interested providers still a little more frequently than once every 12 months and commitneed to qualify to compete in the FCM auction, offer ment periods for each FCA will commence in less than 3 years. However, once the process has matured, FCAs will occur once per the needed amount of capacity, be priced at a level year and commitment periods will start 3 years after the FCA.such that they will be selected in the auction, and actually perform as promised to fulfi ll their capacity supply obligation. If demand resources are selected in the auction, their contribution to meeting New England’s capacity needs will signal an important milestone for

Appendix C-4 Guide to Resource Planning with Energy Effi ciency

## Appendix 

# D: References

Bonneville Power Administration [BPA] (2007). Completed Transmission Projects . <https://www. transmission.bpa.gov/PlanProj/Transmission_Projects/ Completed-TransP/default.cfm?page=KEL>
California Energy Commission. Title 24 Building Standards. <http://www.energy.ca.gov/title24/>
California Public Utilities Commission [CPUC] (2004). Decision 04-02-059 February 26, 2004 <www.cpuc. ca.gov/PUBLISHED/FINAL_DECISION/34516.htm>
Energy & Environmental Economics, Inc. and Rocky Mountain Institute (2004). Methodology and Forecast of Long-Term Avoided Costs for the Evaluation Criteria of California Energy Effi ciency Programs.Prepared for the California Public Utilities Commission [CPUC]. <http://www.ethree.com/CPUC/ E3_Avoided_Costs_Final.doc>
Erickson, J., B. Ward, and J. Mapp (2004). Peak Demand Reduction vs. Emissions Savings: When Does It Pay to Chase Emissions? ACEEE Summer Study paper.
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Appendix D-2 Guide to Resource Planning with Energy Effi ciency**Funding and printing for this report was provided by the U.S. Department of Energy and U.S. Environmental Protection Agency in their capacity as co-sponsors for the National Action Plan for Energy Effi** **ciency.**Recycled/Recyclable—Printed with Vegetable Oil Based Inks on 100% (Minimum 50% Postconsumer) Recycled Paper