## EE.RMISTD-9-440 

# '7t 3 aT



### AirConditioner EfficiencyStandards: Estimating Future Marginal Generation Prices. Preliminary Results
Bruce Blewald & Tim Woolf Synapse Energy Economics 22Crescent Street Cambridge MA 02138 www.synapse-energy.com (617) W61-3248 US Department of Energy Public Hearing on Efficiency Standards for Central AirConditioners and Heat Pumps November 16, 2000



# Overview & Summary * DOE's cost-benefit analyses use marginal customer

electricity prices derived from 1993 rates; which are based on embedded costs, not marginal. * Infuture competitive markets, generation prices will be

based on marginal costs. * Marginal costs willsignificantly exceed average costs

during periods when air conditionersare operating. * Current industrydata indicates that marginal costscan

exceed annual costs by roughly 1to 3c/kWh -- on average. 

### *This price differentialwill make central air conditioner

efficiencystandards much more cost-effective. Synapse Energy Economics Slide 2 

### 1 

# ,

AirConditioner Efficiency Standards: Estimating Future Marginal Generation Prices. Preliminary Results
Bruce Blewald & TimWoolf Synapse Energy Economics 22 CrescentStreetCambrldg.MA 02138 www.synap.... nergy.com 1817} 881-3248 US Departmentof Energy Public Hearing on Efficiency Standards forCentralAirConditioners and Heat Pumps November 16, 2000



## Overview 

# &Summary
• DOE's cost-benefit analyses use marginal customer

electricity prices derived from 1993 rates; which are based on embedded costs, not marginal. • In future competitive markets, generation prices will be

based on marginal costs. • Marginal costs will significantly exceed average costs

during periods when airconditioners are operating. • Current industry data indicates that marginal costs can

exceed annual costs by roughly 1to 3 clkWh -- on average. • This price differential will make central air conditioner

efficiency standards much more cost-effective. SynapseEnergy Economic. SUde I


### 1

## EE-RIM/STD.98e440o- 

# 7> I7- DOE Methodology for LCC and NES * Efficiency costsavings arederived by multiplying energy

savings by marginal prices. * Marginal prices are derived from actual customer bills and

consumption in1993. * 1993 prices are escalated to 1998: *annual average price =8.9 0/kWh *average marginal price =8.6 ¢/kWh *These prices are escalated to relevant yearusing AOE

2000 forecast.

Synapse Energy Economics Slide 3 

# DOE Marginal Price Assumptions Are Not Representative of Prices inFuture Markets * 1993 rates are not based on marginal costs; nearly all

commissions baseelectricity rates on embedded costs. * Incompetitive markets generation prices will be based on

marginal costs. * Incompetitive markets customerswill be offered time-ofuse rates, which will reflect marginal costs hour-by-hour. * DOE's marginal price periods (summer vs. non-summer) do

not reflect important daily and hourly price swings.

Synapse Energy Economics Slide 4 

### 2 

## , 

# '. EE-RM/STD-e8-440-

## ji

# ??:J

# :r-**~**

# . DOE Methodologyfor LCC and NES
• Efficiency cost savings are derived by multiplying energy

savings by marginal prices. • Marginal prices are derived from actual customer bills and

consumption in 1993. • 1993 prices are escalated to 1998: • annual average price = 8.9 ¢/kWh • average marginal price = 8.6 ¢/kWh • These prices are escalated to relevant year using AOE

2000 forecast.

Synapse EnergyEwnomics Slide 3 

## DOE Marginal Price Assumptions Are Not Representative of Prices in Future Markets
• 1993 rates are not based on marginal costs; nearly all

commissions base electricity rates on embedded costs. • In competitive markets generation prices will be based on

marginal costs. • In competitive markets customers will be offered time-ofuse rates, which will reflect marginal costs hour-by-hour. • DOE's marginal price periods (summervs. non-summer) do

not reflect important daily and hourly price swings.

Synapse EnergyEconomics SHde4


### 2

### EE-RMISTD-98-440-r7 - ?'J 

# Marginal Prices ForAir Conditioner Customers Will Exceed Average Prices *Air conditioner loads are coincidentwith peak load periods

in the summer, and are frequently responsible for peak loads. * Peak period prices can be significantly higher than annual

average. * Incompetitive markets, peak period prices may be higher

than they have been in the past. * Following charts compare average annual prices to peak

period prices, for recent electricity markets. These are a compilation ofactual hourly prices experienced overthe past three years nation-wide. Synapse Energy Economics Slde S 

# Wholesale Generation Price Differentials: ExistingCompetitive Wholesale Markets - Average of Hourly Prices Wholesale Generation Prices: Competitive Markets (startofcompetition through10/2000) 90
- 70 - iAnnu fflAwr
0 -

0 NE New York PJM Caifornia Average Synapse Energy Economics Slide 6


### 3 

## Marginal Prices ForAir Conditioner Customers Will Exceed Average Prices • Air conditioner loads are coincidentwith peak load periods

in the summer, and are frequently responsible for peak loads. • Peak period prices can be significantly higherthan annual

average. • In competitive markets, peak period prices may be higher

than they have been in the past. • Following charts compare average annual prices to peak

period prices, for recent electricity markets. These are a compilation ofactual hourly prices experienced overthe pastthree years nation-wide. Synaple EnergyEc:onomica SUdeS


## Wholesale Generation Price Differentials: Existing CompetitiveWholesale Markets - Average of Hourly Prices
Whole.ale GeneraUon PrIce.: eompetlUve Markets (stsrtofc.....,.OOonthrough 1012000) 

# .-- a-Day...... 70 +---"=="======'---------t 1-----------1

NE NewYor!< PJM Cafifomia Awrage Synaple Ener&Y Economica SUde6


### 3

### EE-RM/STD-9844^-W5 --' 

# 5. Wholesale Generation Price Differentials: Currently Regulated Markets - Average of Hourly Prices Wholesale Generation Prices: Regulated Markets (1998&19g) 90 80________so

i__ IMAnnual Average [ Summer Months 70 1 rSummer DayHours
40

-4 _ 20
ECAR ERCOT 0ERC SPP MN FRCC Averae Synapse EnergyEconomics Slide 7 

# Wholesale Generation Price Differentials: Existing Competitive Wholesale Markets - Average of Hourly Prices, from the beginning of competition through October 2000

NE New York PJM California Average Generation Price($/MWh) Annual Average 36.5 38.4 26.0 43.5 37.0 Summer Months 38.7 43.2 33.3 62.0 47.4 Summer Day Hours 47.4 56.0 49.0 83.5 63.7 Price Differential ($/MWh) Annual Average 0.0 0.0 0.0 0.0 0.0 Summer Months 2.2 4.8 7.4 18.5 10.4 Summer Day Hours 11.0 17.6 23.1 40.0 26.7

Synapse Energy Economics Slde 8


### 4 .',

# EE.RM/STD.98-440-~1S .-

# 55
Wholesale Generation Price Differentials: Currently Regulated Markets - Average of Hourly Prices
WIIolesale Gene.. tlon Prle.. : Regulated Markets (18118&1I11III) oo.-____________________________________**~ ~~--------------------~** **7°t-----------------------~~~~~~--1**

20 10 ECAR ERCOT SERe SPP FRCC Average Synapse Energy Economics SUde7 

## Wholesale 

## Generation' Price Differentials: Existing Competitive Wholesale Markets - Average ofHourly Prices, from the beginning ofcompetition through October2000

NE NewYork PJM California Average Generation Price (SlMWh) Annual Average 36,5 38.4 26,0 43,5 37.0 Summer Months 38,7 43.2 33,3 62,0 47.4 Summer Day Hours 47,4 56,0 49.0 83,5 63.7 Price Differential (SIMWh) Annual Average 0,0 0,0 0,0 0,0 0.0 Summer Months 2.2 4.8 7.4 18,5 10,4 Summer Day Hours 11,0 17.6 23,1 40,0 26,7
Synapse Energy Economics SUde8


### 4

### EE-RM/STD-98-440 -$ 

### |3-4-0) 

# Wholesale Generation Price Differentials: Currently Regulated Markets - Average of Hourly Prices, 1998 &1999

ECAR ERCOT SERC SPP MAIN FRCC Average Generation Price ($/MWh) AnnualAverage 26.69 24.76 23.41 2527 20.07 29.64 24.71 Summer Months 47.78 38.90 37.14 39.11 33.18 44.64 40.36 Summer Day Hours 63.87 47.54 46.99 49.11 43.56 54.98 51.72 Price Differential(SIMWh) AnnualAverage 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SummerMonths 21.09 14.14 13.73 13.84 13.11 15.00 15.65 Summer Day Hours 37.18 22.78 23.58 23.84 23.49 25.34 27.01

Synapse Energy Economic Slide 9 

# Conclusions

DOE's economic analysis must use marginal coststhat are based on future electricity markets, not historical rate designs. * Incompetitive markets, generation prices will be based on

marginal costs. * Today's electricity markets suggest that marginal prices

currently exceed average prices by 1to 3 0/kWh. * As a result, efficiency standards for central airconditioners

will be substantially more cost-effectivethan indicated by the DOE's current analysis.
Synapse Energy Economics Slide 10


### 5 

## •

# ..

Wholesale Generation Price Differentials: Currently Regulated Markets - Average of Hourly Prices, 1998 & 1999

ECAR ERCOT SERC spp MAIN FRCC Average Generallon Price ($IMWh) Annual Average 26.69 24.76 23.41 2527 20.07 29.64 24.71 Summer Months 47.78 38.90 37.14 39.11 33.18 44.64 40.36 Summer Day Hours 63.87 47.54 46.99 49.11 43.56 54.98 51.72 Price Differential (SlMWh) Annual Average 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Summer Months 21.09 14.14 13.73 13.84 13.11 15.00 15.65 Summer Day Hours 37.18 22.78 23.58 23.84 23.49 25.34 27.01

Synapse EnergyEconomla SUde9


## Conclusions
• DOE's economic analysis must use marginal costs that are

based on future electricity markets, not historical rate designs. • In competitive markets, generation prices will be based on

marginal costs. • Today's electricity markets suggest that marginal prices

currently exceed average prices by 1to 3 ¢/kWh. • As a result, efficiency standards for central airconditioners

will be substantially more cost-effective than indicated by the DOE's current analysis.
Synapse Energy Economla SUde 10


### 5

### Average vs. Summer Day Peak Prices 80.0 70.0 60.0 50.0 

### 40.0 \ 

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### 1 2 3 4 6 8 7 9 9 10 11 12 13 14 15 10 17 18 19 20 21 22 23 24 

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