EE.RMISTD-9-440 '7t 3 aT

Air Conditioner Efficiency Standards:

Estimating Future Marginal Generation Prices.

Preliminary Results

Bruce Blewald & Tim Woolf

Synapse Energy Economics

22 Crescent Street Cambridge MA 02138

www.synapse-energy.com

(617) W61-3248

US Department of Energy

Public Hearing on Efficiency Standards for Central Air Conditioners

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 air conditioners are operating.

* Current industry data indicates that marginal costs can

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

* This price differential will make central air conditioner

efficiency standards much more cost-effective.

Synapse Energy Economics Slide 2

1

EE-RM-STD-98-440 COMMENT 73JJ

, 

Air Conditioner Efficiency Standards: 

Estimating Future Marginal Generation Prices. 

Preliminary Results 

Bruce Blewald & Tim Woolf 

Synapse Energy Economics 

22 Crescent Street Cambrldg. MA 02138 

www.synap .... nergy.com 

1817} 881-3248 

US Department of Energy 

Public Hearing on Efficiency Standards for Central Air Conditioners 

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 air conditioners are operating. 

• Current industry data indicates that marginal costs can 

exceed annual costs by roughly 1 to 3 clkWh -- on average. 

• This price differential will make central air conditioner 

efficiency standards much more cost-effective. 

Synapse Energy Economic. SUde I 

1 
EE-RIM/STD.98e440o- 7> I7-

DOE Methodology for 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 0/kWh

* average marginal price = 8.6 ¢/kWh

* These prices are escalated to relevant year using AOE

2000 forecast.

Synapse Energy Economics 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 (summer vs. non-summer) do

not reflect important daily and hourly price swings.

Synapse Energy Economics Slide 4

2

EE-RM-STD-98-440 COMMENT 73JJ

, '. EE-RM/STD-e8-440-ji ??:J :r-~ . 

DOE Methodology for 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 Energy Ewnomics 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 (summer vs. non-summer) do 

not reflect important daily and hourly price swings. 

Synapse Energy Economics SHde4 

2 
EE-RMISTD-98-440-r7 ?'J -

Marginal Prices For Air Conditioner

Customers Will Exceed Average Prices

* Air conditioner loads are coincident with peak load periods

in the summer, and are frequently responsible for peak

loads.

* Peak period prices can be significantly higher than 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 of actual hourly prices experienced over the

past three years nation-wide.

Synapse Energy Economics Slde S

Wholesale Generation Price Differentials:

Existing Competitive Wholesale Markets - Average of Hourly Prices

Wholesale Generation Prices:

Competitive Markets (start of competition through 10/2000)

90 -

70 -

iAnnu fflAwr

0 -

0

NE New York PJM Caifornia Average

Synapse Energy Economics Slide 6

3

EE-RM-STD-98-440 COMMENT 73JJ

Marginal Prices For Air Conditioner 

Customers Will Exceed Average Prices 

• Air conditioner loads are coincident with peak load periods 

in the summer, and are frequently responsible for peak 

loads. 

• Peak period prices can be significantly higher than 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 of actual hourly prices experienced over the 

past three years nation-wide. 

Synaple Energy Ec:onomica SUdeS 

Wholesale Generation Price Differentials: 

Existing Competitive Wholesale Markets - Average of Hourly Prices 

Whole.ale GeneraUon PrIce.: 

eompetlUve Markets (stsrt of c.....,.OOon through 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 rSummer 1 Day Hours

40 -4 _

20

ECAR ERCOT 0ERC SPP MN FRCC Averae

Synapse Energy Economics 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 COMMENT 73JJ

.', 

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 of Hourly Prices, 

from the beginning of competition through October 2000 

NE New York 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)

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 (SIMWh)

Annual Average 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 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 1 to 3 0/kWh.

* As a result, efficiency standards for central air conditioners

will be substantially more cost-effective than indicated by

the DOE's current analysis.

Synapse Energy Economics Slide 10

5

EE-RM-STD-98-440 COMMENT 73JJ

• .. 

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 Energy Economla 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 1 to 3 ¢/kWh. 

• As a result, efficiency standards for central air conditioners 

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 \

30.0

20.0

10.0 - -

10.0

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

Hour

.- Summer Peak Average -- Annul Average -W-Summer Hourly Average L

Snoi EBoiwda mni Ewoa thjfil Rjk 8-j rnr~

EE-RM-STD-98-440 COMMENT 73JJ

Average va. Summer Day Peak Price. 

~.o~--------------------------------------------------------------------------~ 

10.0+-----------------------------------------------~~----~------------------------, 

~.O+-------------------------------------------~--------------~--------------------4 

~.o+-------------------------------------~~------------------------~~--------------~ 

I ~.Or-----------------------------~-----------------------------------=~----~ 

~.o+-----------------------~~--------------------------------------------------~~~ 

~.Or-----~~ ____ ~~----------------------------------------------------------~ 

10.0+---------------------------------------------------------------------------------~ 

1 2 3 4 6 8 1 • D 10 11 12 13 14 18 18 11 18 19 20 21 22 23 24 

Hour I _Summer Peak Average ...-Annual Av.rage ...... Summer Hourly Aver. I 
EE-RM/ST D.98.440. ,J .

Average vs. Summer Months Prices

50.0. .

45.0

40.0

35.0

30.0

I 25.0

20.0 ......

15.0

10.0

5.0

0.0- .

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Month

-Summer Average -- Annual Average -- Monthly Average

EE-RM-STD-98-440 COMMENT 73JJ

EE-RM/STD-98-44o.--1t 13 ~. 

Average v •. Summer Month. Price. 

150.0 . -, -- ~ -- -,-

:I''.! 

.L 

45.0 f 

/ . " ; . 

.',' 

..... -

40.0 

35.0 

..... ~ ~ / "- .A 

/ ~ \ .. 

- - - - / - - - - \ .~ ~ 

30.0 

I 28.0 

/ - - - \ - -

, /" \ .."A 

~ ../ V""" .... 20.0 -

15.0 .. 

10.0 

5.0 .. , .- -.-

0.0 

Jan Feb Mar May Jun Jul Aug Sap Oct Nov Dec 

Month 

1-.-Summer Average - Annual Average -..... Monthly Average 1