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Three Benefits Of Energy Efficiency Programs For Utilities

Rakesh  Sharma's picture
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  • Apr 19, 2018

This item is part of the Special Issue - 2018-10 - AESP EE Day, click here for more

In popular imagination, energy efficiency has mostly been associated with climate change. For utilities, however, climate change is a consequence rather than a trigger of energy efficient programs. The main attraction of an energy efficiency program for them lies in their cost-efficiency. 

“Energy efficiency is the cheapest resource that a utility can employ to cut down on costs,” says Martin Kushler, senior fellow at the American Council for an Energy-Efficient Economy (ACEEE), a nonprofit for advancing energy efficient policies. In addition to cost reduction, energy efficiency programs also present a range of tangible benefits for utilities, from operational efficiency to major price reductions. 

According to a post on ACEEE’s website, energy efficiency is America’s third-largest electricity resource and contributes more power to the grid than nuclear power. Estimates peg the levelized cost of energy (LCOE) for energy efficient programs at roughly 3 cents per kilowatt hour. That figure is significantly cheaper as compared to the same figure for renewable energy. “The investments we’ve made in energy efficiency between 1990 and today have helped us to avoid building the equivalent of 313 large power plants and have delivered cumulative savings of nearly $790 billion to customers across the country,” writes Annie Gilleo, senior manager of state policy at the organization.

As Earth Day draws near, it might be a good idea to revisit the benefits of energy efficiency programs for utilities. Their primary benefits lie in avoiding costs that would, otherwise, be necessary for utilities. Calculation of avoided costs is based on opportunity costs.   

Here are three of them:

Avoided Cost of Energy 

The avoided cost of energy refers to the cost savings for a utility that accrue from marginal cost of producing an incremental unit of energy through energy-efficiency programs. These savings can take on several forms from the costs saved from not investing in expensive energy programs to savings from Transmission & Distribution (T&D) losses. There is also the savings from compliance costs for renewable portfolio standards imposed at state levels because energy efficiency projects can mitigate climate change impact.

According to research conducted by ACEEE, the avoided cost of energy is expected to increase in the coming years. As an example, the avoided cost of energy for Texas was 5.32 cents per kWH. After adding an annual escalation rate of 2%, that same figure is expected to reach 7.16 cents/kWH in 2030. 

Avoided Cost of Capacity    

There are two types of avoided cost of capacity: short-term and long-term. The former relates to purchases made to augment existing capacity while the latter is about undertaking new power project construction based on demand forecasts. Purely from an economic perspective, the latter practice is fast becoming an uneconomic option. The costs of building and operating power plants has increased over the years. The latest Handy Whitman Construction Cost Index had an estimated index of 738, up from 714 in 2016. (The inflation factor considered for calculating the index was 3.37% in 2016). A move towards distributed energy resources will further make the market for capital-intensive power projects with sustained infrastructure and time requirements more expensive. Energy efficiency programs are an inexpensive option for utilities interested in maintaining their profit margins.  

In certain instances, utilities can also avoid reserve margin costs through better planning of their programs. For example, a reduction in demand (because of energy efficiency) will translate to reduced reserve margin requirements from NREL for that region. The utility will, therefore, not have to plan for the additional reserve margin requirements. 

Non-Energy Benefits

Not enough attention is paid to the non-energy benefits from energy efficiency programs. The most obvious ones, of course, are the benefits of a better and predictable weather pattern. For consumers, this means a better quality of life. For utilities, energy efficiency programs can reduce the number of shut off notices issues or bill complaints received in low-income communities, according to a 2008 report to outline the cost-effectiveness of such programs. 

Rakesh  Sharma's picture
Thank Rakesh for the Post!
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Sterling Bowen's picture
Sterling Bowen on Apr 24, 2018

ACEEE has also demonstrated that EE decreases capacity price volatility- While this study applies to wholesale markets, many (most?) IOUs participate in these markets, so capacity cost has a direct impact for their ratepayers.

Audra Drazga's picture
Audra Drazga on Apr 25, 2018

Thanks for sharing your post as part of our earth day special issue.

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