Financial Impacts of Achieving Aggressive Financial Impacts of - - PowerPoint PPT Presentation

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Financial Impacts of Achieving Aggressive Financial Impacts of Achieving Aggressive Financial Impacts of Achieving Aggressive Financial Impacts of Achieving Aggressive EE Program Savings Goals: EE Program Savings Goals: Building Stakeholder

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Financial Impacts of Achieving Aggressive Financial Impacts of Achieving Aggressive Financial Impacts of Achieving Aggressive Financial Impacts of Achieving Aggressive EE Program Savings Goals: EE Program Savings Goals: Building Stakeholder Support Building Stakeholder Support Building Stakeholder Support Building Stakeholder Support

Peter Cappers, Andrew Satchwell, Charles Goldman

Lawrence Berkeley National Laboratory Jeff Schlegel Jeff Schlegel Independent Consultant Report Summary Report Summary

August 2010

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Background and Policy Context Background and Policy Context

  • Increased interest by regulators and policymakers in

pursuing aggressive energy efficiency (EE) goals p g gg gy y ( ) g

  • Massachusetts Case Study
  • MA Green Communities Act (GCA) directs EE program

administrators to achieve “all cost effective EE” administrators to achieve “all cost-effective EE”

  • Resulted in establishing a target of 2.4% annual reduction

in retail electric sales, beginning in 2012 (ramp up earlier)

  • Policy issues of interest
  • Ratepayer concerns - What are the customer bill savings

and potential rate impacts of a long-term commitment to and potential rate impacts of a long term commitment to highly aggressive EE goals?

  • Shareholder concerns – What are the effects on

shareholder value if highly aggressive EE goals are g y gg g pursued over the long-term? Is there a viable utility “business model” that is acceptable to customers?

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Presentation Overview Presentation Overview

  • Analysis Approach
  • Characterization of Massachusetts “Super-Utility”

and EE Portfolios

  • Analysis Results
  • Summary and Conclusions

y

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Analysis Approach: Benefits Calculator Analysis Approach: Benefits Calculator

U ili Ch i i

Model Inputs

N N EE

Scenario Analysis

Utility Shareholder

Model Outputs

Utility Characterization EE Portfolio Characterization No New EE With EE U y S e o de Metrics Utility Ratepayer Metrics

EE Business Model

EE Program Cost Resource Costs

EE Costs & Benefits

Recovery Lost Fixed Cost Recovery Shareholder Incentive Resource Benefits

  • Utilized a pro-forma financial spreadsheet model
  • riginally developed as part of the National Action Plan

for Energy Efficiency (NAPEE) but significantly

Incentive

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for Energy Efficiency (NAPEE) but significantly enhanced by LBNL over the past 3 years

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Analysis Approach Analysis Approach

  • Assessed impacts of varying levels of EE on a “super-utility”, composed
  • f all major Electric Operating Companies (EOCs) in Massachusetts
  • Constructed a baseline EE case in order to compare effects of two

Additional EE portfolios that achieve significant savings

  • “No New EE” scenario establishes the case in Massachusetts if no new

EE efforts are undertaken

  • “Business-As-Usual (BAU) EE” based on ~0.9% annual savings
  • “Aggressive EE” based on MA DPU decision approving utility

compliance filings to achieve GCA goals (~2.4%/year)

  • Assumed EE programs are only offered from 2010-2020
  • After 2020, no new EE programs are offered, but effects of measures still

in their useful lifetimes are captured from 2020-2030

  • Quantify impact on ratepayers if additional funding sources are utilized
  • Quantify impact on shareholders and ratepayers if decoupling

Quantify impact on shareholders and ratepayers if decoupling mechanism is implemented

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Presentation Overview Presentation Overview

  • Analysis Approach
  • Characterization of Massachusetts “Super-Utility”

and EE Portfolios

  • Analysis Results
  • Summary and Conclusions

y

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Impact of Energy Efficiency on MA “Super Impact of Energy Efficiency on MA “Super-

  • Utility”

Utility” Retail Sales Forecast Retail Sales Forecast

56,000 60,000 GWh) No New EE BAU EE

  • Agg. EE

EE Programs Offered by Massachusetts Program

48,000 52,000 Retail Sales (G

Administrators

40,000 44,000 Annual R

"No New EE" Utility Assumptions

(% per year) 1.2% 0.3% Retail Sales Growth Customer Growth

Costs grow faster 7

1.9% 1.2% Non‐fuel Cost Growth

Costs grow faster than retail sales

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Initial EE Business Models Initial EE Business Models

  • Lost Fixed Cost Recovery Mechanism
  • Lost base revenue mechanism applied
  • Shareholder Incentive Mechanism

3% of program costs on after tax basis are provided to “super

  • 3% of program costs on after-tax basis are provided to super-

utility” annually

  • EE Program Cost Recovery
  • EE program budgets are covered by Systems Benefits Charge

(fixed 3 mills/kWh) and Energy Efficiency Surcharge (variable volumetric charge to cover residual EE budget) g g )

  • Under Agg. EE Case, impacts of applying additional funding

sources (FCM, RGGI and Other funding) are also shown

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Funding Sources of Energy Efficiency Funding Sources of Energy Efficiency

EE Program Costs

Direct Ratepayer Funding Additional Funding Sources

  • Agg. EE

Scenario Only

Systems Benefits Charge Energy Efficiency Regional Greenhouse ISO-NE Forward Other Funding Sources Benefits Charge (Fixed) y Surcharge (Variable) Gas Initiative Revenue Capacity Market Revenues

(e.g., 3rd party financing) 9

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Presentation Overview Presentation Overview

  • Analysis Approach
  • Characterization of Massachusetts “Super-Utility”

and EE Portfolios

  • Analysis Results
  • Summary and Conclusions

y

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Pursuing these EE Portfolios Produce Pursuing these EE Portfolios Produce Significant Net Benefits Significant Net Benefits

Peak Off-Peak Total Peak Portfolio Lifetime Savings (2009-2020) Total Resource ($B, PV)

Significant Net Benefits Significant Net Benefits

Peak Energy (GWh) Off Peak Energy (GWh) Total Energy (GWh) Peak Demand (MW) Benefits Costs Net Benefits BAU EE 12,221 28,516 40,737 603 $5.6 $1.5 $4.1

  • Agg. EE

34,577 80,679 115,255 1,604 $16.1 $4.9 $11.2

60 200 A id d P k E

Long-term Avoided Cost Forecast (2009-2020)

40 50 60 120 140 160 180 200 ty ($/kW-Yr) gy ($/MWh) Avoided Peak Energy Avoided Off-Peak Energy Avoided Capacity (see right y-axis) 10 20 30 20 40 60 80 100

  • ided Capacit

voided Energ 20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Avo Av 11 11

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Customer Bills Are Reduced Significantly; Customer Bills Are Reduced Significantly; Other Funding Alters Timing of Bill Savings Other Funding Alters Timing of Bill Savings Other Funding Alters Timing of Bill Savings Other Funding Alters Timing of Bill Savings

11 0 11.5 12.0 lls al) No New EE BAU EE 9 0 9.5 10.0 10.5 11.0 Customer Bil ($B, Nomina

  • Agg. EE
  • Agg. EE w/ FCM & RGGI & Other

8.0 8.5 9.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

  • Agg. EE portfolio w/ all additional funding sources saves customers

~$7B (~7%) relative to BAU EE and ~$10B (~10%) relative to No New EE, on a PV basis (2009-2030) (after accounting for rate impacts) , ( ) ( g p )

  • After five years of achieving Agg. EE savings goals, customer bills

are lower than what is observed under BAU EE

  • Aggregate customer bill savings occurs two years earlier if all

Aggregate customer bill savings occurs two years earlier if all additional funding sources are applied in Agg. EE case

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Aggressive EE Portfolio Results in Negative Aggressive EE Portfolio Results in Negative Sales Growth and Large Rate Increases Sales Growth and Large Rate Increases Sales Growth and Large Rate Increases Sales Growth and Large Rate Increases

32 34 36 Wh) No New EE BAU EE 26 28 30 32 tail Rates (¢/kW

  • Agg. EE
  • Agg. EE w/ FCM & RGGI & Other

20 22 24 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 All-In Ret

  • Rate increases with Agg. EE are sizable (~4.4%/year) and are

driven primarily by sales dropping while utility costs rise

  • Utility costs grow at 1.8% per year

Utility costs grow at 1.8% per year

  • Electric sales decrease by -1.1% per year
  • Additional funding sources modestly offsets the rate increases

ith A EE b t 2009 d 2020 (d t 4 2%/ ) with Agg. EE between 2009 and 2020 (down to ~4.2%/year)

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Additional Funding Sources Affects both Additional Funding Sources Affects both Customer Bills and Rates Customer Bills and Rates Customer Bills and Rates Customer Bills and Rates

  • Impact on Aggregate Customer Bills
  • Utilizing additional funding sources reduces

ratepayers’ share of EE program costs by ~32% Ratepayers experience an additional $1 2B or 1 3% in

  • Ratepayers experience an additional $1.2B, or 1.3%, in

bill savings due purely to the use of FCM, RGGI and Other Funding Sources

  • Impact on All-in Retail Rates
  • Applying additional funding sources reduces annual

all-in retail rates in 2020 by 0.25 cents/kWh

  • Mitigates rate increases somewhat, but not a “silver

bullet” (because the rate increases are not driven bullet (because the rate increases are not driven primarily by program costs)

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“Super “Super-

  • Utility” needs Decoupling to Reduce

Utility” needs Decoupling to Reduce Effect of Agg. EE on ROE Effect of Agg. EE on ROE Effect of Agg. EE on ROE Effect of Agg. EE on ROE

Legend

  • LBR mechanism is insufficient to keep pace with revenue erosion

between rate cases (authorized ROE of 10 98%) between rate cases (authorized ROE of 10.98%)

  • Properly designed decoupling mechanism with a k-factor is capable
  • f removing financial impact of Agg. EE on ROE erosion
  • MA shareholder incentive mechanism provides opportunity for

additional earnings for investors

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Decoupling Mechanism Affects Both Decoupling Mechanism Affects Both Shareholders and Ratepayers Shareholders and Ratepayers Shareholders and Ratepayers Shareholders and Ratepayers

  • Utility -- Combining the decoupling mechanism with

shareholder incentive provides 30 basis point p p improvement to ROE and slightly higher earnings (~$20M) than if utility did not pursue future EE efforts

  • Customers – Implementing the decoupling mechanism,

relative to lost base revenue mechanism, would raise customer bills by ~$830M and average rates by ~1.5 y $ g y mills/kWh

  • However, applying all additional funding sources to Agg.

EE program costs lowers customer bills by ~$1 2B EE program costs lowers customer bills by ~$1.2B

  • Achieving Agg. EE, relative to No New EE, with

application of both decoupling and additional funding application of both decoupling and additional funding sources produces ~$8.9B in total bill reductions

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Summary: Policy Conclusions Summary: Policy Conclusions

  • Aggressive EE portfolio provides very large customer bill

savings; in MA possible to design a “business model” savings; in MA, possible to design a business model that aligns the financial interests of utility program administrators with the state’s aggressive energy policy goals to achie e the s bstantial c stomer bill sa ings goals to achieve the substantial customer bill savings

  • As you move towards a “comprehensive” business

model important to consider the combined impact of model, important to consider the combined impact of decoupling (or LBR) and shareholder incentive mechanisms on utilities and customers in their design

  • Given current economic climate, rate impacts may limit

broad stakeholder support for Agg. EE goals; leveraging additional funding sources besides ratepayer funds can additional funding sources besides ratepayer funds can mitigate rate impacts somewhat

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