Market Barriers
Despite the changes in supply and demand technologies, there are market barriers which prevent customers from being able to make the most efficient choice in their energy consumption decisions. These markets barriers take the form of financial, informational, transactional, and behavioral. Squeezing out inefficiencies creates value that eventually is shared by all consumers.
There are other market barriers that may hinder efficient investment in energy efficiency. For instance, rates that are out of alignment with underlying utility costs may produce an overinvestment in energy efficiency not warranted by the load changes it produces. Getting rates in line with incremental or marginal costs is often the most cost-effective means to promote cost effective energy efficiency. Incremental and marginal costs play a role as well.
There may be externalities which are hidden to producers and consumers which may produce an over or under investment from society’s standpoint but the right amount for individual producers or consumers.
Incentive payments are often driven by the savings produced by the load shape changes over the life of the installed measure. But they also include an additional component that reflects the rate savings that are out of sync with the rate changes. This can produce both an over investment and an underinvestment for specific energy efficiency measures.
Furthermore, savings that are expected to accrue over the life of the measure require that the underlying costs reflect those savings. Competitive market prices tend towards fuel costs only. They also tend to create new products and services that reflect the value customers receive from their consumption of the services that use electricity.
Regulation
Regulated markets tend towards recovery of both fuel and capital. Regulated utilities tend to increase their investment in energy investment. From a policy perspective this may be the desired level but there are many risks and uncertainties, (equipment performance, new competing technologies, deregulation) that make forecasting the correct amount of energy efficiency uncertain.
Program design becomes a critical component in this process. Capturing the benefits from energy efficiency. Insufficient incentives may not produce sufficient participation to justify its offering. Excessive incentives may overpay and result on overall higher costs to both participants and non-participants. Balancing these impacts is critical to the implementation of cost-effective energy efficiency. That balance between encouraging the installation of new efficient technologies, the costs that are assumed by participants and non-participants and the value that is created to customers reflect that balancing required for good program dosing by utilities and policy makers.
Regulated utilities tend to use a series of economic tests which are intended to reflect the long run impact of energy investment investments. This study uses these approaches as well.
These economic tests use the impacts from energy efficiency to determine the impacts on participants and non-participants in the long term, the most common perspective since most electric utilities are regulated. Investments in energy efficiency which are less than the avoided costs of supply benefit both groups. This is true when utility involvement produces a change in consumption that otherwise would not occur.
Economic tests are useful to see where opportunities for energy efficiency are greatest. However, in many instances they do not answer the question “how best can utilities encourage energy efficiency”? In the early energy efficiency efforts incentives from non-participants to participants were used to stimulate investment in energy efficiency. For new technologies providing utility incentives had the effect of grabbing the attention of potential buyers of electric measures that the new technology ‘s performance has been verified by the utility. As the product delivery matured that need was less pronounced.
EE&DR Economic Tests & Customer Value
Economic Tests (Regulated Business Model)1
- Participant Cost Test (PCT)
- Rate Impact (RIM)
- Total Resource Cost (TRC)
- Utility Cost (UC)
- Program Administrator Cost
- Societal Cost
Economic Tests (Under Competition)
- TRC (w/o externalities) - load weighted MC (marginal cost), optionality, flexibility
- Total Value Test (w/externalities)
- Overcoming market barriers - financial, informational, transactional, behavioral
- How to internalize externalities?
Customer Value
The value of consuming electricity is a derived demand, derived from the value of the products that consume electricity
The six "C"'s
- Cost
- Comfort
- Convenience
- Control
- Certainty
- Communication
There are others such as safety, environment, status, trust, aesthetics, innovation, etc.
Ultimately, successful companies provide customers what they want at a competitive price — value creation.
The report attempts to identify where the potential for energy efficiency lies, but it does not identify the market barriers nor the value drivers that drive that implementation. These are the purview of the program designer. Program design attempts to find that balance between producer and consumers value by identifying the opportunities.
EPRI’s study shows several factors which have affected the efficiency potential, increased avoided cost of fuel and capital, incremental costs of new technologies compared to baseline technologies, and the penetration of efficiency technologies in the past. Increased penetration of highly cost-effective measures such as LED lightbulbs and inverter (variable speed) based heating, ventilating and air conditioning systems (HVAC); changes in government codes and standards which set minimum levels of measure efficiency; and lower fuel costs especially natural gas; lower wholesale market prices for electricity such as wind and solar which have shifted or reduced the cost curve utilities use to supply power.
1 California Standard Practice Manual, CEC 1987. Program Administrator Test added in 2001