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New Framework for Benefit-Cost Analysis Needed for Distributed Energy Resources in New York, Experts Say

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Consultant report commissioned by Advanced Energy Economy Institute and filed with Public Service Commission offers new methods that take into account all benefits in judging value of efficiency, solar, and other investments

 

Washington, DC – September 22, 2014 – Utility regulators need a new framework for benefit-cost analysis to accurately assess the value of distributed energy resources like energy efficiency, demand response, distributed generation (such as rooftop solar), and energy storage, according to a report submitted to New York’s Public Service Commission (PSC) as part of its “Reforming the Energy Vision” regulatory proceeding.

 

The benefit-cost paper, produced by Synapse Energy Economics, a consulting firm based in Cambridge, Mass., was submitted to the PSC in a filing made by the Advanced Energy Economy Institute (AEEI), a nonprofit charitable organization affiliated with the Advanced Energy Economy (AEE) business association, along with its state and regional partner organizations Alliance for Clean Energy New York (ACE NY) and New England Clean Energy Council (NECEC), all of them active participants in the path-breaking proceeding to reform electric utility business and regulatory models launched in April by the PSC.

 

According to the Synapse paper commissioned by AEEI, the benefit-cost analysis techniques traditionally used to evaluate energy efficiency resources in New York State and many other states around the country are increasingly seen, by the PSC and other utility regulators around the country, as too narrow, overlooking benefits important for meeting state energy goals. Synapse draws on new thinking by energy efficiency experts to propose innovative screening mechanisms to determine whether various distributed energy resources (DER) deserve ratepayer-funded support to meet electric power system, economic, and societal objectives.

 

The paper, “Benefit-Cost Analysis for Distributed Energy Resources,” is available here.

 

“The Public Service Commission is blazing a trail to open up the electric power system in New York State to vital new resources that will make the system more efficient, more resilient, and more responsive to consumer desires,” said Lisa Frantzis, senior vice president of AEE and AEEI lead on the “Reforming the Energy Vision” (REV) proceeding. “To get the most out of these resources, for the grid and for consumers, we need to fully assess their benefits as well as costs. States around the country are looking at this same question. New York can provide the answer.”

 

“For too long, resources like energy efficiency have been undervalued by utilities and regulators, even though such distributed resources bring benefits to all New Yorkers – by reducing demand on the grid, avoiding unnecessary power generation, and reducing air pollution,” said Anne Reynolds, executive director of ACE NY. “As we bring more distributed energy resources into the system, we need to recognize their full value.”

 

“New York is striving to set a new standard for incorporating distributed energy resources into a flexible, cost-effective electric power system that better serves all households and businesses,” said Janet Gail Besser, vice president of policy and government affairs for NECEC. “Getting the benefit-cost analysis right means the difference between improvements around the edges and taking the electric power system fully into the 21st century.”

 

The Synapse paper recommends abandoning the traditional Total Resource Cost Test, which undercounts many benefits for meeting state policy goals, in favor of a Societal Cost Test, which takes a wider range of benefits into account. A Societal Cost Test is currently used in several jurisdictions, including Arizona, Vermont, and Washington, DC, though one would have to be developed specifically for New York reflecting the policy objectives set by the state.

 

In addition, the Synapse paper recommends an innovative approach to assessing customer impacts, one that considers all three ways that impact can be measured:

  • Rate impacts, which would apply to all consumers;
  • Bill impacts, which might vary between participants in DER programs (who would see their electric bills go down because they are using less electricity from the grid) and non-participants (who might see their electric bills rise due to rate impacts); and
  • Participation impacts, which would show the distribution of customers enjoying lower bills due to participation versus higher bills because they don’t participate.

 

The paper also outlines various ways to approximate benefits of DER that are not traditionally accounted for in utility benefit-cost analyses, including monetary values, proxies, and other methods.

 

Finally, Synapse recommends a Societal Discount Rate for financial accounting of benefits over time. Current discounting methods, based on the weighted average of utility cost of capital cost, reflect utility shareholder interests by deeply discounting long-term benefits, rather than the public interest in benefits that persist over time from utility investments. Such a Societal Discount Rate would range from zero to 3 percent per year in real terms, similar to other low-risk investments and significantly lower than the 5.5 percent discount rate now used for investments by NY electric utilities. This would provide a more accurate accounting of the value of future benefits from DER investments.

 

“All across the country, energy experts and state utility regulators have been wrestling with ways to fully assess the value of distributed energy resources that move the electricity system away from increased centrally generated power to meet every new energy need,” said Tim Woolf, principal author of the Synapse report. “Our recommendations give New York’s Public Service Commission the benefit of the latest thinking on measuring value to consumers, the grid, and society as a whole.”

 

 

About AEE and AEEI

Advanced Energy Economy (AEE) is a national association of businesses that are making the energy we use secure, clean, and affordable. AEE’s mission is to transform public policy to enable the rapid growth of advanced energy companies. The Advanced Energy Economy Institute (AEEI) is a nonprofit educational and charitable organization whose mission is to raise awareness of the public benefits and opportunities of advanced energy.

 

About ACE NY

Alliance for Clean Energy New York is a broad coalition, based in Albany, dedicated to promoting clean energy, energy efficiency, a healthy environment, and a strong economy for the Empire State. ACE NY is New York’s premier advocate for the rapid adoption of renewable energy and energy efficiency technologies.

 

About NECEC

NECEC is a regional non-profit organization representing clean energy companies and entrepreneurs throughout New England and the Northeast through programs and initiatives that help clean energy businesses of all stages of development to access the resources they need to grow. NECEC includes New England Clean Energy Council, a trade member organization, and NECEC Institute, a 501(c)(3) non-profit. The New England Clean Energy Council is the lead voice for hundreds of clean energy companies across New England, influencing the energy policy agenda and growing the clean energy economy. The NECEC Institute leads programs that support Innovation & Entrepreneurship, Industry Research & Development, and Workforce Development. NECEC’s mission is to accelerate the region’s clean energy economy to global leadership by building an active community of stakeholders and a world-class cluster of clean energy companies.