DSM Incentive Mechanism Proposal Steering Committee Meeting January 13, 2014 Grayson Heffner, Resident Advisor USAID Jordan Energy Sector Capacity Building Activity CONTRACT NUMBER: AID-OAA-I TASK ORDER NUMBER: AID-278-TO DELOITTE CONSULTING LLP USAID/JORDAN ECONOMIC DEVELOPMENT & ENERGY OFFICE

Key components of a DSM mechanism

Component 1: Regulatory treatment of DSM

Good news! The regulatory treatment of many DSM activities can be accommodated within the Electricity Law A determination by the Regulator that certain DSM activities can be consider “Core Activities” will simplify and accelerate Distributor-delivered DSM These Core DSM Activities will benefit ratepayers, Distributors and especially NEPCO/GoJ

Recommendation: The ERC determine that the following DSM activities carried out by licensees are core activities: Activities contributing to cost savings in the production and delivery of electricity And/Or Activities reducing the amount of subsidies flowing to the power sector

Examples – Core and Non-Core DSM Activities Core DSM Energy efficiency for low- usage, subsidized households and institutions Peak demand shaving (e.g., EDCO agreement with the Water Authority) Load research Non-core DSM Energy savings project development conducted on a fee-for-service or as part of an energy performance contract Energy efficiency for non-subsidized customers

Core and non-Core DSM can co-exist and even reinforce each other! Efficient appliance promotion programs can be targeted to low-usage customers but still available to high-usage customers – but without the incentive payment Energy audits offered for a nominal price to low- usage or subsidized customers can still be available to high-usage customers – but at a market price

Recommendation: The ERC allow Distributors to recover certain costs associated with Core DSM Activities through tariffs Recoverable Core DSM costs include: Cost of distribution company staff assigned to the DSM unit and working on Core DSM Activities Other operating expenses associated with planning, promoting, and monitoring Core DSM activities Costs of studies needed to improve DSM planning and tariff analysis (e.g., load research)

Recommendation: The ERC reviews, approves, and monitors all Core DSM Activities Each Distributor submits an annual budget proposal for their Core DSM Activities, as part of the OpEx budget Distributors describe how their Core DSM activities will: –contribute to efficiency gains and cost savings in the production and delivery of electricity –reduce the amount of subsidies flowing to the power sector Distributors propose a framework for measuring and evaluating Core DSM results

Recommendation: ERC approves a performance incentive for successful and verified delivery of Core DSM activities* Alternative incentive formulas include: Sharing the benefit from reduced subsidy outlays and generation costs Performance payment based on meeting a savings target Increased rate of return based on meeting a target *Comparable to loss reduction incentives currently allowed or the commission for collecting waste disposal and TV revenues

Incentive mechanism alternative formulations Incentive MechanismFormulationTypical incentive level 1 Shared DSM benefits% of the net benefit of DSM (energy savings minus program costs) 11% of net benefits Performance payment for meeting targets % of DSM spending if a performance threshold is met 6% of spending RoE bonusBasis points added to allowable RoE or capitalization of DSM spending Difficult to quantify 1 Source: Carrots for Utilities – Providing Financial Returns for Utility Investments in Energy Efficiency (2011)

Component 2: DSM products and target markets

Core DSM activities should focus on low-usage, high-subsidy customers Electric Demand Side Efficiency Potential in Jordan, Nexant, February 2011 A 1% energy savings reduction in the lowest tier annually over a five year period would save 15 million JD in subsidy and bill savings Such a goal could be achieved through a coordinated EE program targeting the 4 biggest household energy uses Two potential programs are: LED replacement Refrigerator rebates/replacement

LED Key Variables Values (Assumptions) To qualify, participants can have incandescent or CFL lamps. Two scenarios are presented – incandescent-LED conversion and CFL-LED conversion. 4 lamps per household, operating 4 hours a day. Program duration is 5 years. LED economic life is 10 years Program targets 5% of the 1st tier household accounts each year for five years (about 16,000 households per year) Capacity savings based on bulk power demand charge of 3 JD/KW monthly. Coincidence Factor = 1, Diversity Factor = LED cost is JD 8; Two conversion scenarios: – Sc1: LED replaces incandescent lamps – Sc2: LED replaces CFLs and two cost sharing scenarios: – Sc1.1 &Sc2.1: the administrator bears 75% of the units cost and Participant 25% – Sc2.1 &2.2 : the administrator bears 75% of the units cost and Participant 0% Year Avg. Variable Cost KWh Tariffs

CFL  LED; Cost Sharing ParticipantsAdministratorSocietal IndicatorValueIndicatorValueIndicatorValue NPV of Costs 585,159NPV of Costs 1,755,478NPV of Costs 2,340,638 NPV of Benefits 1,173,107NPV of Benefits 2,731,088NPV of Benefits 3,904,195 B / C2 1.56B / C1.7 At a 25% cost share of the participants and 75% cost share of the administrator. At a discount rate of 8%.

LED replaces CFL Sc. 2.1: Administrator bears 75% of it, participant bears 25%

Refrigerators Key Variables Values (Assumptions) To qualify, households must have a refrigerator at least 3 years old with an efficiency of C or worse. Replacement refrigerators would be A+ or better. Refrigerator service life is minimum 10 years Program targets 5% of the 1 st tier household accounts each year for five years (about 16,000 households per year) Capacity savings based on bulk power demand charge of 3 JD/KW monthly. Both Coincidence Factor and Diversity Factor assumed to be unity Delivered cost of a replacement refrigerator is JD 400. Two scenarios are analyzed: – Sc1: Administrator bears 75% of it, participant bears 25% – Sc2: Administrator bears 100% of it, participant bears 0% Year Avg. Variable Cost KWh Tariffs % annual increase till 2034

Refrigerators; Cost Sharing ParticipantsAdministratorSocietal IndicatorValueIndicatorValueIndicatorValue NPV of Costs 7,171,038NPV of Costs 21,513,114NPV of Costs 28,684,153 NPV of Benefits 8,747,780NPV of Benefits 22,221,467NPV of Benefits 30,969,247 B / C1.22B / C1.11B / C1.08 At a discount rate of 8%.

Refrigerators Preliminary DSM Analysis Sc1: Administrator bears 75% of it, participant bears 25%

Component 3: Funding and financing mechanisms

Recommendation: Establish a Distributor DSM Fund The Fund would support Core DSM program costs Potential funding sources: –JREEEF –Rural fills –Surcharge on NEPCO tariff increase Distributors would develop funding proposals for specific DSM programs and measures, to be submitted for consideration by MEMR and ERC

DSM Funding Options SourcePotential Rural fills50% of 1 fills/kWh = 6 million JD/year JREEEFUndisbursed balance = 12 million JD Surcharge on NEPCO tariff increase0.5 fill/kWh= 5 million JD/year 1 1 Assumes one-third of sales come from customers whose rates are frozen

Recommendation: DSM subsidies should reflect tariff price and investment payback period Adjust subsidies to produce the same payback period across tariff classes Highly-subsidized electricity customers would also be highly- subsidized DSM participants

Component 4: Delivery arrangements

Recommendation: Distributors and NEPCO should establish DSM units Some distributors and NEPCO have already established “virtual” DSM units DSM units should be formalized and staff assigned Costs of the DSM unit recovered through rates Consider where best to locate the DSM unit ESCB will support these units with capacity building Each DSM unit develops several plans: –Load survey plan –Implementation plan for the MEMR’s household CFL program –A multi-year Core DSM proposal (for approval by ERC) –Program proposal(s) to the Distributor DSM fund

Summary of DSM mechanism components and recommendations 1.Regulatory treatment: –Some DSM activities should be Core business activities under the Electricity Law –Costs associated with Core DSM Activities should be recoverable through tariffs –ERC reviews, approves, and monitors all Core DSM Activities –Distributors receive a performance incentive for successful delivery of Core DSM Activities 2.Products and target markets: – Focus Core DSM Activities on reducing subsidized consumption 3.Funding and financing mechanisms: –Establish a Distributor DSM Fund for equipment and program delivery costs –DSM subsidies set to reflect tariff price and investment payback period 4.Delivery arrangements: –Distributors and NEPCO should establish DSM units