Cost Benefit Analysis Costs Administration Equipment Incentives Revenue Loss Value of Service Lost Benefits Avoided Costs Environmental Non-energy Non-monetary Tax Credits Cost benefit analysis compares the costs of an activity with its benefits. These are examples of the costs and benefits commonly incurred for customer programs. Costs and benefits are different depending on whose perspective you’re looking at. For example, a utility incurs administrative and equipment costs, but not the value of service lost; tax credits are only a benefit for those who receive them, etc. The results of cost benefit analyses can be shown in several different ways, including the three shown in the lower box. Benefit Cost Ratio Net Benefits Payback Period

Cost-Effectiveness Analysis Benefit Cost Ratio Net Benefits Payback Period Program A 3.28 $1,234 K 7 years Program B 1.65 $35.5 M 1 year Program C 0.82 ($9,036 K) -- Program D 0.33 ($15,678) 2 months Cost effectiveness analysis takes the results of cost benefit tests and compares them. Here we have four programs with different costs and benefits. How the results are analyzed depends on the goals of the program and the perspective of the entity who is incurring the costs and benefits. In the above example, Program A has a much higher benefit cost ratio than Program B, but Program B is clearly a much larger program, so it provides a much larger net benefit. However, from the perspective of a customer, Program D might be attractive because it provides short term benefits, even though it is not cost-effective in the long run.

The Standard Practice Manual (SPM) Developed to measure the cost-effectiveness of Energy Efficiency programs Use four tests to measure cost-effectiveness from four perspectives: Society: The Total Resource Cost (TRC) test Program Administrator: The Program Administrator (PAC) test Ratepayers: The Ratepayer Impact Measure (RIM) test Participant: The Participant Test The Standard Practice Manual is used by the CPUC and many other organizations to determine cost-effectiveness of customer programs. Low Income programs are currently the only type of programs which use other types of cost-effectiveness tests.

ESAP tests MPT – Modified Participant Test UCT – Utility Cost Test Benefits are bill reductions and participant non-energy benefits Costs are measure costs (administrative and capital costs of the measure) UCT – Utility Cost Test Benefits are the avoided costs of the energy savings and utility non-energy benefits TRC – Total Resource Cost Benefits are the avoided costs of the energy savings NPV of avoided costs Avoided costs and NEBs are calculated by discounting annual values over the lifetime of the equipment to determine the Net Present Value. The % of ESAP’s administrative costs and NEBs assigned to each measure are based on the measure’s energy savings.

Cost and Benefits Used TRC MPT UCT   EE TRC EE PAC DR TRC DR PAC DR RIM DR Participant ESAP TRC ESAP Participant ESAP Utility Administrative costs COST Avoided costs of supplying electricity BENEFIT Bill Increases Bill Reductions CAISO Market Revenue Capital costs to participant Capital costs to utility Environmental benefits (GHG only) Incentives paid Increased supply costs Market benefits Non-monetary/Non-energy benefits Revenue gain from increased sales Revenue loss from reduced sales Tax Credits Value of service lost and transaction costs to participant This compares the tests currently used by the CPUC to determine the cost-effectiveness of Energy Efficiency, Demand Response and Low Income cost-effectiveness. EE, DR and DG use the SPM tests. LI uses its own tests – there are 3 of them, but only MPT and UCT are used to determine which measures are included in ESAP. Energy Efficiency doesn’t use the RIM test. Each utility’s EE portfolio must have benefits greater than costs based on a weighted average of the PAC and TRC tests. Individual EE programs do not have to be cost effective. Distributed Generation uses the same tests as EE. Demand Response uses all 4 tests, but DR programs are voluntary so the Participant Test is not really used. DR Protocols are fairly new, so it is not yet clear how the tests will be used to determine DR program cost-effectiveness. Benefits shown in blue are optional, hard-to-quantify benefits. Italics indicate that the quantity is different for each column (i.e., the non-energy benefits that accrue to the utility are not the same as the non-energy benefits that accrue to participants). Blue text indicates optional, hard-to-quantify benefits. Italic text indicates that value may be different for different tests

What is the difference between the ESAP tests and the SPM tests? ESAP Utility test does not include the capital costs to participant, tax credits, or increased supply costs. However, these values should be zero for ESAP. ESAP Utility test includes NEBs, which are not included in the PAC or the EE TRC, and included only as an “optional benefit” in the DR TRC. Other than including NEBs, the ESAP Utility test is effectively the same as both the TRC and PAC tests. ESAP Participant test measures bill reductions and participant NEBs vs. measure costs (i.e., the benefits to the participants vs. the costs to society). It is unclear whose exactly whose perspective this represents.

Cost-effectiveness tests for Demand Response INPUT: TRC (Society) PAC (Utility) RIM (Ratepayers) Participant Administrative costs COST Avoided costs of supplying electricity BENEFIT Bill increases Bill reductions CAISO Market Participation Revenue Capital costs to participant Environmental Benefits Incentives paid Increased supply costs Market benefits Non-monetary benefits Revenue gain from increased sales Revenue loss from decreased sales Tax Credits Transaction costs to participant Value of service lost This is list of the cost and benefit inputs to the SPM tests, with the modifications we’ve made for DR in green. We’ve added or modified what’s done for EE, with 3 categories of costs and benefits which relate to customer behavior – non-monetary benefits, transaction costs, value of service lost. These costs and benefits are included in the participant and TRC tests. Historically, we are most concerned with the TRC. For voluntary programs, we don’t usually compute the Participant test. One option for LI is to do what is shown here – take the basic SPM tests and modify them. This is essentially what the current LI tests are – modified SPM tests – but it is not clear if the way they account for costs and benefits is appropriate.