Transcript Savings ≠ Benefits! An Example

The Smart Grid
Business Case
John Caldwell
Edison Electric Institute
A Potential Roadblock to Smart Grid:
Regulatory Ambivalence
Approved
Conditional
Rejected
• Portland General
Electric AMI
(5/2008)
• Duke Energy Ohio
Infrastructure
Modernization
(5/2010)
• Oklahoma Gas and
Electric Smart
Meters (7/2009)
• Texas – New
Mexico Power AMI
(7/2011)
• Idaho Power AMI
(2/2009)
• Pacific Gas and
Electric (3/2009)
• American Electric
Power Smart Grid
Pilot (3/2009)
• New York – Smart
Grid Initiatives of 6
Utilities (7/2009)
• Baltimore Gas and
Electric AMI
(8/2010)
• Hawaiian Electric
Company Inc.
Smart Meter Pilot
(7/2010)
• Duke Energy
Indiana Smart
Meters (11/2009)
• Commonwealth
Edison Alternative
Rate Plan for
Smart Grid Funding
(5/2011)
The Regulator’s Perspective
Three Questions That Will (Probably) Be Asked
1. Sounds wonderful – but will it “put bread on the
table”? (Will it produce tangible, monetary
benefits or savings to the ratepayer?)
2. Are we “shooting craps”?
a) How probable is it that the benefits stream will occur?
b) Are the benefits contingent on some other activities (e.g.,
demand response)?
3. Will the “check be in the mail”? (How will the
benefits be realized by the ratepayer?)
a) Will they be passed through automatically in a rate
tracker?
b) Will they not be passed through until the next rate case?
The Business Case Challenge
Rigorous
and
Defensible
• Costs are Specific
• Benefits are:
o Trackable,
o Measurable
o Verifiable
• Projections are
Reasonable
• Risks are
Accounted For
Broad
and
Inclusive
• All Benefits
o Ratepayer
o Societal
o Platform
• Must Take “Long
View”
• Potential
Transformational
Impacts Considered
Preparing the Business Case
General Principles
1. For each smart grid application, create “long list” of
benefits
2. Characterize benefits
a)
b)
c)
d)
By recipient (e.g., shareholder, customer, societal)
By contingency (what else must occur for these benefits to be
realized?)
By measurability
By verifiability
3. The value chain in each business case must be
oriented to its relevant beneficiary
a)
b)
c)
For the utility: shareholder benefits
For the regulator: ratepayer benefits
For the taxpayer: societal benefits
Smart Grid Benefits (and Costs)
Not the Same for Everyone!
Consumer
Utility (Shareholder)
Deferred
Generation /
Transmission
Capacity
Gain (from avoided
rate increases)
Loss (from return on
deferred investments)
O&M Savings
Gain (but only after
savings passed
through in rates)
Gain (before savings
passed through in
rates)
Outage
Reductions
Gain
Gain
Demand
Response
Savings
Gain (in consumer
surplus)
Loss (in producer
surplus)
CO2
Emissions
Reductions
No Monetary Benefit
(without CO2 tax)
Society
Gain
General
societal
benefit
AMI: The Complete Business Case
Consumer Perspective
Benefits
• Peak/Off-Peak Pricing
– Change in Consumer
Surplus (Not Savings!)
– Deferred Generation
Capacity
• Reduced O&M
–
–
–
–
Meter Reading
Call and Billing Centers
Outage Response
Energy Theft / Meter Errors
• Enhanced Receivables
Recovery
Costs
• Peak/Off-Peak Pricing
– Change in Producer
Surplus? (No!)
– Marketing / Administrative
Costs
• Capital Costs for New
Meters
• O&M for New Meters
• Billing / Customer
Information Systems
Upgrade
Incremental expenditures and savings are tracked by year, and converted into net present
value. Length of study period should correspond with service life of principal assets.
A Good Deal???
Suppose Starbuck’s sells a medium cup of
coffee for $2.00 and you buy two cups a day, five
days a week. . .
. . . but then they raise the price to $3.00, so now
you only buy one cup a day, five days a week.
CONGRATULATIONS!!! Starbuck’s has
saved you 25% on your coffee costs!
Savings ≠ Benefits!
An Example
Assumptions:
• Flat rate energy price of 4.1 cents/kWh
• Two consumption behaviors
– Peak (2:00 PM – 7:00 PM Weekdays): 1.33 kW/hour
– Off-Peak (All Other Hours): 0.85 kW/hour
• Introduce peak / off-peak rate
– Peak: 4.9 cents/kWh
– Off-Peak: 3.7 cents/kWh
• Price elasticity
– Peak: -0.6
– Off-Peak: -0.1
Peak Pricing Example
Supply and Demand Curves
$0.080
$0.070
Price ($/kWh)
$0.060
$0.050
Flat Rate
$0.040
$0.030
$0.020
Off-Peak
Demand Curve
$0.010
$0.000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Usage (kWh)
1
1.1
1.2
1.3
1.4
1.5
1.6
Peak Pricing Example
Consumer Loss Calculation for On-Peak Period
On-Peak Price
On-Peak
Demand Curve
$0.054
On-Peak Price
Lost value of
reduced electricity
consumption.
Price ($/kWh)
$0.049
Loss from purchasing
electricity at new, higher price.
$0.044
$0.039
Original Flat Rate
$0.034
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Usage (kWh)
0.8
0.9
1
1.1
1.2
1.3
1.4
New
Old
Usage Usage
1.5
Peak Pricing Example
Consumer Benefits Calculation for Off-Peak Period
Off-Peak Price
Off-Peak
Demand Curve
$0.050
Original Flat Rate
Price ($/kWh)
$0.045
$0.040
Benefit of
additional usage at
new, lower price.
Savings from old usage
level at new, lower price.
$0.035
Old
Usage
Off-Peak Price
$0.030
0
0.1
0.2
0.3
0.4
Usage (kWh)
0.5
0.6
0.7
0.8
0.9
New
Usage
Consumer Benefits Calculation Summary
Off-Peak Benefits
Savings from original usage at lower price
(Old Price – New Price) x (Original Hourly Consumption) x (# of Off-Peak Hours)
Benefit from additional usage
½ x (Old Price – New Price) x (New Hourly Consumption – Old Hourly Consumption)
x (# of Off-Peak Hours)
On-Peak (Negative) Benefits
Losses from new usage level at higher price
(Old Price – New Price) x (New Hourly Consumption) x (# of On-Peak Hours)
Lost benefit from curtailed usage
½ x (Old Price – New Price) x (Old Hourly Consumption – New Hourly Consumption)
x (# of On-Peak Hours)
Consumer Surplus Calculation Results
Flat Pricing
Demand
Price
Hours
kWh
Total Cost
Off-Peak
0.85 kW
$0.041/kWh
7,456
6,344
$258.43
On-Peak
1.33 kW
$0.041/kWh
1,304
1,730
$ 70.47
8,760
8,075
$328.90
Total
Peak Pricing
Demand
Price
Hours
kWh
Total Cost
Off-Peak
0.86 kW
$0.037/kWh
7,456
6,407
$235.33
On-Peak
1.16 kW
$0.049/kWh
1,304
1,508
$ 74.57
8,760
7,971
$309.90
Total
Savings = $ 328.90 – 309.90 = $19.00
Consumer Surplus = [($0.041-$0.037) x (0.85 + 0.5 x (0.86-0.85)) x 7,456] –
[($0.049-$0.041) x (1.16 + 0.5 x (1.33-1.16)) x 1304] = $11.41
Conclusion: Savings calculation overstates consumer benefits estimate by 66%!
A Note on Producer Surplus
• Consumer Savings = Lost (Producer) Revenue
• But Loss in Producer Surplus is Less Than Loss
in Revenue
• The Benefits Stream Parallels that for
Consumers (i.e., Gain During Off-Peak Hours,
Loss During On-Peak Hours)
– Off-Peak Benefits
• Serve original load - at higher price!
• Serve additional load (at higher price)
– On-Peak (Negative) Benefits
• Serve reduced load – at lower price!
• Lost benefit of curtailed usage
Peak Pricing Example
Producer Loss Calculation for On-Peak Period
On-Peak Price
$0.063
Supplier Price When
Customer Billed on Flat Rate
Lost margin from
reduced electricity
sales.
Price ($/kWh)
$0.058
Supply
Curve
Loss from selling electricity at
new, lower price.
$0.053
$0.048
Supplier Price
When Customer
Billed on Peak Rate
$0.043
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Usage (kWh)
0.8
0.9
1
1.1
1.2
Peak Rate
Usage
1.3
1.4
1.5
Flat Rate
Usage
Peak Pricing Example
Producer Benefits Calculation for Off-Peak Period
Off-Peak Price
Supply
Curve
$0.038
Price ($/kWh)
Supplier Price When
Customer Billed on
Off-Peak Rate
Margin from
additional sales at
new, higher price.
$0.037
Increased margin from selling electricity at new, higher price.
$0.036
Supplier Price When
Customer Billed on
Flat Rate
Flat Rate
Usage
$0.035
0
0.1
0.2
0.3
0.4
Usage (kWh)
0.5
0.6
0.7
0.8
0.9
Off-Peak
Rate Usage
Supplier Benefits Calculation Summary
Off-Peak Benefits
Increased margin from original usage at higher price
(New Price – Old Price) x (Original Hourly Consumption) x (# of Off-Peak Hours)
Increased margin from additional usage
½ x (New Price – Old Price) x (New Hourly Consumption – Old Hourly Consumption)
x (# of Off-Peak Hours)
On-Peak (Negative) Benefits
Margin losses from new usage level at lower price
(New Price – Old Price) x (New Hourly Consumption) x (# of On-Peak Hours)
Lost margin from curtailed usage
½ x (New Price – Old Price) x (Old Hourly Consumption – New Hourly Consumption)
x (# of On-Peak Hours)
Producer Surplus Calculation Results
Flat Pricing
Demand
Price
Hours
kWh
Total Revenue
Off-Peak
0.85 kW
$0.036/kWh
7,456
6,344
$230.78
On-Peak
1.33 kW
$0.057/kWh
1,304
1,730
$ 98.12
8,760
8,075
$328.90
Total
Peak Pricing
Demand
Price
Hours
kWh
Total Revenue
Off-Peak
0.86 kW
$0.037/kWh
7,456
6,407
$235.33
On-Peak
1.16 kW
$0.049/kWh
1,304
1,508
$ 74.57
8,760
7,971
$309.90
Total
Lost Revenue = $ 328.90 – 309.90 = $19.00
Producer Surplus = [($0.037-$0.036) x (0.85 + 0.5 x (0.86-0.85)) x 7,456] –
[($0.057-$0.049) x (1.16 + 0.5 x (1.33-1.16)) x 1304] = - $9.50
Conclusion: Margin loss (negative producer surplus) is half of revenue loss.
Why Energy Savings is a Bad Metric
• It ignores the value of energy consumed
• It ignores collateral costs that may be incurred by
consumers if energy use is shifted
• It ignores the corresponding losses incurred by
producers from lower sales (however, these can
be ignored if business case is from consumer
perspective only)
Consumer Surplus is the appropriate metric for
measuring the direct impact of changes in
energy consumption behavior.
But Does This Mean that Real-Time
Pricing is a Bad Thing?
Not Necessarily!!!
• Consumer surplus could (and usually does) increase
• Future rate increases (and perhaps even current rates)
will be reduced due to deferred capacity expansion
and/or lower capacity charges
• Traditional non-TOU pricing is a form of hedging (i.e.,
energy provider pays for energy in real time, while
customer does not), which may result in a “hedge
premium” that can be removed or reduced with TOU
pricing
. . . And What About that Starbuck’s Deal?
Here’s the Real Impact of the Price Increase
Starbuck's Solution
$4.00
Lost value of reduced coffee
consumption
$3.00
New Price
$0.00
New Quantity
0
1
2
3
4
5
$2.10
$2.30
Original Price
$1.00
$2.50
$2.00
$2.70
Loss from purchasing coffee at
new, higher price
$2.90
Price per Cup
$5.00
Old Quantity
6
7
8
9
10
Quantity per Week
Loss from Purchasing Coffee at Higher Price
5 cups x $1.00/cup = $5.00
Total Loss: $7.50
Lost Value of Reduced Coffee Consumption
Cup 6: $2.90 - $2.00 = $0.90
Cup 7: $2.70 - $2.00 = $0.70
Cup 8: $2.50 - $2.00 = $0.50
Cup 9: $2.30 - $2.00 = $0.30
Cup 10: $2.10 - $2.00 = $0.10
Sample AMI Business Case
Ratepayer’s Perspective
Costs
Benefits
Meters
$ 60,100,000
Reduced Meter Reading
Costs
$123,070,000
Remote Disconnect Collars
$101,820,000
Billing / Call Center
Savings
$
AMI Operating Costs
$ 10,160,000
Reduced Energy Theft /
Meter Error
$ 30,440,000
Information Systems
Upgrade
$
Enhanced Receivables
Recovery
$ 10,810,000
Marketing / Administration
$
Total
5,720,000
20,000 Salvage
$177,820,000
$
8,730,000
1,660,000
Deferred Generation
Capacity
$ 17,800,000
Gain in Consumer Surplus
$ 16,800,000
Total
$209,310,000
Assumptions: 20-year meter life, 8% discount rate, 20% residential customer
enrollment in peak / off-peak rate.
Some Final Lessons
• Don’t oversell the case! (It’s only as strong as it’s weakest
link.)
• Different stakeholders will have different business cases.
Don’t ignore the distinctions!
• Multipliers multiply confusion (and grief!). Smart grid
investments may create positive job multipliers, but
reductions in staff due to automation may produce negative
job multipliers
• Phantom benefits will only haunt the case: best if they are
measurable and trackable!
• There’s no such thing as a risk-free investment.
Acknowledge it in the case, and be willing to share it!
Who Bears the Risk?
Utility
High
Risk
Rate Case for
Cost
Recovery /
Guaranteed
Reduction in
Revenue
Requirements
Over Time
Rate Tracker
for Cost
Recovery /
Guaranteed
Reduction in
Revenue
Requirements
Over Time
Rate Case for
Cost
Recovery /
Rate Tracker
for Savings
and Benefits
PerformanceBased
Ratemaking?
Rate Tracker
for Cost
Recovery /
Rate Tracker
for Savings
and Benefits
Customer
Rate Case for
Cost
Recovery /
Rate Case for
Savings and
Benefits
Rate Tracker
for Cost
Recovery /
Rate Case for
Savings and
Benefits
High
Risk
Thank You!
Questions?
John Caldwell
202-508-5175
[email protected]