Tag Archives: regulation

Decoupling & Demand Side Management in Colorado

Utility revenue decoupling is often seen as an enabling policy supporting “demand side management” (DSM) programs.  DSM is a catch-all term for the things you can do behind the meter that reduce the amount of energy (kWh) a utility needs to produce or the amount of capacity (kW) it needs to have available.  DSM includes investments improving the energy efficiency of buildings and their heating and cooling systems, lighting, and appliances.  It can also include “demand response” (DR) which is a dispatchable decline in energy consumption — like the ability of a utility to ask every Walmart in New England to turn down their lights or air conditioning at the same time on a moment’s notice — in order to avoid needing to build seldom used peaking power plants.

For reasons that will be obvious if you’ve read our previous posts on revenue decoupling, getting utilities to invest in these kinds of measures can be challenging, so long as their revenues are directly tied to the amount of electricity they sell.  Revenue decoupling can fix that problem.  However, reducing customer demand for energy on a larger scale, especially during times of peak demand, can seriously detract from the utility’s ability to deploy capital (on which they earn a return) for the construction of additional generating capacity.  That conflict of interests is harder to address.

But it’s worth working on, because as we’ll see below, DSM is cheap and very low risk — it’s great for rate payers, and it’s great for the economy as a whole.  It can reduce our economic sensitivity to volatile fuel prices, and often shifts investment away from low-value environmentally damaging commodities like natural gas and coal, toward skilled labor and high performance building systems and industrial components.

The rest of this post is based on the testimony that Clean Energy Action prepared for Xcel Energy’s 14AL-0660E rate case proceeding, before revenue decoupling was split off.  Much of it applies specifically to Xcel in Colorado.  However, the overall issues addressed are applicable in many traditional regulated, vertically integrated monopoly utility settings.

Why can’t we scale up DSM?

There are several barriers to Xcel profitably and cost-effectively scaling up their current DSM programs.  Removing these impediments is necessary if DSM is to realize its full potential for reducing GHG emissions from Colorado’s electricity sector.  Revenue decoupling can address some, but not all of them.

  1. There are the lost revenues from energy saved, which impacts the utility’s fixed cost recovery.  If the incentive payment that they earn by meeting DSM targets is too small to compensate for those lost revenues, then the net financial impact of investing in DSM is still negative — i.e. the utility will see investing in DSM as a losing proposition.  Xcel currently gets a “disincentive offset” to make up for lost revenues, but they say that this doesn’t entirely offset their lost revenues.
  2. Even if the performance incentive is big enough to make DSM an attractive investment, the PUC currently caps the incentive at $30M per year (including the $5M “disincentive offset”), meaning that even if there’s a larger pool of cost-effective energy efficiency measures to invest in, the utility has no reason to go above and beyond and save more energy once they’ve maxed out the incentive.
  3. If this cap were removed, the utility would still have a finite approved DSM budget.  With an unlimited performance incentive and a finite DSM budget, the utility would have an incentive to buy as much efficiency as possible, within their approved budget, which would encourage cost-effectiveness, but wouldn’t necessarily mean all the available cost-effective DSM was being acquired.
  4. Given that the utility has an annual obligation under the current DSM legislation to save a particular amount of energy (400 GWh), they have an incentive to “bank” some opportunities, and save them for later, lest they make it more difficult for themselves to satisfy their regulatory mandate in later years by buying all the easy stuff up front.
  5. It is of course the possible that beyond a certain point there simply aren’t any more scalable, cost-effective efficiency investments to be made.
  6. Finally and most seriously, declining electricity demand would pose a threat to the “used and useful” status of existing generation assets and to the utility’s future capital investment program, which is how they make basically all of their money right now.

Revenue decoupling can play an important role in overcoming some, but not all, of these limitations.  With decoupling in place, we’d expect that the utility would be willing and able to earn the entire $30M performance incentive (which they have yet to do in any year) so long as it didn’t make regulatory compliance in future years more challenging by prematurely exhausting some of the easy DSM opportunities.

Continue reading Decoupling & Demand Side Management in Colorado

Facing the Risk in Fossil Fueled Electricity

I recently wrote about how our risk tolerance/aversion powerfully affects our estimation of the social cost of carbon, but obviously that’s not the only place that risk shows up in our energy systems.  Fossil fuel based electricity is also exposed to a much more prosaic kind of risk: the possibility that fuel prices will increase over time.

Building a new coal or gas plant is a wager that fuel will continue to be available at a reasonable price over the lifetime of the plant, a lifetime measured in decades.  Unfortunately, nobody has a particularly good record with long term energy system predictions so this is a fairly risky bet, unless you can get somebody to sign a long term fuel contract with a known price.  That doesn’t really get rid of the risk, it just shifts it onto your fuel supplier.  They take on the risk that they won’t make as much money as they could have, if they’d been able to sell the fuel at (higher) market rates.  If the consumer is worried about rising prices, and the producer is worried about falling prices, then sometimes this can be a mutually beneficial arrangement.  This is called “hedging”.

Continue reading Facing the Risk in Fossil Fueled Electricity

Bright or Dark?

The City of Boulder Presents Karl Rabago

Thursday, March 13th, 7:00 pm – 8:30 pm
West Senior Center: Creekside Room
909 Arapahoe Ave, Boulder, CO 80302

Update! Watch the presentation online:

The Q&A Session:

Are you wondering why solar is in the news so much these days? Is the industry in trouble? And what might changes mean for Boulder’s plans to draw more of its power from the sun?

We’ll be exploring these questions – and many more – on March 13 at a free and public event featuring Karl Rábago, a national leader and innovator on solar energy. We’d love to see you there!

This conversation is both relevant and timely. As part of the Energy Future initiative, the Boulder community has said it wants to increase opportunities for local generation of cleaner electricity. While initial modeling put an emphasis on wind, solar will undoubtedly be an important part of our resource mix. Boulder also has lots at stake in terms of the solar industry. Solar leaders that help individuals and businesses gain access to solar technology are contributing to our strong economy, positioning our community to make the type of environmental progress others dream about.

But regulatory changes are looming – and some worry solar’s golden era may be coming to an end. Locally, Xcel Energy has proposed significant changes in net metering as part of its 2014 renewable energy standard compliance plan. These issues have been severed into different dockets, but the decisions will be important nonetheless.

Few people understand the concerns and opportunities better than Karl Rábago. With more than 20 years of experience in electricity policy and regulation, energy market development and energy technology development, his perspective is deep and broad. Rábago operates an energy consulting practice, Rábago Energy LLC, providing strategic, policy, regulatory and market development consulting in the clean and innovative energy sectors. He serves as Chair of the Board of the Center for Resource Solutions, a San Francisco-based non-governmental organization that works to advance voluntary clean energy markets, and also sits on the Board of the Interstate Renewable Energy Council (IREC).

Past Positions:

  • Commissioner, Texas Public Utility Commission
  • Deputy Assistant Secretary at the US Department of Energy Vice President of Distributed Energy
  • Services at Austin Energy Director of Regulatory Affairs for the AES Corporation and AES Wind
  • Sustainability Leader with NatureWorks, LLC
  • Managing Director & Principal, Rocky Mountain Institute

Legal Foundations for New Carbon Pollution Standards Outlined

The Environmental Protection Agency (EPA) is currently developing carbon pollution reduction standards for new and existing power plants that will be implemented under the Clean Air Act as part of President Obama’s Climate Action Plan. According to the Environmental Defense Fund (EDF), “fossil fuel lawyers are attacking the standards, saying that the EPA does not have the authority under the Clean Air Act to establish any actual limits on carbon pollution. If the EPA does have that authority, there are no demonstrated measures to reduce carbon pollution from power plants, so any required emission reductions must at most be ‘minimal.'”

In objection to these statements, the EDF released a white paper, Section 111(d) of the Clean Air Act: The Legal Foundation for Strong, Flexible and Cost-Effective Carbon Pollution Standards for Existing Power Plants, describing the legal foundations for the EPA to work with states to reduce carbon emissions for existing power plants. Continue reading Legal Foundations for New Carbon Pollution Standards Outlined