Chuck Goldman. July 15, New Mexico PRC Workshop on Utility Incentives. Energy Analysis Department

Transcription

1 Financial Analysis of Incentive Approaches to Promote Energy Efficiency for a Prototypical Southwest Utility Chuck Goldman Lawrence Berkeley National Laboratory New Mexico PRC Workshop on Utility Incentives July 15,

2 Project Approach & Objectives Facilitate dialogue on various shareholder incentive mechanisms and/or decoupling by conducting quantitative financial analysis Analyze impacts of various incentives and ratemaking mechanisms on stakeholders (shareholders, ratepayers); calculate earnings, utility bill and rate impacts for prototypical utilities under different scenarios (e.g. size of EE program portfolio, initial retail rate levels, build vs. buy) Caveats: - We do NOT account for any potential link between the type and/or size of shareholder incentive mechanism and utility s motivation to increase EE goals or portfolio size - We do NOT analyze other potential non-financial motivators of utility behavior and support for EE (e.g., PUC orders, customer relations) Project Team - Chuck Goldman & Peter Cappers (LBNL) - Wayne Shirley (Regulatory Assistance Project) - Michele Chait (E-Three) - Jeff Schlegel (Consultant) - George Edgar (Wisconsin Energy Conservation Corp.) 2

3 Overview Characterize prototypical southwest utility (~10 min.) Characterize alternative energy efficiency portfolios (~15 min.) Summarize shareholder incentive and decoupling mechanism analyzed (~5 min.) Results of financial modeling of prototypical southwest utility implementing alternative EE portfolios (~20 min) Discuss implications of results 3

4 Developing Prototypical SW Utility Examined financial, cost and system characteristics of IOUs serving southwestern states Used characteristics of Arizona Public Service (APS) and Nevada Power (NP) to help develop our prototype SW utility - Collected some data on utility financial, system characteristics and DSM for Pacificorp, Public Service New Mexico (PSNM), Tucson Electric and Rocky Mountain Power Relied heavily upon publicly available data sources - Annual Financial i Reports & 10-K filings - FERC Form 1 - Integrated Resource Plan filings - Demand Side Management program filings Created business as usual base case for prototypical SW utility, - EE cases with varying incentive mechanisms compared to Base Case 4

5 Southwest Utility Characteristics APS NP LBNL Prototype PSNM Sales Growth 3.6% 2.0% 2.4% 6.6% Demand Growth 5.5% 2.1% 2.6% 3.9% Customer Growth 3.8% 5.0% 3.2% 5.3% Fuel Expense Growth 4.4% 14.8% 5.9% 5.2% Non-Fuel Expense Growth 7.4% 7.8% 7.1% 15.1% Authorized ROE 11.50% 10.70% 11.00% 10.75% 5

6 Southwest Utility Characteristics (2) 16% 14% APS LBNL Prototype NP PSNM 12% ROE 10% Annual Gr rowth Rate / 8% 6% 4% 2% 0% -2% Retail Sales Peak Demand Customer Fuel Expenses Non-Fuel Expenses Authorized ROE -4% 6

7 Physical Characteristics of Prototypical Southwest Utility GWh/MW 7 50,000 45,000 40,000 35,000 30,000 25,000 20, ,000 10,000 5, % Retail Sales Peak Demand Load Factor Annual 50.5% % 49.5% 49.0% 48.5% 48.0% 47.5% 47.0% 46.5% 46.0% Lo oad Factor Growth Rate Retail Sales 2.4% Peak Demand 2.6% Customers 3.2%

8 Financial & Cost Characteristics of Prototypical Southwest Utility Authorized Level 1 st Year Revenue Requirement ROE 11.0% Debt Cost 6.6% 66% D:E Ratio 50:50 Fuel and Purchased Power 47% Taxes 7% Return on Rate Base 12% Depreciation 7% Annual Growth Debt Interest 7% Fuel & PP 5.9% CapEx 5.1% O&M 8.8% O&M 20% 8

9 Prototypical Southwest Utility Earnings Base Case inal) Earning gs ($MM, Nom 9 Rate Case Filed $ % $700 $600 $500 $400 $300 $200 $100 $ % 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% Accumulated Unachieved Earnings Achieved Earnings Unachieved Earnings Authorized ROE Achieved ROE Ret turn on Equity Base case represents no decoupling mechanism and no energy efficiency Utility unable to achieve authorized earnings (@ 11% ROE) between rate cases Utility s costs growing faster than revenue it receives from increases in sales Assume utility files biennial rate case to mitigate further earnings erosion ($335M)

10 Overview Characterize prototypical southwest utility Characterize alternative energy efficiency portfolios Summarize shareholder incentive and decoupling mechanism analyzed Results of financial modeling of prototypical southwest utility implementing alternative EE portfolios Discuss implications of results 10

11 Retail Sales (G GWh) Annual Effect of EE Portfolios on Retail Sales and Peak Demand ( ) 44,000 9,750 42,000 40,000 38,000 36,000 34,000 32,000 30,000 28,000 26,000 9,000 8,250 7,500 6,750 6,000 5,250 4,500 3,750 3,000 24,000 2, Retail Sales Base Case Retail Sales w/ Retail Sales w/ Retail Sales w/ Peak Demand Base Case Peak Demand w/ Peak Demand w/ Peak Demand w/ Annua al Peak Deman nd (MW) Utility delivers EE programs for 10 years Assume 11 year avg. measure lifetime of EE portfolio Moderate EE 0.5% sales reduction per year by 2009 Significant EE 1% sales reduction per year by 2010 Aggressive EE 2% sales reduction per year by

12 Avoided Cost of Energy Av voided Cost of Energy ($/kw Wh, Nominal) $0.110 $0.100 $0.090 $ $0.070 $0.060 $0.050 $0.040 $0.030 $ Peak - Peak - Peak - OffPeak - Off-Peak - Off-Peak Avoided cost of peak and offpeak energy forecast developed for entire analysis period Supply-side additions influence growth and level of avoided costs 12

13 Avoided Cost of Generation, Transmission and Distribution Capacity Avoided d Cost of Capa acity ($/kw-yea ar, Nominal) $120 Generation Transmission & Distribution $110 $100 $90 $80 $70 $60 $50 $40 $30 $ Avoided cost of generation, and T&D capacity forecast developed for entire analysis period Avoided T&D investment is only 50% of cost due to limited ability of EE to affect T&D capital expenditures Neither supply-side additions nor size of EE portfolio influences avoided capacity costs Avoided capacity costs grow at constant rate of 1.9% annually 13

14 Costs and Benefits of Alternative EE Portfolios PA Cost per Lifetime kwh Saved $2008 for 1 st Yr Implementation TR Cost per Lifetime kwh Saved $2008 for 1 st Yr Implementation TR Benefit Cost Ratio w/o Shareholder Incentives 1.6 /kwh 1.8 /kwh 2.6 /kwh 3.0 /kwh /kwh 4.0 /kwh 1.60 Assume Sig. and portfolios have higher costs than portfolio due to more expensive measures and higher customer incentives All EE Portfolios are very costeffective, from TR perspective Net benefits increase but B/C ratio decreases somewhat in Significant and Aggressive EE cases 14

15 Total Resource Cost of Alternative EE Portfolios ( ) Nominal) Costs ($MM, Resource $350 $300 $250 $200 $150 $100 $50 $0 Administrative Measure Incentive Participant Administrative costs increase marginally as EE increases Measure incentive costs must increase due to more expensive measures and for utility to achieve its savings goals Participant i t costs increase as more expensive measures must be undertaken 15

16 Energy Savings as a % of Forecasted Load Growth Energy Sa avings as % of Forecast Loa ad Growth (%) 80% 70% 60% 50% 40% 30% 20% 10% 0% 2012 (5 Yr.) 2017 (10 Yr.) After 5 years, the Moderate EE portfolio offsets ~24% of load growth, while Aggressive EE offsets 56% Moderate EE portfolio offsets ~40% of load growth In 2017, Aggressive EE portfolio offsets 73% of projected load growth 16

17 Overview Characterize prototypical southwest utility Characterize alternative energy efficiency portfolios Summarize shareholder incentive and decoupling mechanism analyzed Results of financial modeling of prototypical southwest utility implementing alternative EE portfolios Discuss implications of results 17

18 Strategies to Encourage Utility to Achieve Energy egy Efficiency ce cygoas Goals Issues: - EE reduces future sales, which h leads to some erosion of authorized earnings between rate cases - How does utility earn $$ for superior performance in delivering EE (compared to other investment opportunities)? Decoupling - Utility considers instituting a Revenue-Per-Customer (RPC) decoupling mechanism Shareholder Performance Incentives - Additional financial payment could induce utility to achieve EE program savings goals - Utility considering several different designs 18

19 Alternative Shareholder Incentives Performance Target - Utility receives performance-based incentive of an additional 10% of program costs if it achieves EE portfolio goals - Program costs and shareholder incentive are explicitly recovered through a rider Cost Capitalization ti (similar il to approach used in NV) - Utility capitalizes the annual cost of the program over the lifetime of the installed measures - Authorized ROE (11%) is increased by 500 basis points for these EE investments 19

20 Alternative Shareholder Incentives (2) Shared Net Benefits (Similar to approach used in CA and MN) - Utility retains 15% of the net benefits from the portfolio of EE programs - Program costs and shareholder incentives are explicitly recovered through a rider Save-a-Watt (Proposed by Duke Energy) - Utility capitalizes 90% of the costs avoided over the lifetime of the installed measures - Collected through a rider which serves to cover program costs and any lost earnings from reduced sales and provides financial incentive to shareholders 20

21 Overview Characterize prototypical southwest utility Characterize alternative energy efficiency portfolios Summarize shareholder incentive and decoupling mechanism analyzed Results of financial modeling of prototypical southwest utility implementing alternative EE portfolios Discuss implications of results 21

22 Effect of EE on Allowed Revenue Requirement ( ) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 In all EE cases after 2008, revenue requirement is below Base Case (No EE) Fuel and purchased power savings account for most of reduced revenue requirement EE also minimally reduces the annual growth in CapEx budgets, which impacts ratebase levels Revenuee Requirement ($MM, Nominal) Base Case Base Case Base Case Base Case Base Case Base Case Base Case Base Case Base Case Base Case O&M Return on Rate Base Depreciation Interest on Debt Fuel and Purchased Power Utility EE Program Costs Taxes

23 Effect of EE & Decoupling on Unachieved Earnings Unach hieved Earning gs relative to Authorized ($ MM, PV) $180 w/o Decoupling w/ Decoupling $160 $140 $120 $100 $80 $60 $40 $20 $0 Base Case ROE 10.57% 10.68% 10.54% 10.69% 10.52% 10.69% 10.48% 10.69% With EE and no decoupling, earnings and ROE erode more relative to authorized levels as sales are reduced Decoupling significantly reduces unachieved earnings for larger EE portfolios 23

24 Shareholder Perspective Effect of Decoupling and Shareholder Incentive After-Ta ax Earnings ($ $B, PV) 24 With decoupling and no shareholder $ % incentive, earnings Earnings Decoupling Lost Margin Shareholder Incentive ROE drop when EE is $ % implemented $ % ($0.08B $0.12B) $ % Earnings increase w/ contribution of $ % decoupling and a $ % shareholder incentive relative $ % to Base Case for all $ % but Performance $ % Target in Mod. and cases $ % Performance $ % Target and Cost Capitalization incentives jump dramatically from to No EE No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Base Case Save-a-Watt Averag ge Return on Equity due to 118% increase in program costs

25 Shareholder Perspective Change Effect of Decoupling and Shareholder Incentives $500 Earnings only increase over Base Case when shareholder PV) Change in Avg. ROE from Base Case (Basiss Points) $400 $300 $200 $100 $- $(100) 250 Earnings ROE increase over incentives are implemented ROE increases over Base Case regardless if shareholder incentives are Change in Earnings from Base Case ($MM, No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt 25 provided

26 Program Cos sts ($MM, PV) Ratepaye er Cost Net of $1,200 $1,000 $800 $600 $400 $200 $0 Ratepayer Perspective Cost of Shareholder Incentives and Decoupling Shareholder incentives AND decoupling for each Decoupling Lost Margin Performance Target mechanism EXCEPT Cost Capitalization Shared Net Benefits Save-a-Watt Save-a-Watt Decoupling contributes less than shareholder incentive for all but Performance Target in Mod. and cases Combined cost to ratepayers of incentives (all but SaW) and decoupling is $96MM - $354MM SaW, net of EE program budgets, costs ratepayers between $412MM and $958MM 26

27 Ratepayer Perspective Effect of Decoupling and Shareholder Incentive ls (Collected Revenue $B, PV) Ratepayer Bill $31.25 $31.00 $30.75 $30.50 $30.25 $30.00 $29.75 $29.50 $29.25 $29.00 $28.75 No EE Ratepayer bill savings increase with larger EE portfolios (i.e., ~$0.9 to ~$1.7B, except for Save-A-Watt) $0.131 g Rev. Req. Decoupling Lost Margin Shareholder Incentive Rates $0.130 No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Base Case Save-a-Watt $0.129 $0.128 $0.127 $0.126 $0.125 $0.124 $0.123 $0.122 $0.121 Average Re etail Rates ($/k kwh, Nominal) Small retail rate increase (0 5 mills/kwh) in all cases relative to Base Case w/o decoupling 27

28 Ratepayer Perspective % Change Effect of Decoupling and Shareholder Incentive % Cha ange from Bas se Case 8.0% 6.0% 4.0% 20% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt % increase in retail rates Retail Rates Ratepayer Bills grows as size of EE portfolio increases No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt Avg. bill savings to ratepayers increases with larger EE portfolios (e.g. ~3.0% to ~4.5%, to ~6.0%), excluding Save-A-Watt 28

29 TRC Net Resource Benefits of EE al Resource ($ $B, PV) Tot $2.4 $2.2 $2.0 $1.8 $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $- $(0.2) $(0.4) Measure lifetime without replacement. e No Incentiv Cost Benefits Net Benefits Performance e n et Target Cost Capitalizatio Shared Ne Benefits tt Save-a-Wat No Incentiv e Performance e n et Target Cost Capitalizatio Shared Ne Benefits tt Save-a-Wat e No Incentiv Performance e n et Target Cost Capitalizatio Shared Ne Benefits tt Save-a-Wat Resource benefits valued at forecasted avoided cost of energy and capacity In every case (except SaW), EE with incentives produces positive net benefits (~$0.3B $0.6B) SaW resource costs are 90% of Resource Benefits + Participant costs, the latter increases with larger EE portfolios by design * Measure lifetime ** TR Cost without replacement metric includes cost of shareholder incentives. 29

30 TRC w/ Shareholder Incentive per Lifetime kwh Saved TRC w/ Share eholder Incentive e per Lifetime kw Wh Saved ($/kw h) $0.140 $0.120 $0.100 $0.080 $0.060 $0.040 $0.020 $0.000 Lost Margin Contribution No Incentive Performance Target Cost Capitalization Shared Net Benefits Save-a-Watt This metric includes total resource cost with cost of EE shareholder incentives Contribution of Lost Margin to SaW is explicitly shown so that one can properly compare costs of alternative incentive designs Costs per lifetime kwh saved increase with EE portfolio in all cases, minimally for SaW 30

31 Overview Characterize prototypical southwest utility Characterize alternative energy efficiency portfolios Summarize shareholder incentive and decoupling mechanism analyzed Present results of financially modeling prototypical southwest utility introducing alternative EE portfolios Discuss implications of results 31

32 Implications of Results Our southwestern prototypical utility has: - Costs growing g faster than sales; declining sales per customer - In Base Case, utility experiencing earnings growth but not achieving authorized ROE - Low to moderate EE costs Implementing EE: Societal perspective - The EE portfolios are cost effective from the TRC perspective, but the contribution of the shareholder incentive results in negative net benefits to ratepayers for Save-a-Watt only Net resource benefits are significant ($0.3B to $0.6B) with Performance Target, Cost Capitalization, and Shared Net Benefits incentives; and increase with more aggressive EE goals Net resource benefits are negative with Save-A-Watt ($-0.05B to $-0.26B) as assumed participant costs exceed the 10% of net resource benefits to ratepayers left over from SaW incentive mechanism (i.e., 90% of avoided costs) Ratepayer Perspective - Significant bill savings accrue (2% - 6%) in all EE cases - For all EE cases with shareholder incentives, average rates increase (0 5 mills/kwh) 32

33 Implications of Results (cont) Shareholder perspective - If EE is implemented without decoupling, the overall level of earnings decreases by $79 - $118M and ROE drops by 2 to 9 basis points compared to Base Case - Introducing decoupling increases ROE by 12 basis points compared to Base Case without EE (but utility still not achieving authorized ROE) but utility still has lower earnings by $35 to $52M relative to the Base Case - Additionally implementing shareholder incentives results in: ROE increasing in all cases and over all shareholder incentives, relative to Base Case, and this increase gets larger as size of EE portfolio grows If decoupling and either Shared Net Benefits or Cost Capitalization are implemented, earnings improve for all EE portfolios With Performance Target and a decoupling mechanism applied, earnings improve over the Base Case only with an Aggressive EE portfolio If Save-A-Watt alone is implemented, much higher earnings ($177 - $477M) and ROE ( basis points) are achieved compared to Base Case 33

34 Discussion Questions POLICY ISSUES Relative importance and contribution of decoupling and alternative incentive mechanisms to shareholders and ratepayers? How much is enough? - Level & structure of incentives necessary to motivate utility mgmt Are incentives a zero sum game between utilities and consumers or are shareholder incentives likely to increase net benefits by driving higher levels of efficiency? If states pursue Aggressive EE savings goals, how does this affect our thinking about incentive mechanisms and decoupling? Relationship between utility s incentive mechanism and types of EE or DSM programs that it is likely to deploy? Relative importance of ROE vs. absolute earnings in motivating utilities? 34

35 Appendix Slides 35

36 Performance Target Incentive Mechanism Utility able to fully recover er program costs Cost Achieves > X% As an incentive, utility is rewarded an additional Bonus (% of Actual Program Costs) % of total program costs Achieves < Incentive level typically tied to achievement of energy (and/or demand) savings goals X% reduction in annual retail sales Actual Program Costs reduction in annual retail sales 36

37 Shared Net Benefits Incentive Mechanism Utility retains % of the net resource benefits of the EE program portfolio Incentive level typically tied to achievement of energy savings goals or level of net benefits Benefits are typically defined as avoided costs of energy, capacity, T&D savings, and environmental benefits (in some cases) 37 California EE Incentive Mechanism Source: CPUC Decision

38 Cost Capitalization Incentive Mechanism Utility is able to capitalize/ratebase EE program costs (similar to supplyside assets) EE investment is typically amortized over avg. lifetime of EE measures Utility earns a return on the undepreciated EE asset, often with a kicker to its authorized ROE Asset Valu ue ($MM) $10 $1.00 $9 $0.90 $8 $0.80 $7 $0.70 $6 $0.60 $5 $0.50 $4 $0.40 $3 $0.30 $2 $0.20 $1 $0.10 $0 $ Years Undepreciated Asset (Left Axis) Return on Equity (Right Axis) Recovery M) Asset Cost ($M Depreciated Asset (Left Axis) Debt Interest Cost (Right Axis) 38

39 Save-a-Watt Incentive Mechanism Duke Energy proposed an incentive mechanism that values DSM demand and energy savings at 90% of their lifetime avoided costs Avoided investment in energy and capacity is amortized over lifetime of the EE measures Utility able to charge ratepayers a return on the un-depreciated avoided investment Cost ( /kwh) 90% of AC 2 Profit Net Lost Revenu enue Program Costs Loss Efficiency Savings Mechanism covers program costs, any net lost revenue, and traditional incentive payment 39