CPUC Avoided Cost Proceedings (updated 7/31/06)   >

Avoided Cost Estimation

As part of its electricity deregulation reforms, California committed to funding for programs that promote distributed energy resources such as demand-side-management (DSM), distributed generation (DG) and demand response. Besides mitigating price increases and volatility and deferring T&D investments, distributed energy resource programs can also reduce negative externalities (e.g., carbon dioxide) in the production and consumption of electricity and natural gas.

Many of these programs are evaluated and selected based on their cost-effectiveness, which in turn is based on a comparison of a program's costs and the "avoided costs" used to value the energy saved by each program. The term "total avoided cost" refers to the total cost avoided by society through a reduction in energy usage, which can be either electricity or natural gas. For the evaluation of cost-effectiveness, the avoided cost is the societal benefit of conservation.

E3's avoided cost methodology recognizes that avoided costs are not uniform across a large geographical region. In fact, they vary by hour of a typical year and by planning areas and climate zones within a state. They are known as "area- and time-specific" (ATS) avoided costs. In quantifying avoided costs, E3 suitably includes various adders to capture factors not embodied in the market price (or marginal cost) of energy. Such factors include environmental externalities (eg., carbon dioxide emissions), T&D capacity and line losses, the marginal cost of ancillary services, and the price effect of demand reduction on energy consumers.

E3 professionals have been retained to extend area- and time-specific costs to applications beyond distributed resource evaluations. For example, utilities and commissions have found that the higher accuracy offered by area- and time-specific costs can be beneficial for ratemaking and resource management policies.

E3 professionals routinely answer such questions as:

• What distributed resource programs should be developed to reduce the incremental cost of meeting the demand for energy services (e.g., heating and lighting)?

• When should distributed resource programs be put in place to achieve the greatest gain?

• Where should a distributed resource program be implemented to achieve the most benefit?

The allocation of costs to area and time can have a dramatic effect on the level of avoided costs for efficiency measures that target the peak. The figure below illustrates the variation in electricity avoided costs by utility, planning area and climate zone across California in $/kW-year, as developed for the California Public Utilities Commission in 2003.

E3 at Work

• E3 was hired by the California Public Utilities Commission (CPUC) to develop detailed avoided cost estimates for use in cost-effectiveness evaluations of energy efficiency (EE) and demand-side management (DSM) programs. The methodology produces avoided cost estimates that are transparent and can be easily updated as gas and electricity market prices change.  These new avoided cost estimates are significantly different than past avoided costs used in California and other jurisdictions because they vary by region within the state (by utility planning area and climate zone) and time of year. This approach results in higher value of energy savings during peak times of year and within higher cost areas (more extreme climates and areas with higher local transmission and distribution investments). Click here for a summary of proceedings and the final report.

• E3 supported Heschong Mahone Group (HMG) and Pacific Gas & Electric Company (PG&E) in the development of a time- and area-dependent evaluation of energy value for the California building standards. The Time-Dependent Valuation (TDV) approach will be incorporated into the Title 24 California buildings energy efficiency standards beginning in 2005. Using the TDV approach, energy efficiency measure savings are valued differently at different times to better reflect the actual costs to users, to the utility system, and to society.Click here for a brief Power Point summary given to the CEC.

• New York utilities ConEdison wand Oarnge & Rockland have retained Mr. Price to lead their pilot programs for distributed resource requests for proposals.

• Mr. Price and E3 affiliate Roger Dugan conduct seminars for utility staff on the engineering and economic issues central to the integration of distributed resources into utility systems. 

• Dr. Orans and Mr. Horii were instrumental in PG&E’s adoption of area-specific costs for its revenue allocation and ratemaking applications.

• Dr. Orans and Mr. Horii developed an area-specific wholesale transmission tariff for BC Hydro.

Selected E3 Publications

• Horowitz, I. and C.K. Woo (2006) “Designing Pareto-Superior Demand-Response Rate Options,” Energy, 31:6-7, 1040-1051.
• Orans R. et al. (2004) A Forecast of Cost-Effectiveness: Avoided Costs and Externality Adders, E3 Research Report submitted to the California Public Utilities Commission.
• Hartway, R., S. Price and C.K. Woo (1999) “Smart Meters, Customer Choice and Profitable Time of Use Rate Option,” Energy - The International Journal, 24, 895-903.
• Heffner, G., C.K. Woo, B. Horii and D. Lloyd-Zannetti (1998) “Variations in Area- and Time-Specific Marginal Capacity Costs of Electricity Distribution,” IEEE Transactions on Power Systems, PE-493-PWRS-012-1997, 13:2, 560-567.
• Ball, G., D.L. Zannetti, B. Horii, D. Birch, R. Ricks and H. Lively (1997) “Integrated local T&D planning using customer outage costs,” Energy Journal, DR Special Issue, 137-160.
• Forte, V.J., R. Pupp, R. Putnam and C.K. Woo (1995) "Using Customer Outage Costs in Electricity Reliability Planning," Energy - The International Journal, 20:2, 81-87.
• Swisher, J. and R. Orans (1996) “The Use of Area-Specific Utility Costs to Target Intensive DSM Campaigns,” Utility Policy 5:3/4, 185-197.
• Pupp, R., C.K.Woo, R. Orans, B. Horii and G. Heffner (1995) "Load Research and Integrated Local T&D Planning," Energy - The International Journal, 20:2, 89-94.
• Woo, C.K., D. Lloyd-Zannetti, R. Orans, B. Horii and G. Heffner (1995) "Marginal Capacity Costs of Electricity Distribution and Demand for Distributed Generation," Energy Journal, 16:2, 111-130.
• Woo, C.K., R. Orans, B. Horii, R. Pupp and G. Heffner (1994) "Area- and Time-Specific Marginal Capacity Costs of Electricity Distribution," Energy - The International Journal, 19:12, 1213-1218.
• Orans, R., C.K. Woo and B. Horii (1994) "Targeting Demand Side Management for Electricity Transmission and Distribution Benefits," Managerial and Decision Economics, 15, 169-175.
• Orans, R., C.K. Woo, R. Pupp and I. Horowitz (1994) "Demand Side Management and Electric Power Exchange," Resource and Energy Economics, 16, 243-254.