Can electric utilities continue to acquire the efficiency resource in the ways that have been employed since the early 1980s, or are there potentially more efficient and effective ways to secure energy savings that should be given serious consideration? That is the question this paper explores.
Energy conservation programs have been a success in the Northwest. In the last 15 years the electric utilities in the Northwest captured nearly 800 average megawatts of energy-efficiency improvements through conservation programs. These energy savings cost significantly less than alternative electrical resources available during that period.
In addition, there were significant efficiency gains attributable to improved residential and commercial energy codes. During this decade, the two most populous states in the region, Oregon and Washington, and several local jurisdictions in Idaho and Montana, adopted energy codes for new residential and commercial buildings that are the among the most rigorous in the nation. These codes will result in several hundred megawatts of savings. Utility support has been critical to implementing these codes.
At the federal level, minimum efficiency standards were established for major residential appliances. Also at the federal level, the National Energy Policy Act of 1992, established new efficiency standards for some lamps, lighting equipment, electric motors, commercial heating, ventilating and air conditioning equipment and shower heads. These standards will result in savings that do not have to be sought through utility programs.
The Council estimates that these local, state and federal codes and standards have already contributed an additional 150 average megawatts of savings.
The Northwest Power Planning Council’s 1991 Power Plan sets an ambitious goal of an additional 1,500 average megawatts of cost-effective efficiency savings by the end of the decade. So far, the Council’s tracking effort indicates that the region is on the path to achieving its conservation goals. Efficiency continues to be an attractive resource. Nearly one half of it is available for less than two-thirds of the cost of a new combined-cycle combustion turbine. It is environmentally benign. It is not subject to the risks of increasing fuel prices. Based on a Council staff analysis, even with natural gas price escalation rates at approximately 40 percent below those used in the 1991 plan, the acquisition of conservation resources of this magnitude remained regionally cost-effective. Analysis conducted by the Council also shows that if 30 percent of the energy savings now called for in the plan fail to materialize, the present value cost to the region would be approximately $1.8 billion higher.
Despite the successes of the past decade, there is reason to question whether the region can continue to acquire energy savings in the ways employed since the early 1980s. The changing utility environment may call into question the means by which we acquire the conservation resource.
There are two key factors in this new environment. First, the benchmark resource with which efficiency must compete is no longer a capital-intensive, long lead time, inflexible and expensive coal plant that costs two to three times more than the average efficiency resources. Now the competition is a low capital cost, short lead time, highly flexible and relatively clean natural gas-fired combustion turbine. The levelized cost of power from a combustion turbine is not much more than the cost of the average efficiency resource. At the very minimum, this implies that developers of efficiency must be very cost-conscious if they wish to compete.
In addition, because combustion turbines have low capital costs and the utility’s revenues are not reduced as they are with conservation, there will be slightly smaller impacts on rates with combustion turbines than with efficiency. Because the costs of the conservation are essentially all front-loaded capital costs, the rate impact of the conservation will be greatest in the near term. However, as gas prices rise, the power from combustion turbines will begin to be more expensive than most efficiency resources in the long run.
The rate impacts of conservation interact with the second major factor in the changing utility environment — increasing utility concerns about their competitiveness. As the utility industry restructures itself in response to ongoing technological and regulatory changes, many utilities are becoming concerned about their ability to be competitive suppliers. This is certainly the case with the Bonneville Power Administration’s concerns about being a competitive wholesale supplier of electricity. It is also a concern for some retail utilities that fear the loss of major industrial or commercial customers to lower-price power providers. Some are beginning to question whether demand-side management can be sustained in a more competitive utility environment. Will utilities concerned about near-term rate competitiveness continue to invest in a long-term resource like efficiency?