April 11, 2005

Metering, Billing, CRM/CIS America Conference

Valuation & Funding Issues with Demand Response Deployments

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Valuation for Demand Response

Typically focused on least-cost planning

Focused on NPV analysis of multi-year deployment, translating it into a levelized $kW-yr to compare it against other supply options

Given its nature, negawatt deployments are typically compared against costs of a peaking plant

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Typical Model Structure

Program costs & model assumption (technology, recruiting, O&M, and related expenditures; technical performance, financial measures (e.g., WACC, rates, etc.))

Value Components - estimates for:

– Capacity requirement & associated reserve margin reductions

– Energy value & risk management benefits

– Ancillary services

– Environmental values

– Operational benefits

– MTDCC

Option value of distributed & scalable resources

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Typical Value Components

Lower Supply Costs – Capacity and Reserves - Load management reduces system peak, thus reduces capacity obligation as well as associated reserve margins

Lower Supply Cost: Energy – The cost of supply will be reduced because demand response can shifts load to lower cost energy time periods, allowing more sophisticated supply portfolio management and trading interactions with the market

Risk Management – Power market can be “tamed” if a percentage of system load is shifted to demand response. Dispatching demand response both reduce spot exposure and reduce the supply price to the remaining exposed load

Ancillary Services Value – demand response deployments using advanced load control technologies can provide 10 -minute non-spinning reserve

MTDCC Value – Marginal Transmission & Distribution Capacity Costs can be deferred or eliminated by deploying “negawatts” intensively vs distribution costly upgrades

Environmental Value – Reduction in consumption has associated reduction in emission levels of PM-10, NOx, SOx and CO2

Operational Service Value – Automated meter technologies help in reducing bill errors, UFE, bill resolutions

Option Value – Because of potential for staged investment GoodWatts can be used as an option to manage the risk from future power market price spikes

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Operational benefits and MTDCC are often not included in valuation analysis, but they provide significant value

Typical Operational Benefits That Can Accrue with Automated Meter Technology

Typical Operational Benefits That Can Accrue with Automated Meter Technology

Meter Reading. Reduction in workforce costs from ability to remotely read meters

Revenue Cycle. Fewer customer calls over meter reading and billing issues, such as high bills, delayed bills, and estimated bills. Associated cost reductions of issuing rebills due to improper estimation and other factors and potential cash flow improvements due to fewer delayed bills

Field Operations. Reductions in unnecessary field dispatches for customer reported outages that were on the customer side of the meter  

Unaccounted for Energy: Improved metering accuracy and reduced meter tampering and energy theft

Meter Reading. Reduction in workforce costs from ability to remotely read meters

Revenue Cycle. Fewer customer calls over meter reading and billing issues, such as high bills, delayed bills, and estimated bills. Associated cost reductions of issuing rebills due to improper estimation and other factors and potential cash flow improvements due to fewer delayed bills

Field Operations. Reductions in unnecessary field dispatches for customer reported outages that were on the customer side of the meter  

Unaccounted for Energy: Improved metering accuracy and reduced meter tampering and energy theft

MDCC Value from Negawatt DeploymentsMDCC Value from Negawatt Deployments

Strategic deployment can defer or minimize Marginal Distribution Capacity Costs by deploying “negawatts” intensively vs. distribution constraints in specific areas

Investing in distribution system upgrades and expansions are by their nature “lumpy”: large dollar commitments made prospectively in anticipation of rising usage

“Negawatt” technologies can be applied on a concentrated basis to defer distribution system upgrades, especially if investments are made to service peak residential demand with poor load factor and/or to T&D congestion “hot spots”

Clearly, value would only be captured where energy savings are coincident with locational peaks

Strategic deployment can defer or minimize Marginal Distribution Capacity Costs by deploying “negawatts” intensively vs. distribution constraints in specific areas

Investing in distribution system upgrades and expansions are by their nature “lumpy”: large dollar commitments made prospectively in anticipation of rising usage

“Negawatt” technologies can be applied on a concentrated basis to defer distribution system upgrades, especially if investments are made to service peak residential demand with poor load factor and/or to T&D congestion “hot spots”

Clearly, value would only be captured where energy savings are coincident with locational peaks

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Typical valuation of demand response

$/k

W-y

r

0

10

20

30

40

50

60

70

80

90

100

Capacity Reserve Margin Energy Value T&D Loss Value AS Value EnviromentalValue

MDCC OperationalBenefits

Total Value

Benefits

$92.41

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Several, utilities, however, disallow MTDCC or service value

$/k

W-y

r

0

10

20

30

40

50

60

70

80

90

100

Capacity Reserve Margin Energy Value T&D Loss Value AS Value EnviromentalValue

MDCC OperationalBenefits

Total Value

Benefits

$76.78

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And since capacity is the highest driver, any oversupply of generation assets, quickly makes DR deployments economically unfeasible, despite potential value in localized places

$/k

W-y

r

0

10

20

30

40

50

60

70

80

90

100

Capacity Reserve Margin Energy Value T&D Loss Value AS Value EnviromentalValue

MDCC OperationalBenefits

Total Value

Benefits

$56.92

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The option value provided by demand response is often overlooked in traditional economic analysis

The risk-adjusted costs of demand response deployments against the avoided costs of supply resources should also be incorporated. Demand response resources have shorter lead times, are more flexible and scalable than central supply resources, potentially reducing financial risk to deploying supply resources to meet demand growth and/or peak

Thus, the value attributed to the risk-reduction provided by demand response resources can be treated as a “real option” – the ability to deploy demand response resources – that can be deferred until needed through the expenditure of small investments, until market conditions are favorable

Option holder pays an upfront cost to acquire this option - pilot testing, limited initial recruiting, small scale deployments

The initial investment – or the cost of the option – enables the option-holder to evaluate the relative cost of a full scale program, including establishing processes to maximize market opportunities and to increase efficiency of internal utility operations

The option value is sensitive to the magnitude of market uncertainty, the program benefits, and the incentive payments provided to potential deployment sites

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Thus, the widely used traditional valuation methodology for demand response does not consider sources of value that would make the business case more attractive

Regulated utilities can typically get cost-recovery – but this is usually not included in valuation models

While MTDCC deferment is a significant source of value, it is typically not incorporated into valuation methodologies, given planning committees skepticism about negawatts ability to defer upgrades, and the lack of acknowledgment of the monetary value of deferment

Demand Response is not often included in RPS programs, thus making a comparison against a peaking plant the only truly feasible alternative

Where Demand Response is part of a RPS (e.g., PA), then deployment economics should be compared against other RPS-qualified supply options, not a gas peaking plant

For deregulated utilities, the utility making the investment in demand response is not always able to capture the full value of such deployments

Issues associated with peaking plants siting: permitting, NIMBY, grid interconnection, time to bring plant on-line are always not incorporated into comparative analysis

Demand response is also enabling utilities to implement TOU type tariffs thus further providing incentive for reduction of energy consumption

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Conclusion

For demand response to be appropriately valued, economic valuation models need to be updated to incorporate the full source of value that can be derived from such deployments

Not incorporating multiple business units in the evaluation of demand response – or propensity to rely on a more known solution (e.g., engineering upgrades to T&D system) often results in a business case which is undervalued

Rather than being compared with gas peaking units, demand response technology should also be evaluated compared against other alternative technologies that qualify for RPS credits

Demand response also qualifies for emissions credits, which will increasingly become an important source of value

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For more information:

Isabelle GecilsGecils Energy LLC2025 Arbor AvenueBelmont, CA 94002gecils@gecilsenergy.com650-596-7355