How Will the SCC Approach Energy-Efficiency Investments?

The 2018 Grid Transformation and Security Act requires Dominion Energy Virginia to propose at least $870 million in energy-efficiency investments over the next ten years. Yesterday Dominion submitted the first wave of proposals, eleven projects totaling $280 million.

The company estimates that it would spend $215 million on new initiatives and $46.7 million on reconstituting existing programs, reports the Richmond Times-Dispatch. The proposals must be approved by the State Corporation Commission, which in the past has applied a skeptical eye toward energy-efficiency and conservation programs. Under the 2018 legislation, however, the General Assembly declared energy-efficiency to be in the public interest, presumably lowering the bar for approval.

The proposed programs include:

Residential:
1. Recycling older fridges and freezers
2. Gaining insights into energy usage to make suggestions on how to save
3. Rebates on purchases of specific energy-efficient appliances
4. Installation of energy-saving measures following a home-energy assessment
5. Management of heat pumps and air-conditioning units using smart thermostats to reduce peak demand
6. Rebates on qualifying smart thermostats coupled with energy saving recommendations

Non-residential:
1. Implementation of more efficient lighting
2. Upgrades to or implementation of more efficient HVAC technology
3. Installation of solar reduction window film
4. Energy efficiency improvements to small manufacturing facilities
5. Energy-efficiency improvements at smaller offices

In the past, the SCC has balked on energy-efficiency proposals for at least two reasons. First, proposed programs offered a poor return on financial investment — they cost more to implement than they provided in savings to rate payers. Second, some programs benefited narrow groups while loading the cost on rate payers generally. It’s not clear yet how the three SCC judges will reconcile their previous logic with the General Assembly’s declaration that energy efficiency and conservation are in the public interest.

A third question, which I have yet to see raised, is whether electric utilities are the logical entities to implement energy-efficiency measures. The free-market environmentalist Rocky Mountain Institute (RMI) has just released an analysis concluding that zero-energy homes — homes that literally produce as much energy as they consume over the course of a year — are reaching cost parity with normal homes in many parts of the country.

While there is no one-size-fits-all solution, RMI says, “In all climates, the cost optimal solution … included 100-percent LED lighting, low-flow water fixtures, and ENERGY STAR appliances, all of which reduce load at a very minimal cost premium. In addition, heat pumps were used for both space heating and water heating.”

This raises a fundamental question: Should Virginia spend arbitrarily determined amounts of money on utility investments or should it rely upon developers and home builders driven by market forces? Or a third option: Should Dominion and Appalachian Power tailor programs to incentivize home builders to install energy-efficiency measures, making the construction of energy-efficient new homes, which, if RMI is to be believed, a no-brainer?

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16 responses to “How Will the SCC Approach Energy-Efficiency Investments?

  1. We should just go ahead and name the blog SCC News and Views……

    Just spent the morning listening to arguments about what authority the SCC actually has under this statute, which designates so many things as “in the public interest” and which still requires the SCC to review everything for prudency and reasonableness. I won’t preview the column I intend to write this afternoon….

    The big news on the energy efficiency front is that the General Assembly in the 2018 bill weakened the rate impact measure, or RIM test, which is a method of evaluating a demand management program’s cost versus benefits. The pressure came from environmentalists who don’t care what things cost people, and absent the RIM test more of these will get approved. But there remain other accounting tests and I expect the SCC will continue to apply them.

    In the SCC staff testimony on the ongoing IRP case it was noted that many of the efficiency and demand management programs already approved by the SCC have not been that attractive to customers. Dominion has put them out there and there were fewer takers than expected. That will be the case on some of these. Dominion has also pointed out, and it was discussed in the Times-Dispatch story, that the law only requires it to propose a certain dollar amount of spending on these – it does not require the SCC to approve one dime of it, or if approved it does not require one customer to take advantage of it. Also large commercial customers are exempt from all this now – part of their payoff for supporting a bill that screwed customers – but with them out of the picture big changes in demand are unlikely.

    The rising retail price, and the spread of smart meters that educate consumers, will be the big drivers on the demand side.

    • Steve,

      From what I can see, the deployment of smart meters will benefit primarily the utilities by saving costs for meter reading and making deployment of crews for outages faster and more accurate. The ability to provide customers relatively real-time information about their energy usage is not being activated during the first three phases of new smart meter installations according to information that I received from others.

      The utility will provide text alerts during high usage periods in order to shift loads to other parts of the day. But there appears to be no automatic data feed to customers for use with a smart thermostat or home energy system.

      Perhaps they are waiting to charge for this as part of their energy efficiency programs.

  2. If done correctly, energy efficiency has a zero net cost. A building owner would invest in an energy project only if it returned more in savings than it required in investment. If an owner invested $5 in an energy efficiency project and received $20 in savings, it would have cost them nothing to save energy. This is especially true if an Energy Service Company (ESCO) undertook the project with no upfront investment required. The facility owner would save money from the outset, with the greatest savings coming once the project and financing costs are repaid in full.

    This relationship is complicated when we have our utilities invest in efficiency projects that are then put in the rate base. Such projects require a stream of payments from ratepayers that are equal to about four times the original investment (assuming a rate of return of 10% over 40 years and an undiscounted cash flow). For the $5 dollars invested in the efficiency project, $20 would be repaid to the utility over time.

    Dominion is not very good at energy efficiency. In a 2017 study that rated 51 of the largest utilities in the U.S., Dominion finished 50th in a summary comparison.

    Dominion reduced its peak energy use by 0.08% compared to the average reduction of 0.76% for the entire group (over 9 times better than Dominion). The two leading companies achieved 2.43% and 2.54% savings, over 30 times better than Dominion’s performance.

    To be fair, many of the top performers were in states where generation is not in the rate base. This removes the penalty that Dominion feels when it reduces energy sales. However, by putting investments in energy efficiency in the rate base, it would be as good as building a new generating plant in terms of profit.

    One would hope that the SCC will consider these proposals on their merits. And that the GA will realize that energy efficiency is in the public interest but not by having most of it done by utilities at a very high cost. Our utilities should be able to profit by pursuing energy efficiency in the same way as any energy service company. But not with the exorbitant reward of a guaranteed 40-year profit of 10% by putting these programs in the rate base. Let them compete in the open market in an unregulated way.

    If there is an experimental program that the GA wants to incentivize, that could be a special situation. But it should be open for other energy service providers to participate in as well. Our objective should be to reduce the energy costs for Virginia. We already have the highest residential rates compared to NC, WV, KY and TN. Only Maryland is higher and they reduced their rates in the last year, after embarking on a modern energy program. We will soon have the highest rates of surrounding states if we continue the path we are on.

    • I think these programs are paid for through a rate adjustment clause (RAC) and are not to be in the rate base. Rider C2A, energy efficiency incremental rider.

      • That is probably true, since Dominion does not want to mess with the base rates. I used “rate base” as meaning any depreciable asset subject to a rate of return (such as with a RAC) as opposed to the “base rates” which include depreciable assets as well as operating expenses and other items that produce a certain level of charges to customers and equivalent revenue recovery by the utility.

        • Yeah, about the “base rates.” They don’t make any money directly off this. There is a largely untested provision still in the code, I think, where they can seek to recover revenue lost due to declining sales. Under their current model with no base rate reduction in prospect (not in our lifetime baby), this now is to their advantage in that lower operating costs just means a higher profit for them now. We give them money through a RAC which they then use to lower the usage of subset of customers, and if that makes the system more efficient the benefit flows to the stockholders. If they retire a power plant, for example, they keep all the savings.

        • Not all of the power plants are governed by RACs are they? I thought those were relatively new devices used to make more money without touching the base rate (since it over-recovered without any review).

          I would think there are plenty of utility facilities 20 years old or more that are included in the base rate.

  3. Very few of these energy efficiency projects seem to be capital in nature mainly because they are not substantial in amount. I can see no justification for Dominion capitalizing its expenditures.

  4. I’ve mentioned before, we did have an appliance program a few years back. I got an $650 HE washing machine on Black Friday sale for $500 and then got $350 rebate, which was a little too generous. But don’t worry the State got even with me on some other tax items. I think that was a DMME program.

    I’d like to see LED bulb discounts.

  5. I have the opposite view of smart meters if they are used to dynamically price electricity to pass on the higher costs of generation during high demand periods.

    My understanding is that Dominion pays 3-4 times as much for electricity during peak periods and they basically spread these higher costs across the rate base instead of passing that cost onto those that are using it.

    So we need to pay for our marginal use of electricity rather than have some of us subsidize it for others and if it cost 3 times as much to generate it at peak demand periods – that ought to be the price of it to those who need it.

    • Time of use rates have thus far been used just at night to encourage people to shift demand into late night periods in order to keep the nukes running. That’s why there is a night-time EV charging special rate and a rate for putting water heaters on timers, etc.

      Utilities like to use smart meters for time of day rates that encourage load shifting because they earn a profit on the meters and earn a profit by shifting load to times of day when it is less expensive to serve. They earn a little less in revenue but save a lot in costs.

      The problem is that low-income families in substandard housing end up spending a great deal more for electricity with time of day metering. Energy efficiency would actually save them money as well as reducing the peak. But efficiency projects are more complicated in rental housing.

      • As I posted earlier, MWCOG looked at how much energy consumption could be reduced as well as related greenhouse gas emissions, by insulating older buildings, replacing doors and windows, old and inefficient heating and cooling equipment, including the residential segment. It concluded that major savings could occur but the cost was simply unaffordable by any standard. As I recall, this area offered savings at least as large, if not larger, than the transportation segment. My knowledge in this area came from attending a meeting where this was discussed. I did no independent review.

        My point is I see this major disconnection between those who advocate more energy efficiency and economics. I’m not against energy efficiency. It makes sense. But there are costs. Probably mega-billions of dollars. Who is going to pay these costs? It strikes me that this has the potential to cause an enormous transfer of wealth to property owners near the ocean. Is that fair?

        Where is the debate?

  6. I would deal with the low income situation the same way we deal with it in other areas.

    But just to point out – we let gasoline float to the market regardless of the incomes of the folks who buy it and electricity is a similar commodity.

    Food is similar – the price of it floats according to demand and supply and we do not artificially keep the price low for low income. Folks get food stamps and food pantries distribute food for low income.

    Perhaps, we want to have special lower rates at night to motivate load-shifting – then yes… do it as an incentive for lower rates rather than a penalty with higher rates. Airlines do this… off peak is cheaper.

    Either way – it’s a win-win because people’s behavior on energy use will change – just as it has in places where electricity is very expensive – like on most islands and many places in Europe.

    I’m NOT advocating that we make the price of electricity artificially higher but instead – when we sell it for 1/4 the actual cost of it and make up that loss by adding on to everyone’s bills.. we are basically rewarding waste.

    Today – people, more often than not, check the EPA mileage rating on a prospective car purchase – and decisions are often made on that basis. We need the same type of environment for electricity. To basically argue that we should not do this because it would adversely affect low income basically encourages everyone to waste – regardless of income.

  7. Efficiency projects are property improvements and should be initiated at the property level. Having the funds readily available is the best incentive. Using a financing program like Property Assessed Clean Energy loans, efficiency can be accomplished with PACE monies by the building owner who pays for the loan with monies saved on their utility bill and can save additional money as well. Currently the loans ae only available for commercial though the blocks against residential use are being removed.

    PACE is voluntary for all parties involved. … PACE can cover 100% of a project’s hard and soft costs….. Long financing terms up to 20 years….. Can be combined with utility, local and federal incentive programs…. Energy projects are permanently affixed to a property, .and are not required to be paid off when the property changes hands…. PACE assessment is filed with the local municipality as a lien on the property … Pace does not require building equity… rates can be lower as the loan is secure.

    Dreamed up a decade ago by those environmentalists “who don’t care what things cost”, it has been blocked by the fossil industries and those conservatives who support corporate profits at the expense of the rest of us. Our VA law enabling the required local initiative was useless until changed 2 years ago, a change that still made adopting the program very difficult. Now there is help.

    DMME is encouraging growth of C-PACE throughout the Commonwealth. Currently, there are localities in the preliminary stages of exploring the development of C-PACE ordinances. These localities include Arlington county, Charlottesville, and the cities of Richmond and Roanoke. https://www.pacealliance.org/

    The Mid-Atlantic PACE Alliance is a partnership between stakeholders in Virginia, Maryland, and the District of Columbia to accelerate the implementation of Commercial PACE programs and projects in the region.
    MAPA is pleased to announce publication of the Regional C-PACE Toolkit! The Toolkit was developed to provide reliable guidance, share best practices and foster growth and development of Commercial PACE programs in the region.

    More help …Virginia Energy Efficiency Council (VAEEC) is a statewide nonprofit organization providing a voice for the energy efficiency industry.
    Sustainable Real Estate Solutions (SRS) is a third party C-PACE program administrator, providing program design and implementation services to local jurisdictions and in several states. In Virginia, SRS is currently the program administrator for Arlington County’s C-PACE program. Arlington County: Arlington launched the Commonwealth’s first C-PACE program.
    Abacus Property Solutions: Abacus Property Solutions is a real estate advisory firm working to engage commercial building/property owners and other stakeholders in efforts to promote C-PACE and the financial and environmental benefits of energy efficiency retrofits using PACE and other forms of financing.

    PACE can be used for onsite generation and is the best way to develop distributed energy, something we won’t see much of in VA without an alternative to our utilities programs.

  8. What I’d support would be the use of Smart Meters to be used to charge more for electricity in high demand periods and for higher than average use -and that money goes into a fund that provides credits and loans to folks who want o replace or install high efficiency HVAC and water heaters.

    Folks who install highly efficient equipment would then get a break on the higher rate during high demand use.

    In other words – incentivize more efficient use of electricity.

    I don’t see Dominion liking this much if it leads to less demand for electricity and that’s the fundamental problem with having Dominion in charge of energy use programs. It’s simply against their bottom line for such programs to be successful and I’d not be surprised at all that they’d favor programs that don’t measure ROI much less require a positive ROI.

    Any program which intends to lower energy use – is not one that is beneficial to Dominion in the current monopoly framework – where basically their level of profitability is solely tied to how much electricity they sell.

    So the question is – what kind of energy conservation program would result in less electricity use AND improve Dominion’s bottom line?

    (Yes. I’m on board with Tom H’s view).

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