Strange Bedfellows
Submitted by JayBlair on Thu, 02/14/2008 - 12:16am
Today's News & Observer printed an op-ed authored by representatives of the John Locke Foundation, NC PIRG and NC WARN. Their common foe? Duke Energy.
Duke Energy has proposed a "Save A Watt" program where Duke invests to improve conservation efforts. The goal is to reduce demand by 1700 megawatts per year by 2012. This would exceed the production of two Cliffside plants. If successful, new sources of energy production (coal fired, nuclear or gas) need not be built or existing dirty plants can be used less or shut down. If the Duke program succeeds, the environmental benefits would seem to be astounding.
So what is there to complain about from these strange bedfellows? While it is hard to follow (as are most diatribes authored in whole or part by the JLF "analysts") it is either 1) consumers will have to bear some of the cost of Duke's investment; 2) this is a government subsidized program of conservation; and/or 3)conservation efforts should be left to non-profits.
These conclusions seem to be reached on "facts" that don't seem to comport to the proposed program or common sense. For example, the article claims that consumers will pay for electricity they do not use but at 90% of the regular cost; that low income families will be subsidizing the conservation efforts of the well-heeled; and that it doesn't cost Duke anything for people to use less energy so they should not profit from the program. Each of these claims appears flawed.
Regulated utilities are guaranteed a rate of return (kind of like profit) in return for a guarantee that it will provide power to a certain service area regardless of where a residence or business is located or how many residences and businesses locate there. As a result there is a rate of return for both the number of kws sold and the investment made to produce those kws. This structure is designed to maximize profits the more power is sold and the more plants are built (there are many other complications that can affect profitability but this is the basic model). This is a deadly combination given the environmental effects of such a model in a publically traded for profit company. Why would any shareholder want to have the company sell less power or build fewer plants?
The simple beauty of the Duke plan is that shareholders will not suffer as much if Duke gets people to use less energy. This is not done by charging consumers for not using the electricity, but by allowing Duke to put into their rates a cost that would equal 90% of what it would cost consumers had new plants been built to produce the power that was conserved by virtue of Duke's investment in reducing power consumption. The reason shareholders would like this plan is that while they get slightly less profit (both from the lower recovery in the investment and loss of kw sales) there is less risk of cost overruns or construction stoppage associated with plant construction (things consumers do not neccessarily have to pay for).
The benefit to consumers, who don't seem to conserve voluntarily is that Duke will be providing tools to help them conserve. Tools we may not even know about today such as a smart meter in the home that a consumer can view the current cost of electric use in real time. Computer programs that can control usage from a laptop at work. Who knows what? We are only limited by imagination. But instead of consumers paying directly for all that, the cost is spread out in the rates. And if the tools are successful in reducing usage, then the consumer pays even less because they are using less (albeit at a slightly higher rate, but still a lower rate than if a plant was built).
This does not seem like a government subsidized program. And as much as a profit based approach has its problems, it also has its benefits and I am hard pressed to see non-profits in a position to do the things a power provider can do as quickly as Duke is proposing to do it.
My quarel with the program is two fold. First, consumers who actually use the tools and succeed in conserving ought to get a break in rates compared to those that don't reduce consumption. This creates not only an incentive for Duke to sell less power but an added incentive for the user to use less power. Second, there is still a slight profit incentive to build than invest in conservation tools. I wonder weather the program would be better if Duke shareholders made more in conservation efforts than in building plants. What would happen? Our first investor owned company solely geared to reducing power usage? What a wonderful world.
Frontpaged.
I'm not sure I'm following all the nuance here, but hope that more discussion will illuminate. My initial instinct? Where profit motive and the common good collide, most regular people get screwed.
Do good. Be nice. Have fun.
Perhaps
But, the failure to embrace a wide variety of efforts to reduce power consumption, even from the for-profit world, will only screw future generations.
We can not wait for the perfect intervention to rid America's dependence on power. Knee jerk negative reactions against for-profit options only delays achieving common goals of environmental protection and energy independence.
The fact that two supposedly progressive organizations are joining forces with JLF makes me sad and confused because as we know JLF does not believe global warming issues need be adressed at all so conservation efforts in itself are not needed and certainly should never be paid for by anyone. I fear that the non-profit distrust of Duke is clouding their eyes of the bigger problem we face.
NCPIRG response
The Strange Bedfellow blogger correctly pens the urgency for action with respect to our environment and the sustainability of our current energy structure. We must maximize energy efficiency now. But Save-a-Watt is not part of the solution.
The Strange Bedfellow blogger is mistaken about the efficacy and fairness of Duke's energy efficiency program. Save-a-Watt fails every measure of progressive, and the Utilities Commission should reject it. Some examples of its failures follow.
From an environmental perspective:
Large industrial and commercial consumers probably can opt out of Save-a-Watt (SAW). Opting-out appears to be allowed by the energy legislation passed this summer. To opt out, companies would have to assert to Duke that they have their own energy efficiency programs. Then Duke, in its sole discretion, could excuse them from participating in SAW. This opt-out option is part of the settlement proposed in the South Carolina SAW litigation. I don't know if it will be pursued here. But if it is, some of the biggest consumers of energy would not even be participating in the energy efficiency program.
SAW puts a premium on load shifting, as opposed to load reduction (energy efficiency). Duke can charge us for shifting energy from peak times to non-peak times, in addition to charging them for reducing the number of kilowatts consumed. While load shifting has some environmental benefits, they are not as significant as the benefits of energy efficiency.
The energy efficiency programs that SAW does offer are not necessarily geared toward maximizing energy efficiency. They are geared toward generating the most profit. The programs that create the biggest profit margin may not be the ones that maximize energy efficiency.
From a consumer protection perspective:
SAW sends the wrong price signal for energy efficiency. Energy efficiency is the cheapest and cleanest way to meet demand, or at least it should be. Generating energy efficiency costs a fraction of the cost of generating energy. At the Emerging Issues Forum this week, I heard the fraction 1/10th. But Duke Energy is requesting to charge for energy efficiency at nearly the same rate as energy construction and consumption. The Durham County Attorney, in her pleading before the Utilities Commission, called SAW possibly the most expensive energy efficiency program in the United States. Pricing energy efficiency in this way is contrary to economic sense.
Making energy efficiency expensive has three untoward consequences. First, it depresses the rate of growth for the market of energy efficiency. Second, it makes energy efficiency a status/privilege issue- i.e., energy efficiency is something that only rich people can afford/do. Third, the way SAW works, low-income people will subsidize the energy efficiency of wealthy people.
SAW also introduces a host of measurement and verification errors, along with exceeding administrative burdens. The details deserve a blog unto itself. But the short of it is that SAW bases Duke's compensation on demand projections and a black box of future generation costs. It even includes in its calculations of SAW savings what Duke calls "free-drivers" - people who save energy on their own, unrelated to SAW.
What are our options?
There are a lot of them. Here's one that Duke doesn't really dispute, and that hasn't gotten much attention in the press.
Many states employ a third party administrator to manage the state's energy efficiency program. They are sometimes called “energy efficiency utilities,” and they are tasked with maximizing energy efficiency. They can be state-run, private, or non-profit. Unlike utility companies, they do not have competing interests with respect to the success of energy efficiency. Customers do not have to compensate them for not building power plants. Customers simply pay for the cost of the energy efficiency programs, themselves. Or, administrators could be compensated for reaching energy efficiency targets. Most likely, these costs would be much less than the costs of SAW.
These energy efficiency utilities are successful in other states. If you want to read more about them, check out this Synapse report on such programs in six states. http://www.cwfnc.org/documents/Independent%20Admin%20Efficiency%20Progra...
In short, there are better, cheaper, and fairer ways to maximize energy efficiency. The environmental and energy crises are here and now, but they should not compel us to embrace half-baked schemes that fleece customers while barely making a difference. It would be a grave mistake to be lulled into accepting SAW as part of the solution. There are much more effective and affordable ways to increase energy efficiency.
Thanks, Shana
NCPIRG has been resolute in fighting against the obfuscation and BS of Duke Energy and I'm really happy that you weighed in here.
Well said.
Do good. Be nice. Have fun.
Clearer, but
Yes, thank you Shana for providing a more rational critique of the Save A Watt program than that penned in cooperation with the John Locke Foundation. I still fear that we are fiddling while Rome burns.
I would hope that rather than PIRG and the JLF's stated desire of rejecting a plan that is intended to reduce the need for 1700 MW of power production in four years, that our shared goal should be to get the program up and running with an objective of optimizing it during the next four years.
Every day we debate what program is best and what flaws exist here or there, is a day we lose in cleaning our environment and makes it harder to do so. How will we be remembered by our grandchildren? As problem solvers or problem debaters?
To your specific points:
Environmental perspective - - I personally don't care how the avoidance of power production occurs. Load shifting; load reduction; industrial opt-out because they have their own plan for power reduction. I don't care. Results matter and matter quickly. 1700 MW in avoided production; two Cliffsides. Once we get that done we can up the goal and Duke will find that load reduction won't be able to be offset by load shifting to achieve those goals.
Consumer perspective - - Energy efficiency is going to cost someone something. This will be true whether it is a government run program, a non-profit run program or a for-profit run program. Sure its cheap to buy ads to remind people to conserve and some will. But we will never see the reduction of energy dependency proposed with cheap fixes. Nor will attempting to minimize investment produce innovative breakthroughs that will be neccessary to go beyond what is being proposed. We will set the monumental environmental task we face backwards if we are plying consumers with the false expectation that it will not cost them anything, or very little. Once the bill comes in they will revolt and stop seeking ways to conserve. It is counter productive. As to the alleged regressiveness of Save A Watt, more will be paid by those that don't conserve. Rich or poor, we need economic incentives for conservation.
Options - - yes there are many options to administrate energy efficiency programs and I have seen little data to suggest one option is better than the other. I do know this, until there is an economic incentive for an investor owned utility to save rather than sell a kW, conservation efforts will always have an uphill battle in succeeeding. This point is made in the report you cite. Thus the creation of third party administrators or energy efficiency utilities which are, as you point out, "tasked with maximizing energy efficiency".
The problem, as I see it, is, that States which have used the third party administrator approach have merely established two competing forces. "Energy efficiency utilities" and "energy producing utilities" each tasked with opposite chores, maximizing energy efficiency and maximizing energy growth. Certainly this could result in moderating power growth. But for real reductions from current levels, I think a different model should be tried. And why not something like Save A Watt? Where the incentives for the for-profit entity are turned on its head? When investors can make slightly less for less risk by reducing usage, many rational decisions should fall in favor of conservation over production. Will this cost consumers more to remove the economic incentive to produce and sell more power? Yes it will. But is there a better prospect for the larger reductions we need quickly? None that I am aware of.
We need radical approaches to achieve significant reductions in power usage. And we need to start now. Even if it costs more than traditional approaches. Give it a try. Or at least when forced to choose dance partners choose Duke over the JLF.
Duke's Fuzzy Math
Jay, I appreciate your conviction, and whole-heartedly agree with your general point: we don’t have time to play Price-Is-Right while we try to stem the tide of global warming. But, we also can’t afford to abuse people’s goodwill and pocketbooks on paltry energy efficiency gains.
You want to throw caution for price to the wind in exchange for two Cliffside’s worth of kilowatt savings. Okay. For the moment, let’s put aside the economic prudence of ignoring the price signal for energy efficiency. Let’s also ignore the comparative efficacy of the energy efficiency programs in Duke's proposal. The only criteria we will use as the measure of a good program is saving two Cliffside’s worth of kilowatts. Save-A-Watt still fails.
Because of the way Duke has presented SAW, it is possible for the claimed energy efficiency gains to be measurement errors. Here’s how. Duke can’t measure saved energy directly – ie, energy meters can’t say this is how much energy we didn’t use. To figure out energy savings, Duke has to project demand, and measure it against actual consumption. The difference between the two is the savings. In the SAW petition, Duke projected demand growth of 3400 MW by 2012. Yet, two months earlier, during the Cliffside hearing, the Utilities Commission found, that “Duke’s need for additional generating capacity in the 2011-12 time frame, …decreased from 3400 MW to 2120 MW.” (emphasis added). The difference between the two projections is 1280 MW. That is 1 ½ Cliffside’s worth of kilowatts Duke could claim, from what seems to be measurement error.
It is one thing to force people to pay an excessive amount of money for energy efficiency. It’s entirely a different thing to make people pay for nothing.
We can’t afford to do either. There’s not a bottomless pit of money to throw at the global climate crisis – at some point, people can’t or won’t pay anymore. And there isn’t time to play games with Duke Energy.
If you fancy a utility-driven energy efficiency program, as opposed to a third party administrator, that’s more expensive, but fine too. There are several good programs in other states that are much fairer and more promising than Save-a-watt. I hear that California and Idaho have promising models. Save-a-watt isn't a fair or effective alternative.
Jay, we would be having a totally different
discussion on this subject if the GA had not allowed the baseloading provision into the REPS. Now, once again, ratepayers are directly tied to the profitability of construction projects. Under a normal "operating costs vs product sold" formula,
profitability would be relative. Demand drops, reduce your overhead. That may entail shutting down some (unnecessary) facilities permanently and reorganizing your labor pool so that your bottom line doesn't drop as much as your kwh sold, but that's business.
I tell you what else is business—being proactive by anticipating your market and the regulatory environment of the near future. Duke should be pushing for wind turbines East and West and developing a profitable and consumer-friendly approach to installing residential Solar. Instead, they're shoving a 2 billion dollar poison factory down our throats.
If Duke gets away with meeting their 6% "reduction through efficiency" requirement from our REPS without losing any gross revenues, because they were allowed to raise our rates to cover their "loss", then every single member of the General Assembly as well as the NCUC needs to be tarred, feathered, and rode out of Raleigh on rail.