Download National Standard Practice Manual NSPM for Assessing Cost-Effectiveness of Energy Efficient Resources – NESP PDF

TitleNational Standard Practice Manual NSPM for Assessing Cost-Effectiveness of Energy Efficient Resources – NESP
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Table of Contents
                            01-National Standard Practice Manual NSPM for Assessing  Cost-Effectiveness of Energy Efficient Resources May-2017_final
	NSPM coverFNL2
	Manual_05-17-17.pdf
		The National Efficiency Screening Project
		Report Authors
		Review Committee
		Abstract
			Contents
		Executive Summary
			ES.1 Universal Principles
			ES.2 Resource Value Framework
			ES.3 Resource Value Test
			ES.4 Applicability to Other Types of Resources
			ES.5 Foundational Information Covered in the NSPM
		INTRODUCTION:  Purpose, Scope and Format
			Purpose
			Why the Need for this NSPM?
			Applicability to Other Types of Utility Resources
			Format of this Manual
			Key Terminology Used in this Manual
		PART I.  Developing Cost-Effectiveness Tests Using the Resource Value Framework
		1. Principles of Cost-Effectiveness 1. Analyses
			Principle #1: Efficiency as a Resource
			Principle #2:  Applicable Policy Goals
			Principle #3: Hard-to-Quantify Impacts
			Principle #4: Symmetry
			Principle #5: Forward-Looking Analyses
			Principle #6: Transparency
		2. The Resource Value Framework and 2. Primary Test
			2.1 Summary of Key Points
			2.2 The Resource Value Framework
			2.3 The Resource Value Test as the Primary Test
			2.4 The RVT as a Dynamic Test
		3. Developing the Resource Value Test
			3.1 STEP 1: Identify and Articulate Applicable Policy Goals
				3.1.1 The Importance of Policy Goals
				3.1.2 Documenting Applicable Policy Goals
				3.1.3 Process and Stakeholder Input
			3.2 STEP 2: Include Utility System Costs and Benefits
			3.3 STEP 3: Decide Which Non-Utility Costs and Benefits to Include
				3.3.1 Ensuring that Utility Customer Payments Are Justified by Customer Benefits
				3.3.2 Consider Participant Impacts
				3.3.3 Consider Low-Income Impacts
				3.3.4 Consider Other Fuel Impacts
				3.3.5 Consider Water Impacts
				3.3.6 Consider Environmental Impacts
				3.3.7 Consider Public Health Impacts
				3.3.8 Consider Economic Development and Job Impacts
				3.3.9 Consider Energy Security
			3.4 STEP 4: Ensure the Test Is Symmetrical
			3.5 STEP 5: Ensure the Analysis Is Forward-Looking and Incremental
			3.6 STEP 6: Develop Methodologies to Account for All Relevant Impacts
			3.7 STEP 7: Ensure Transparency
				3.7.1 Template Reporting Table
				3.7.2 Reporting Categories and Descriptions
		4. Relationship to Traditional Tests
			4.1 Summary of Key Points
			4.2 Resource Value Test Examples
			4.3 Conceptual Differences between the RVT and Traditional Tests
		5.  Secondary Cost-Effectiveness Tests
			5.1 Summary of Key Points
			5.2 Potential Reasons for Using Multiple Tests
			5.3 Secondary Tests to Consider
				5.3.1 Understanding Implications of Impacts Included in the RVT
				5.3.2 Informing Efficiency Program Selection, Spending, and/or Design Decisions
				5.3.3 Informing Public Debate
		PART II.  Developing Inputs for  Cost-Effectiveness Tests
		6.  Energy Efficiency Costs and Benefits
			6.1 Summary of Efficiency Resource Impacts
			6.2 Utility System Impacts
				6.2.1 Utility System Costs
				6.2.2 Utility System Benefits
			6.3 Non-Utility System Impacts
				6.3.1 Participant Impacts
				6.3.2 Societal Impacts
		7. Methodologies to Account for Relevant Impacts
			7.1 Summary of Key Points
			7.2 Jurisdiction-Specific Studies
			7.3 Studies from Other Jurisdictions
			7.4 Proxies
				Level of Application
				Type of Proxy
			7.5 Quantitative and Qualitative Information
				Step A: Provide as much quantitative evidence as possible
				Step B: Provide as much qualitative evidence as possible
				Step C: Present quantitative and qualitative evidence alongside monetary results
				Step D: Decide upon the implications of the quantitative and qualitative evidence
				Step E: Document and justify the decision
			7.6 Alternative Thresholds
			7.7 Sensitivity Analyses
			7.8 Reliability of Data
		8.  Participant Impacts
			8.1 Summary of Key Points
			8.2 Policy and Symmetry
			8.3 Account for the Impacts on All Customers Combined
			8.4 Account for the Total Cost of the Resource
			8.5 Protect Program Participants
			8.6 Account for Low-Income Program Participant Benefits
			8.7 Account for Other Fuel and Water Impacts
			8.8 Quality of the Information
		9. Discount Rates
			9.1 Summary of Key Points
			9.2 The Purpose of Discount Rates
			9.3 Commonly Used Discount Rates
				Different Perspectives and Time Preferences
				The Role of the Cost of Capital
			9.4 The Regulatory Perspective
			9.5 The Investor-Owned Utility Perspective
				The Investor-Owned Utility Perspective
				The Cost of Capital of Different Utility Resources
				Collection of Revenues to Pay for Debt and Equity
				Unregulated Companies Versus Regulated Utilities
			9.6 The Publicly Owned Utility Perspective
			9.7 The Utility Customer Perspective
			9.8 Risk Considerations
				Accounting for Risk in Determining the Discount Rate
				Addressing Resource-Specific Risk
				Energy Efficiency Risk
			9.9 Determining the Discount Rate
				9.9.1 Discount Rate for the Resource Value Test
				9.9.2 Discount Rates for Different Cost-Effectiveness Tests
				9.9.3 Discount Rates for Analyzing Different Resource Types
		10. Assessment Level
			10.1  Summary of Key Points
			10.2  Assessment Level Options
				10.2.1 Measure-Level Assessment
				10.2.2 Project-Level Assessment
				10.2.3 Program-Level Assessment
				10.2.4 Sector-Level Assessment
				10.2.5 Portfolio-Level Assessment
			10.3  Properly Accounting for Fixed and Variable Costs
		11. Analysis Period and End Effects
			11.1 Summary of Key Points
			11.2 Analysis Period
			11.3 End-Effects Problems
			11.4 Remedies for End-Effects Problems
		12. Analysis of Early Replacement
			12.1 Summary of Key Points
			12.2 Overview
			12.3 Accounting for Changes in the Timing of Costs
			12.4 Accounting for Multiple Baselines for Both Costs and Savings
		13. Free-Riders and Spillover
			13.1 Summary of Key Points
			13.2 Applicability and Definitions
			13.3 Economic Treatment of Free-Rider Impacts
				13.3.1 Utility System Impacts
				13.3.2 Participant Impacts
				13.3.3 Other Types of Impacts
				13.3.4 Summary of Economic Treatment of Free-Riders
			13.4 Economic Treatment of Spillover Effects
				13.4.1 Utility System Impacts
				13.4.2 Participant Impacts
				13.4.3 Other Types of Impacts
				13.4.4 Summary of Economic Treatment of Spillover Effects
		References
			Appendix A. Traditional Cost-Effectiveness Tests
				A.1 Overview
				A.2 Utility Cost Test
				A.3 Total Resource Cost Test
				A.4 Societal Cost Test
				A.5 Participant Cost Test
				A.6 Rate Impact Measure Test
			Appendix B. Costs and Benefits of Other Types  of DERs
			Appendix C. Accounting for Rate and Bill Impacts
				C.1 Multiple Factors Affecting Rate Impacts
				C.2 Limitations of the Rate Impact Measure Test
				C.3 Rate Impacts and Customer Equity
				C.4 A Better Approach for Analyzing Rate Impacts
				C.5 Relationship to the Cost-Effectiveness Analysis
			Appendix D. Glossary of Terms
02-National Standard Practice Manual for Assessing  Cost-Effectiveness of Energy Efficient Resources -Frequ Asked Questions
	Introduction, Purpose, Scope
	Cost-Effectiveness Principles
	The Resource Value Framework
	The Resource Value Test
	Relationship to Traditional Tests
	Secondary Cost-Effectiveness Tests
	Foundational Information
03-NSPM - Efficiency Cost-Effective-Reporting-Template-Table
04-National Standard Practice Manual for Assessing  Cost-Effectiveness of Energy Efficient Resources final NSPM slides
	National Standard Practice Manual for Energy Efficiency Cost-Effectiveness
	Overview of the NSPM Process
	The Need for a National Standard Practice Manual (I)
	The Need for a National Standard Practice Manual (II)
	Purpose and Scope of the Manual
	Outline of the NSPM - Overview
	Outline: Part I – Developing Cost-Effectiveness Tests
	Outline: Part II – Developing Inputs
	Outline: Appendices
	Part I
	Key Concepts Underlying the NSPM
	NSPM Principles
	Foundational Principle:  Applicable Policy Goals
	Cost-Effectiveness Perspectives
	7-Step Resource Value Framework
	Identify and Articulate Applicable Policy Goals
	Include All Utility System Impacts in the Test
	Decide Which Non-Utility System Impacts to Include
	Ensure Symmetry Across Benefits and Costs
	Analysis Is Forward-looking, Incremental, and Long Term
	Identify Methodologies & Inputs for All Impacts Chosen
	Ensure Transparency
	Relationship to Traditional Tests - Examples
	Relationship to Traditional Tests - Examples
	Secondary Tests
	Part II
	Utility System Impacts
	Non-Utility System Impacts
	Methodologies to Account for Relevant Impacts
	Consider Participant Impacts
	Discount Rates
	Steps for Choosing a Discount Rate
	Additional Foundational Information
	Appendices
	The Traditional Cost-Effectiveness Tests
	
	Distributed Energy Resources: Non-Utility System Impacts
	Limitations of the Rate Impact Measure Test
	Better Options for Assessing Rate Impacts
	Slide Number 40
                        
Document Text Contents
Page 1

National Standard
Practice Manual
for Assessing Cost-Effectiveness
of Energy Efficiency Resources

EDITION 1 Spring 2017

Page 2

National Standard
Practice Manual

for Assessing Cost-Effectiveness
of Energy Efficiency Resources

May 18, 2017

Prepared by
The National Efficiency Screening Project

Page 101

National Standard Practice Manual Page 82

Step C: Consider the Average Customer Discount Rate

Regulators should consider whether the average customer discount rate represents the
regulatory time preference, based on the considerations outlined above. Should the
discount rate be based on the average utility customer cost of capital? Does this time
preference adequately address applicable policy goals and future utility customer?

• If the answer to these questions is “yes,” then the average customer discount
rate as the discount rate could be used.

• If the answer to these questions is “no,” then a discount rate that is lower than
the average customer discount rate could be used. A lower discount rate would
be warranted if the customer discount rate does not adequately account for
policy goals and long-term customer impacts.

Step D: Consider the Societal Discount Rate

Regulators should also consider whether a societal discount rate is appropriate for the
primary cost-effectiveness test, based on the considerations outlined above. Is a societal
time preference consistent with the jurisdiction’s applicable policy goals?

• If the answer to this question is “yes,” then a societal discount rate could be
used.

• If the answer to these questions is “no,” then a discount rate that is higher than
the societal discount rate could be used. A higher discount rate would be
warranted if the jurisdiction’s places less value on long-term impacts than society
would.

Step E: Consider an Alternative Discount Rate

Regulators/decision makers should also consider whether to use a discount rate that is
not tied to any one of the three perspectives described above. The regulatory
perspective may be different from the perspective of utility investors, customers, and
society; thus, the regulatory time preference and discount rate could be different as well.

• Does the jurisdiction’s regulatory perspective suggest a greater value on long-
term impacts than that of utility investors?

o If so, then use a discount rate that is lower than the utility WACC. If not, then
use a discount rate that is higher than the utility WACC.

• Does the jurisdiction’s regulatory perspective suggest a greater value on long-
term impacts than that of customers?

o If so, then use a discount rate that is lower than that of customers. If not, then
use a discount rate that is higher than that of customers.

• Does the jurisdiction’s regulatory perspective suggest a greater value on long-
term impacts than that of society?

o If so, then use a discount rate that is lower than that of society. If not, then
use a discount rate that is higher than that of society.

Step F: Consider Risk Implications

Resource-specific risk issues are best accounted for in estimating the costs of each
resource, for example in the resource-specific cost of capital, as adjustments to a
resources costs or benefits, and/or in the avoided cost portfolio modeling process.

Page 102

National Standard Practice Manual Page 83

Nonetheless, there may be situations where the EE costs or benefits do not properly
reflect resource-specific risks. For example, the full set of risks associated with avoided
costs (e.g., risks associated with avoided fuel costs, risks associated with construction
costs) are often not captured in the cost-effectiveness inputs. In such situations,
regulators and other decision-makers may choose to apply a low-risk discount rate to
reflect the net risk benefits of EE resources, because those benefits are not otherwise
accounted for in the inputs to the analysis.

9.9.2 Discount Rates for Different Cost-Effectiveness Tests

The discount rate concepts and considerations described in this chapter are not only
relevant to the RVT; they are also relevant to other tests.

The Utility Cost Test
For all the reasons discussed above in Section 9.5, regulators and other decision-
makers should be circumspect about using the utility WACC as the discount rate for the
UCT. The utility WACC represents the perspective of utility investors, which is
fundamentally different from the customer or regulatory perspectives.
This distinction between the customer or regulatory perspectives and utility investor
perspectives is relevant regardless of which test is used for EE cost-effectiveness. In all
cost-effectiveness analyses, the purpose is to identify resources that best serve
customers, and the regulators are in the best
position to define what is in the long-term
interest of customers. Therefore, the discount
rate to use for the RVT should be used for
the UCT as well.
Note that the UCT does not represent the
perspective of the “utility” per se (i.e., in
terms of the interests of utility investors or
utility management). This test includes all the
costs and benefits within the scope of the
“utility system” that is used to serve customers, as described in Section 3.3 and Section
6.2.
This distinction between the “utility” (i.e., investors) and the “utility system” (i.e.,
customers) is important when considering whether the utility WACC is relevant for the
UCT. The purpose of the UCT is to identify those resources that will best serve
customers, including all costs that customers pay to the utility, and all benefits that
customers receive from the utility. This is different from the goal of maximizing value for
utility investors.

Total Resource Cost Test
The choice of a discount rate for the TRC test should be based on the same
considerations as the choice for the UCT. Adding participant impacts in the test does not
change the fact that the purpose of the cost-effectiveness analysis is to provide the best
services to customers, and not to maximize shareholder value.

The Societal Cost Test
It is widely accepted that the societal discount rate should be used for the SCT. This is
consistent with the notion of aligning the discount rate with the relevant perspective of

In all cost-effectiveness analyses, the
purpose is to identify resources that
best serve customers, and the
regulators are in the best position to
define what is in the long-term interest
of customers.

Page 201

National Standard Practice Manual

Better Options for Assessing Rate Impacts

Participation impacts are also key to understanding the extent to which
energy efficiency resources are being adopted over time.

Slide 39

A thorough understanding of rate impacts requires a comprehensive
analysis of three important factors:

• Rate impacts, to provide an indication of the extent to which rates for all
customers might increase.

• Bill impacts, to provide an indication of the extent to which customer bills might
be reduced for those customers that install distributed energy resources.

• Participation impacts, to provide an indication of the portion of customers that will
experience bill reductions or bill increases.
(Participating customers will generally experience bill reductions, while non-
participants might see rate increases leading to bill increases.)

Taken together, these three factors indicate the extent to which customers
will benefit from energy efficiency resources.

Page 202

National Standard Practice Manual

The NSPM, and related materials from the NESP, are
available at: nationalefficiencyscreening.org

May 2017

https://nationalefficiencyscreening.org/

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