To:Jonathan Raab, Paul Centolella, Docket 4600 Stakeholders

Memorandum

To:Jonathan Raab, Paul Centolella, Docket 4600 Stakeholders

From:Tim Woolf and Jenn Kallay on behalf of the Division

Date:November 17, 2016

Re:Docket 4600: Cost-Effectiveness – Roadmap

Draft – For Discussion Purposes

Introduction

The purpose of this memo is inform the discussions on developing the cost-effectiveness framework for all DERs and all policy-driven resources in Rhode Island. It is our understanding that the Commission has several goals regarding cost-effectiveness, including (a) understanding how cost-effective each distributed/policy resource is using a common framework; (b) understanding how cost-effective each distributed/policy resource is relative to other distributed/policy resources; and (c) understanding how cost-effective distributed/policy resources are relative to conventional distribution technologies.

Two different techniques can be used to evaluate the cost-effectiveness of distributed/policy resources:

• Single-resource approach. This methodology is currently used to evaluate energy efficiency resources in RI. It uses a single, static set of avoided costs to evaluate specific energy efficiency programs against a reference case of generation, transmission, and conventional distribution resources.
• Portfolio optimization approach. This methodology is used in integrated resource planning practices, and is being explored in several states for use in distribution system planning. It uses detailed modeling practices to optimize an entire portfolio of resources, with the goal of reducing long-term utility costs, and meeting other policy goals.

The technique that is best suited to our needs will (1) have a reasonable turnaround time and commitment of resources to produce results, (2) be transparent, (3) allow for integration of policy considerations and (4) enable optimization across all available resource options. The two techniques discussed above have different and complementary advantages and disadvantages, and while each technique can and should be improved, neither technique, on its own, can meet all our needs in the long run.

The single-resource approach can be performed in the short-term, is transparent to all stakeholders, and allows for explicit policy considerations. A key downside is that it does not allow for dynamic optimization of all resource options available.

In contrast, the portfolio optimization approach will take much longer and is more resource-intensive to develop and apply, may not be transparent to all stakeholders, and may not allow for explicit policy considerations. However, it does allow for optimization across all resource options.

To achieve the goals of this docket, we recommend expanding upon the current energy efficiency cost effectiveness practices (e.g., the single-resource approach), and eventually including them in integrated resource planning practices (e.g., the portfolio optimization approach). We propose a five-step plan for modifying current cost-effectiveness practices in discrete steps. The five steps are as follows:

1. Update the Rhode Island Cost-Effectiveness Test.
2. Apply the New RI Test to the Existing Energy Efficiency Programs.
3. Apply the New RI Test to Other Distributed/Policy Resources.
4. Compare Distributed/Policy Resources to Each Other.
5. Conduct Dynamic Portfolio Optimization Analyses

Each step is intended to provide increased information on distributed/policy resource cost-effectiveness, while remaining feasible, practical, and transparent. Each step builds from the singe-resource evaluation approach, except for the last step, which is integrates portfolio optimization. We describe each step in more detail in the following sections.

1.Update the Rhode Island Cost-Effectiveness Test for Energy Efficiency

The stakeholders should start by deciding whether to add, subtract, or redefine any of the costs or benefits used in the current energy efficiency cost-effectiveness test. This should include the full universe of costs and benefits that might apply to any type of distributed/policy resources.

The stakeholders should identify methodologies that should be used for monetizing any new costs or benefits.

The stakeholders should identify methodologies to account for temporal and locational value of distributed/policy resources.

This new set of costs and benefits should be referred to as the RI cost-effectiveness test, and should be applied to all distributed/policy resources.

2.Apply the New RI Test to the Existing Energy Efficiency Programs

The RI Test should be applied to the current energy efficiency programs. The results should be presented in terms of benefit-cost ratios and net benefits for each program. Then the stakeholders and Commission can assess the implications of the new test on existing energy efficiency programs.Figure 1 provides benefit cost ratios for each of the 2017 energy efficiency programs offered by National Grid in Rhode Island.

Figure 1. Cost-Effectiveness of Energy Efficiency Programs: Benefit-Cost Ratios

Further, the new information should be presented in ways that are useful for the questions posed by the Commission above. For example, the costs of the energy efficiency programs could be put in terms of $/MWh, $/kW, and $/ton of CO2 avoided. As an example, Figure 2 provides the costs per MWh for each of the 2017 energy efficiency programs offered by National Grid in Rhode Island.

Figure 2. Cost-Effectiveness of Energy Efficiency Programs: Costs per MWh

Note that the information in Figure 2 does directly account for the benefits of the efficiency programs. It presents the costs of the programs only, normalized by the energy savings. The results do not indicate whether a program is cost-effective. Instead, it allows for a comparison of the costs of the programs against each other and against other distributed/policy resources.

3.Apply the New RI Test to Other Distributed/Policy Resources

The RI Test should also be applied separately to (a) potential demand response programs; (b) different types of distributed solar resources (e.g., residential rooftop, commercial rooftop, municipal rooftop); and (c) other resources or policies of interest to the Commission. The results should be presented in terms of benefit-cost ratios and net benefits for each program. These results should also be put in terms of $/MWh, $/kW, and $/ton of CO2 avoided. They could also be presented in terms of $/MMBtu if the Commission wishes to present the information across fuel types.

4.Compare Distributed/Policy Resources to Each Other

The steps described above will provide useful information for the Commission and stakeholders to compare distributed/policy resources to each other. First, we can examine the benefit-cost ratios across all resources , as illustrated in Figure 3 below. Second, we can compare the cost metrics provided above across all resources, as indicated in Figure 4 below.

Figure 3. Cost-Effectiveness of Multiple Resources: Benefit-Cost Ratios

Figure 4. Cost-Effectiveness of Multiple Resources: Costs per MWh

This comparison across resources is somewhat limited, because it does not indicate how the distributed policy resources will interact with each other. It also does not allow the Commission or others to optimize across different policy resources. Nonetheless, it does provide considerable new information about how the resources compare in general.

5.Conduct Dynamic Portfolio Optimization Analyses

This methodology can be developed over time, in parallel with the steps described above. The results of the steps described above will be useful in determining the methodology for the portfolio analyses.

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