Avoided Cost Methodology Flashcards
To understand E3 avoided cost methodology
What is this methodology for?
long-term forecast of electric and gas avoided costs for the evaluation of California energy efficiency (EE).
What is avoided cost?
- total cost avoided to society through reduction in energy demand
- can be either gas or electricity
- societal perspective
- direct savings and externality values of unpriced emission
- The resulting avoided costs are appropriate for applying the Total Resource Cost (TRC) test Societal Version which is the primary cost-effectiveness test for California efficiency programs
What is the avoided cost methodology most appropriate for?
evaluating resources that a) reduce load or produce energy for hundreds of hours per year in a predictable pattern, b) are relatively small (such that they can be installed behind the customer meter), and c) are expected to be installed in large numbers.
What are the standard practice manual cost effectiveness tests?
- participant test
- ratepayer impact measure test
- program administrator test
- total resource cost test
- TRC societal test
What are the location and time variation by cost component for the avoided cost methodology?
- generation cost variable by hour and location
- T&D costs variable by hour and location
- Emission Costs variable by hour
- Reliability adder variable by hour
- price elasticity adder variable by hour
what approach does the methodology use?
bottom up approach
-quantify an hourly avoided cost as the sum of elements of forward-looking incremental costs for that hour.
what is the result of the methodology like?
hourly electricity avoided costs are location-specific and vary by hour of day, day of week, and time of year
How is generation cost determined?
The annual forecast of generation costs avoided is allocated according to an hourly price shape obtained from historic data that reflect a workably competitive market environment. These hourly costs further vary by location, depending on locational capacity constraints and fuel costs.
How is the T&D capacity cost determined?
The T&D capacity costs are allocated by typical weather patterns for the State’s climate zones, with the highest costs allocated to the hottest temperature hours, as done in the CEC TDV evaluation.
Non-peak hours have zero avoided T&D capacity costs, reflecting that T&D capacity investments are made to serve peak hours.
How is emission cost determined?
Generation market prices capture the per-MWH variable costs of buying emission permits required to comply with emissions regulations incurred by generators. However, emissions such as CO2 are unpriced, thus constituting external costs. Under TDV, we allocate such external costs based on the time profile of generation dispatch with on-peak hours having higher emission costs than off-peak hours.
What is reliability adder?
This adder reflects the reliability benefit of a demand reduction not already captured in the avoided cost of generation. To illustrate, the market price of firm energy already contains the market value of capacity, but does not include the price (or marginal cost) of ancillary services required by California Independent System Operator (CAISO) for safe and reliable operation of the grid.
What is the price elasticity adder?
This adder is related to the benefit of a price reduction to all electricity consumers caused by a demand reduction. This benefit, however, is likely to be relatively small in the next few years because of the utility distribution company’s (UDC) reduced reliance on the spot markets for meeting their load obligations. When the electric system is in resource-load balance, the benefit vanishes because a demand reduction along the flat long-run supply curve (which reflects the cost of market entry, the all-in per MWH cost of a CCGT) does not result in a price decrease.
How is the value of capacity calculated in the avoided cost calculator?
The real annualized cost of a new CT less the annual net revenues that generator could earn through participation in the real-time energy and ancillary services markets
What is the real annualized cost of a new CT?
The real annualized cost of a CT is calculated by levelizing the cash flow associated with a new CT using the real utility after-tax WACC. This cost is adjusted upward for inflation in each year
What is the net revenue in real-time market?
E3 assumes that the new CT will participate in the real-time energy market, dispatching in each hour if average real-time market price in that hour exceeds its operating cost.
