DSM and the Utility

1. DSM and the Utility Day 3 – Dr. Herb Wade

2. Economics of DSM For the Utility and for the Nation

3. Fuel prices • The high fuel prices of 2008 are an indication of the future • Some utilities had fuel contributing to 80% of their operating cost • Some PICs doubled their import expenditures – with no corresponding increase in export revenues – due to the increased price of fuel

4. Price Volatility • Not only was there a problem due to the high fuel prices, the rate of change of the prices made it impossible to adjust to the higher prices • Financial planning for the utility or for its customers was not possible

5. The Good News • The scare of 2008 woke up both the utilities and PIC governments to the need to reduce dependence on foreign oil as much as possible through • Renewable energy • Offer relatively fixed generation costs for a long term so more price stability • DSM • Can be rapidly deployed to provide quick benefits • SSM • Stable benefits and improved long term profitability

6. Utility revenues • During times of rising fuel prices, utility revenues may go to record highs but profits may go to new lows due to the inability of rates to keep up with fuel costs • Profits can increase through reduced sales of electricity when rates are below real costs

7. Effect of DSM on Cash Flow

8. Calculating cash flow after DSM • 1. Calculate non-fuel costs of utility operation without DSM • 2. Determine the per kWh cost of fuel • 4. Determine total kWh sold and the revenue for target sector customers without DSM • 5. Determine total kWh sold and revenue in the target sector after DSM • 6. Determine the per kWh cost of operations after DSM

9. Change in cash flow due to DSM • 7. Calculate the revenues for the target sector after DSM • 8. Calculate the change in cash flow of the rate group due to DSM • 9. Calculate the reduction in cash flow for the rest of the customers after DSM • 10. Subtract the reduction in cash flow for the rest of the customers from the change in cash flow for the target group. This is net cash flow.

10. If cash flow is reduced is DSM still advisable • Probably it is because it still reduces dependence on diesel fuel • Lowered risk for the future • More stable environment for business development • Better customer relations

11. Case without DSM: Sales 100,000,000 kWh per year Fuel cost $40,000,000 ($0.40 per kWh) Fixed costs $8,000,000 ($0.08 per kWh) Residential rate = $0.30 per kWh Residential sales = 30,000,000 kWh Residential revenues = $9,000,000 Cost of residential electricity = $14,400,000 30,000,000 x $0.48/kwh = $14,400,00 14400000-9000000=5400000 Net loss in residential sales = ($5,400,000) DSM Saves 4,500,000 kWh/year

12. Case with 15% residential DSM Residential sales reduces from 30,000,000 to 25,500,000 kWh per year (4,500,000 reduction) due to DSM Total energy sold becomes 95,500,000 kWh/year New cost per kWh of operations = $8,000,000 / 95,500,000 = $0.08377 (because operations cost does not change with lower kWh). An increase of $0.00377

13. Residential revenue = 25,500,000 X $0.30 = $7,650,000 Cost of residential sales = 25,500,000 X $0.48377 = $12,336,135 Losses on residential sales = $12,336,135 - $7,650,000 = $4,686,135 Net improved cash flow on residential sales $5,400,000 - $4,686,135 = $713,865

14. Added cost per kWh on remaining kWh sold $0.00337 for all sales 95,500,00 – 25,500,000 = 70,000,000 non DSM 70,000,000 x $0.00377 = $263,900 added cost of delivery to non residential customers Total added cost on other sales = $263,900 Net improved cash flow = $713,865 - $263,900 = $449,965 - cost of DSM = benefit

15. Long Term Effects of High Fuel Prices • Economic growth halts or reverses • Utility sales growth halts or reverses • More customers default on payments • Hundreds of customers in RMI had to be disconnected due to non-payment in 2008 many have not reconnected now that prices are back down • Government revenues are down and non-payment of electric bills becomes more common • In most PICs government owns the utility plus government services are considered to be essential so disconnection of government facilities often is not allowed

16. Maintenance of utility equipment tends to be reduced • Since rates usually don’t keep up with rising fuel prices, funds at the utility become scarce and maintenance – and reliability – usually suffers • Capital investment in new equipment may slow • Prospects for future income are poorer than usual and borrowing money for capital investments becomes more difficult and risky.

17. A New Business Model for PIC Utilities? • Old model concentrated on growth and increased return on investments (ROI) but how can you predict ROI when you cannot predict the cost of 50-80% of your costs? Does ROI mean anything when rates are below costs? • New model must concentrate on survival with high fuel prices, stable or reduced level of sales and a ROI that is largely out of the hands of management due to such a high percentage of costs being uncontrollable

18. Government Actions Likely • Mandate DSM and use of renewable energy • Government utility owners avoid energy system capital investments where possible • Politicians force rates below a cost level that allows for good maintenance

19. Utility Actions • Improve system efficiency with minimal capital investment through DSM • DSM places efficiency improvement costs on the consumer not the utility and engages the financial resources of the whole population, not just that of the utility • Increase the use of grants from donors • Donor money is easily accessed for capital investment in DSM and renewable energy • Donor money is sometimes available for SSM investment • Donor money is rarely available for fossil fuel generation investment

20. In order to reduce the trauma of another round of rising fuel prices Pacific utilities dependent on diesel generation need to consider a changed business model • Not strive for load growth but for stable and reliable operations with gradually reducing sales likely • Concentrate on all avenues that can lead to reduced reliance on imported fuel • DSM • SSM • Renewable Energy

21. Energy Standards for Buildings

22. Building Standards to Support DSM • Energy Standards for new buildings • May be voluntary for residences and commercial buildings if incentives for following the standards are included • Should be mandatory for government • Practical for the conditions in the country • Not so complicated that local officials cannot easily enforce the rules • Fit the climate conditions • Most PICs do not require A/C for comfort if the building design is appropriate

23. Standards are focused on comfort without air-conditioning where practical • Includes renewable energy where practical • Solar water heating • Grid connected solar • Standards are enforced • Through financing agencies • By a government agency • Voluntarily but with incentives to offset the added cost of their application

24. Appliance Energy Standards

25. Appliance Standards and Labelling • All appliances in the PICs are imported. Many countries provide efficiency labels on appliances but they are not consistent and many include information not accurate for the PIC environment • PICs cannot afford energy testing laboratories and their own labeling tests • Some labels (Chinese mainly) are not government labels but manufacturer labels and cannot be relied on to be accurate.

26. A Babel of Labels

27. Label Translation • Local labels that fit PIC conditions can be applied based on a translation of the label information provided by the governments of the manufacturers of the imported equipment • Locally prepared labels based on other governmentally applied labels provides PIC consumers with consistent and more accurate information on energy use and efficiency • Cost of this type of local labelling is low and acceptable even for small countries

28. Incentives to Buy Efficient Appliances • Importers are willing to import high efficiency appliances only if customers will buy them over cheaper low efficiency units. • Lobby government to add extra duty to low efficiency appliance imports to make their cost about equal to that of high efficiency appliances • Utility can arrange low cost finance for customers on terms that allow monthly payments for high efficiency appliances to be about the same as payments for low efficiency equipment

29. Carbon Emission Calculations

30. Carbon Emission Savings • Many donor programmes focusing on energy will require the calculation of carbon emission savings for DSM and renewable energy projects • For utility energy projects, Carbon Dioxide (CO2) is the only concern • Donors assume that the equipment used for renewable energy and DSM projects does not have a carbon footprint. Not true but they ignore it.

31. Calculating Carbon Savings • Determine the kWh saved by the project • Determine the amount of fuel needed to deliver those kWh to users -- Can be complicated for utilities that include hydro or geothermal • Using published data determine the number of tons of carbon emitted per ton of fuel burned (may be slightly different method for different agencies who are asking for data) • Calculate the carbon saved based on the number of tons of fuel saved by the project

32. Example carbon emission calculation • Assumptions: • Project claims to provide 6,000,000 kWh per year reduction for the utility • System fuel efficiency (kWh sold per gallon of fuel used for generating that kWh ) = 13.20 • Assume diesel fuel produces 217.5 lbs of CO2 per gallon when burned • The utility uses diesels for 70% of generation 6,000,000/13.2 =454,545 gallons X 70% = 318,182 gal. 318,182 gal X 217.5 = 69,204,000 lbs of CO2 = 34,602 tons

33. What About Carbon Credits • If a major DSM project is to be implemented, can the utility get paid for the carbon reduction? • Yes – but: • There has to be an application before the project is implemented. The carbon credit concept is not to reward saving carbon emissions but to make it more likely that the decision to save will be made. • Verification is required. An independent auditor will have to verify the savings • Difficult for many types of DSM • Costly process. Only practical for very large savings that are clearly tied to the project

34. Designing DSM Projects for Donors

35. Creating Donor Projects for DSM • Projects for DSM and renewable energy are presently of great interest to donor agencies. However, to get donor grants, a proper project document meeting the donor requirements must be submitted • Must follow the documentation requirements of the donor being sought • Should show multiple benefits including • Poverty reduction • Small business development • Reduction in gender bias • Carbon emission reduction

36. Components common to all project documents: • Background information about the country and the need for the project • The goals and objectives of the project (include economic, financial, social and energy specific goals) • The organization and people that are to manage the project and their capability to perform • Who will be the beneficiaries and who are the “stakeholders”

37. 4. The budget for the project including: - Capital investment (equipment) - Cost of external expertise - Installation cost - Support cost (communications, etc.) - Monitoring and evaluation cost - How will the project be sustained after implementation? - Locally provided inputs (in-kind services land, personnel, money)

38. 5. The time line for all phases of the project 6. The government Agency to be responsible for proper implementation of the project (donors usually will not provide grant money directly to the utility, they will provide it to government who will have overall responsibility for proper management of the project) 7. Cover letter from government official stating that this is a formal request from government.

39. Remember to include how the current priorities of donor agencies will benefit – with numbers estimating the benefits, if practical. • Carbon emissions (will there be a reduction in carbon emissions? If so how much?) • Poverty (are the poor affected? If so how do they benefit?_ • Small Enterprise Development (will small, local businesses benefit? If no how? • Gender equality (will the project increase the participation of women in decision making or in economic terms? If so how?)

40. Project concepts for donor funding • Provide businesses free energy audits and finance assistance for implementing changes needed • Energy awareness “fair” with energy related exhibits from local businesses, organizations and NGOs • Government facility energy audits and technical assistance for implementation • Appliance energy labelling to fit local conditions • Awareness workshop for retail businesses selling air conditioners and large appliances • Public awareness programmes through the media • School curriculum development for energy efficiency • Incandescent light replacement programme • Air conditioner maintenance programme

41. Sample project concept • Goals: • To get households involved in energy efficiency • To provide school children with education in the concepts of energy efficiency • To distribute CFLs to replace incandescent bulbs • To get information on the type of appliances in homes • Concept: • Middle schools teach a module on home energy efficiency and how to do home energy audits • School children do energy audit with the support of family • Bring in incandescent lamp bulbs and take home CFLs in trade • Utility gets home audits for analysis

42. Actions • Work with Education Department to develop course materials and home audit procedures • Train persons to train teachers how to present the course • The trainers train science teachers from middle schools through a one day course • Teachers provide the students with information about energy and home energy auditing • Students do the home energy audit and get the completed audit signed off by parents • Students hand in audits and incandescent bulbs collected from home • Teachers provide CFL replacements and turn over audit forms to the utility (no user identification on audit forms)

43. Resources needed • Expertise to develop the course • Expertise to train trainers • Enough CFLs to replace incandescent bulbs • Audit analysis skills to extract useful data for home DSM project development

44. Benefits that can be listed • Helps the poor through provision of CFLs and a better understanding of how to save energy and its cost • Helps children through an introduction to the importance of energy efficiency and the techniques for saving energy • Lowers carbon emissions through CFLs replacing incandescent bulbs • Provides for long term benefits because the course module becomes a permanent part of the school curriculum • Provides for public information through the interaction of the students with families

45. Costs • Personnel time for expert support in curriculum development and training of trainers • Personnel time for interaction with Department of Education in planning and execution of the project • CFL purchase • Printing and audio-visual support for the course • Cost of analysis of home energy audits received • Report writing

46. Time line

47. Herb Wade herbwade@sprynet.com = regular email herbwade@gmail.com = email & attachments over 500kb