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Better Ways of Valuing Energy Efficiency in Minnesota and Beyond

, lead Midwest energy analyst | August 20, 2020, 9:22 am EDT
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Today, the Union of Concerned Scientists released a new report on ways to better value the benefits of energy efficiency. Our report, Energy and Emissions Benefits from Minnesota Energy Efficiency Investments, focuses on improving the analytical approach to how Minnesota utilities value energy efficiency but is broadly applicable to other states as well.

Why energy efficiency matters

Minnesota has long been a big supporter of energy efficiency and for good reason. By finding ways to use less electricity to accomplish the same amount of work in our businesses, and to provide the same amount of comfort and other services in our homes, both consumer costs and air pollution emissions from fossil fuel power plants are reduced. Energy efficiency projects are also a prime source of local job growth.

Small-scale renewable energy, sometimes referred to as distributed generation and frequently consisting of solar power, brings many of the same benefits. Installing solar locally, for example, and potentially pairing it with energy storage technologies like lithium-ion batteries can avoid the need for dirty and expensive gas peaker plants and also provide customers with opportunities to lower their electricity bills by getting credit for the solar resources in which they invest.

Calculating the full value of energy efficiency and distributed generation is key

Electric utilities must make decisions about where to invest funds from their ratepayers. Options utilities can take include spending money on building new fossil fuel power plants, purchasing electricity and other products from other suppliers, or investing in carbon-free energy technologies such as energy efficiency and renewable energy.

The costs required to pursue efficiency programs and distributed solar projects include design and marketing, payments to workers, and purchase of equipment needed for the installations. The process of determining those costs is relatively straightforward. What’s more complicated is assessing the benefits, or the value, that applications like efficiency and distributed solar provide to utilities, consumers, and society as a whole.

This is where avoided cost analyses comes in. When we install efficiency upgrades in our homes or put up rooftop solar, we save money. But our utility company also avoids several costs that would otherwise be incurred and passed back onto all of us as consumers.

The cost utilities most obviously avoid when we use less electricity are the costs that would have been associated with generating or buying that electricity for us. Also, some amount of capacity payments—compensation to a power generator to promise to be available in the future—is reduced. Finally, the costs of air pollution emissions are lowered because fossil fuel plants such as coal and gas units run less, which reduces the amount of respiratory and other health damage and climate change-causing pollutants that society (and, disproportionately, people of color) must bear.

There are other benefits of efficiency and distributed generation too, but the categories listed above are the big ones involved in avoided cost analyses. How all of these avoided costs are calculated—the energy, capacity, and emissions savings—is crucial because the avoided costs (i.e., the benefits) are compared to what it costs to pursue the energy efficiency and distributed solar measures. This comparison is a key factor in how much of these programs utilities ultimately implement.

Better ways to conduct avoided cost analyses

Our report examined the traditional approach—used in Minnesota and other states—of calculating avoided costs and compared it to alternative methods that better reflect the value of energy efficiency and distributed generation while maintaining simplicity and transparency. Check out the UCS report for the full details, but key themes throughout are that avoided cost methodologies need to be more transparent, accessible, and auditable. The alternative methods discussed in our report seek to achieve these criteria and rely on publicly available data wherever possible.

UCS worked on this analysis last year, using data primarily from 2018, to illustrate how alternative approaches to calculating avoided costs work in practice. We’re making our report available now as an advisory committee to the Minnesota Department of Commerce is expected to begin work soon on exploring several issues—including calculation of avoided costs—related to cost-effectiveness assessments under the state’s Conservation Improvement Program (CIP). The advisory committee is anticipated to continue throughout 2021 and 2022.

The path ahead: improving the understanding of clean energy’s value

In addition to providing better information in technical regulatory dockets, a more accurate picture of the value that efficiency and small-scale renewables provide to the electricity system is valuable for several other initiatives underway in Minnesota:

  • The Minnesota legislature is considering bills to expand energy efficiency investments by electric and gas utilities, as well as proposals to put the state on a path toward 100 percent clean energy. Better data on the value these resources provide would give legislators even greater confidence that expanding clean energy is the right path for the state.
  • The state’s largest utility, Xcel Energy, has an integrated resource plan (IRP) pending that outlines the company’s long-term plans for meeting its clean energy and carbon reduction goals. Ensuring consistency between how efficiency and renewables are valued between different types of utility planning is important. And maximizing the amount of energy efficiency and renewable energy in Xcel’s plan will reduce or eliminate the need for new gas plants, in addition to much-needed transmission infrastructure expansion options from the regional grid operator, the Midcontinent Independent System Operator (MISO).
  • Utilities, in Minnesota and other states, are operating coal plants when they do not need to and when it would be cheaper to purchase electricity from the market instead. This problem—known as “self-committing”—is explored in depth in UCS’ May 2020 report Used, But How Useful? The issue is getting more attention, especially in Minnesota where the Public Utilities Commission has an investigatory docket open on the issue and recently concurred with Xcel Energy’s plan to operate some of its units on a seasonal basis. Improved information on the value of efficiency and distributed solar will help show these resources are better options than losing money on uneconomic coal power.
  • Investing in making homes and businesses more climate resilient for both extreme heat and extreme cold is a triple win for cost effectiveness, comfort, and resilience. Such steps include making homes less leaky for air drafts, adding solar panels and batteries, and electrifying heating systems. Incentives for customers to reduce demand during extreme events like polar vortexes and heat waves are also important to expand. Again, improving avoided cost methodologies provides additional foundation for the value of these approaches to make Minnesota better prepared for climate resiliency.
  • Power cooperatives—which serve one-third of Minnesota customers—can also benefit from improved avoided cost methodologies. Customers served by power cooperatives can be better informed about how their power providers need to be moving away from coal plants and investing in greater amounts of local energy through efficiency and distributed solar.

In the end, improving avoided cost methodologies is an important part of keeping Minnesota at the forefront of energy leadership. As the state looks to economic recovery from the COVID-19 pandemic and confronts systemic racism that persists in institutions including the energy sector, ensuring that we have the best information about the benefits of energy efficiency and other clean energy applications is key to a more robust and equitable energy future.

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