Bacon's Rebellion

Democracy Thrives in Sunlight

How Much Energy Conservation Is the Right Amount?

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by

James A. Bacon
in

The Virginia Energy Plan

has set the goal of reducing the rate of energy consumption per capita in Virginia by 40 percent from current projections, in effect stabilizing per capita consumption, not reducing it. Total energy use would continue to grow along with the population.

While praising many aspects of the plan, the Southern Environmental Law Center criticized the report for its modest conservation goal. Write Trip Pollard and Cale Jaffe in a prepared statement:

The plan also deserves praise for recognizing the importance of energy efficiency as the “least costly and most readily deployable energy resource.” However, it recommends a target of reducing electricity use in Virginia by only 3900 MW by 2022. A recent analysis shows Virginia ranks dead last in the U.S. on per capita investments on energy efficiency, meaning far greater energy savings should be achieved.

How much conservation is it reasonable to expect Virginia to achieve? Virginia has one of the more electricity-intensive economies in the 50 states, and there are abundant opportunities for conservation and energy efficiency. But we cannot write a blank check. With many competing uses for our resources, we cannot afford to squander funds on any old program with a political constituency.
Earlier this year the General Assembly set a goal of reducing retail electric consumption by the year 2022 by 10 percent of 2006 levels through conservation and energy efficiency. That would defer or postpone the need for about 3,900 megawatts of electric genration capacity, equivalent to four or five large power-generating stations.
That does not strike me as especially ambitious, but I don’t have the data to say one way or another. Here’s the question I always come back to: What’s the Return on Investment? The Energy Plan does not say explicitly, but it does provide some numbers to work with. The report assumes that electric companies and consumers would invest about $300 million a year over the fifteen-year life of the program. Annual savings would amount to between $15 million to $50 million per year, depending on the assumptions made.
Let’s see, if we invest $300 million and generate $15 million a year in savings, that’s a 5.0 percent Return on Investment, equivalent to investing in a money market fund. Not terribly attractive. Saving $50 million a year would yield 17 percent, which is very competitive, the kind of return that the private sector looks for.
Presumably, those numbers mask a wide range of returns on individual projects. Rather than commit to a specific statewide number, I would suggest, consumers and power companies should be allowed to make investments in line with their personal expectations. And instead of setting artificial statewide goals, the state should focus on (a) creating the legal and regulatory conditions where the marketplace rewards investments in conservation and energy efficiency, and (b) fixing energy-inefficient human settlement patterns that result in unnecessary expenditure of energy for driving and home heating/cooling. Then the state should step aside and let individual households and businesses figure out how to maximize their own good through conservation and energy efficiency.
As a practical matter, what does that mean? I hope to elaborate in future posts.

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12 responses to “How Much Energy Conservation Is the Right Amount?”

  1. Larry Gross Avatar
    Larry Gross

    three thoughts:

    * – decoupling

    * – mandatory Smart Meters

    * – peak-hour pricing

    Let folks decide how they want to conserve (or not).

    decoupling BUT then allow full competition

    In other words – pay Dominion for their stranded investment costs – but transition to an environment where we have competitors producing power – and everyone has Smart Meters ….

    If we had some legislators with some backbone.. and again.. where is the bold thinking Republican Party on issues like this?

    There are no end to opportunities for Conservatives in Va .. note the close relationship of the word Conservative to Conservation…

    Batter UP… let’s see those Republicans get in the game…

    If you be a Republican or Conservative – let’s hear your ideas on this…. we already know what the tax and spend folks think.

  2. Anonymous Avatar
    Anonymous

    You should have stopped at a).

    b) doesn’t necessarily follow, and it might cost more than it saves.

    RH

  3. Larry Gross Avatar
    Larry Gross

    (b) – lets you decide based on real-time useage data

    without (b) – there is no reason to do anything other than continue as before….

    Folks who want to conserve – will want the option of (B)

    whereas folks who don’t .. won’t want (B) ….. because then.. they’ll have to do something rather than nothing…

    How about this – Smart Meters and peak-hour pricing plans for those that want them – and status quo for those that don’t?

  4. Anonymous Avatar
    Anonymous

    Decoupling is the worst idea since price controls..wait a minute, it is price controls.

    It promises the utilities a fat profit no matter if the lost revenue is due to conservation, weather issues, or stupid mismanagement. If the global warming is as bad as the Chicken Little’s think, the power companies are going to get rich on air condititioning.

    Isn’t it curious that no matter how we turn, the power companies get richer? Give them enough of a guaranteed ROI and they’ll happily bury every power line — no skin off their nose.

    Smart meters, time-sensitive pricing, those are fine ideas that work now with major consumers and need to move to the residential market. Make the CFL light bulbs tax free for five years, or better yet give people a tax credit. There are plenty of good ideas that preserve choice and market forces, and if the power companies have to work harder to make their profits — tough, so do the rest of us.

  5. Larry Gross Avatar
    Larry Gross

    the reality is – that companies like Dominion cannot build major power plants without thinking in terms of 20,30 or even 40 years of amortizing the cost.

    If we allowed Dominion to fully recover the cost of those facilities in say – 5 years – the cost to consumers would be very high.

    So the current process is to essentially promise Dominion that they will be kept “whole” if they make major capital investments and this is not a trivial thing because if that commitment were not there – the investors – the folks who hold paper – would pull out and Dominion would – ultimately fail – go bankrupt.

    So – if we want to change – we have to fairly compensate Dominion as we transition.

    That is what decoupling is.

    How else would you do this?

    What power company would dare try to replace Dominion – if Virginia reneges on the capital investment agreement?

    This is the problem.

    How do we transition from where we are right now – to an environment – that allows companies like Dominion to remain a competitive business – and at the same time – allow consumers .. options in terms of conserving?

    You have to give some – to get some.

    It’s easy to knock down decoupling but be honest – what we have right now.. IS a guaranteed profit – already – right?

    So .. offer something else – that might work.. rather than just knocking down what’s on the table.

  6. Anonymous Avatar
    Anonymous

    If you read the Plan, you will see that it acknowledges that in the past it has not made economic sense to spend broadly on conservation, since our regulated energy costs were also among the lowest in the nation. They are still low — comparatively — but the cost of fuel (not regulated) has increased greatly. So it begins to make sense to promote conservation. Hard to say exactly where the tipping point is, at least for me.

    With regard to the comment about decoupling guaranteeing a “fat profit” to the utilities, I doubt that person works for a company whose return is required by law to be less than 11 or 12%, as utilities’ are. Part of the bargain for agreeing to serve everyone, at a limited margin and with intensive capital requirements, is the guarantee of “an opportunity to earn a fair return.” No one will invest in a company that doesn’t have that opportunity — and the company still has the manage its business well to earn it.

    Public service companies were formed because without them, it is impossible to assemble the capital to build the infrastructure almost everyone reading the blog takes for granted. We think of them as monolithic, bureacratic money machines, but in reality, even in a regulated environment, they have to take huge risks that the regulatory world won’t change, and the billion or two they invest today won’t be stranded five years down the road.

  7. Anonymous Avatar
    Anonymous

    “So the current process is to essentially promise Dominion that they will be kept “whole” if they make major capital investments …”

    Isn’t this the argument we were having earlier? Why should Dominion’s capital investments be any more valuable than the next guy? If you are going to change the rules,you still need to play fair.

    We don’t know of any workable settlement pattern that we can prove will use less energy and resources down the road. It has never been proven to be so, and we have zero extant examples. then of course to change the pattern will take decades, nay centuries, and will require a not inconsiderable amount of energy and resoources.

    RH

  8. Larry Gross Avatar
    Larry Gross

    this is pretty darn simple.

    you have a company who has agree to supply electric power for an agreed-profit.

    power plants cost millions even billions of dollars.

    the money for these plants comes not from the users in terms of up-front fees but rather as part of their monthly bills – not unlike a mortgage payment.

    The availability of capital to build the plant – was/is contingent upon Dominion’s ability to repay the debt, which in turn is based on their ability to collect from each ratepayer – a certain amount each month on their bill.

    So, Dominion has sustained huge debt – on the premise that they can repay it – in exchange for agreeing to provide adequate, reliable power for the forseeable future.

    This directly benefits the public – as opposed to companies engaged in businesses that benefit them and their investors but not the public.

    THAT’s why Dominion gets different treatment than the “next guy”.

    This agreement is – an agreement that can change per how Virginia would like to proceed with regard to energy use and supply.

    Virginia could even “dump” Dominion but the consequences of doing so would be pretty ugly because no other provider of power would step forward to receive the same treatment.

    The quid-quo-pro agreement has absolutely nothing to do with settlement patterns or even the “next guy”.

    It boils down to a simple premise.

    Dominion goes into debt for 30, 40, 50 years and agrees to provide power for a specified profit and, in return Va consumers receive reliable power.

    If you want to change this agreement – don’t expect Dominion and it’s investors to remain quiet.

    If we want to better orient Va users of electricity towards an environment that encourages conservation – we need Dominion as a partner in that effort if it is to succeed.

    The “other guy” is not providing a public benefit …. that’s the difference RH.

  9. Anonymous Avatar
    Anonymous

    Decoupling actually reduces the incentive for customers to conserve. When capital cost recovery is tied to consumption, there is greater bite to higher consumption. When you remove that variable from consumption, there is less of a swing between periods of high and low consumption. The consumer equivalently receives less bang for their buck when they conserve. So, I would respectfully disagree that decoupling will induce conservation.

    I do agree with decoupling though, but not for that reason. Decoupling should reduce regulatory costs by decreasing the number of rate filings. It’s better for the utility (reliable return) and for the public (reduced regulatory cost).

    To Mr. Bacon’s point on ROI, the rate of return you would expect is very dependent upon risk. An equivalent consideration of risk would be necessary in judging an investment in conservation. If you are guaranteed a savings of $315 million a year for an investment of $300 million a year, then the expectation of an ROI equivalent to a risk free security would be applicable. The question is how certain are these savings. And if they are not very certain, then even 17% may not be an applicable comparison.

  10. Anonymous Avatar
    Anonymous

    “This directly benefits the public – as opposed to companies engaged in businesses that benefit them and their investors but not the public.”

    WHAT?????

    Janus strikes again.

    Every business is involved in negotiations with the public. If the public doesn’t think the negotiations benefit themselves, then they won’t engage, and the company will be out of business.

    The nature of a deal is that BOTH parties benefit. Anything else is either extortion or stealing.

    The other guy, may also have incurred big debt, at least for him. There is no morally acceptable reason for treating ANYBODY else differently than you propose treating Dominion.

    If you want ANYBODY or ANY Business to move towards an environment that encourages conservation – we need them as partners in that effort. Partners who have agreed to a deal and not having one imposed on them for someone elses benefit solely.

    I agree with what you say about Dominion, I just think it applies equally to everyone everywhere. Sure, nearly everyone uses electricity, and not everyone uses cello bows. But you can’t put the cello bow maker out of business just because you love horses, without some compensation.

    RH

  11. Anonymous Avatar
    Anonymous

    Anonymous is correct onthe ROI. In addition, Jim seems to assume that you could get 50 million in savings for the same investment.

    I was returning from a hay delivery and saw a place with two rows of Bradford Pear trees along the driveway. (Why wnyonw would want such trees is beyone me, but they seem to be popular.) Every tree was strung up with little white lights and each tree was illuminated by a floodlight. Combine that kind of aesthetic with gas stations blindingly lit up, and I’d say the savings are not very certain.

    Then again we have to ask what we have saved FOR? If we burn less oil to produce electricity, won’t the Chinese just burn it for us?

    We have to ask if there are losses associated with the savings themselves. Having an accident because we saved on lighting should count as part of the cost.

    RH

  12. Anonymous Avatar
    Anonymous

    For me to reduce electricity usage by 40%, I’d have to unscrew 40% of my light bulbs, including the energy efficient ones. I’d have to turn the water heater back 40%, and have tepid showers, at best. Then I’d have to figure out how to to consume 40% less energy in my oil burner, and use my workshop 40% less.

    I don’t see it happening, at least not at the consumer level. We could kill a lot of outdoor lighting without too much loss, but what then?

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