National Standard Practice Manual for Energy Efficiency Cost-Effectiveness

1. National Standard Practice Manual for Energy Efficiency Cost-Effectiveness Prepared by The National Efficiency Screening Project Presentation at 2019 NASEO Mid-Atlantic Regional Meeting Erin Malone, Synapse Energy Economics June 3, 2019

2. Overview What is the National Standard Practice Manual (NSPM)? Which states are using the NSPM? Database of State Efficiency Screening Practices (DSESP) NSPM for distributed energy resources (DERs) Questions / Discussion

3. What is the National Standard Practice Manual?

4. NSPM for EE(Edition 1 - May 2017) • Align with applicable state policies • Treat costs & benefits symmetrically • Account for relevant impacts (even if hard to quantify) • A state’s test may align with a traditional test…. or not

5. What’s Covered - NSPM Outline Part 2: Developing Test Inputs Efficiency Costs & Benefits Methods to Account for Costs & Benefits Participant Impacts Discount Rates Assessment Level Analysis Period & End Effects Analysis of Early Retirement Free Rider & Spillover Effects Executive Summary Introduction Part 1: Developing Your Test • Principles • Resource Value Framework • Developing Resource Value Test • Relationship to Traditional Tests • Secondary Tests Appendices Summary of Traditional Tests Cost-Effectiveness of Other DERs Accounting for Rate & Bill Impacts Glossary

6. NSPM Principles Recognize that energy efficiency is a resource. Account for applicable policy goals. Account for all relevant costs & benefits (based on applicable policies), even if hard to quantify impacts. Ensure symmetry across all relevant costs and benefits. Conduct a forward-looking, long-term analysis that captures incremental impacts of energy efficiency. Ensure transparency in presenting the analysis and the results.

7. Implementing the Resource Value Framework Involves Seven Steps

8. Cost-Effectiveness Perspectives Public utility commissions Legislators Muni/Coop advisory boards Public power authorities Other decision-makers California Standard Practice Manual (CaSPM) – test perspectives are used to define the scope of impacts to include in the ‘traditional’ cost-effectiveness tests NPSM introduces the ‘regulatory’ perspective, which is guided by the jurisdiction’s energy and other applicable policy goals

9. Relationship of Resource Value Test (RVT) to Traditional Tests – Results May Align or Not

10. Which states are using the NSPM?

11. NH 2 ME 2 VT WA 1 MA:1 MT ND NY 6 MN 3 RI:1 OR WI 1 ID 1 MI 1 CT:6 SD NJ:3 WY PA IA 2 DE OH NV 1 NE IN IL 2 MD WV 2 VA 6 UT Washington D.C. CO KY 1 KS 1 MO NC 1 CA 5 TN SC 1 AR 2 OK 2 AZ 3 NM GA AL MS 1 TX LA 2 FL AK HI 1 NSPM for Energy Efficiency State References and Application to Date States Referencing and Applying the NSPM PUC Order on NSPM or use of RVT 2 Actively applying NSPM to review current test 5 In process of learning about the NSPM 3 *Numbers next to state abbreviations in map indicate number of NSPM references in state formal proceedings References have been made in PUC proceedings 20

12. NSPM Case Studies Case studies of NSPM application and supporting guidance documents are available on the NESP website. • In Minnesota, the MN Department of Commerce’s Framework Study applied the NSPM to develop a new primary cost-effectiveness test. • In Arkansas, the Parties Working Collaboratively followed the NSPM principles to assess the state’s current cost-effectiveness practices. • Rhode Island’s PUC developed a “Rhode Island Test” based on the NSPM principles.

13. Societal Cost Test as Applied in Minnesota Utility System Impacts

14. Recommended Minnesota Test Utility System Impacts

15. Database of State Efficiency Screening Practices

16. DSESP Background and Purpose Background Part of the National Efficiency Screening Project, which produced the National Standard Practice Manual Is a living database, updated as state practices change Purpose To provide information regarding state screening practices for ratepayer-funded electric efficiency programs States can use the DSESP to learn from other state’s practices, and readily access policies, processes, and studies.

17. DSESP Scope • The DSESP is still under construction • It currently includes 30 states • It will include all states by the end of 2019 • The DSESP follows the structure of the NSPM, including state-by-state information regarding: • Which cost-effectiveness tests are used; primary and secondary • Key planning parameters; e.g., discount rate, study period • Which utility system impacts are accounted for • Which non-utility system impacts accounted for • The DSESP can be easily sorted by users • By state, by test, by planning parameter, etc. • The DSESP Includes sources for every data point

18. DSESP DataGraphic Presentation: which test is used?

19. NSPM for DERs

20. NSPM for DERs(Edition 2 – forthcoming 2020) • Growing interest in range of DERs as grid resources and for distribution planning  regulators need further guidance to support BCA considerations and common framework for DER analyses • States currently are using different techniques, methodologies, and assumptions for DER BCA, leading to inconsistency even within states • NSPM for DERs will generally apply principles from the NSPM for EE guidance to DERs to support consistent and economically sound BCA policies and practices • E4TheFuture is project coordinator and funder. Other funding sources being leveraged to support project • Project Schedule:

21. Thank you!Questions?Erin MaloneSynapse Energy Economicsemalone@synapse-energy.com

22. For more information visitwww.nationalefficiencyscreening.org For additional questions, emailNSPM@nationalefficiencyscreening.org or Julie Michals, E4TheFuturejmichals@e4thefuture.org

23. Appendix AThe Traditional Cost-Effectiveness Tests

24. Appendix B NSPM for DERs - Advisory Group

25. Appendix B NSPM for DERs - Consulting Team * with Janet Gail Besser as Advisory Group member

26. Appendix BThe Goal of the NSPM for DERs: Answering Key Questions Why a common framework for assessing the value of DERs? How should the Utility Cost test or Societal Cost test be used in assessing DERs? What costs and benefits should be accounted for? Should a different, state-specific test be used in assessing different types of DERs? If so, how should that test be designed? Should multiple tests be used to assess DERs? If so, how? Or should the same tests be used for all DERs? If not, why not? How should DER analyses account for revenue-shifting, cost-shifting, rate increases, or rate decreases? How should third party capital be assessed in valuing DERs (in particular for non-utility system impacts)?

27. Appendix B Three Tiers of DER Analyses • Single-DER analysis; where one type of DER is assessed relative to a fixed (i.e., static) set of alternative resources. • Multiple-DER analysis; where multiple DERs are assessed and optimized relative to a fixed set of alternative resources. • Integrated-DER analysis; where all electric resources, both distributed and utility-scale, are optimized. NSPM for DERs will focus on #1-2

28. Appendix B NSPM for DERs Table of Contents • Executive Summary • Introduction • Common Framework for Benefit-Cost Analysis of DERs • Energy Efficiency Resources • Demand Response Resources • Distributed Generation Resources • Distributed Storage Resources • Electrification • Non-Wires Alternatives/Solutions • Analysis of Multiple DERs • Integrated DER Planning • Tools and Techniques for DER BCAs

29. Appendix BProject will Build on Past & Ongoing Projects

30. Appendix B EE vs Distributed Energy Resources Utility System Impacts

31. Appendix BEE vs Distributed Energy Resources Non-Utility System Impacts

32. Appendix CLimitations of the Rate Impact Measure Test • The RIM Test not appropriate for cost-effectiveness analyses: • Does not provide meaningful information about the magnitude of rate impacts, or customer equity • Will not result in lowest costs to customers • Is inconsistent with economic theory. The RIM test includes sunk costs, which should not be used for choosing new investments • Can lead to perverse outcomes, where large benefits are rejected to avoid de minimus rate impacts • Can be misleading. Results suggest that customers will be exposed to new costs, which is not true • Other approaches should be used to assess rate and equity issues.

33. Appendix CBetter Options for Assessing Rate Impacts A thorough understanding of rate impacts requires a comprehensive analysis of three important factors: • Rate impacts, to provide an indication of the extent to which rates for all customers might increase. • Bill impacts, to provide an indication of the extent to which customer bills might be reduced for those customers that install distributed energy resources. • Participation impacts, to provide an indication of the portion of customers that will experience bill reductions or bill increases. Taken together, these three factors indicate the extent to which customers will benefit from energy efficiency resources. Participation impacts are also key to understanding the extent to which energy efficiency resources are being adopted over time.