Least Cost Procurement Strategy
Rhode Island established the principle of Least Cost Procurement as the key strategy to achieve the state’s ambitious energy savings and economic development goals. Least Cost Procurement prioritizes energy efficiency in state energy planning by directing the utility to invest in energy efficiency first whenever it proves cost-effective and less expensive than energy supply. Best practices in stakeholder engagement, utility motivation, sustainable funding, and program evaluation support energy efficiency as a driver of Rhode Island’s energy and economic success.
Rhode Island has a history of groundbreaking policy in the area of energy efficiency. In the 1990s, the state was responsible for the first public benefits fund and led efforts in demand-side management and renewable energy, generating $15 million every year for energy efficiency. At the same time energy supply costs remained high, and ten years later, Rhode Island was still spending 60 times more on energy supply that was six times more expensive than energy efficiency.
Recognizing energy efficiency as a strategic economic and energy resource for achieving the state’s energy and economic goals, Rhode Island unanimously passed legislation establishing energy efficiency as the state’s “First Fuel.” The Comprehensive Energy Efficiency, Conservation, and Affordability Act of 2006 (the 2006 Act) transformed the energy market in Rhode Island by adopting the key concept of Least Cost Procurement (LCP). LCP establishes that efficiency investment decisions be made on an economic basis rather than placing a cap on investments for budgetary or other reasons.
Establishing the Infrastructure for Least Cost Procurement
In practice, LCP required Rhode Island’s primary utility, National Grid, which serves nearly 100% of electric customers and all natural gas customers, to invest in all cost-effective energy efficiency that is less expensive than supply. A supporting framework of best practices ensures that LCP drives energy investment in the state:
1. Stakeholder engagement
Engaging stakeholders to participate in LCP supports transparency in the decision-making process and results in programs that are responsive to customer needs. The 2006 Act created the Energy Efficiency and Resource Management Council (EERMC), a stakeholder group charged with guiding, overseeing, and evaluating the utility’s programs.
Funded through the public benefits fund, the EERMC includes 13 voluntary members. The governor, with input from the state Senate, appoints nine voting members representing expertise such as law, environment, energy codes, and a spectrum of end-users. Four additional non-voting members represent the utilities and the delivered fuel industry. The Commissioner of Rhode Island’s Office of Energy Resources (the State Energy Office or SEO) serves as the EERMC’s Executive Director and Executive Secretary and the SEO’s staff provides Council administration. Monthly EERMC meetings are open to the public.
In addition to the EERMC, a stakeholder body called the Demand Collaborative provides consistent and comprehensive input into the processes related to the delivery of Least Cost Procurement. Although individual members vary over time, they represent National Grid, the state ratepayer advocate body, non-profit organizations, the SEO, the EERMC and other special interest organizations.
The EERMC also has funding to retain independent, expert consultants that give technical assistance to Council members on LCP. The consultants also provide research and recommendations that help the Council in decision-making, program improvement, and independent verification of the cost-effectiveness of National Grid’s plans.
2. Realigned business interests
A policy of revenue decoupling paired with a performance incentive motivates National Grid to be a full partner in acquiring all cost-effective efficiency resources. Legislators amended the 2006 Act two years later to add the rule of decoupling, which broke the link between National Grid’s profits and energy supply sales volume. Realigning National Grid’s business interests removed the disincentive for the utility to pursue energy efficiency.
LCP also offers performance-based incentives that reward National Grid for achieving energy savings goals. National Grid receives five percent of its spending budget as an incentive if it hits 100 percent of its goal within budget. Declining percentages of the incentive are available for energy savings achievement less than 100 percent, and “kicker” incentives exist for exceeding the goal.
3. Sustained funding
Stable, long-term funding mechanisms have enabled Rhode Island’s investment in all cost-effective energy efficiency since the 2006 Act. Once National Grid, the EERMC, and the Public Utility Commission (PUC) determine the level of energy efficiency investment each year, the state uses three major funding streams to make the investment possible:
a. Energy Efficiency Program Charge
Through the Energy Efficiency Program Charge on utility bills, every customer sector contributes towards the needed amount of funding. In return the energy efficiency programs, energy audits, technical assistance, rebates, and incentives are offered to every customer. The Energy Efficiency Program Charge, collected as a single charge on National Grid customers’ electric and natural gas bills, is composed of two charges:
- Demand Side Management (DSM) charge
The electric DSM charge has been in effect since 1996 and the natural gas charge since 2007. The charges generate tens of millions of dollars each year for energy efficiency, e.g. in 2015 $80 million from electricity bills and $20 million from gas bills.
- Reconciling funding
This mechanism generates the balance of funding that is needed to meet the year’s planned cost-effective efficiency program investments.
b. New England’s Forward Capacity Market (FCM)
The FCM is a system created to ensure that the New England region has enough energy capacity to meet future peak loads. FCM meets the need in two ways: it pays suppliers to ensure capacity is available and makes small but regular payments to the state’s energy efficiency programs for the capacity value they deliver by reducing peak demand. In 2015 the FCM payment to Rhode Island’s efficiency programs was over $5 million.
c. Regional Greenhouse Gas Initiative (RGGI)
RGGI is a mandatory, market-based effort to reduce greenhouse gas emissions in the northeastern and mid-Atlantic states. In 2015, RGGI auctions contributed over $20 million toward energy efficiency and renewable energy programs.
4. Integrated cost-effectiveness assessment
A critical element of Rhode Island’s First Fuel effort is to ensure that the benefits of its energy efficiency programs are greater than the costs. The state measures the cost-effectiveness of its programs using the Total Resource Cost (TRC) test, regularly used by regulators and policymakers to facilitate investments in energy efficiency based on economics. The TRC test considers a program cost-effective if the net present value of benefits to the utility and stakeholders exceeds the present value of costs, including rebates/consumer incentives, administrative costs, and customer contributions to the efficiency measures. A cost-effective program has a benefit-cost ratio greater than 1.0.
How It Works
As required by the 2006 Act, the EERMC, together with some of the other stakeholders, developed the Standards for Energy Efficiency and Conservation Procurement and System Reliability (Standards), which the PUC then approved. The Standards establish a clear structure and process for achieving the goals of LCP and define the roles and responsibilities for LCP’s administrative and oversight entities. The figure below illustrates how the Standards organize efficiency program administration, oversight, and reporting:
1. Step 1: Set targets
The EERMC sets targets for electricity and natural gas load reduction tri-annually based on an analysis of the potential that is both cost-effective and less expensive than the cost of supply. The Council then proposes those three-year energy savings targets to the PUC. Current electricity savings targets for 2015-2017 range from 2.5%, 2.55% and 2.6% and natural gas targets for this period range from 1.0%, 1.05% and 1.1%. Both use 2012 sales levels as the base year, which was the last set of actual sales data when the targets were formulated.
2. Step 2: Develop plans
The Standards guide National Grid as it develops LCP plans, setting submission deadlines and content requirements. Using the targets proposed by the EERMC as guideposts, National Grid then develops two plans:
a. Three-Year Energy Efficiency Procurement Plan
With stakeholder input from the DSM Collaborative, National Grid develops a high-level plan for how it will invest in all cost-effective energy efficiency that is less expensive than supply over the next three years, with estimated budgets. The utility passes the plan to the EERMC, which uses the TRC test to verify the cost-effectiveness and feasibility of the proposed programs. National Grid then submits the Plan to the PUC for review and approval.
b. One-Year Implementation Plan
National Grid develops a more detailed annual implementation plan for each of the three years, also with stakeholder input. The plans contain more granular program design and budgets, and they go through the same review and approval process as the procurement plan.
3. Step 3: Implement Plan
Upon final PUC approval, National Grid implements all components of the Annual Plan and reports to stakeholders monthly. The EERMC and SEO provide oversight and feedback during the process. All three parties meet regularly to ensure that savings will be met and to make mid-course corrections as needed. The annual plan’s proposed savings and budget are used for assessing National Grid’s performance incentives based on actual end-of-year results.
4. Step 4: Conduct Evaluation, Measurement, & Verification (EM&V)
As part of the approved annual plans, National Grid conducts regular EM&V to measure and verify the savings resulting from the programs and evaluate impacts of the program and process on the market. The utility also applies the evaluation results to improve program design and delivery in future annual and three-year plans.
Regular stakeholder participation and information maintains support for energy efficiency investment in Rhode Island even as the level of investment in energy efficiency grows. Stakeholder outreach around LCP takes two primary forms:
a. Monthly Stakeholder Meetings
National Grid reports efficiency program results from its Annual Implementation Plan monthly to the EERMC and the SEO.
b. Continuing Economic Education
The EERMC continually educates policymakers, regulators, and other stakeholders on basic economic facts, showing the benefits to consumers and Rhode Island’s economy to maintain support for LCP. The EERMC is also responsible for general community outreach.
Rhode Island’s primary success metric is the cost-effectiveness of its efficiency investments, represented by the benefit-cost ratios resulting from the TRC test. The state tracks the program benefits versus costs of all program investment every year, and each investment must yield a ratio of at least 1.0 to remain in the state’s investment plan.
Other measures of program success are the benefits LCP drives for consumers and the state. Specifically, as the diagram illustrates, Rhode Island tracks consumer benefits in the form of lower energy bills and state benefits in the form of energy savings in electricity and natural gas and job years of employment.
Within four years, Rhode Island’s investment in energy efficiency tripled, and the state was third in per capita efficiency investment. The 2012-2014 Energy Efficiency Procurement Plan, approved by the PUC in December 2011, expanded Rhode Island’s annual investments to five times the level of 2008.
Since 2008, Rhode Island’s $558 million in efficiency investments has consistently yielded cost-effectiveness ratios higher than 2.0. In 2014, every $1 invested in cost-effective energy efficiency in Rhode Island returned on average $4.20 in customer savings.
Consumers in Rhode Island saved $384 million on their electricity bills during the period 2010-2014, and since 2008, they have saved $2 billion on their energy bills. Since 2008, the state has also created more than 25,000 job-years of employment.
Success on all these metrics raised Rhode Island to the top five in state energy efficiency programs, where it has remained for five years in a row. As one of only seven states that have adopted LCP to date, in 2015 Rhode Island earned a perfect score and tied for the top place in utility policies and programs. With efficiency as the successful cornerstone of energy policy in the state, Rhode Island is looking to expand LCP in 2016.
Rhode Island established the principle of Least Cost Procurement which prioritizes energy efficiency in state energy planning by directing the utility to invest in energy efficiency first whenever it proves cost-effective and less expensive than energy supply.
Achieve a reduction in energy use intensity of 20 percent by 2020, based on a 2010 baseline
Energy efficiency was not viewed as a management priority
Rhode Island established Least Cost Procurement as the guiding principle of energy planning in the state, prioritizing energy efficiency that is cost-effective and less expensive than energy supply as the state’s “First Fuel.”
Within four years, Rhode Island’s investment in energy efficiency tripled, and the state was third in per capita efficiency investment. The 2012-2014 Energy Efficiency Procurement Plan expanded Rhode Island’s annual investments to five times the level in 2008. Since 2008, Rhode Island consumers have saved $2 billion on their energy bills, and the state has created more than 25,000 job-years of employment. Rhode Island has exceeded its energy savings targets for the last two years.