Why not ditch the TRC?

Posted on February 12, 2016
Posted By: Rasika Athawale
 

A combination of factors including a deep and long recession since 2008 led to a flattening of electricity demand, and a dramatic reduction in wholesale natural gas prices with corresponding downward pressure on wholesale electricity prices that contributed to a reassessment of metrics used by policymakers in evaluation of energy efficiency (EE) programs. Some EE analysts prefer the Program Administrator Cost Test (PACT; also referred to as the Utility Cost Test where the utility is the program administrator) over the Total Resource Cost Test (TRC) as the primary screening tool for EE program investments. See here, and here.  

Use of five standard EE cost-effectiveness screening tests (also commonly referred to as the cost-benefit analysis (CBA)) for evaluation of program investments has been prevalent for long, and most state commissions follow the guidelines prescribed in California Public Utility Commission and California Energy Commission’s Standard Practice for Cost-Benefit Analysis of Conservation and Load Management Programs, published in February 1983, and subsequent revisions.

Table 1: Benefits and Costs Considered by Various Energy Efficiency Cost Benefit Analyses (Source: National Action Plan for Energy Efficiency 2008) 

One of the primary arguments in favor of PACT is that it is more accurate (than TRC) thereby leading to a question of determining the best test. However the basic premise of this question is wrong as it compares apples to oranges. Such a statement in effect proposes that “the CBA Test X is inaccurate therefore CBA Test Y should be used” and is a non sequitur. Even if Test Y is 100% accurate, it is not answering the question Test X is attempting to answer. Although analysts do recognize that the five different tests are answering the question about cost-effectiveness from five different perspectives, this important caveat sometimes gets lost.

Another argument made against TRC is that it does not consider non-energy benefits (increased comfort, health, safety, aesthetics, reduced utility bad debts etc.) which are large, but at the same time difficult, expensive and controversial to quantify. However, if private benefits are relatively large to private costs, then why is government intervention necessary if the private party may already have the incentive to participate in such EE program. Second, the PACT’s argument either ignores or minimizes non-energy costs. Examples of these costs include time to apply for program rebates, hiring and supervising contractors, increased disposal or recycling costs, reduced convenience as well as risks of poor performance or fraud. Furthermore, some of the non-energy benefits are not “benefits” as economists use the term but are “transfer payments.”  For example, reducing a utility’s bad debt and arrearages from a societal perspective are a transfer from utility shareholders and other ratepayer (depending if and to what extent the utility is allowed to recover these costs from other ratepayers).  The reduction of the administrative costs associated with these debts, however, is cost saving because it avoids the use of resources that would otherwise be necessary. It should be noted here that the Societal Cost Test (SCT, see table 1) does include other non-energy benefits.

A third argument is that estimating incremental costs is usually difficult and sometimes close to impossible (especially for measures such as a whole building or integrated designs) and therefore the TRC test is not reliable and should be replaced with the PACT. This argument makes two other supporting claims: a) the uncertainty in estimating incremental costs is fundamentally bigger than other uncertainties that are part of the other tests, and b) the uncertainty in estimating incremental costs cannot be handled by existing techniques. Without these supporting claims, rejecting the TRC test and accepting another one, like the PACT, is not logical.

A final argument in favor of PACT’s appropriateness is that it properly compares supply side options with energy efficiency options. However, this claim ignores the use of Integrated Resource Planning for procuring supply-side options and the fact that the Participant may incur costs which may not be completely covered by program incentives and rebates.

As demand for these changes is increasing, more thought is required on what really is the underlying question that is answered via cost-effectiveness analysis of EE programs. Opting for a change in primary screening test (PACT over TRC) or for modifications to the test, may lead to better benefit to cost ratios. However, it does not answer whether the purpose of cost-effectiveness is to aid in selection of programs (given a certain budget that can be expended on energy efficiency) or to inform decisions in program design (including type of measures, target participants, reach etc.). With the heterogeneity of benefit recipients, one may also explore whether different set of rules (benefit to cost ratio above 1, below 1 or equal to 1) can be applied to different participants. For example, a possibility of one set of rules for low-income residential programs and a different set of rules for industrial programs can be explored.

 

Co-author: Frank A. Felder is the Director of the Center for Energy, Economic & Environmental Policy (CEEEP) at the Edward J. Bloustein School of Planning and Public Policy, Rutgers University. He is an expert in energy policy and electricity markets.

 
 
Authored By:
Rasika is a Research Manager at the Center of Energy, Economic & Environmental Policy (CEEEP) at the Rutgers University. Previously as a consultant, she has worked on feasibility studies, entry and growth strategy and bid process advisory. As a Founder of MindCrunch she has assisted clients in developing thought leadership content. She writes for various business magazines on global energy industry issues and can be followed on Twitter (@GoRasika).
 

Other Posts by: Rasika Athawale

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