Overview
The Lesson of the Past Few Years
Over the last years of the 1990s, the Northwest and, for that matter, the entire West invested very little in new resources, whether generation or efficiency. During the years 1997 through 2000, Northwest utilities invested in efficiency at a pace that was roughly half as much as the Council determined to be cost-effective in its 1998 Power Plan. This is despite the fact that the Council’s cost-effectiveness assessment was based on forecast power costs that were much less than current forecasts and very much less than the actual wholesale power costs experienced over the June 2000 to June 2001 period. The factors influencing that decline included the uncertainty about electricity industry restructuring and the mistaken expectation that the low market prices of the late 1990s would persist.
What seems likely is that electricity prices will be much more volatile than they have been in the past. The extreme volatility of the past year is an example. In such an environment, investments in efficiency that appear only marginally cost-effective during periods of lower prices will be extremely cost-effective during periods of higher prices. In fact, if the conservation called for in the Council’s 1998 Plan had been in place in the June 2000 to June 2001 period, more than 80 percent of its full cost would have been paid for at the average firm wholesale prices at the Mid-Columbia trading hub. If this conservation were in place today, it would produce additional savings for an average of 13 more years.
In response to the tight supplies and high prices of the past year, utilities have refocused on conservation, in particular on conservation measures that could be implemented quickly. For example, record numbers of compact fluorescent lights have been sold over the past year with incentives from regional utilities. However, the question now is what is going to happen over the next few years. At least two scenarios are possible. Prices have moderated and some are predicting an excess of new generation that, combined with more normal hydro conditions, would drive power prices down. This could presage another round of volatile prices by suppressing development until demand again overtakes supply. Alternatively, much of the generation currently in the development process or in the earliest stages of construction may not be completed as scheduled, leaving the region facing potential reliability issues when we again experience worse-than-normal hydro conditions.
Either scenario suggests that we ought to re-think our approach to conservation. Many analysts believe that volatility will be the norm in electricity markets. Rather than accelerating and decelerating conservation acquisition in response to the swings in market prices, we believe it makes more sense to sustain a level of investment that is justifiable in light of expected average prices and that can prove very valuable during periods of upward volatility. Such investment can insulate a portion of a utility’s loads from that volatility and protect consumers. Moreover, sustainable investment in efficiency is more economically efficient. The infrastructure needed to implement much of the lowest cost efficiency resource – manufacturers, engineers, contractors, utility staff – cannot efficiently ramp their activity up and down with the variations of the power market.
Prospects for Sustainable Funding
What is the prospect that the region will provide sustainable funding for implementing the cost-effective amounts of conservation over the next several years? The signs are mixed. Two states in the region have instituted systems benefits charges. In Oregon, for example, the Legislature has created a mechanism to fund conservation and renewables efforts in investor-owned utility (IOU) service areas as part of its electricity restructuring legislation. This mechanism will begin operation in March of next year. A non-governmental, non-profit group, The Energy Trust of Oregon, will administer funds equal to 3 percent of revenues from the sale of electricity by the investor-owned utilities and is mandated to use those funds to develop conservation and renewable resources. Most of it is targeted for conservation, including low-income conservation. Low-income energy bill assistance is funded separately. Large customers will self-direct similar conservation and renewables efforts. That system should provide sufficient funding for customers of Oregon’s investor-owned utilities. Public utilities can opt out of the system. Among the publicly owned utilities, some have and will continue to pursue efficiency improvements aggressively, some have not. What they will do in the future is unclear.
Montana also has a systems benefit charge established as part of its restructuring legislation. It is funded at the rate of 2.4 percent of utility revenues. The funds are administered by the individual utilities and can be used for conservation, low-income weatherization, low-income bill assistance and renewables. Public utilities that purchase power from Bonneville can use the portion of their Bonneville charges attributable to debt service on past conservation investments as an offset to the system benefits charge. This reduces the amount available for new conservation investment.
In Washington and Idaho, there is no overall system benefit charge, and utilities, both public and private, are pursuing efficiency improvements at different rates. Some utilities have been very aggressive, some have not.
We do know that many utilities will be implementing rate increases, which should increase many consumers’ interest in and need for conservation. The Bonneville Power Administration is offering a discount on its wholesale rates to its utility customers that operate qualifying conservation and renewables programs. On the other hand, many utilities will be trying to recover high costs of power purchases made over the past year. Many may be inclined to cut conservation staff and expenditures on the grounds that the "energy crisis" has passed and costs must be cut. Some already have.
The New Power Plan
Over the next year or so, the Council will be developing a new power plan. As required by the Northwest Power Act, an important element of that plan will focus on evaluating the benefits and costs of investment in new and existing efficiency technologies and programs and the potential contribution of these technologies and programs to the region’s energy supply. Equally important, the plan will also address the policies necessary to achieve sustainable levels of investment in cost-effective efficiency throughout the region. This is consistent with both the Northwest Power Act and the energy policy recently adopted by the Western Governors.
In developing the conservation elements of the power plan, the Council will work with the Bonneville Power Administration, individual utilities, industries, builders and developers , conservation advocates, state and local governments, tribes and other interested members of the public. The Council will form a Conservation Advisory Committee in the very near future to carry this work forward. While we believe we can accomplish this task over the next year or so, the complete process from conception to implementation will take some time. In the interim, it is important that the region not lose the momentum established for conservation over the last year.
Maintaining Momentum in the Interim
As a way of encouraging continued attention to cost-effective conservation at sustainable levels, the Council is proposing to adopt a tangible near-term conservation goal for the region and to challenge the region’s citizens, utilities, and others responsible for conservation implementation to commit to achieving their share of that goal. In general, the proportion of regional load that each load-serving entity represents would determine the share. A tangible near term goal would be to commit to building roughly the equivalent of the output of a power plant – a large combined cycle combustion turbine – through conservation over three years. This would translate into approximately 100 average megawatts per year. As will be shown in the following sections, the Council believes such a goal is achievable and cost-effective.
