Elaborate Plan, Odd Consequences
Posted January 30, 2015
An Integrated Resource Plan (IRP) for electricity is produced from time to time by an elaborate regulatory process. It looks at expected total demand and visualizes how it will be provided, starting with existing resources such as power plants or import availability. This gives an indication of what future infrastructure might need to be built.
Efficiency Nova Scotia (ENS) is the organization that helps residential and commercial customers reduce their consumption in several different ways. The collective impact of those programs is called Demand Side Management (DSM).
Energy saving initiatives reduce usage but do not reduce rates. They are paid for by every ratepayer but only benefit those who choose to participate. A retail customer is subsidized for exchanging an old fridge for a more efficient one or trading in old light bulbs for LEDs. She gets a lower electric bill, but everyone’s rates have to go up a little to pay for the subsidy.
ENS only subsidizes projects if the combined ratepayer and ENS investment is less than the value of electricity to be saved. Its budget must be limited to actual savings to the system. Existing plant and transmission have to be paid for no matter how much energy is consumed, so the only real savings are in the cost of fuels and plant operations, or imports.
With that as background consider these odd consequences.
1. Each additional ratepayer that uses DSM adds to the upward pressure on rates, and therefore adds to the adverse impact on those who do not use it.
2. Once the amount of planned DSM is agreed it is paid for by NSP and then charged back to ratepayers, with interest, over eight years.NSP receives a rate of return on capital of more than 9%. That makes sense when they have operating risk. For example their profits in 2012 and 2013 were reduced by $5.1 million because the Utility and Review Board (UARB) disallowed some of their fuel charges.
There is no corresponding risk for spending on DSM. NSP just collects the money from ratepayers to pay back the loan. At today’s very low interest rates many lenders would be willing to offer much better terms.
3. NSPI’s commercial interest is served by having as little DSM as possible since that increases the likelihood that they will have to build new capacity on which they can make a profit. The greater the amount of DSM, the less power NSP has to provide. For that reason DSM’s product is sometimes called “negawatts.”
DSM a thus a competitor to NSP, not a supplier. Yet ENS is supposed to “negotiate” a three year contract about how much DSM service to supply with NSP. NSP has no involvement in the implementation of DSM and is only impacted by the reductions in demand.
There is no basis for negotiations. NSP has nothing to offer in exchange for reduced DSM plans. This is all part of the smoke and mirrors invented by the Liberal government to try and hide the fact that ratepayers are still paying for what they call the “Efficiency Tax.”
4. The mix of future energy sources in the Plan is based on projections by independent consultants. It shows the entire expensive fixed block of Muskrat Falls electricity being employed (since we are committed to it) but only half the amount of inexpensive surplus energy that was anticipated in the application for that project—presumably because the DSM is even cheaper. Had the current projection been available to inform the Muskrat Falls application, it would have made that proposal distinctly less competitive.
Unsurprisingly, NSP takes the position that large amounts of DSM will hurt affordability for those who do not use it.
5. Also in the mix are small-scale wind and biomass projects which are allowed into the system entirely independent of whether they are needed. As well as annoying the neighbours, these projects produce electricity at entirely uncompetitive rates (depending on size they are between two and eight times the savings from not using fuel-based alternatives), thus further boosting prices. Over 90 of these have been approved. Government has declared a pause in approvals pending review.
We are fortunate that the UARB provides knowledgeable oversight of plans, projects, and rates, but it has to work within the legislative framework.
Government has three opportunities to lower future prices for ratepayers:
- Recognize that NSP and ENS are competitors. Let NSP offer its comments to the UARB as part of the DSM approval process, but beyond that let them operate independently
- Seek competitive alternatives for financing DSM spending
- Stop approvals of small scale power generation projects that are unnecessary, expensive, and often annoying to neighbours.
Reducing demand for electricity has environmental as well as economic benefits. Each of these steps can contribute to making the cost of achieving those reductions more affordable.
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