New performance incentive for LDCs' conservation initiatives (Updated)

An IndEco article

By: Eric Buan

Update 2010-09-16 The OEB issued the CDM code today and there are some significant changes that affect the incentive available, including: the payment of incentives for energy and demand are separated, and are not dependent once 80% of both targets have been achieved. Changes since the original article are marked with the 'new' symbol.

This article provides:

  • a brief background on the new incentive mechanism for conservation and demand management (CDM) by electric utilities in Ontario
  • an overview on what the incentive looks like
  • a calculator you can use to see how different CDM results will affect the incentive you will receive
  • the top three actions you should get going on now.

The Ontario Energy Board (OEB) issued the proposed Conservation and Demand Management Code (CDM Code) on June 22nd 2010 that sets out the framework for electricity demand side management (DSM) in Ontario for 2011 through 2014. The final code was issued on September 16, 2010. This article discusses the new proposed performance incentive mechanism described within the CDM Code.

The new performance incentive mechanism will replace the Shared Savings Mechanism (SSM) that is currently in use in Ontario to incent distributors to implement CDM initiatives.

The Ontario Power Authority (OPA) has developed both electricity (GWh) and peak demand savings (MW) targets for each distributor. The GWh target is based on each distributor’s share of total annual energy consumption, by customer account type based on the most recent year of available data. Annual energy consumption data was taken from the 2008 OEB Yearbook of Distributors. Peak demand savings targets are based on each distributor’s contribution to the system peak demand. The allocation is made using a peak demand target allocation factor based on each distributor’s average contribution to the top ten system peak hours, calculated as the average over the most recent two years of available data.

The incentive mechanism will reward a distributor once the distributor reaches at least 80% of both its GWh and peak demand (MW) CDM targets. Incentives are capped at 150% of either target. The Board is proposing an incentive structure that would make available $72 million over the four-year period beginning 2011. This is the amount that would be required to reward each distributor for reaching 150% of their CDM targets.

What does the proposed performance incentive mechanism look like?

The incentive mechanism consists of six different performance tiers as shown in the table below:

Performance Tiers (% of CDM targets)
Performance incentive received
Range begins
Range ends
up to 100%
up to 110%
up to 120%
up to 130%
up to 140%
up to 150%

A distributor will receive the performance incentive indicated for each Tier for every kWh or kW saved within the Tier. However, a distributor is eligible for the performance incentive indicated for each Tier when the indicated range is met for both GWh and MW targets. In the final code, once the 80% threshold has been met for both, the distributor may begin receiving incentives for each, up to 150% of the target, and the ranges need not be met for both tiers to receive an incentive in that tier. Thus if a distributor is at 125% of the energy target, and 105% of the demand target, it will receive an incentive for tier 4 for energy and tier 2 for demand.

The distributor must provide verified results for these savings. An independent third party selected from the OPA’s third party vendor of records list must complete this verification. The incentive is calculated across the distributor’s entire portfolio of Board-Approved and OPA-Contracted Province-Wide CDM Programs.

The Board also sees merit in establishing an incentive structure that rewards distributors for achieving their CDM targets in the most cost-effective manner. The Board is interested in receiving proposals that offer suggestions on any such cost-effective incentive structures. Although the Board received two proposals, in its notice of the code, it advises that it did not consider the benefits of the cost-effective incentive structures proposed sufficient to justify the additional complexity they would introduce.

The Board recognizes that meeting CDM targets will lead to lost revenues for the distributor. The existing mechanism in place to account for these lost revenues and ensure that the distributor remains whole is known as the Lost Revenue Adjustment Mechanism (LRAM). As indicated in the CDM Code, the Board has initiated a consultation process (EB-2010-0060) to examine what other mechanisms are currently available to both electricity and natural gas distributors that can prevent the loss of revenue due to unforecasted CDM initiatives. Apart from LRAM, another mechanism that is being considered is the use of revenue decoupling.

Can you help me calculate the incentive I may be entitled to?

Curious about the size of the incentive that you can receive? Here is an easy to use Excel incentive calculator. It can provide the incentive that would be received based on your selection of a particular distributor and predicted GWh and summer 2014 peak demand savings. The incentive mechanism calculator here is an updated version that takes into account the changes from the proposed to the final code.

New incentive mechanism calculator Final CDM code New incentive mechanism calculator Final CDM code

(Note: the spreadsheet is an .xlsx file used by Excel 2007 for Windows and Excel 2008 for the Mac, which has been saved here as a .zip file. Please uncompress the file before loading into Excel. Please contact IndEco if you need a copy compatible with earlier Excel versions, or if you are having problems downloading or opening the file.)

You can watch a brief tutorial about this calculator here ( please note that we haven't updated the video explanation to take into account the decoupling of demand and energy incentives once the 80% threshold for both has been met):

What are the top three actions I should take to maximize my revenue?

Action 1: Aim to exceed your target by a substantial amount.

Since the performance incentives (in /kWh and in $/kW) increase in subsequent tiers, it becomes increasingly beneficial for a distributor to aim for greater GWh and MW savings. For instance, in comparison to the size of the incentive that a distributor would receive if 100% of both its GWh and MW targets were met:

  • Meeting 112% of both targets would double the incentive received
  • Meeting 132% of both targets would increase the incentive received five-fold
  • Meeting 140% of both targets would increase the incentive received seven-fold
  • Meeting 150% or more of both targets (the incentive cap) would increase the incentive received ten-fold.

Action 2: Start early: energy savings in the first year are worth four times those in year 4.

Distributor GWh CDM targets are cumulative between 2011 and 2014. Energy savings from a CDM program can contribute to a distributor’s GWh target for as long as those savings persist (between 2011 and 2014). Establishing CDM programs early in 2011 can help a distributor reach the maximum incentive levels.

Distributor peak demand targets are set compared to peak demand during the 2014 summer peak. Establishing peak-saving CDM programs early will ensure that programs are well established by 2014 and are contributing as much as they possibly can to a reduction of the 2014 summer peak. Recall that achieving higher incentive levels is only possible if the distributor meets the required percentage range for both the GWh and MW targets.

Action 3: Get in your claims for the shared savings mechanism (SSM) and lost revenues (LRAM) for your programs delivered through 2010.

From the five key principles used by the OPA to develop its target setting:

      “Targets should reflect savings from activities starting in the first year of the target period
      onwards (i.e. should not include persistent savings from activities implemented before the target period).”
      (Emphasis added)

Energy saved through a distributor’s CDM initiatives prior to 2011 will not be considered towards the meeting of its 2011-2014 CDM targets. Since incentive mechanisms will change as of 2011, there remains a risk that lost revenue due to a distributor’s pre-2011 CDM initiatives will remain lost once the new mechanisms are in place. Distributors should act now to file LRAM and SSM claims for all unclaimed CDM initiatives.

IndEco is well equipped to prepare LRAM and SSM claims on your behalf. In addition, we can provide forecasts through 2014 of energy savings from all of your existing and previous CDM initiatives. While these savings will not contribute to CDM targets, they can help improve the quality of your forecasted energy demand and ensure that rates better reflect the reality of energy use within your service area.

Should partial decoupling become the mechanism used to protect distributors against lost revenues due to CDM initiatives, IndEco would be well prepared to provide forecasts of energy savings due to CDM initiatives in 2011 and beyond. This is particularly true if a relationship with a distributor can be developed now; an early relationship can help us gain a better understanding of your service area, including the level of uptake into CDM programs, the extent of market saturation and what ‘low-hanging fruit’ still remains.

In addition to filling LRAM and SSM claims for any unclaimed CDM initiatives, distributors should prepare for 2011 by ensuring that CDM programs are ready for rollout and that they meet the requirements set out by the CDM Code.

Related information

IndEco's highlights of the proposed CDM code and the OEB letter on CDM targets
Click here for details on other aspects of the CDM Code, including the derivation of CDM targets, the content of annual reports, Board-approved CDM programs, and general CDM strategy.
The Board has also published a document that shows the differences between the draft and final code.
Overview of IndEco services for electric LDCs: IndEco and the EDA

We would appreciate any comments or feedback you may have on this article.

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