Regulatory frameworks for demand side managementAn IndEco project report
IndEco, in collaboration with Navigant Consulting, recently released two reports on regulatory frameworks on DSM:
• DSM in North American gas utilities
• Policy paper for DSM in Ontario
These reports were prepared for Enbridge Gas Distribution Inc., (EGD) the largest distributor of natural gas within the province of Ontario, serving about 1.6 million residential, commercial and industrial customers across Ontario.
DSM in North American gas utilities
The survey on DSM frameworks in North American natural gas jurisdictions was designed to meet the following objectives:
- explore the treatment of DSM in both cost of service and performance-based regulation (PBR) regulatory frameworks
- identify similarities and differences in the regulatory treatment of natural gas and electric DSM across jurisdictions and within the same jurisdiction
- obtain insight into how DSM plans are designed, approved and delivered in other jurisdictions
- explore the level of regulatory scrutiny of DSM plans
- determine how the budget and target setting processes work
- review the incentive mechanisms offered to encourage DSM by the utility
- identify tracking and reporting obligations.
Twelve jurisdictions were selected from across North America to participate in this survey. These jurisdictions were selected based on evidence of reasonable levels of natural gas DSM obtained from previous projects by the research team, various industry reports and publications and references from survey participants.
Some of the key findings of this survey are described below. These findings have been grouped according to the key elements of the survey:
The DSM programs offered by utilities operate under both PBR and cost of service regulatory regimes. These regulatory frameworks sometimes vary between electricity and gas utilities or between different gas utilities in the same jurisdiction.
Design, approval and delivery of DSM plans
In most jurisdictions, utilities develop a DSM plan and a regulator approves it. The DSM programs are then delivered by the utility, or delivery is contracted out, or some combination of the two. In a minority of jurisdictions there is a central agency which is responsible for developing the DSM plan, most of these central agencies outsource DSM delivery. Generally, there is limited regulatory scrutiny of the DSM plans.
Very few jurisdictions have a formal consultative process, but utilities typically involve stakeholders in developing the DSM plans.
Budget and target setting process
The DSM budget is almost always set first, before the target is developed. Many jurisdictions allow multi-year DSM plans, in which the budget, the target or both are set for multiple years. The DSM funding levels range from 0.2% to 2% of total customer bills and average 1%.
Utility DSM incentive mechanisms
Five of the jurisdictions surveyed have utility DSM incentive mechanisms. These incentives are typically based on the DSM budget, volumetric savings of gas, benefits realized as determined by a total resource cost test (TRC benefits), incremental TRC benefits realized over a set target or some combination of these.
Tracking and reporting
The majority of utilities file a report with their regulator on DSM at least annually. These reports typically include a description of DSM programs and a summary of expenditures and achievements.
Overall we found a great diversity in the frameworks under which utilities offer DSM; jurisdictions define their DSM frameworks to meet the needs of their situation, and the needs of their utilities.
Policy paper for DSM in Ontario
The paper produced for EGD recognizes, as outlined in the jurisdiction report, that DSM frameworks for gas and electiricity should reflect the unique circumstances of utilities offering these services. They should also have certain common principles. The paper sets out six key principles:
- The local distribution utility should be accountable for DSM within its service territory, but not be required to implement program design, delivery, and evaluation.
- DSM program cost-effectiveness and DSM performance should be based on the Total Resource Cost ("TRC") test.
- The OEB should have a central role in DSM policy development and regulatory oversight.
- The IMO should have oversight over emergency and short duration DR.
- Industry collaboration should be encouraged.
- LDCs should be given financial instruments to keep them whole and to reward them for aggressive, cost-effective DSM.
We offered two specific suggestions to facilitate the implementation of DSM for electric local distribution companies (LDCs) in Ontario:
- The electric DSM budget should be based on a fixed energy charge. This can either be incorporated into the LDC’s rates or treated as a separate system benefit charge.
- Introduction of DSM in the electricity sector should be staged based on the size of the LDC. Introduction of electric DSM should be staged based on the size of the LDC. The “top 20” largest LDCs covering about 70% of total electricity customers in Ontario should be required to do DSM first, followed by the remaining 30%.
Finally, though the details remain to be worked out, it was proposed that distributed energy (DE) be included within the scope of DSM/DR initiatives.
The paper was prepared as input to a process but in place by the Ontario regulator, the Ontario Energy Board. In 2003, the then Ontario Minister of Energy directed the Ontario Energy Board (OEB) to consult with stakeholders to identify and review options for the delivery of demand side management and demand response (DSM/DR) within the electricity sector. (See The Directive) The OEB subsequently decided to consider gas DSM within the scope of its response to the directive.
Review the full reports
About the authors:
David Heeney is president of IndEco Strategic Consulting Inc. David has more than 20 years of experience in energy and environmental economics and management. His wide ranging policy and program experience in energy includes DSM, demand response, conservation and renewables for both public and private sector clients.
Shona Adamson is a consultant at IndEco Strategic Consulting Inc. Shona is an environmental researcher with extensive experience in a broad range of environmental issues. She has a background in physical and environmental science.
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