New Analysis Shows How to Optimize Energy Efficiency Benefits in Wholesale Markets

WASHINGTON, D.C., April 1, 2021 – Today, national business organization Advanced Energy Economy (AEE) released two papers prepared by The Brattle Group that highlight opportunities to ensure that energy efficiency is able to compete fairly to meet resource adequacy needs in centralized markets operated by regional transmission organizations and independent system operators (RTOs/ISOs). The first paper, The Benefits of Energy Efficiency Participation in Capacity Markets, explains the importance of allowing energy efficiency to participate in capacity markets as a supply-side resource. The second, Enabling Cost-Effective Energy Efficiency in the Midcontinent ISO Resource Adequacy Construct, focuses on maximizing the benefits of energy efficiency in the MISO market in particular.

“These reports show how to enable energy efficiency resources to compete fairly against other resources to provide resource adequacy,” said Jeff Dennis, Managing Director and General Counsel at AEE. “Given that energy efficiency is one of the most cost-effective and reliable options to meet resource adequacy needs, increased participation by energy efficiency will lead to better outcomes for consumers and the grid.”

 

In The Benefits of Energy Efficiency Participation in Capacity Markets, the Brattle Group explains that energy efficiency can be accounted for in regional resource adequacy or capacity market structures either on the supply side (bidding into the market as a load-reducing resource) or on the demand side (serving to reduce a utility’s or load serving entity’s peak load forecast, thereby lowering the amount of capacity to be procured in the market). The paper explores the impact of supply-side versus demand-side accounting, and identifies a few key reasons why supply-side participation leads to more efficient outcomes:

• Under supply-side accounting, energy efficiency faces binding capacity market commitments, giving market operators more confidence in the quantity and delivery of energy efficiency measures.
• Supply-side accounting leads to improved load forecasts relative to demand-side accounting, which is inherently conservative, reducing load forecast uncertainty and avoiding capacity over-procurement.
• Energy efficiency—particularly non-utility or ‘merchant’ energy efficiency—faces fewer barriers to entry under a supply-side accounting paradigm because all resources are able to compete to provide capacity on the same forward time horizon.
• Capacity market and resource adequacy procurement outcomes are more cost-effective with supply-side accounting due to the factors above, which facilitate more energy efficiency participation and avoid inflated load forecasts, thereby reducing overall capacity costs.

The second paper, Enabling Cost-Effective Energy Efficiency in the Midcontinent ISO Resource Adequacy Construct, focuses on the MISO market, where the resource adequacy construct is being reviewed and updated in light of a changing resource mix and system needs. The Brattle Group identifies two key decision points for energy efficiency participation, and offers recommendations to maximize the benefits of energy efficiency in the MISO market.

First, The Brattle Group recommends continuing to allow energy efficiency to participate in the market as a supply-side capacity resource, for all the reasons outlined above. Second, The Brattle Group also recommends continuing to rely on gross accounting rather than making a switch to net accounting. Under gross accounting, peak energy reductions from an energy efficiency measure are compared to a baseline that corresponds with the MISO peak load forecast. Under net accounting, gross savings are adjusted to reflect total savings caused by an energy efficiency program. The Brattle Group explains that while net accounting has a role in evaluating the efficacy of state or utility energy efficiency programs, it is not a relevant metric for wholesale capacity markets, where what matters is real and verified energy efficiency contributions to resource adequacy—exactly what gross accounting measures.

“Imposing proof of ‘net’ savings on merchant EE providers would increase participation costs, reduce developers’ ability to achieve EE savings, under-count the total quantity of EE deployments, lead markets to procure more expensive (but unused) capacity resources, and increase costs for customers,” the paper finds. The Brattle Group further explains that studies to prove “causality” as would be required to determine net savings would be subjective, discriminatory, and unfairly burdensome, since equivalent determinations are not required for other resource types.

“Avoiding subjective and discriminatory administrative barriers to participation by energy efficiency—including merchant energy efficiency—is essential to maintain competitive markets,” said Dennis. “Allowing supply-side participation by energy efficiency and relying on gross accounting methodologies are two key ways to ensure that energy efficiency can compete fairly, and for customers and systems operators to leverage the benefits of that participation.”