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Using Benefit-Cost Analysis to Improve Distribution System Investment Decisions: Issue Brief

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Electric utility regulators are paying closer attention than ever before to individual distribution system investment decisions, in part because of the rapid growth in distributed energy resources and the need for new grid modernization investments.

To achieve the best outcomes for ratepayers and society, regulators need robust and comprehensive tools for evaluating utility investments. Benefit-cost analysis is, in many cases, a superior analytical tool to traditional least cost/best fit methods. It can recognize and maximize a wider range of benefits and consider a broader range of impacts. It also allows for a more detailed analysis.

This issue brief compares the two analytical approaches and describes the many opportunities to use benefit-cost analysis (BCA) in new and better ways.

Author John Shenot and contributors Elaine Prause and Jessica Shipley also explore five crucial questions that regulators must answer as they shape benefit-cost analysis policies for their jurisdictions:

  • In what proceedings will we use BCA methods?
  • Who will conduct BCAs?
  • How will we engage stakeholders?
  • Which cost-effectiveness test(s) will we use?
  • How will we use BCA results to make decisions?

For those interested in a more thorough treatment of the topic, a companion reference report offers more detail as well as many examples from state regulatory proceedings.

Czyst(sz)e ciepło: Zmiana uwarunkowań ekonomicznych dla pomp ciepła w Polsce

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W ciągu ostatnich dwóch lat Polska znacząco przyspieszyła transformację systemów ogrzewania w budownictwie jednorodzinnym, zwłaszcza jeśli chodzi o rozwój pomp ciepła. Postęp ten zawdzięcza silnemu wsparciu politycznemu w zakresie wycofywania węgla do ogrzewania indywidualnego. Jednak zależność Polski od paliw kopalnych w ogrzewaniu jest nadal bardzo wysoka, a inwazja Rosji na Ukrainę pokazała, że kraje silnie uzależnione od paliw kopalnych są narażone na ekstremalne ryzyko cenowe.

W niniejszym opracowaniu Duncan Gibb i Monika Morawiecka pokazują, że inwestycja w pompę ciepła ma sens dla polskich gospodarstw domowych z punktu widzenia ekonomicznego, środowiskowego, ochrony klimatu i bezpieczeństwa energetycznego. Analiza przedstawia także kilka rekomendacji, które pozwolą upewnić się, że polityka w zakresie czystego ogrzewania uwzględnia długoterminowe cele dekarbonizacji, jakości powietrza i skutków społecznych. Rekomendacje odnoszą się m.in. do właściwego uwzględnienia kosztów zewnętrznych paliw kopalnych, wzmocnienia przepisów dotyczących jakości powietrza oraz wdrażania skutecznych regulacji dla dekarbonizacji ogrzewania.

制定配电系统分时电价:支持系统灵活性,实现低成本电气化

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在世界范围,分时电价机制正在逐渐普及。时至今日,大部分国家的分时电价都是根据使用时间,将发电相关成本分摊到不同的时间段中,同时在各个时间平均分摊电网相关成本。本文的主题是将分时电价机制的概念延展到配电系统定价中。

最近,一些国家和地区已经开始着手处理这一课题。在此,我们关注到了丹麦电力市场正在发生的变化,丹麦在将分时电价用于配电系统定价机制中已先行一步,有些经验可圈可点,我们在此梳理了一些相关经验,也许对世界各地的政策制定者有所启发。

本文修改版首发于《南方能源观察》

 

Cleaning up heat: The changing economics for heat pumps in Poland

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Over the past two years, Poland has become a remarkable success story for deployment of clean heat systems, especially heat pumps. Its progress is due to strong policy support for phasing out coal for individual heating. However, Poland’s dependence on fossil fuels for heating is still high, and Russia’s invasion of Ukraine has shown that countries heavily reliant on fossil fuels are exposed to extreme price risk.

Duncan Gibb and Monika Morawiecka show that investment in a heat pump makes sense for Polish households from an economic, environmental, climate and energy security standpoint. This analysis investigates two current economic cases and makes several recommendations to make sure that policies for clean heating consider long-term objectives of decarbonisation, air quality and social impacts. These include properly pricing externalities into fossil fuels, strengthening clean air legislation and effectively regulating to decarbonise heating.

Getting the hydrogen network we need for decarbonisation

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Clean hydrogen provides a tool that can open up new opportunities for decarbonisation. But it is just one tool, and an expensive one at that. If policymakers allow, or even support, continuation of the current ‘hydrogen rush,’ we will end up with a larger hydrogen network than needed — with high costs for consumers.

Policymakers have the right tools in their toolbox — including unbundling, transparency requirements and regulatory oversight — to ensure that hydrogen supports rather than hinders decarbonisation efforts. The regulation of the fossil gas sector provides important lessons to be considered for hydrogen regulation. Megan Anderson and Andreas Jahn explain how independent, unbundled ownership can allow for the hydrogen network to be efficiently planned, developed and operated.

Turning off the gas: Stronger and coherent EU policy to accelerate the fossil gas phaseout

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Rapidly phasing out fossil gas demand has become a top priority in Europe. Existing European legislation is expected to achieve only moderate reductions by 2030. The ongoing energy crisis has provided an opportunity to aim for even more extensive decreases in fossil gas demand. Legislation under negotiation, informed by the European Commission’s REPowerEU plan, is expected to go further, yet more ambitious targets and a unified policy approach could achieve potential reductions currently left on the table.  

RAP’s analysis finds that even with full implementation of the REPowerEU plan, by 2030 natural gas demand in Europe will remain roughly equivalent to Russian gas imports in 2021. A stronger energy efficiency target in the Energy Efficiency Directive (EED) and a higher renewable energy target in the Renewable Energy Directive (RED) could reduce gas demand and eliminate Russian gas imports. 

Furthermore, the Hydrogen and Decarbonised Gas Market package should emphasize integrated planning and targeted applications of alternative gases to ensure its consistent with a fossil gas phaseout. 

A joint, coherent policy approach — addressing more ambitious targets for the EED and the RED and complementary metrics applied to the Hydrogen and Decarbonised Gas Market package — would guarantee that fossil gas use is rapidly reduced and the infrastructure is in place to meet the remaining demand equitably and efficiently.

Facilitating Distributed Energy Resources Requires Policy Actions

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Distributed energy resources can provide key opportunities that would empower India’s retail customers to improve system efficiency, lower costs, and reduce emissions. In the first part of our DER series, we laid out the arguments for how deploying distributed energy resources (DER) in scale provides a key opportunity to empower customers.

DERs include elements such as energy efficiency, demand response, storage resources, distributed generation closer to load (such as rooftop solar), and more. DERs help customers modify their electric usage in ways that will save them money, offer reliability products to electric wholesale system operators and discoms to increase reliability and efficiency of the system, and help reduce emissions. The promotion of DERs, however, requires affirmative action by utility regulators and policy makers.

In the second part our series, we outline policies that will facilitate the entry of DER providers.

Modernizing Gas Utility Planning: New Approaches for New Challenges

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Significant new uncertainties and options for the gas industry are creating new challenges for regulators who are responsible for ensuring that utility investments are in the public interest.

Many of the unknowns relate to the potential for customers to switch from gas to electricity for heating and other uses and the potential for utilities to replace fossil methane with alternative gases. Gas customers could face higher costs if their numbers decline in favor of electrification or if investments in alternative gases far exceed current resource costs.

Yet current typical tools and processes for regulating gas distribution utilities do not give regulators complete information on which to make decisions about long-term utility investments in this context.

Commissions across the country are recognizing the need to review and update their planning approaches. This paper surveys current efforts to modernize gas utility planning and draws lessons for those considering similar work. At the heart of the paper are five principles for redesigning planning to restore confidence that utility investments will be in the public interest:

  1. Build equity into planning so decisions are made with equitable service and distribution of costs and benefits in mind.
  2. Consider an expanded range of investment and resource options.
  3. Establish integrated gas planning by combining integrated resource planning practices with gas distribution system planning.
  4. Use combined energy planning to take the broadest possible view of emissions reduction opportunities.
  5. Foster collaboration with state agencies that have expertise in emissions reduction.

Metrics matter: Efficient renewable heating and cooling in the Renewable Energy Directive

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The Renewable Energy Directive (RED), designed to help meet the EU’s ambitious 2030 and 2050 climate targets, sets targets for growing renewables usage for heating and cooling in the building sector. As currently written, however, the RED encourages inefficient uses of renewables in buildings to meet these goals.

In this paper, we suggest reforms to the RED would ensure a more efficient and balanced approach to renewable heating and cooling in the EU. It shows that the RED’s metric for determining the contribution of renewable heating and cooling tends to favour less efficient technologies. The paper also discusses how the use of electricity for heating and cooling is not accounted for in the RED definition of renewable heating and cooling, nor in the methodology for the renewable contribution of heat pumps.

By adapting the definition of renewable heating and cooling and updating the definition of renewable heat from heat pumps, the RED can provide a more comprehensive overview of the status of decarbonising the sector. We recommend the following policy adjustments:

  • Amend Article 7 (3) of the RED to calculate the useful energy produced instead of fuels consumed to produce it.
  • Mandate Eurostat to develop a consistent method for counting the amount of (renewable) electricity used for different services including heating and cooling, both in general and from heat pumps. To avoid double counting, remove this electricity from the heating and cooling sector when calculating the headline renewable share.
  • Amend Annex VII of the RED to include the electricity used to drive heat pumps so that it accounts for the full contribution of heat pumps.

Empowering Retail Customers: Improve Efficiency, Lower Costs and Reduce Emissions

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As a tool in combating greenhouse gas emissions, India is aggressively adding renewable energy resources to its electric system resource mix to displace fossil fuel and meet future electric load growth. Much of this is being accomplished using competitive procurement processes and private capital for investment needs. At the same time the country is also rapidly implementing wholesale competitive electric markets to improve the efficiency of the electric system.

Deploying Distributed Energy Resources (DER) in scale provides another key opportunity to improve electric system efficiency and combat emissions. DERs empower customers to modify their electricity usage and help reduce emissions, as well as offer reliability products to electric system operators. The promotion of DERs, however, requires action by utility regulators and policy makers. There is a real need to allow private sector participants to assist customers and bring private capital in implementing DERs. Applying advanced metering, while not mandatory, would also be very helpful to facilitate full utilization of DERs. Advanced metering and sophisticated tariffs would allow customers to react to granular wholesale granular price signals, help reduce distribution utility operating and capital costs, and improve efficiency and system reliability.

This paper will be the first in a series about the benefits of DER. The first part describes the benefits of deploying DER and advanced metering for customers and the electric system, discusses different business models that can be used, and recommends key actions regulators and policy makers must take.

Future papers will delve into more detail on the specific regulatory actions that would be required to:

  • allow customers to participate in DER programs;
  • motivate utilities to actively facilitate and promote DERs; and
  • facilitate the entry of DER providers that would allow them to deploy their technical expertise and private capital in the space.