Demand Side Management (DSM)
Demand-side management or DSM refers to active efforts by electric and gas utilities to modify customers’ energy use patterns. These programs are often implemented as part of a utility’s least cost or integrated resource plans. Such plans require utilities to consider demand side resources as well as traditional sources of supply.
DSM programs began modestly in the 1970s in response to growing concerns about dependence on foreign sources of oil and environmental consequences of electricity generation, especially nuclear power. They grew rapidly during the late 1980s as state regulators provided incentives for utilities to pursue least-cost or integrated resource planning principles.
Electric utility DSM programs reached their largest size in 1993, accounting for $2.7 billion of utility spending or about one percent of US utility revenues. These programs emphasized cash rebates and low-interest financing to encourage customers to buy more efficient appliances and build more efficient buildings and industrial plants. These programs proved to be very cumbersome and not sustainable over the long haul and DSM began to fall by the wayside.
The power crisis in the Western US in 2000-2001 spawned the “second-generation” of DSM programs, which emphasized reductions in customer loads during critical times of low reliability or rising wholesale prices. This crop of programs included (a) programs that involved cash payments to customers for demand and energy reductions during critical time periods (load curtailment) and (b) programs that involved variations in the price of electricity during critical time periods (dynamic pricing).
DSM programs today have evolved to consist of new rate designs (inclining block and dynamic pricing rates), behavior change programs (web group comparisons and portals), and financing programs including low interest loans, rebates to end users, and incentives to equipment manufacturers and builders.
ELCON strongly supports efforts to improve the efficiency of energy utilization, including conservation. Industrial electricity consumers have made and will continue to make substantial investments in energy efficient equipment, technologies, and facilities. When cost-effective, these investments can help ensure the competitiveness of US industry in domestic and international markets, address the nation’s security interests, and make substantial contributions to a cleaner environment.
ELCON Position and Recommendations
- ELCON supports cost-effective demand side management programs. A utility should only implement DSM programs that are consistent with the minimization of its long-term revenue requirements necessary for and adequate, reliable and efficient electric supply.
- Prior to implementing DSM programs, utilities should set rates based on cost-of-service, and without subsidies, so as to send appropriate price signals. Rates should be established for a full range of services, including time-of-use, curtailable and interruptible rates.
- Where “market barriers” exist that discourage end-use efficiency improvements, information programs should be directed to mitigate those barriers and encourage efficient demand side behavior.
- The acquisition of demand side resources should start with the development of an overall resource plan. The resource plan should begin with a determination of need and include both demand and supply options.
- Demand and supply options should be properly compared. The maximum payment a utility should make for a demand side resource is the avoided costs minus bill savings. Financial incentives should not be paid for demand side resources which already are economic to implement under existing rates.
- Competitive bid solicitations may be used for the acquisition of quantifiable DSM resources.
- The energy and capacity savings and costs of DSM programs should be measured with the same accuracy as estimates of capacity, energy output, losses, availability, reliability and economic life of supply side resources. In all cases, metered capacity and energy, whether provided by DSM or traditional supply, should be given preference in a utility’s resource plan.
- Selected social costs (such as environmental externalities) should not be internalized. Resources should be compared using actual costs, including the costs required to comply with environmental regulations.
- Embedded cost-of-service standards should be applied to the recovery of both demand and supply resource costs. Fixed costs should be recovered in the fixed (demand-related) component of rates and variable costs should be recovered in the variable (energy-related) component of rates.
- DSM programs that target large industrial ratepayers should be carefully designed to minimize: (a) adverse impacts on the competitive markets in which industrial ratepayers operate; (b) the participation of so-called “free-riders;” and (c) subsidization of DSM participants by other industrial ratepayers who previously had implemented demand side programs at their own expense.
- A utilities overall allowed rate of return should reflect the aggregate risk of all its supply and demand side investments. Utilities should not be given financial incentives to implement DSM programs.
- Regulatory commissions must not require mandatory DSM programs. Utilities must always retain the responsibility and accountability to manage the use of their system resources whether demand or supply side. All investments – including DSM investments – should be subject to prudence and used-and-useful reviews.