Electric Supply
Cost Effectiveness Sample
Proposals must be cost effective from the utility cost and total resource cost perspectives. The following definitions and example are being provided to give bidders a general idea of cost effectiveness for their proposals. Puget Sound Energy will do its own cost effectiveness analysis that will include administrative costs and any updated data available at the time.
Measure Cost is the known and measurable cost of purchasing and installing an energy efficient measure at a facility. Measure Cost is often the full cost of purchase and installation. Where the item being replaced would need to be replaced at that time anyway, the Measure Cost is the incremental cost, the cost of an energy efficient measure in excess of a measure to satisfy standard practice or existing codes. Use of the incremental cost applies to most new construction measures, and retrofit measures such as efficient gas water heaters or furnaces, where the window for efficient measure placement is usually at the point of original equipment failure.
Financial Incentives are usually in the form of grants or rebates that offset the Measure Cost. Customers generally receive incentives to install conservation measures, but incentives may be paid to other parties. Except were paid by other parties, Financial Incentives are a subset of Utility Cost.
Customer Cost (CC) is the cost born by the customer to purchase and install the measure, generally the difference between Measure Cost and Financial Incentives paid to the customer.
Third Party Cost (TPC) is any part of the Measure Cost, including 2005 Energy Bill credits, that is born by a party other than the customer or Puget Sound Energy.
Energy Savings Benefit is the value of the energy saved as determined by Puget Sound Energy's electric and gas Cost Effectiveness Standards, shown in tables IV-A and IV-B of Exhibit IV. Both tables provide values by end-use category and measure life.
Quantified Non-Energy Benefits (QNEB) are known and measurable cost savings associated with the purchase, installation and use of the energy efficient measure, not derived directly from the energy saved. This may include known and measurable cost savings from reduced water or other resource usage, or reduction of maintenance costs.
Utility Cost (UC) is Puget Sound Energy's cost to administer programs, including but not limited to funding specific to the measure or program and evaluation.
Total Resource Cost (TRC) is equal to UC + CC + TPC - QNEB
Example of Cost Effectiveness Calculation
The following example is for calculating electric energy efficiency cost effectiveness. Table IV-A in the Demand Side Resources Request for Proposals lists levelized avoided costs per kWh by end-use category and measure life up to 30 years. Similarly, Table IV-B lists levelized avoided costs per therm by end-use category and measure life. If calculating cost effectiveness for a gas measure or program, the following principles are the same, except that you will be using Table IV-B.
Looking at Table IV-A, if an electric efficiency measure under the category Commercial, Existing HVAC/Shell has a 12 year measure life, then the levelized value per kWh is $0.058, as shown in the table.
This levelized value is applied to first year savings and is referred to as avoided cost, or the financial benefit of saving a kWh. If the Commercial, Existing HVAC/Shell measure will save 1,000 kWh, then the levelized Energy Savings Benefit is $0.058 * 1,000 kWh or $58.00.
Cost must be levelized to compare to this levelized Energy Savings Benefit value. Referring to the Levelized Fixed Charge Rate (LFCR) table posted on this site, a measure with a 12 year measure life would use a LFCR of 12.597%.
If the Utility Cost is $200, the levelized Utility Cost is $200 * 12.597%, or $25.19.
If Customer Cost is $150, the levelized Customer Cost is $150 * 12.597%, or $18.90.
Levelized Energy Savings Benefit = $58.00
Levelized Utility Cost = $25.19
If there is no Third Party Cost and no Quantified Non-Energy Benefits then,
Levelized Total Resource Cost = $25.19 + $18.90 = $44.09
UC Benefit/Cost Ratio = $58.00/$25.19 = 2.3
TRC Benefit/Cost Ratio = $58.00/$44.09 = 1.3
If a Benefit/Cost Ratio falls below 1.0, the energy-efficiency measure or program does not pass the cost effectiveness test.