Amy Oliver Cooke, Energy, Environment, Gold Dome

Demand side management enriches Xcel at ratepayer expense

At the end of the legislative session, the Colorado General Assembly had an opportunity to stop a nonsensical electricity program that will cost Xcel Energy ratepayers well north of $100 million a year while Xcel shareholders enjoy the profits.

File photo - Todd Shepherd
File photo – Todd Shepherd

House Bill 1227 re-authorizes the Public Utilities Commission to continue expensive but pointless demand-side management policies through 2028. The entire point is to head-off supply constraints; in other words, to reduce ratepayer electricity demand and thereby avoid the need to build costly new power plants. To this end, lawmakers in 2007 passed HB 1037, which established a target for Colorado utilities to reduce peak demand and retail electricity sales 5 percent below 2006 levels by 2018.

The happy news is that utilities met the target. The state’s largest monopoly utility, Xcel Energy, now has almost 400 megawatts of surplus supply. The fundamental purpose behind demand-side management, which is to avoid building new capacity, is no longer applicable.

There are other reasons to be wary of continuing with a program that costs ratepayers so much money. In the most recent strategic issues docket for demand-side management, it was established that the marginal cost of these policies is increasing. All the low-hanging fruit has been plucked. At the same time, the “benefits” of the program are diminishing, due to low natural gas prices and a host of federal energy efficiency standards implemented during the Obama administration.

Also, the market is already moving towards the adoption of some of Xcel’s demand-side programs, such as energy efficient lighting, without charging ratepayers $100 million per year.

Given all these reasons, why did the General Assembly re-authorize the program?

One explanation we heard from supporters was that this bill is a climate change policy. If so, then it’s a grossly inefficient one. In 2016, Xcel stated that the demand-side program reduced carbon dioxide emissions by 330,000 tons, at a cost of about $110 million (including utility incentives). Do the math. That’s about $330/ton, an astoundingly high cost.

Icon_2016_Op_EdEven the CO2 adverse Obama administration only considered a $20-$40/ton social cost of carbon (the supposed societal cost of emitting a ton of CO2). Xcel’s demand-side program reduces greenhouse gases at a cost that is 8 to 16 times more expensive than the harm allegedly wrought by the emissions. In any context, that’s a horrible deal!

Another explanation we heard from sponsor Sen. Kevin Priola, R-Adams County, is that the policy somehow saves ratepayers money. That’s just wrong.

First, remember that Xcel has surplus capacity so there is no need for ratepayers to pay Xcel extra money to “manage” their demand. Second, the PUC just allowed Xcel to build an inefficient, $1 billion industrial wind project with a mere 51 megawatts capacity value, despite the fact that there are no supply constraints. So Priola has it backwards. In fact, unwise investments like industrial wind and demand-side policies are reasons why electricity rates have skyrocketed 67 percent over the last decade plus in Colorado.

The one other justification we heard for keeping the program is that it enjoys “bipartisan” support. Bipartisan support for bad and expensive policy doesn’t miraculously change it to good policy, especially when it costs ratepayers more than $100 million annually for no discernible purpose.

If lawmakers really want to save ratepayers money, then stop social engineering electricity use through government rate manipulation and consider real-time pricing instead. The ratepayer resources given to demand-side management would be much better spent installing the technology needed to inform consumers how much their electricity costs as they use it. Consumers would modify their behavior accordingly, which would both reduce bills and resolve the engineering issues associated with peak demand.

Unfortunately, we have yet to see a courageous Colorado legislature where the majority puts ratepayers’ wallets ahead of its need to social engineer electricity use and monopoly utility interests.

Amy Oliver Cooke directs energy policy at the Independence Institute. She can be reached at amy@i2i.org. William Yeatman, an energy policy analyst at the Competitive Enterprise Institute, can be reached at William.Yeatman@cei.org.

 

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