New standard practice manual for cost-effectiveness is an indispensable resource

Blog | May 26, 2017 - 10:00 am
By Martin Kushler, Senior Fellow

On May 18th the National Efficiency Screening Project and E4TheFuture announced the release of the first National Standard Practice Manual (NSPM). The detailed manual guides regulators on how to develop their own jurisdictional cost-effectiveness tests of utility customer-funded energy efficiency programs. More than 40 key organizations and national experts reviewed the manual.

Time for a refresh

Few areas of utility energy efficiency policies and procedures possess as much diversity of opinion as cost-effectiveness testing. Virtually every state uses some version of the five tests outlined in the California Standard Practice Manual (CA SPM). But as we documented in a 2012 study, substantial variability exists in how states define and calculate those tests. There is concern that the CA SPM has become somewhat dated (the last major revision was in 2001), and implementation of the tests has become inconsistent. While there is an impression that states use “standard tests” for calculating cost-effectiveness, the practical reality is very different. Implementation is often ad hoc and poorly documented.

Rather than prescribe standard tests that everyone should use, the NSPM begins with the premise that each jurisdiction (typically a state, but it could also be a municipality or other territory served by a public utility) should develop its own primary cost-effectiveness test to reflect its guiding policies. Rather than standard tests, the NSPM offers core principles and a systematic process (the Resource Value Framework [PDF]) for jurisdictions to develop their own primary cost-effectiveness tests.

A how-to guide

The NSPM lays out six core principles:

  1. Assess efficiency as a utility resource
  2. Incorporate applicable policy goals of the jurisdiction
  3. Create symmetry for both costs and benefits
  4. Conduct a forward-looking analysis
  5. Include all relevant impacts
  6. Assure transparency for all inputs, assumptions, methodologies, and results

The NSPM then provides a step-by-step process for developing a primary test, followed by extensive information and examples for dealing with common technical issues in assessing cost-effectiveness. Issues addressed include defining and estimating utility system impacts, accounting for impacts external to the utility system, determining discount rates, defining the analysis period, dealing with free-riders and spillover, and accounting for rate and bill impacts.

We hope the NSPM will become an indispensable resource for regulatory staff and anyone else involved in assessing the cost-effectiveness of utility energy efficiency programs. Readers are encouraged to check out the NSPM and watch for more information and announcements at upcoming events.

(In full disclosure, I was one of the five primary authors of this NSPM.  The team was led by Tim Woolf and Chris Neme, with assistance from myself, Steve Schiller and Tom Eckman, and management assistance from Julie Michals.)