Economic Criteria for Evaluating Demand Side Management Measures in the Context of Electricity Sector Regulation

Abstract

In the present regulations of the Portuguese electricity sector distribution companies, acting as last resort suppliers, they can promote energy efficiency measures also designated in this context by Demand Side Management (DSM) measures. In order to promote the implementation of these measures, the Tariff Code establishes that the measures, costs and half of the respective net benefits will be reflected in the supply tariffs. In this paper different criteria for valuing DSM measures are analysed, including valuing avoided costs from the electricity sector (namely by considering data from marginal costs) and valuing environmental benefits. The economic criteria discussed are applied to five DSM measures. For each criterion and for each DSM measure several aspects are evaluated, namely: 1) the respective costs and benefits, distinguishing between bill reduction benefits and environmental benefits; 2) the benefit/cost ratio; 3) the amount of allowed revenues to be included in the supply tariffs and the impact this causes to consumers; and 4) the cost per ton of avoided CO2 emission as well as the cost per kWh of saved energy. A sensitivity analysis on the merit order of the different measures is also performed. The results show that the different criteria considered have a significant impact on the costs that electricity consumers pay through tariffs and a relatively minor impact on the merit order of the different measures. Therefore, changing the hypotheses behind the criteria discussed would not have a major impact on project selection, but could be relevant for the design of incentives for each measure. It is shown that despite the attribution of high environmental premiums for the implementation of DSM measures, the costs for ton of CO2 avoided are much lower than those that would result from the implementation of equivalent supply side measures.