In this section, we define the general components of the five standard benefit-cost tests used to evaluate demand-side program cost effectiveness. Such tests are used for both energy efficiency programs and dynamic pricing programs. For each test, we identify the source of data as either the utility or the PRISM model. In general, the cost components for the tests are utility-specific and the benefit components for each of the tests can be obtained from the PRISM Suite. Before we begin our discussion of the purpose of each test, Table 11 summarizes the components of the five benefit-cost tests from the California Standard Practice Manual.30
In practice, most utilities use the total resource cost (TRC) test today as the basic test. A few utilities still use the rate impact (RIM) test. The TRC provides a measure of net expenditures from the point of view of the utility and its ratepayers taken as a whole. In contrast, the RIM test measures whether rates will have to change as a result of a program. In addition to these standard benefit-cost components, the following should also be considered when evaluating programs: environmental emissions costs and benefits, cost of utility performance incentives (which will be a cost in all tests except the participant test), reliability benefits, and consumer surplus.
Table 11: The Benefit-cost Tests from the California Standard Practice Manual
30 California Standard Practice Manual: Economic Analysis of Demand-Response Programs and Projects. July 2002.
Barakat and Chamberlin, “Principles and Practice of Demand-Side Management,” EPRI TR-102556, Final Report, August 1993.
Test Benefits Costs
Participant Test Participant bill reductions Participant bill increases Incentive payments to participants Program costs paid by participant
Tax credits Fees paid to utility by participant
Total Resource Cost (TRC) Test Utility avoided energy costs Energy, capacity, and t & d costs Utility avoided capacity costs Utility rate-based investment
Utility avoided distribution costs Program costs paid by utility (operating, marketing) Utility avoided transmission costs Program costs paid by participant (investment, operating) Tax credits
Ratepayer Impact (RIM) Test Utility avoided energy costs Energy, capacity, and t & d costs Utility avoided capacity costs Utility rate-based investment
Utility avoided distribution costs Program costs paid by utility (operating, marketing) Utility avoided transmission costs
Revenue gains Revenue losses
Fees paid to utility by participant Incentives paid to participants Utility Cost Test Utility avoided energy costs Energy, capacity, and t & d costs
Utility avoided capacity costs Utility rate-based investment
Utility avoided distribution costs Program costs paid by utility (operating, marketing) Utility avoided transmission costs
Fees paid to utility by participant Incentives paid to participants Societal Cost Test Utility avoided energy costs Energy, capacity, and t & d costs
Utility avoided capacity costs Utility rate-based investment
Utility avoided distribution costs Program costs paid by utility (operating, marketing) Utility avoided transmission costs Program costs paid by participant (investment, operating)
External benefits External costs
Section III: Standard Benefit-cost Tests for Evaluating Cost-effectiveness
Participant Perspective
The participant test asks the question, “Are participants better off?” This test simply quantifies the net benefits to a participating customer; it does not consider utility impacts. To answer this question, the NPV of the benefits minus the costs shown in Table 12 over the life of the program is calculated. Programs with a positive NPV pass the participant test, implying that participants are better off as a result of the program.
Table 12: Participant Test
PARTICIPANT TEST - Are Participants Better Off? SOURCE
Benefit Participant bill reductions PRISM
Benefit Incentive payments to participants PRISM
Benefit Tax credits Utility
Cost Participant bill increases PRISM
Cost Program costs paid by participant Utility
Cost Fees paid to utility by participants Utility
Total Resource Cost Perspective
The total resource cost test asks the question, “Does the total resource cost go down?” To answer this question, the NPV of the benefits minus the costs shown in Table 13 over the life of the program is
calculated. Costs include supply costs, utility costs, and participant costs. Dollar amounts that flow between the utility and participants drop out. This test measures the change in the average cost of energy across all customers. Programs with a positive NPV pass the total resource cost test. The TRC is similar to the societal test, but differs primarily in that it excludes externalities.
Table 13: Total Resource Cost Test
TOTAL RESOURCE COST (TRC) TEST - Are Resources Conserved? SOURCE
Benefit Utility avoided energy cost savings PRISM
Benefit Utility avoided transmission cost savings PRISM
Benefit Utility avoided distribution cost savings PRISM
Benefit Utility avoided capacity cost savings PRISM
Benefit Tax credits Utility
Cost Energy, capacity, and t & d costs PRISM
Cost Utility rate-based investment Utility
Cost Program costs paid by utility (operating, marketing) Utility Cost Program costs paid by participant (investment, operating) Utility
Non-participant (or Rate Impact) Perspective
The rate impact test asks the question, “Are non-participants better off?” The RIM test looks at the change in revenues paid to the utility and the total costs resulting from a program and measures whether rates will have to change. The NPV of the benefits minus the costs shown in Table 14 over the life of the program is
calculated. Programs with a positive NPV pass the non-participant test. The RIM test and the participant test when “summed” together result in the TRC test.
Table 14: Rate Impact Test
RATE IMPACT (RIM) TEST - Will Rates Increase? SOURCE
Benefit Utility avoided energy cost savings PRISM
Benefit Utility avoided transmission cost savings PRISM
Benefit Utility avoided distribution cost savings PRISM
Benefit Utility avoided capacity cost savings PRISM
Benefit Revenue gains Utility
Benefit Fees paid to utility by participants Utility
Cost Energy, capacity, and t & d costs PRISM
Cost Utility rate-based investment Utility
Cost Program costs paid by utility (operating, marketing) Utility
Cost Revenue losses Utility
Cost Incentive payments to participants Utility
Section III: Standard Benefit-cost Tests for Evaluating Cost-effectiveness
Utility Perspective
The utility cost test evaluates a program from the utility perspective and asks the question, “Will revenue requirements be lowered as a result of the program?” To answer this question, the NPV of the benefits minus the costs shown in Table 15 over the life of the program is calculated. Table 15 lists the source for each input in the test—either the utility (for the cost components) or PRISM (for the benefit components). Programs with a positive NPV pass the utility cost test.
Table 15: Utility Cost Test
UTILITY COST TEST - Are Revenue Requirements Lowered? SOURCE
Benefit Utility avoided energy cost savings PRISM
Benefit Utility avoided transmission cost savings PRISM
Benefit Utility avoided distribution cost savings PRISM
Benefit Utility avoided capacity cost savings PRISM
Benefit Fees paid to utility by participants Utility
Cost Energy, capacity, and t & d costs PRISM
Cost Utility rate-based investment Utility
Cost Program costs paid by utility (operating, marketing) Utility
Cost Incentive payments to participants Utility
Societal Cost Perspective
The societal cost test asks the question, “Do societal costs go down?” As noted previously, the only difference between this and the TRC test is the addition of externality costs and benefits. To answer this question, the NPV of the benefits minus the costs shown in Table 16 over the life of the program is calculated. Programs with a positive NPV pass the societal test.
Table 16: Societal Cost Test
SOCIETAL TEST - Is Society Better Off? SOURCE
Benefit Utility avoided energy cost savings PRISM
Benefit Utility avoided transmission cost savings PRISM
Benefit Utility avoided distribution cost savings PRISM
Benefit Utility avoided capacity cost savings PRISM
Benefit External benefits Utility
Cost Energy, capacity, and t & d costs PRISM
Cost Utility rate-based investment Utility
Cost Program costs paid by utility (operating, marketing) Utility Cost Program costs paid by participant (investment, operating) Utility
Cost External costs Utility
In general, although these tests measure different perspectives, the biggest debate has been between the use of the RIM test (which ensures that all ratepayers benefit) and the TRC test (which looks at the average customer).