3.3. Calculation of Avoided Costs

One of the most contentious issues in the development of these cost-effectiveness protocols has been the calculation of the cost of the electricity that would have been used in the absence of demand response, generally called the "avoided electricity cost." Avoided electricity costs consist of the avoided costs of generation capacity (the avoided capacity costs), avoided costs of the saved energy (avoided energy costs), and avoided costs of transmission and distribution. These avoided costs comprise the major benefit of most demand response programs, and are similar to the avoided costs of other demand-side management activities such as energy efficiency and distributed generation. Because demand response programs are generally active at times of peak electricity demand, during those relatively few hours per year when electricity costs are particularly high, the avoided electricity costs used in demand response cost-effectiveness calculations must reflect the value of those peak hours. In particular, the avoided costs used for demand response must reflect the high cost of building "peaker plants" (power plants used only during those peak hours, remaining idle the rest of the year). The avoided cost calculations considered in this proceeding estimate these costs using a simulation model of a combustion turbine, which is the most common type of peaker plant. Questions remain about the best way to approximate the avoided electricity costs, but in order to avoid further delay, we adopt consistent methods to be used by the utilities to obtain the needed avoided cost inputs to their cost-effectiveness analyses. In comments on the proposed decision, DRA and TURN expressed concern that the long-term costs reflected through this method are higher than short-term prices in the bilateral Resource Adequacy market. Both DRA and TURN argue that short-term prices can be much lower when available capacity resources substantially exceed forecasted peak loads; these parties support the use of short-term prices in the cost effectiveness analysis as either the primary avoided cost input or as part of the sensitivity analysis.¹² We believe that use of long-term avoided costs are consistent with Commission energy policy for Demand Response activities, and as a result we retain the requirement for the sensitivity analysis to encompass a range defined by Energy Division around the long-term cost calculated through the Avoided Cost Calculator. Parties will have an opportunity to comment on these methods, along with other variables and data sources used in the analyses, when final cost-benefit results utilizing these protocols are submitted within Commission proceedings.

¹² In advocating for use of short-term market costs rather than a combustion turbine proxy for estimating avoided costs, TURN's comments on the proposed decision depart from its general philosophy of deference to the Consensus Framework, given that the Consensus Framework recommended a combustion turbine proxy.