Legislative Council
Economic Services Panel
ELECTRICITY : DEMAND SIDE MANAGEMENT

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Introduction
Consultants’ recommendations
Impact of DSM on peak demand and energy consumption
Impact of DSM on consumers
Negotiations with the power companies
Consultants’ preliminary estimate of the cumulative impact of their DSM recommendations on maximum demand (in MW) and energy (in GWh)

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Introduction

The objective of demand side management (DSM) is to reduce the summer peak demand for electricity and longer term growth in demand for electricity, so as to postpone, and possibly avoid, the construction of additional plant. It requires measures to be taken by the power companies to influence the level or timing of consumers’ demand for energy.

2.The Scheme of Control Agreements require the power companies to develop and promote energy efficiency and conservation measures. They accept that this includes DSM, but have stated that a financial incentive should be provided before they can agree to implement large-scale DSM programmes as these could have a significant impact on the returns that they would otherwise expect to earn from investment in new electricity generation and distribution facilities to meet growth in demand.

3.The Burns and Roe Company of the US has completed a study for the Government to identify the DSM programmes and technologies and related tariff requirements most appropriate to the different electricity consumption sectors in Hong Kong and the DSM incentive arrangements most suited to those programmes and local circumstances.

4.This paper informs Members of the consultants’ recommendations and the Administration’s follow-up action.

Consultants’ recommendations

5.The consultants recommend a DSM Plan for Hong Kong that includes -

• an incentive scheme for the power companies

• recommended DSM programmes

• arrangements for measurement and verification of performance

• a regulatory framework.

The following paragraphs summarise the recommendations.

(a)DSM Incentive Scheme

6.After a detailed comparison of different incentive schemes, including schemes in use overseas and schemes proposed by the power companies, the consultants have recommended an incentive scheme that is compatible with the Scheme of Control Agreements and rewards avoidance of investment in generating capacity by providing for comparable earnings to be derived from the demand side.

7.The scheme is based on a complex formula for calculating incentive earnings which apportions deferred capital investment partly as costs attributable to system reliability and partly as costs attributable to energy production and takes into account the amount of reserve generating capacity already in the system. In simple terms, the proposed incentive scheme -

• encourages DSM programmes that save capacity by shifting peak load to off peak periods

• encourages DSM programmes that promote energy efficiency and conservation by saving energy at any time of the day or year; and

• links the company’s DSM incentive earnings potential to its performance in optimising the level of reserve generating capacity in its system (the incentive earnings potential will be at its maximum when reserve margin is low and at its minimum when reserve margin is high).

8.The incentive scheme is also designed to encourage aggressive pursuit of DSM. It provides for a minimum performance threshold for each DSM programme, which must be met for the company to be eligible for incentive earnings on that programme. Incentive earnings for a particular programme will be allowed to exceed an agreed goal for the programme, up to a certain limit (perhaps twice as much). Conversely, if the company falls short of the agreed goal, it would be entitled to recover only a certain proportion of the programme costs. These performance-related provisions are designed to produce an equitable balance of risks and rewards for the companies and consumers.

(b) Recommended DSM Programmes

9. The consultants recommend a portfolio of DSM programmes for Hong Kong based on their proven success in the US and their suitability for Hong Kong. They also recommend that specific DSM programmes proposed by the power companies should have their total costs compared to those of other resource options, such as adding generating capacity to meet the demand, and that, if a proposed programme would not produce overall savings for the community, it should not proceed.

10.The programmes recommended by the consultants, for implementation in two stages, are described below.

i) First stage programmes - immediate implementation

11.The first stage programmes, which are for immediate full scale implementation, include promotion of high efficiency lighting, appliances and heating, ventilation and air-conditioning (HVAC) systems as energy-saving DSM programmes and thermal storage air-conditioning systems as capacity-saving DSM programmes. (Thermal storage air-conditioning involves installation of an ice-storage air-conditioning system rather than the usual electric chiller system). Informational and educational programmes and non-contractual time-of-use tariffs to encourage shifting of demand from peak to off peak periods are also recommended.

12.Some of these programmes will involve rebates to the consumer on presentation to the power company of proof of purchase and will qualify for DSM incentive earnings. Others will not be eligible for DSM incentive earnings as the savings resulting from them cannot be quantified or verified.

13.The consultants recommend that all of the first stage programmes be implemented together, so as to allow all consumers the opportunity to participate and minimise cross-subsidisation. The first stage programmes will continue as the second stage programmes are introduced.

2. Second stage programmes - longer term

14.The second stage programmes are to be implemented once experience has been gained with the first stage programmes and the DSM market has become more mature. They include DSM Bidding and contractual time-of-use tariffs as energy saving and capacity saving DSM programmes, respectively. These programmes will qualify for DSM incentive earnings.

15.DSM Bidding would be new to Hong Kong. However, it requires the emergence of energy services companies (ESCOs) to serve the needs of both power companies requiring assistance in meeting DSM goals and corporate consumers requiring specialists to identify energy saving and energy management opportunities in their business operations. It works as follows -

• the power company invites bids from ESCOs to "deliver" a specific amount of verifiable energy and capacity savings over a fixed contractual term

• the ESCO locates consumers prepared to allow the ESCO, at its expense, to retrofit energy efficient equipment or introduce energy efficient management practices into the consumer’s operations

• the ESCO receives its return as a monthly payment from the power company, representing a portion of the value of the energy and capacity savings achieved

• participating consumers receive a lower energy bill.

16.Contractual time-of-use tariffs typically involve an agreement between the power company and a corporate consumer under which the consumer agrees to achieve a specific reduction in load within a specific time in return for an economic incentive - usually a bill credit.

(c) Measurement and verification of performance

17.The consultants recommend that, as the DSM incentive scheme is tied to estimates of programme benefits and thus relies heavily on programme measurement and verification, the power companies should be required to measure DSM programme performance as diligently as they monitor supply side performance. A set of DSM measurement and verification protocols have been prepared by the consultants for discussion with the power companies.

18.The protocols provide a basis for calculating as accurately as possible a change in energy use arising from a DSM programme, using load research data and various engineering estimates and statistical methods, with the assistance, where possible, of direct "before and after" metering of energy use. They also enable qualitative evaluation of DSM programmes, including the level of consumer satisfaction with a programme.

(d) Regulatory arrangements

19.The consultants recommend that DSM Regulatory Guidelines should be adopted to define -

• what constitutes a valid DSM programme

• the procedures and timing that the power companies should follow in submitting DSM plans for government approval

• the approved methods for calculating and collecting incentive earnings; and

• procedures for resolving disputes.

Proposed regulatory guidelines have been prepared by the consultants for discussion with the power companies.

Impact of DSM on peak demand and energy consumption

20.The consultants have prepared a preliminary estimate of the impact on peak demand (in MW) and energy (in GWh) of implementing their recommendations. The data are at the Annex. Briefly, the consultants advise that savings of both generating capacity and energy will accumulate rapidly after start-up in 1997. They estimate that installation of 700MW of generating capacity can be avoided from 1997 to 2004.

Impact of DSM on consumers

21.As regards the impact on consumers, the consultants advise that DSM will put upward pressure on tariffs in the short term, because DSM programme costs always precede energy savings. DSM will however put downward pressure on tariffs in the longer term as the programmes gather momentum and substantial savings materialise. The consultants propose that the companies should not be allowed to increase tariffs by more than 2% above what they would have been without DSM and that DSM programme costs and incentive earnings should be recovered through a DSM account credit/debit adjustment on consumers’ bills, similar to the existing arrangements for fuel cost recovery.

Negotiations with the power companies

22.The Government has begun negotiations with the power companies with a view to reaching formal agreements with them on early implementation of full scale DSM programmes. Members will be kept informed of developments.

Economic Services Branch
March 1997

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Annex

Consultants’ preliminary estimate of the cumulative impact of their DSM recommendations on maximum demand (in MW) and energy (in GWh)