NSPM 101: Evaluating Costs & Benefits of Energy Efficiency Investments from the Regulator’s Perspective

Lily Smith

Conducting Benefit-Cost Analysis for Energy Efficiency and Other DERs  

How much energy efficiency should utilities deliver? This question is the subject of discussion among many stakeholders, including utilities, public service commissions, ratepayers, and others interested in maintaining a clean, reliable, affordable energy system. Undoubtedly, a variety of perspectives contribute to this answer – one of them is understanding the costs and benefits of energy efficiency programs. For decades, most utilities and commissions have relied on the California Standard Practice Manual – guidance established forty years ago – to evaluate the costs and benefits of energy efficiency programs from different stakeholder perspectives, including program participants, utilities, a ‘total resource’ perspective, and even society. However, up until recently, there has been no approach that evaluates energy efficiency investments from the energy regulator’s perspective – the entity making final decisions about energy efficiency programs, budgets, and related issues. 

The National Standard Practice Manual (NSPM)  

In 2017, the National Standard Practice Manual for Assessing Cost-Effectiveness of Energy Efficiency Resources (NSPM for EE) was published by the National Energy Screening Project. This manual provided a framework for cost-effectiveness testing with a focus on energy efficiency. In 2020, the National Standard Practice Manual for Assessing the Cost-Effectiveness of Distributed Energy Resources (NSPM for DERs, or NSPM) was developed (expanding on the NSPM for EE) to account for other DERs—demand response, distributed generation (e.g., rooftop solar, combined-heat power), distributed storage, electric vehicles and building electrification. The NSPM for DERs supplants the earlier EE version. 

The NSPM for DERs is policy-neutral and employs the use of economically sound principles, concepts, and methodologies for both single and multi-DER analysis to help guide the development of jurisdictions’ cost-effectiveness test(s) for conducting benefit-cost analyses (BCAs) of DERs.  

Unique to the NSPM is that it fills the gap by proposing a regulatory perspective to support the development of a jurisdiction’s primary cost-effectiveness test, which the NSPM refers to as a ‘Jurisdiction-Specific Test’ (JST). The NSPM provides eight foundational guiding principles and a multi-step process for developing a JST.  

NSPM BCA Principles 

The NSPM for DERs builds on traditional cost-effectiveness tests by focusing on the regulatory perspective, where a core principle is to ensure alignment with the jurisdiction’s applicable energy policies. Such an alignment may influence the inclusion (or exclusion) of certain impacts (benefits and costs) included in the test. As such, a state’s JST may (or may not) align with one of the traditional cost tests, as this will depend on the state’s specific policies. Further, the NSPM principles emphasize the importance of ensuring consistency across DERs and regulatory mechanisms for measuring cost-effectiveness to avoid bias in resource investment decisions. The NSPM can help states create a consistent BCA framework for valuing the full range of DERs. Policymakers are encouraged to design a BCA guided by the NSPM BCA Principles below.  

Table 1. NSPM BCA Principles 

Principle 1	Treat DERs as a Utility System Resource  DERs are one of many energy resources that can be deployed to meet utility/power system needs. DERs should therefore be compared with other energy resources, including other DERs, using consistent methods and assumptions to avoid bias across resource investment decisions.
Principle 2	Align with Policy Goals  Jurisdictions invest in or support energy resources to meet a variety of goals and objectives. The primary cost-effectiveness test should therefore reflect this intent by accounting for the jurisdiction’s applicable policy goals and objectives.
Principle 3	Ensure Symmetry  Asymmetrical treatment of benefits and costs associated with a resource can lead to a biased assessment of the resource. To avoid such bias, benefits and costs should be treated symmetrically for any given type of impact.
Principle 4	Account for Relevant, Material Impacts  Cost-effectiveness tests should include all relevant (according to applicable policy goals), material impacts including those that are difficult to quantify or monetize.
Principle 5	Conduct Forward-Looking, Long-term, Incremental Analyses  Cost-effectiveness analyses should be forward-looking, long-term, and incremental to what would have occurred absent the DER. This helps ensure that the resource in question is properly compared with alternatives.
Principle 6	Avoid Double-Counting Impacts  Cost-effectiveness analyses present a risk of double-counting benefits and/or costs. All impacts should therefore be clearly defined and valued to avoid double-counting.
Principle 7	Ensure Transparency  Transparency helps to ensure engagement and trust in the BCA process and decisions. BCA practices should therefore be transparent, where all relevant assumptions, methodologies, and results are clearly documented and available for stakeholder review and input.
Principle 8	Conduct BCAs Separately from Rate Impact Analyses  Cost-effectiveness analyses answer fundamentally different questions than rate impact analyses, and therefore should be conducted separately from rate impact analyses.

Importantly, applying the NSPM principles help to ensure that impacts are treated symmetrical to avoid over or under-counting a cost or benefit stream, the BCAs are forward-looking and do not account for sunk costs (i.e., lost revenues), and that impacts are not double counted. Transparency is important to ensure that regulators and all stakeholders understand the inputs and results of a BCA.  Finally, the NSPM dedicates a full appendix to describing why BCAs and rate impact analyses (which are both important) should be conducted separately and not in combination (i.e., avoid the use of the RIM test). The use of the RIM test is further discussed below. 

Understanding Methods of Cost-Benefit Analysis   

Most states in the Southeast require utilities to employ the use of one or more traditional cost-effectiveness tests to analyze the costs and benefits of a proposed program. The states’ primary cost-effectiveness tests measure the net benefits or costs of proposed programs and are used to determine whether the states’ commission or regulatory body will approve of the proposed program or not. Secondary cost-effectiveness tests are sometimes used to inform program design further and prioritize efficiency program investments and strategies. Test definitions and up-to-date testing mechanisms for southeast states are housed in the Database of Screen Practices (DSP). 

State	Primary Test	Secondary Test
Alabama	None	None
Arkansas	TRC	UCT, PCT, RIM
Florida	RIM	TRC, PCT
Georgia	TRC	UCT, PCT, SCT, RIM
Kentucky	TRC	UCT, PCT, RIM
Louisiana	TRC	UCT, PCT, RIM
Mississippi	TRC, UCT, PCT, RIM	None
North Carolina	UCT, TRC	PCT, RIM
South Carolina	UCT, TRC	RIM
Tennessee	TRC	UCT, PCT, RIM
Virginia	TRC, UCT, PCT, RIM	None

The Total Resource Cost Test (TRC), Utility Cost Test (UCT), Participant Cost Test (PCT), Rate Impact Measure (RIM), and Society Cost Test (SCT) are the primary and secondary tests currently used throughout the region. The TRC is the most common primary test used to measure cost-effectiveness of investments. Both the UCT and PCT are the most common secondary tests. 

The Rate Impact Measure  

Energy efficiency programs are voluntary for customers to participate in. Therefore, those customers who participate will receive program benefits while others who do not participate may not; however, all customers pay for these programs.  Accordingly, public service commissions are rightly concerned with maintaining a balance between the benefits energy efficiency programs provide and the costs to non-participating customers. Many commissions rely on the Rate Impact Measure (RIM) test from the California Standard Practice Manual (CASPM) for this purpose. The logic is that any program that puts upward pressure on rates will negatively impact non-participating customers. 

The NSPM makes the case that the RIM test is not appropriate as a BCA test and recommends instead that a more full-fledged rate bill impact analysis should be conducted to comprehensively measure the benefits of energy efficiency programs and costs to both participants and non-participants.  Unlike other cost-effectiveness tests, the RIM test indicates whether DER investments will impact rates, while benefit-cost analysis reveals which DERs will provide benefits that outweigh the average customer cost. A comprehensive RIM analysis reveals how programs will affect ratepayers’ costs, how the installation of a DER will affect the overall price ratepayers pay towards their monthly electricity bill, and the percentage of ratepayers in a certain jurisdiction who will experience either bill reductions or bill increases. The NSPM discusses this in more detail in Appendix A. 

Additional Resources 

As more commissions and utilities consider adopting a JST designed for their unique circumstances, they may benefit from resources that supplement the NSPM, including NSPM case studies from states that have already gone through the process to the Methods, Tools, and Resources Handbook that provides technical guidance on how to monetize or quantify specific costs and benefits (utility and non-utility system impacts) to include in a JST. 

Stakeholders also recognize that BCAs do not address equity issues – specifically, who benefits and who pays for DERs. The NESP, in coordination with Lawrence Berkeley National Laboratory, is creating guidance for commissions to conduct a “distributional equity analysis” (DEA) as a complementary analysis to BCA, providing a broader decision framework for DER investments. The DEA Guide is due to be published in fall 2023. For more information, please see https://emp.lbl.gov/publications/distributional-equity-analysis  

Acknowledgments  

Thank you to Julie Michals of E4theFuture for their expertise on the NSPM for DERs and contribution to the development of this resource. Read more about how to apply the NSPM for DERs.  

Questions? Contact Lily Smith, program associate.