Demand-Side Management: Role of Natural Gas Utilities

August 2011

• Demand-side management activities are not a new concept for the two major natural gas utilities in Ontario, Enbridge Gas Distribution and Union Gas. They have been delivering DSM programs to their customers since the mid-1990's with the costs of the programs recovered in the utilities' regulated distribution rates.
• In June of this year, the Ontario Energy Board released its latest guidelines that will govern the Enbridge and Union DSM plans for at least 2012 to 2014. The two utilities have been directed to submit their next generation of plans to the OEB by September 15, 2011.
• It is the OEB's responsibility to ensure that the DSM plans of the gas utilities with all of their component parts are appropriate, and the associated costs are reasonable. This has always been the case, but in its latest set of rules the OEB is also recognizing how the conservation landscape is changing.

With energy conservation and energy efficiency topics of considerable attention since the provincial government's Green Energy and Green Economy Act, 2009 was passed and initiatives to promote conservation throughout Ontario introduced, we thought it would be interesting to look at the energy conservation role played by the natural gas utilities, how gas demand-side management (DSM) works, and how the utilities' role affects consumers.

Demand-side management activities are not a new concept for the two major natural gas utilities in Ontario, Enbridge Gas Distribution and Union Gas. In fact, they have been delivering DSM programs to their customers since the mid-1990's with the costs of the programs recovered in the utilities' regulated distribution rates.

In the recently-revised framework governing the utilities' DSM plans, the Ontario Energy Board (OEB) describes natural gas demand-side management as follows:

"... the modification of consumer demand for natural gas through various methods such as financial incentives, education and other programs. While the focus of DSM is natural gas savings and the reduction in greenhouse gases emissions, it may also result in the saving of a number of other resources such as electricity, water, propane, and heating fuel oil."

Gas utility DSM is not new

The Ontario Energy Board first released guidelines for gas utility DSM activities in 1993 and directed Enbridge and Union to develop DSM plans for review and approval according to the guidelines. The initial plans were submitted to the OEB in 1995. The 1993 framework guided the utilities' DSM activities until a revised framework was established in 2006. The revised guidelines set out a rules-based approach to DSM. Enbridge and Union were required to submit three-year plans for 2007 to 2009 that were consistent with the new rules.

In 2008, the OEB commenced a consultation process to develop another set of guidelines to be used by the utilities in developing their next generation of DSM plans. However, with the introduction of the Ontario Government's Green Energy and Green Economy Act, the OEB decided to extend the 2006 framework for one year to provide time for the impact of the new legislation to become clearer. The framework was extended for another year after that. In June of this year, the OEB completed the consultation process and released its latest guidelines that will govern the Enbridge and Union DSM plans for at least 2012 to 2014. The two utilities have been directed to submit their next generation of plans to the OEB by September 15, 2011.

Key elements of gas DSM

The main elements of the DSM framework for gas utilities have remained essentially the same, with some modification and fine-tuning over the years as experience has been gained.

The current basic types of DSM programs are: resource acquisition including separate initiatives for low-income consumers, market transformation, and research and development and pilot projects.

Resource acquisition programs are geared to all types of consumers - residential, commercial, and industrial. For the residential sector, the programs can involve "traditional" measures such as energy saving kits provided free of charge to consumers (e.g., low-flow showerheads, tap aerators, and pipe wraps) or a financial incentive to install a programmable thermostat. Going forward, there may be more emphasis on less traditional measures such as incentives to homeowners to increase the insulation in their homes. For the commercial and industrial sectors, DSM programs can involve financial incentives towards equipment and installation costs as well as support from the utilities in areas such as energy data collection, site assessments, and process improvement studies.

Not all programs are allowed into the portfolio of resource acquisition activities. The gas utilities are required to screen candidate initiatives. The screening examines the cost effectiveness of the program according to a specific, detailed test that looks at the benefits and costs over a number of years. Only cost effective programs are eligible for inclusion in the portfolio. Since not all cost effective programs may make it into the portfolio because of budget constraints, programs are prioritized according to certain criteria. Market transformation programs and R&D/pilot projects are assessed on the merits of each program based on the specific program objectives.

The utilities are required to establish targets for their DSM activities (e.g., natural gas savings to be achieved). They are also required to develop and follow a comprehensive evaluation plan that assesses the impacts of the DSM programs and how much was actually spent in achieving those impacts. An annual evaluation report must be prepared, audited by an independent third party, and submitted to the OEB for approval.

Gas utilities' involvement in the delivery of programs that are intended to reduce gas consumption seems at odds with the primary business of the utilities, which is to distribute gas to consumers throughout their franchise areas. So how is this disincentive to the utility to deliver DSM programs handled?

There are two elements of the gas DSM framework designed to address this disincentive. The first element is a mechanism, the "lost revenue adjustment mechanism" that serves to true-up the actual impact of DSM activities on distribution revenue from the forecasted impact designed into the utility's rates. It is an amount that is either refundable to or receivable from utility customers depending on whether actual gas savings from DSM are less than or greater than the savings forecast when rates are set. So if natural gas savings are greater than forecast, then there is an additional cost to customers.

The second element of the framework is a shareholder incentive payment that rewards the utility shareholder for achieving specified DSM outcomes. The incentive amount is determined according to reasonably strict guidelines and is recoverable from utility customers.

Since the first set of formal DSM plans were submitted to the OEB, the costs of the gas utilities' DSM plans have been recovered in the distribution rates charged to customers of Enbridge and Union. That will continue to be the case.

To the greatest extent possible, costs associated with DSM activities are allocated to the rate groups to which particular DSM programs apply. However, within a rate group there is always an unavoidable level of cross-subsidization in the sense that the group will inevitably include consumers who take advantage of DSM programs and those who do not. But both pay for DSM in their rates.

Landscape is changing

It is the OEB's responsibility to ensure that the DSM plans of the gas utilities with all of their component parts are appropriate, and the associated costs are reasonable. This has always been the case, but in its latest set of rules the OEB is also recognizing how the conservation landscape is changing.

Gas DSM has evolved from there being limited DSM offerings and experience so that the gas utilities were seen as the logical delivery channel, to today's environment in which there are a number of additional entities in the market delivering energy conservation and efficiency offerings. As well, the implementation of higher mandatory efficiency standards for new building construction and appliances, including furnaces and water heaters, is expected to lead to reduced natural gas consumption without the involvement of the utilities. This has led the OEB and some but not all stakeholders to conclude that the expansion of DSM activities funded by gas utility ratepayers is not necessary. As a result, the latest set of rules for the Enbridge and Union DSM plans for the next three years holds their annual DSM budgets at current levels. The one exception is the budget for low-income programs, which may increase but only within a very specific range. The new rules also recognize that large industrial customers have the expertise and incentive to undertake energy efficiency programs on their own and so ratepayer-funded DSM programs for large industrials are no longer a mandatory component of the utilities' DSM plans.

OEB's Demand Side Management Guidelines for Natural Gas Utilities, June 30, 2011 Read more »

Ontario's Green Energy Act: A Major Shift Read more »