Avoided cost estimation and post-reform funding allocation for Californiaʹs energy efficiency programs

This paper summarizes the first comprehensive estimation of Californiaʹs electricity avoided costs since the state reformed its electricity market. It describes avoided cost estimates that vary by time and location, thus facilitating targeted design, funding, and marketing of demand-side management (DSM) and energy efficiency (EE) programs that could not have occurred under the previous methodology of system average cost estimation. The approach, data, and results reflect two important market structure changes: (a) wholesale spot and forward markets now supply electricity commodities to load serving entities; and (b) the evolution of an emissions market that internalizes and prices some of the externalities of electricity generation. The paper also introduces the multiplier effect of a price reduction due to DSM/EE implementation on electricity bills of all consumers. It affirms that area- and time-specific avoided cost estimates can improve the allocation of the stateʹs public funding for DSM/EE programs, a finding that could benefit other parts of North America (e.g. Ontario and New York), which have undergone electricity deregulation.