Utility demand
side management (DSM) is on the rise again, driven
by regulatory requirements tied to new power plant
construction, rate and restructuring case settlements,
and concerns with rising natural prices. While many
utilities once maintained in-house experts to design
and administer energy efficiency programs for their
customers, much of that capacity has long since been
dismantled as utilities slimmed down and redeployed
resources in anticipation of industry restructuring.
Working with a number of these companies over the
past year, ICF International has developed a proprietary
business process model that helps utilities put effective
DSM programs into practice, minimizing time and money
invested and lessening the impact on their core utility
business. |
This article was published
in the Spring/Summer 2005 issue
of Perspectives.
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of Use policy regarding acceptable
use of content on the ICF International Web
site. |
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Business Process Requirements
Utility DSM programs should
be designed and run to serve three critical requirements:
Physical performance. The delivery of an energy efficiency
resource of specified magnitude within a specified time frame
Financial
performance. The delivery of the resource at or below projected
cost within a system of well-defined financial controls
Performance
quality. A metric using the programs to maximize customer
satisfaction while protecting/enhancing the utility’s
brand, meeting/exceeding regulatory requirements, and minimizing
impacts on the rest of the organization
Elements of the Model
The three performance requirements establish the context
for the specific elements of the process: Planning,
Procurement, Implementation, and Management.
Planning defines the specific business process requirements
for the DSM initiative. The process itself need not be cumbersome
or resource intensive, but it must yield six specific outcomes.
1) The right business model. Cost recovery, the availability
of incentives, and corporate business processes and organization
combine to define the right model. The cost-minimizing/profit-maximizing
model for many utilities is one that relies, to the maximum
extent practical, on outsourcing most program design and
implementation activities within a performance-based system.
2) A clear set of portfolio objectives. The typical portfolio
must balance program performance risks, regulatory interests,
costs, customer satisfaction goals, and the imperatives of
the business model.
3) A "sufficient" understanding of DSM
potential. Although a utility
can spend upwards of US$250,000 to study DSM potential,
almost invariably the largest areas of potential savings
are in residential lighting, commercial and industrial
(C&I) lighting, C&I heating,
ventilation, air conditioning (HVAC), and industrial processes.
Resources are better invested in understanding local markets
and program design, rather than on estimating potential.
4)
An initial set of program concepts. A best-practice
starter portfolio begins with a core set of programs targeting
broad market segments with straightforward, measure-based
incentives. As experience is gained, more targeted and
complex programs can be added. Every portfolio based even
in part on demand reduction should include load management
and demand response as a performance hedge.
5) Initial program
designs. The planning process should yield initial
program designs that outline the utility’s
expectations for branding, marketing, incentive, and implementation
strategies, customer relationship management, and verification
and should set performance targets and budgets.
6) Management
and evaluation plans. The utility’s DSM
business model will dictate the management approach that
is feasible. The greater the reliance on outsourcing, the
greater the importance of tracking and evaluation systems
that boost management productivity. The management plan also
should define an implementation schedule compatible with
management resources.
Procurement acquires the resources needed
to support successful implementation and is a critical
process that is often underplanned and undermanaged. Evaluation
resources should be acquired first—they are critical
to efficient design of programs and performance tracking
systems. Secondly, utilities should acquire the expertise
to design and build the core portfolio management and tracking
system, a system that must be in place before program launch.
The third step is to structure all program implementation
contracts with performance incentives that provide an upside
for beating physical and financial performance targets
and mitigate the utility’s financial
exposure to performance risk. Finally, the procurement process
is staged to avoid taxing limited management resources and
ensure that the programs most critical to meeting performance
targets are launched first.
Implementation delivers physical
performance against financial performance and performance
quality constraints. If the planning and procurement stages
have been executed effectively, utility implementation activity
focuses primarily on integrating activities of implementation
contractors with existing customer service and account management
functions.
Management monitors performance
relative to metrics. For utilities with business models that
require outsourcing of most functions, the centerpiece of
effective and resource-efficient management is the core portfolio
tracking system. Properly designed and used, this system
literally substitutes for internal program management staff.
The system should be Web based to enable close to real-time
entry of project data, provide program activity tracking
by stage, incorporate trending/forecasting capability to
enable managers to “look
ahead” at program performance based on the project
pipeline, and track portfolio budgets and costs. Key metrics—denominated
in megawatt hours (MWh) and/or kilowatts (kW)—include
performance by stage versus goal, the length of time projects
spend in the pipeline, the ratio of project leads to project
completions, and cost per performance unit. A program management
guide, developed at the beginning of the implementation stage,
identifies critical methods and the reporting structure.
The Results
Using ICF International’s model, a comprehensive starter
portfolio of programs can be implemented for less than US$800
per kW. Total portfolio management costs—including
contracting support for planning, evaluation, tracking system
development, and management support—will run between
10 and 15 percent of total portfolio costs. At the same time,
the model can reduce internal staff requirements to approximately
two to four professional full-time employees (FTE), depending
on the number of programs offered. In one ongoing implementation
of ICF International’s DSM business process model, a utility
is managing a $43-million portfolio of 13 programs designed
to capture 55MW, employing the equivalent of three professional
FTEs. By comparison, a standard program management approach
typically would require eight full-time professional program
managers and planners. The result is an annual savings of
close to $500,000 in internal labor costs.
Learn more about ICF International’s energy efficiency
and demand side management capabilities.
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