the dramatic growth in demand-side management: too much, too soon?

Bob Wirtshafter is associate director of research at the University of

Pennsylvania's Center for Energy and the Environment and serves as special

consultant to XENERGY Inc. He was an early advocate of DSM and

helped start the solar energy program at the Tennessee Valley Authority.

Over the past two years he has participated in the planning and

evaluation of DSM programs for over 20 utilities. Dr. Wirtshafter has a

Ph.D. in geography from Clark University.

He thanks Les Baxter, Chuck Goldman, Kim Oswald, and Agatha

Andrews for their helpful comments; however the views expressed here are

his own and not those of any reviewer, individual or organization he may be

associated with.

The Dramatic Growth in Demand-Side Management: Too Much,, Too Soon? Utilities and their collaborators advocating DSM are making significant developmental mistakes not unlike those associated with the nuclear indus t ry - that threaten DSM's future. A more controlled research-oriented development strategy for DSM will better ensure its long-term viability.

Robert M Wirtshafter

T he rapid increase in utility demand-side management

(DSM) efforts should be a vindica- tion for early proponents, like this author, who argued the benefits of energy efficiency over contin- ued reliance on centralized generation facilities. Now that many utilities have embarked on aggressive programs, it is appropriate to review the progress being made and directions being taken.

This paper questions the wis- dom of pushing for the fastest possible development of DSM resources. Short-term gains in DSM market share may not be the best way to ensure the long-term via-

bility of the industry. The focus of this paper is not on nuclear and DSM technologies, but instead on the means by which utilities have incorporated them into their integrated resource plans. Despite the dissimilarity of the technologies, there are striking similarities in the way utilities have chosen to promote them.

I. The Nuclear Bandwagon Revisited

In the late '60s and early '70s, nuclear power rose suddenly to dominate utility investment in new generation facilities. Nudear plant orders totaled 1467 MW for

36 The Electricity Journal

the l l -year period 1953-63. Dur-

ing the next five years orders rose to 50,481 MW. At the height of the bandwagon - - from 1969 to 1974 - - 167,071 MW were ordered. After 1974, only 15,232 MW were ordered, with orders dropping to zero in 1979.1

The euphoria surrounding nudear power was short-lived. A

dramatic and complete collapse of the industry soon followed the boom, leaving the utilities sad- died with enormous debt and customers facing high rates. Of

more relevance to the DSM indus- ~ 4 the collapse devastated the nu-

clear industry and destroyed the livelihoods of numerous professionals who chose the promising field for their careers.

S everal authors have ana-

lyzed the reasons for the collapse of the nuclear industry. 2 It is

not the intention of this paper to recount all of these complex and controversial arguments. How-

ever, some of the most important reasons do appear to be relevant to the current course of DSM development. Before discussing

these, however, it is necessary to address the purported and actual dif-

ferences between the developmental paths of the two technologies.

A natural tendency among DSM proponents, when con-

fronted with the proposition that the DSM development pattern is

similar to nuclear's, is to cite differences between the growth of DSM and nuclear power. Four arguments are generally given:

• The current growth in DSM investment is significantly less than

the investments made in nuclear.

• Utilities are not relying on

new DSM resources to the extent some did on nudear.

• DSM investments encompass numerous programs, so the DSM portfolio risk is diversified over a broad range of programs.

• DSM programs have a much quicker delivery time, so results will be known sooner and conec-

tions can be applied to other pro-

grams.

A. Portfolio Share

With the first of these argu-

ments, we are told not to worry Because the growth of DSM investment is not on the same scale as nuclear investment was, DSM,

The rapid growth in DSM is steadily bringing DSM investment closer to the nuclear level.

it is said, will not be vulnerable to the same boom-and-bust experi-

ence. In reality, the rapid growth in DSM is steadily bringing DSM

investment closer to the nuclear

level. The numbers are not easy to compare because nudear re-

quired large commitments spread over a number of years, while

DSM involves year-by-year ex-

penditures. Also, DSM program costs usually exdude customer expenditures, while nudear invest-

ment excludes significant annual

fuel and O&M charges. But keep

in mind that when people envi- sion the large size of past nuclear investment, they are thinking of the final costs and not the costs projected at the time of commitment; projected DSM costs may be underestimated as well.

T hese difficulties aside, the numbers show us that the

gap between nuclear investments

and DSM expenditures is dosing rapidly As Table I illustrates, the cost estimates for nuclear plants begun in 1966 and 1967 during the height of the boom were around $10 billion and $20 billion,

respectively; in 1991 dollars. By contrast, investment in DSM in 1991 was estimated to be approxi- mately $1.64 billion, 3 or 8%-16%

of the highest levels committed to

nudear. This estimate shows a 35% per

year increase in investment over the last few years, but goes on to project only an 8% per year in-

crease from 1992 to 2000. If we use a growth rate midway be-

tween these projections - - say, 16% per year after inflation - - it

takes only until 2003 for the projected DSM investment in a single

year to exceed the total dollars committed to nuclear investment

in 1966. DSM investments account for a

large percentage of the incremen- tal investments in new resources.

For example, Southern California Edison intends to meet 100% of its

new supply needs with DSM through the year 2003. 4

"Aggressive" DSM programs are expected to contribute 25%-

30% of capacity requirements; the

November 1992 37

Table 1: How DSM Expenditures Compare to Nuclear Investment at the Peak of the Bandwagon

Nuclear Investment Committed

Original Cost Estimate of Plants Eventually Completed I

Number of Megawatts Completed Cost per Kilowatt Total Megawatts Ordered Cost Estimate for All Plants Started in Year Inflator to 1991 Approximate Equivalent 1991 $

DMS Expenditures =

1966 1967

$1,994,300,000 $3,328,900,000 13,900 17,980

$143 $185 16,526 26,462

$2,371,064,878 $4,899,296,541 4.20 4.08

$9,967,254,208 $19,978,508,528

1990 1991

$1,200,000,000 $1,640,000,000

1. Nuclear I ~ Plant Activity 1987, Energy Info. Admin., DOE/EIA-0473(87), Table 5. 2. Electric Power Monthly, Apr. 19,19o~, Energy Info. Adrnin., DOE/EIA.O226(92). The ir~ators used are for ~e year the

plant was committed. In 1966 and 1967, intlation was low and not much of a factor in the original eslimates.

"most aggressive" expect DSM to meet 50-75% of their future supply needs?

B. Ease of Withdrawal

One difference between DSM and nuclear that does hold true is the relative ease of withdrawal from DSM commitments. Utili- ties committed to nuclear found it difficult to abandon plants in which they had already heavily invested. With DSM, utilities are much less likely to be forced to continue their commitment should a change of course be indi- cated. A large portion of DSM costs are service oriented and there are few long-term capital ex- penses, so utilities should be able to abandon programs relatively quickly. Ironically, while this greater flexibility and quick lead- time may have benefits for utilities, these same attributes also leave the DSM industry highly vulnerable to erratic commitments.

C. Portfolio Diversity

The argument that DSM investments are diverse, so that failures in parts of a DSM plan may not mean complete failure is not alto- gether valid either. While portfolio diversity exists, many utilities rely on only one or two programs, such as commercial and industrial lighting programs, for the bulk of their savings. New England Elec- tric System's (NEES) Energy Ini- tiative and Small Commercial/In- dustrial Programs in 1991, for example, represent 84% of the annual kWh saved and 83% of the dollars spent. 6

D. Program Delivery Time

Finally, the quicker delivery time and resultant greater opportunity for evaluation and correc- tion of mistakes in DSM programs than in nuclear is only a benefit if this opportunity is taken advantage of. Later, I will discuss essential problems with evaluation and planning processes in the

DSM industry that undercut this supposed benefit.

A second tendency of DSM proponents is to cite the success of existing utility DSM programs as ev- idence of their viability. Proponents point to $50 to $100 million per year programs devel- oped by NEES's and other utilities as proof of the future of DSM. These programs have produced measurable reductions in energy consumption cost-effectively, and have reduced or eliminated the need to build central generating capaci~. Again, this is not the central issue. Just as there are examples of utilities with stellar nudear-plant performance records, there are utilities that will use DSM effectively. But a few promi- nent failures can be ruinous for DSM as well as nuclear. 7 Espe- dally because DSM requires broad public cooperation with planning and implementation processes, its image as an effective approach is critical.

The types of breakdowns that could potentially jeopardize DSM are not limited to a program's total failure to deliver energy or capacity savings. DSM's pros- pects depend very much on its cost relative to other supply alternatives. Under-performance relative to these expectations may be enough to tip the scales away from future utility efforts.

Changes in factors beyond the control of DSM managers may also affect DSM's future. Low oil (and then natural gas) prices in the '80s derailed California's utility DSM programs. The recent experience of New York utilities,


where changes in long-run avoided costs may force the utilities to scale down development plans, illustrates the rocky path DSM must tread. Mature DSM programs may eventually possess more flexibility than other supply options to respond to changing conditions. However, it is not clear that the current development strategy will ensure the for- marion of a healthy and flexible DSM service industry.

T he DSM industry should be concerned about failure.

How well is it positioned to sur- vive failures? Is it doing all that's needed to avoid them? What will happen if in three or four years utilities discover they obtained in- significant savings from programs after hundreds of millions of dollars of investments? There is much to suggest that the current development pattern, while maxi- mizing present growth, may ex- pose the industry to a real risk of ultimate collapse.

In this light, the remainder of this paper explores these questions:

• What are the danger signs in the current DSM growth?

• What can the DSM industry do to ensure its long-term viability?

II. Trouble Signs wi th D S M

The nuclear industry collapsed in large part due to stunning cost escalations and poor operating performance. These problems did not occur suddenly, but were the ultimate result of a failed relationship between the nuclear industry, utilities and regulators. Using the nuclear experience as a

guide, we can see a number of danger signs in the current development of DSM. These indude:

• reliance on a strategic planning process that exploits immediate opportunities rather than emphasizing a viable long-term development strategy;

• rapid growth in implementation of the technology/process, before concrete performance re- suits are available from early program results;

• expansion of scope beyond the current abilities of existing staffing and suppliers, and inadequate training of new personnel; and

• inadequate research and development for alternative approaches.

A. Over-Reliance on Exploiting Immediate Opportunities

In the early '60s, nuclear power dominated supply-side investment. In the late '80s, DSM has as- sumed a dominant supply position. Although on the surface this dominant position may seem ben- eficial to the DSM industry, it may actually lead to greater instability.

The dominance of DSM de- pends on the relative cost advantage DSM holds over other supply options. But the current

integrated resource planning environment is politically charged and subject to volatile shifts in the calculus procedure and the weighting of various factors. As DSM's contribution to an IRP increases, the likelihood increases also that marginally cost-effective programs will swing in or out of the plan. This potential instability makes it difficult for the industry to project a long-term development strategy and to raise capital to meet these long-term objec- tives. This produces a situation of "feast or famine" in which the industry must grab as much as it can while it can.

One DSM practitioner has suggested that that industry would be better off if utilities made a longer-term commitment to a fixed level of DSM contribution, even if that level is lower than what might be suggested under typical utility screening proce- dures. 8 He recommends that utility planning follow the formula used in assembling investment portfolios, in which the portfolio is assembled to control long-term risks through diversification. While DSM may not grow as quickly under this approach, its growth is likely to be more stable.

B. Rapid Growth in Implementation Prior to Performance Results

One characteristic that led to problems in the nuclear industry was the rapid adoption of the technology from utility to utility. The decision to adopt nuclear was generally made on the basis of assumptions used by earlier adopt-

November 1992 39

ers. Over the course of time, each new project fed off the projected costs and performance figures of earlier projects. Unfortunately for all involved, the early assumptions proved to be overly optimistic.

T he problem was exacer- bated by the expansion of

scale. As new utilities entered the market, they - - and industry suppliers and consultants - - used the projected savings from a small research reactor over a short period to justify plants of larger and larger capacity. In the nuclear case, "so-called fourth generation reactors of 1300 MW were being justified and built even though the largest operating unit was only a 190 MW first generation system. "9

A similar trend can be seen in the development of DSM. There are numerous examples of new utility programs with large first, second, and third-year budgets. Several utilities have first-year DSM budgets in excess of $5 million that grow to $20-$70 million within a few years. Even small gas utilities with one- or two-per- son marketing staffs have filed for multi-million dollar programs.

DSM proponents such as the NRDC and the Conservation Law Foundation have enthusiastically endorsed these large start-up budgets. They believe it is critical to jump-start utility efforts, so that utilities will work aggressively and opportunities for efficiency are not lost. The justification for these expenditures comes from engineering assumptions or numbers projected from other utilities. DSM consultants and advocates

pushing to expand DSM's influ- ence are the most frequent source of these numbers.

Making assumptions about fu- ~ r e performance is necessary to evaluate the cost-effectiveness of DSM. Prudent utilities recognize the weakness of their own assumptions and design evaluation strategies to clarify the uncertain- ties surrounding them. The problem arises when we treat the wide acceptance of an assumption as proof of the viability of DSM, and then change the context under

Several utilities have first-year DSM

budgets in excess of $5 million that grow

to $20-$70 million within a few years.

which the original assumption was made. For example, the savings per lamp as determined by a tightly controlled direct-install program may not be achieved in a broader-based rebate coupon program.

This use of assumptions is par- ticularly dangerous when we not only expand the scale, but simul- taneously transfer the assumptions to a new utility. Many of the program components that drive performance levels are utility specific, and seemingly minor differences in program structure, operation, or personnel across utilities

may lead to divergent outcomes. A utility would be wise to design a more cautious development strategy for DSM - - one that in- dudes experiments for testing assumptions prior to making a full commitment to implementation.

Large initial budgets forced on an unprepared utility will at best result in wasted dollars as the utility rushes to meet expenditure requirements. Of greater concern is the possibility that an initial failure will dissuade the utility from ever seriously attempting DSM programs again.

C. Expansion Beyond Current Abilities of Existing Staff and Suppliers

An issue seldom addressed by advocates of DSM is whether DSM can continue to expand at its current rapid rate. To meet the expanding needs of the industry, utilities, consulting groups, service providers, government labo- ratories, and regulators must continue to add to their staffs. The industry has already expanded its workforce. Many of the large con- suiting firms have more than dou- bled their workforce in the last year, and attendance at the major DSM and DSM evaluation confer- ences has increased greatly over previous sessions. If DSM is to expand further, staffing must expand accordingly.

We are already witnessing the consequences of an insufficiently trained and experienced DSM labor force coping with an exces- sively demanding workload. Those with competence are spread very thin, while inexperi-


enced newcomers accept greater responsibility. Consulting firms which should help transfer the expertise from existing utilities to newcomers are also forced to shift responsibility to the less experienced. If implementation permit- ted these newcomers the time and training support their predeces- sors got, an orderly expansion might be possible. But if large programs are thrust upon those with inadequate supervision and training, we should expect to wit- ness a correspondingly higher program failure rate.

I t is important to make a dis- tinction between mistakes

and failures. New undertakings should expect to encounter problems; mistakes will be made. If managers are allowed to learn from their mistakes, good programs can evolve. The problem with many new DSM efforts is that they have become too large too fast. The period in which small mistakes are tolerated is by- passed so that when problems occur they have far greater consequences. Like managers of nuclear construction facilities, managers of large-scale DSM efforts that grow too quickly will find it hard to admit that large costly mistakes have been made. 1° DSM managers will also be less able to correct the problems because the scale of operations magnifies the difficulties. Of greatest concern, the momentum of the operation will make it difficult to overhaul the existing program. Day-to-day crises will prevent the clear identi- fication of an appropriate alternative course of development.

It is also unreasonable to assume that utility personnel switched from other job areas will be immediately comfortable with DSM and will have the vision and training necessary to take responsibility for leading a large-scale effort. The types of services required for a successful DSM program are not similar to those found in most job requirements in a utility company. Those with technical expertise may lack pro-

If large DSM programs are thrust upon those with inadequate supervision and training, we can expect a higher program failure rate.

gram management and customer outreach capabilities. The only employees with any record of reaching out to the customers are in the marketing departments. In many cases, DSM responsibilities are added to existing marketing functions causing conflicting inter- ests and confusion for the employees and their customers.

This lack of resources extends beyond utility personnel. Suppli- ers of products and services must continue to train new employees on the job. Finally, regulators who generally have the least resources for searching, hiring, and

training are expected to set policy and oversee the progress of several different utilities simulta- neously. These impediments are coupled with the current shortage of regulators responsible for DSM. u Even in the most active states there is inadequate staff to monitor existing programs, much less absorb the additional responsibilities required to control cost- recovery and incentive proce- dul~.

In thenuclear boom, the utilities relied on university engineering programs to fill the bulk of job openings. There is no equivalent source of qualified DSM professionals. A DSM program requires a staff with training in a variety of disciplines and a manager who appreciates the interplay of these disciplines. Many of the key planning challenges and day-to-day practical choices depend on the ability to synthesize interdiscipli- nary information. 12 In the end, the best training will be on-the- job. Unfortunately, utility programs which require full operation of multi-million dollar efforts within six months of conception don't allow newcomers to learn the essentials before making critical program decisions.

D. Inadequate R&D for Alternatives

One of the most interesting theo- ries about the demise of nudear power focuses on the process by which "light water" technology emerged as the sole nuclear tech- nolog)a 13 In the '50s, several com- peting technologies were being tested for commercial feasibility.

November1992 41

Because of earlier experience in the nuclear powered Navy, light- water, liquid-cooled reactors were given almost exdusive sponsor- ship by the federal government, since this technology was the far- thest advanced of the possible alternatives.

T he decision to promote light water reactors was made at

the expense of other potential technologies, such as gas-cooled reactors, which were less advanced but thought by many to be a more appropriate technology. This focus on light water occurred even though several experts had serious doubts about the long- term viability of light water. In addition, too much emphasis was concentrated on the technology it- self, and insufficient attention given to the development of an effective infrastructure to manage nuclear plant construction and operation.

Similarly, today's DSM programs are being pushed not for their long-term potential, but rather because programs can deliver measurable energy savings quickly. Most new utility efforts begin with a sc~ening process in which potential energy conservation measures are ranked by their cost-effectiveness to the consumer and the utility. This process iden- tifies those measures for which current expenditures by the utility will translate into the largest dollar savings. In order to achieve large savings quickly these programs are put on a fast track. Of- tentimes, the plans for these programs are copied whole doth from another utility. The empha-

sis then becomes how to get as many of these measures installed as quickly as possible. This emphasis on installations supersedes concerns about program delivery approaches or costs. Yet for new programs it is the latter areas that warrant the greatest attention.

For many of these fast-track programs, cost has not been a pri- mary concern because, even with additional administrative costs, programs still pass the cost/benefit tests. But this attitude is a dangerous one. The nuclear industry began with similar thinking about

the dear advantages of nuclear "too cheap to meter" - - and ended with an environment in which the costs to build a nuclear plant in this country were significantly higher than they were in others. 14

In the DSM industry, for each technology that proves to be cost- effective in the screening process there are many options for program deliveD; yet there are fright- fully few experiments being per- formed to test the various delivery methods) s There are too many examples of utilities beginning multi-million dollar programs with a single delivery approach, selected not on the basis

of careful experimentation and testing, but on the described success of another utility (that may have also failed to research or consider other options).

M any utilities do start new progran~s as a demonstra-

tion or pilot project, but these demonstrations are normally full start-up programs merely re- stricted to a geographic area or a sub-set of eligible customers. Generally, whether started as a demonstration or as a full-scale effort, programs select a single delivery mechanism. Since no alternative approaches are tested, the utility cannot determine how effective the approach is relative to alternatives.

This lack of research is attribut- able to two factors. Among DSM proponents who are pushing hardest to get utilities involved in DSM, many believe that some DSM activities are fully commer- cialized and therefore require min- imal testing before full implementation. Others believe current efforts at evaluation are providing the necessary research and feedback. In the next two sections, I will demonstrate that DSM programs are not easily transferable across utilities and will discuss the inadequacies of the current evaluation process for protecting the long-term viability of DSM. I will also discuss how some of the policy mechanisms set up to encourage utility involvement in DSM have led utilities to adopt re- sponses that maximize short-term return instead of optimizing the long-term DSM performance.


III. Are DSM Programs Transferable?

One of the premises legitimiz- ing the boom of DSM is the belief that programs successful in one utility can be transferred fully to another. One reason for this rapid transfer of programs is the pres- sure exerted by regulators and ad- vocacy groups to adopt programs found to be successful at another utility with similar experience. Unfortunately, those pushing the transfer of programs concentrate on the current status of the prototype utilities and overlook the development process that was needed to achieve that success. To assume that DSM programs can be transported from utility to utility underestimates the com- plexity involved in designing and implementing these efforts.

Let us begin by examining the broadest issue, the overall pace of development. Figure I displays NEES's expenditure level for DSM over the last 13 years. While it's true that NEES now spends $100 a year on DSM, it's also appropriate to note that it has taken 13 years to achieve this level of expenditure. In 1986, when NEES began its collaborative effort with the Conservation Law Founda- tion, NEES had already devoted $19 million and six years to testing various DSM technologies. A1 Destribats, who directed NEES's efforts through this period, concedes that it took NEES an additional four or five years to learn how to deliver DSM programs effectively: 16

Collaborative participants and DSM advocates now pushing

other utilities to emulate NEES's program rapidly and to adopt programs with large early-year budgets overlook NEES's development time and jump too easily to the final result.

T hose who advocate transfer of NEES's programs into

immediate full-scale efforts at other utilities conceive of DSM as a technology that can be transferred easily. Once the bugs are removed from a technology, wide- scale commercialization is nor- really achievable. But for DSM, the transfer of delivery mechanisms is not so straightforward. While there certainly are lessons learned from early utility experi- ences, a DSM programmust develop within a utility service terri- tory. Differences between areas and the decentralized nature of the process requires that links be forged between and among customers, trade allies, utility field representatives, and central utility management and planning staff, to name just a few of the disciplines involved.

To illustrate this point, take the case of NEES's commercial lighting program, which is often used as a prototype for other utilities. Current program design gives an incentive directly to customers who purchase energy-efficient lamps. Before settling on this current approach, NEES offered the rebates to dealers who sold the lamps. During this development period, NEES worked hard to reach trade allies to educate them about efficient lighting and to ensure that it was stocked.

In time, the program came to educate customers, builders, archi- tects, and lighting designers about the benefits of energy-efficient lighting. The transformation of the market for energy-efficient lighting took four to five years to accomplish. Thus when NEES an- nounces a new program approach that redirects the incentive pay- ment, this change reverberates in the relatively mature market it has fostered. Another utility cannot simply copy NEES's current program and expect similar success.

Expenditures on DSM ($ mRIions) 100

80

60

40

20

0 1979-1985 1986 1987 1988 1989 1990 1991

Figure 1: Expenditures on DSM by New England Electric System. Figures for the years 1979- 1985 are the average expenditures per year for that period.

November 1992 43

In a similar manner, Pacific Gas

& Electric has worked for ten years to develop a relationship

with its trade allies within the Electric and Gas Industries Associ-

ation, with the result that PG&E

can deliver DSM programs to resi- dential customers effectively.

All of us who promote DSM

should recognize that it takes rime and effort to change existing mar-

kets. DSM is a decentralized process; the diffusion of the idea is not immediate, and markets are not driven by relative prices alone.

W e seem to be constantly amazed by examples of

incentive programs that place a high-efficiency product at a clear economic advantage over ineffi- cient ones m sometimes to the

point that the high-efficiency product has a cheaper first c o s t - -

yet these programs still fail to cap- ture the market. But accelerated

lighting programs with high incentives do not work if there are

few sto~s selling the products,

few design professional recom-

mending the products and few

customers who know enough to

demand the products. Proponents of DSM, myself in-

cluded, have argued that DSM's shorter lead-time gives it a critical

advantage over centralized power plants. But we need to qualify this assertion, noting that utilities which have established a full de-

livery infrastructure may then find it possible to accelerate the

delivery rate by adjusting incen- rives. Those without the infra-

structure in place may require a long lead-rime to deliver large DSM benefits.

Interestingly, it has been noted

that nuclear power proponents made a similar type of underesti-

marion in projecting the development of commercial light water re-

actors.

...neither Westinghouse nor Gen- eral Electric fully comprehended the truly novel nature of the busi- ness they were entering. The lack of understanding was proba- bly due to everyone's confusion about the relationship between successful prototype operation and successful reactor development. Both companies accepted their previous technical success with submarine propulsion reactors and, later, with the first light

water reactor prototypes as proof that light water reactor technology was "in hand." Both the manufacturers and their customers overlooked the fact that development of commer- cially competitive nuclear technology required.., the establish- ment of entirely new and intricately interrelated industrial processes and services. And it required public acceptanceJ

IV. H o w Cur r en t Cost Recovery and Incentive Methods Encourage the Bandwagon Effect

One factor that contributes to

the accelerating DSM bandwagon

is the cost-recovery and incentive methods now being instituted across the country. These mechanisms are designed to reward utilities for their investment in DSM.

Their implementation has been a major factor in the recent increase in utility involvement in DSM. Because DSM cost recovery is

new, there remain questions re- garding its implementation. The

sum effect of this regulatory uncertainty and other technical con- straints I will note is to cause utilities to take a very short-term

perspective on their DSM activi-

ties.

T he largest uncertainty sur-

rounding cost-recovery and

incentive schemes is their long- term viability. Because the methods are untested, there remains the possibility that the payments will only be temporary or that the method will radically change.

Under these circumstances, some utilities are hesitant to make long-

term commitments to DSM,

though many are willing to cash

in while they can.

There is also a concern about re-

lying on program evaluation to determine savings and n ulti-

mately - - the level of incentives

granted and costs recovered. The assessment of program savings by evaluation occurs after the pro-

gram expenditures have been made. This leaves the utility vul-

nerable to interpretation of evaluation results. As I have noted else-

where, the need to prove program savings shifts the emphasis of

evaluation away from program enhancement towards verifica- rion. TM It also forces utilities to


concentrate their efforts on those programs that can be most easily monitored. This favors direct in- stallation programs over market research and customer education efforts. Evaluation is supposed to protect DSM from nuclear's fate by uncovering problems early and allowing changes to be made. But if too much emphasis is placed on proving past savings instead of monitoring and improving design, process, and management, then managers will not have the feedback necessary to alert them to impending problems.

E ven for those utilities using engineering estimates to cal-

culate savings, too much emphasis is placed on the number of customers reached and savings per customer as the determinants of cost recovery. This emphasis leads utilities to concentrate on those programs that can deliver savings immediately. It specifically penalizes utilities that are williflg to experiment with alternative development schemes. Yet, in the long-term interest of DSM, the early years of a program should be more focused on infrastructure development and less on quick results. Lessons learned from early experiments will eventually lead to healthier programs. Commissions should consider using different criteria for judging the effectiveness of na- scent programs. These might in- clude the successful development of long-range strategic DSM plans, the number of field representatives trained, the number of trade allies enrolled, and the suc-

cess of market research and customer outreach efforts.

V. A Long-Term Posi t ion for D S M

If they have read this far, read- ers may conclude that I support the arguments of the Electricity Consumers Resource Council (ELCON) and others who criticize DSM programs as being im- proper or excessive. TM No doubt those critics will use some of these arguments to try to reduce utility DSM efforts. However, if ELCON and I both come to the same con- clusions, that DSM development

should slow down, we do so for very different reasons, and with very different futures in mind.

Both ELCON and I fear a future in which large expenditures in DSM produce few benefits. ELCON would tighten controls on DSM before the process gets too far out of hand; they want closer scrutiny of dollars spent and greater accountability for costs and benefits by each rate dass. They are also reluctant to provide any incentives to utilities that pursue DSM, and are only willing to pay these incentives

when proof of savings is pro- vided.

My response is virtually the op- posite. I find the DSM industry's concentration on short-term mea- surement of success to be destruc- tive to its long-term viability. The very controls suggested by ELCON fix us more acutely and improperly - - on the short- term.

T he current emphasis on maintaining program cost

effectiveness forces us to consider only those opportunities that are easily achieved and easily evalu- ated. Research and experimentation in various delivery mechanisms is not tolerated because it does not bring immediate returns or even guarantee them eventually. Our limited evaluation dollars are spent on proving that every dollar spent has been justified, and not on improving program deliver~ If DSM is forced to satisfy strict, short-term cost justification, then it will never have the opportunity to develop fully.

On the other hand, I think it is critical for advocates to recognize the real challenges of developing DSM resources. The immediate focus should be on the building of an effective institutional structure. In a general sense, this means de- emphasizing numbers and con- centrating more on process. New programs should be more con- cemed with market research and the testing of alternative delivery mechanisms than with the number of units installed. A slower pace in the beginning will be com- pensated by stronger programs with a better chance of maximiz-

November1992 45

ing DSM's effectiveness in the

long run.

Will DSM follow the pa th of nu-

clear? The actions taken in the

next few years are likely to deter-

mine DSM's ult imate fate. There

will be programs that are success-

ful and that m a y serve as mode l s

for others. However , their success

does not guarantee that DSM's po-

tential will be realized nation-

wide.

The ult imate fate of DSM de-

pends on whether the indust ry

chooses to address its p roblems or

to ride the b a n d w a g o n uncon-

cerned. Utilities and regulators

alike will be quick to j ump off the

DSM b a n d w a g o n if too m a n y pro-

grams fall short of expectations.

p ushing hard for DSM is

good, bu t not so hard that

we lose control of the process b y

which good programs are devel-

oped.

If long-term health is the impor-

tant thing, w e should act accord-

ingly. The real lesson to be

learned from the pro to type DSM

programs such as that at NEES is

that their deve lopment requires

careful planning and manage-

ment, aggressive outreach to

customers and trade allies, and re-

search, evaluation, and reassess-

ment of p rogram direction. These

functions take t ime to deve lop

and perfect. The current b o o m

mentali ty provides neither the

t ime required nor the tolerance to

explore alternative deve lopment

schemes. Those w h o are impa-

tient for DSM to expand more

quickly should consider whether

such an expansion helps or hin-

ders the long-term health of this

very promising resource. •

Endnotes:

1. ENERGY INFO. ADMIN., PROJECTED COSTS OF ELECTRICITY FROM NUCLEAR

AND COAL-FIRED POWER PLANTS 28

(DOE 1986).

2. See, e.g., I.C. Bupp and J. C. Derian, 1978. Light Water: How the Nuclear Dream Dissolved (Basic Books 1978); J. Cook, Nuclear Follies, FORBES, Feb. 11, 1985, at 82-100.

3. Energy Info. Admin., ELECTRIC POWER MONTHLY, Apr. 19, 1992, DOE/EIA-0226(92).

4. So. Cal. Edison Co., Final Resource Case Analysis and Testimony, Docket No. 90-ER-92, Cal. Energy Comm., 1992 Electricity Report Proceedings, June 26, 1992.

5. M. SCHWEITZER, E. HIRST AND L.J. HILL, DEMAND-SIDE IV[ANAGEMENT AND

INTEGRATED RESOURCE PLANNING:

FINDINGS FROM A SURVEY OF 24 ELEC-

TRIC UTILITIES (ORNL-CON 313 Feb. 1991).

6. Most of the measures in both programs (84% for Energy Initiatives) are lighting.

New England Electric System, 1991-92 Demand-Side Management Report.

7. People do not remember the many utilities with nuclear plants that per- form well. They remember instead the many serious cost overruns and delays, the accidents at Three Mile Is- land and Chernobyl, and the abandon- ment of the Zimmer, Marble Hill, and Shoreham plants.

8. Conversation with H. Michaels, XENERGY Inc., Mar. 19, 1992.

9. Conversation with A. Destribats, Synergic Resources Corp., who worked for General Electric's boiling water reactor division during this period.

10. Cook, supra note 2.

11. R.M. Wirtshafter and L.W. Baxter, Establishing Priorities for Future Eval-

uation Efforts (paper presented at 1991 Energy Program Evaluation Con- ference, Chicago, Aug. 1991) at 137-42.

12. Some 62 energy-related graduate programs have been identified, n o n e

of which specifically concentrates on training DSM professionals. In fact it appears that only one course, which I happen to teach, deals directly with the design and evaluation of DSM programs. Therefore, even under the best circumstances, current graduates are hardly ready to assume leadership roles in directing DSM, though many of them are being asked to do so. Short-term training programs such as those offered by EPRI and the Associa- tion of Demand Side Management Pro- fessionals are increasing, but these are effective mostly in training existing utility personnel by introducing the concepts of DSM or by providing additional training on a particular DSM topic.

THE ENERGY FOUNDATION, DIRECTORY

OF ENERGY-RELATED GRADUATE PRO-

GRAMS IN U.S. UNIVERSITIES (1992).

13. Bupp and Derian, supra note 2.

14. Cook, supra note 2 at 82, 100.

15. One notable exception was the Ni- agara Mohawk marketing test of fluo- rescent lighting for small commercial and industrial customers. See J. Clin- ton and A. Goett, High Efficiency Fluo- rescent Lighting Program: An Experiment with Marketing Tech- niques to Reach Commercial and Small Industrial Customers (paper presented at 1989 Energy Program Evalu- ation Conference, Chicago, Aug. 1989) at 93-98.

16. Destribats, supra note 9.

17. Bupp and Derian, supra note 2, at 186.

18. R. M Wirtshafter and R. Obeiter, The Use of Evaluation in Conservation Cost Recovery, (paper presented at 1991 Energy Program Evaluation Con- ference, Chicago, Aug. 1991).

19. See, e.g., J. Anderson, presentation to Am. Pub. Power Ass'n Nat'l Conf., Nashville, Tenn. (June 18, 1991).


the dramatic growth in demand-side management: too much, too soon?

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