Budget Freeze for Natural Gas Conservation: Who Will Pick Up the Cheque?

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In June, 2011, the ECO released volume 1 of its 2010 Annual Report on the progress of activities in Ontario to reduce or make more efficient use of electricity, natural gas, propane, oil and transportation fuels. Click here for more information on this report, including videos and communications materials.



The OEB Determination

On March 29, 2011, as part of its review of guidelines dealing with the conservation activities of natural gas distributors (case #EB-2008-0346), the OEB issued a letter stating that the demand-side management (DSM), another term for conservation, budgets for Ontario’s natural gas utilities would be limited to their existing levels for the next three years. This decision was somewhat surprising, as Board staff had recommended an increase in conservation spending that would more than double Enbridge Gas Distribution’s DSM budget and increase Union Gas’ DSM budget by more than 50 per cent by 2014, relative to 2011 spending levels.[1] In addition, both utilities had expressed support for an increase in DSM spending[2] and the Minister of Energy had urged the Board to “consider expanding both low-income and general natural gas DSM…efforts relative to previous years.”[3]

The Board based its decision to freeze gas utility DSM budgets on several arguments.

  • A more mature consumer market, with public and private entities providing energy efficient products and services, has led to consumers implementing conservation measures without the need for taxpayer or ratepayer funded incentives or programs. The availability of ratepayer-funded DSM programs may discourage market-driven activities.
  • Higher minimum efficiency standards and the high penetration of traditional DSM measures mean that much of the “lowhanging fruit” for conservation programs has been picked. DSM programs were originally intended to achieve gas savings above what would naturally result from market forces and higher efficiency standards. Future savings will be more expensive to achieve.
  • The justification for cross-subsidies (transferring funds from non-participants to participants in conservation programs) to fund DSM is eroding. To achieve savings, future conservation efforts may need to focus on deep measures, such as wholehouse retrofits that will have a higher unit cost, which increases the risk of cross-subsidization.
  • The federal and provincial withdrawal from deep measure programs such as the Home Energy Savings Program “should signal a cautionary approach in considering a significant expansion of ratepayer funded deep DSM programs.”[4]

The Board also commented that “to the extent non-market support continues to be required for these [DSM] services beyond that available from the current level of ratepayer funding, the Board believes that alternative sources of funding would be more appropriate,”[5] an apparent suggestion that taxpayer funding from government would be preferable.

At the same time that the Board announced its decision on budget levels, it invited comments on a number of other issues related to the natural gas DSM framework. The ECO will review these issues in a future report. However, given the importance of the budget to the success of any conservation efforts, the ECO believes it appropriate to make some observations on the Board’s arguments on this issue now.

ECO Comment

Given that the ECO has previously stated support for the expansion of conservation spending by gas utilities,[6] it is not surprising that the ECO is disappointed in the Board’s decision. The ECO believes that the freeze in gas utility DSM budgets will have a detrimental impact, reducing conservation investment in Ontario below societally optimal levels.

It is worth examining each of the key arguments the Board provided for its decision.

Consumers are implementing conservation measures without incentives. It is certainly true that the marketplace for energy efficiency and conservation products is more robust than it was a decade ago. This is good news. However, the savings that consumers receive from conservation investments (in the form of reduced natural gas costs) do not reflect the full value of conservation. The avoided system cost (i.e., the marginal cost) from saving a unit of gas is greater than the average cost. This is referred to as the system benefit, which lowers bills for all ratepayers because gas transportation and storage costs are lower, and consumers undertaking conservation investments are not credited for this benefit or for the environmental benefit of avoiding GHG emissions. Therefore, from a purely economic perspective, if supporting incentives are not provided, consumers will not invest in conservation to the societally optimal level. In the absence of pricing changes to correct this issue, financial incentives to consumers for conservation serve a necessary purpose.

The cheap and easy conservation savings are gone. Again, partially true, particularly for long-standing gas DSM programs such as low-flow showerheads that are close to full market penetration. However, as the ECO has previously noted, gas utility conservation programs in 2007 to 2009 delivered between 7 and 14 dollars in net benefits for every utility dollar spent.[7] Gas utilities are far from being unable to find cost-effective energy conservation investments.

Conservation programs transfer income from non-participants to participants. True, however, the rules of utility conservation funding minimize the amount of this income transfer and also enable broad participation of ratepayers in conservation initiatives.[8] Also, as noted above, all utility customers including non-participants benefit from conservation through lower system costs.

The government’s exit from funding conservation programs suggests that these programs were failures. This is perhaps the easiest argument to refute. The Minister’s letter to the OEB urging an increase in conservation spending suggests an alternative explanation – that a cash-strapped government was hoping to transfer some of the costs of conservation from taxpayers to ratepayers, by having gas utilities offer some of the features of the cancelled government programs. This explanation is consistent with an earlier action by the government. Prior to ending funding for government conservation programs, the Ministry of Energy and Infrastructure passed a regulation (O. Reg. 66/10, made under the Ontario Energy Board Act, 1998) to recover $54 million in costs for government conservation programs from electricity ratepayers.[9] A similar regulation was under consideration for natural gas ratepayers, but was never finalized.

On the issue of whether taxpayers or gas utility ratepayers should fund conservation, there are arguments on both sides. To the degree that conservation programs partially internalize the environmental costs of fossil fuel consumption and also avoid system costs, it makes sense for ratepayers to pay. In cases where there are large-scale monetary transfers that may exceed the system value of the conservation savings (e.g., fully-funded deep measure low-income programs), or where conservation programming is experimental in nature (e.g., research & development, pilot programs), it may make sense for government to play a funding role.

What is clear, however, is that the decisions of both the government and the OEB to restrict conservation spending and hope that the gap will be filled by the other party have the consequence of hurting the public good. Given that direct use of natural gas comprises a much larger share of Ontario’s final energy consumption and GHG emissions than electricity does,[10] the systematic underfunding of natural gas conservation is perverse. Someone needs to step up to the plate.

The ECO recommends that the Ministry of Energy clarify the appropriate roles of the government and gas utilities in funding natural gas conservation, with the goal of increasing overall funding.

References

  1. ↑ Ontario Energy Board, EB-2008-0346 Staff Discussion Paper On Revised Draft Demand Side Management Guidelines for Natural Gas Utilities (2011), 47 (budget levels), 50 (recommendation). Board staff ’s recommendation was that budget levels should increase by 2014 to approximately 6 per cent of regulated utility revenues less the cost of purchased gas.
  2. ↑ Enbridge Gas Distribution Inc., 2012 DSM Framework Development Response to the Report of Concentric Energy Advisors, Review of Demand Side Management (DSM) Framework for Natural Gas Distributors, and Response to the Report of the Pacific Economics Group, “Top Down” Estimation of DSM Program Impacts on Natural Gas Usage (2010), 19. Union Gas, Re: EB-2008-0346 – Union’s Comments on the “Review of the DSM Framework for Natural Gas Distributors” Report (2010), 15. Both utilities had suggested an increase slightly less than recommended by Board staff, to 4-6% of regulated utility revenues less the cost of purchased gas.
  3. ↑ Minister of Energy Brad Duguid, letter (untitled) to Chair of the Ontario Energy Board Howard Weston, July 5, 2010.
  4. ↑ Ontario Energy Board, letter, March 29, 2011. “Re: Demand Side Management (“DSM”) Guidelines for Natural Gas Utilities (EB-2008-0346); Issues for Further Comment”, 4.
  5. ↑ Ontario Energy Board, letter, March 29, 2011. “Re: Demand Side Management (“DSM”) Guidelines for Natural Gas Utilities (EB-2008-0346); Issues for Further Comment”, 5.
  6. ↑ Environmental Commissioner of Ontario, Annual Energy Conservation Progress Report – 2009 (Volume Two): Re-thinking Energy Conservation in Ontario – Results (Toronto, Ontario: 2010), 2.
  7. ↑ Environmental Commissioner of Ontario, Annual Energy Conservation Progress Report – 2009 (Volume Two): Re-thinking Energy Conservation in Ontario – Results (Toronto, Ontario: 2010), 38.
  8. ↑ Utilities are required to offer conservation programs to all customer classes, and the funds spent on conservation programs offered to a class are taken only from ratepayers in that rate class. In addition, most conservation programs only fund a percentage of total costs (the major exception being low-income programs), with participants paying for the remainder.
  9. ↑ The Consumers’ Council of Canada and Audrey LeBlanc have asked the Ontario Energy Board to cancel this charge, on the grounds that it is in fact an indirect tax that is unconstitutional in nature. The case is currently before the Board (EB-2010-0184).
  10. ↑ Environmental Commissioner of Ontario, Annual Energy Conservation Progress Report – 2009 (Volume One): Rethinking Energy Conservation in Ontario (Toronto, Ontario: 2010), 56.



Citing This Article:
Environmental Commissioner of Ontario. 2010. Annual Energy Conservation Progress Report, 2010 (Volume One): Managing a Complex Energy System. Toronto, ON : Environmental Commissioner of Ontario. pp. 39-42

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