ESTIMATION OF AVOIDED COSTS FOR ELECTRIC UTILITY DEMAND-SIDE PLANNING

Avoided costs originated with federal laws designed to encourage renew able energy and small power production. When estimated properly, they provide an unbundled characterization of the short- and long-run cost structure of a utility. We review current practices for estimating avo ided costs for use in electric utility demand-side management (DSM) re source planning. For large DSM resource options, using avoided costs t o estimate value is more accurate than using short-run marginal costs; avoided costs are simpler to use than traditional supply planning met hods. We describe various administrative approaches for estimating avo ided power generation costs and discuss modeling issues that arise in the estimation process. We also discuss emerging, market-based approac hes for estimating avoided costs and describe current estimation pract ices for the additional, often substantial, non-generation-related cos ts avoided by DSM programs. Finally, we discuss special considerations in using avoided costs to estimate the system value of DSM.