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# CONSERVATION SUPPLY CURVES

The cost of conserved energy (CCE) and its extension, supply curves of conserved energy, are useful tools for investigating the technical potential and economics of energy conservation measures. The CCE is an investment metric that is well suited for analysis of energy conservation investments, and the supply curve approach provides a bookkeeping framework that is ideal for diverse conservation investments. Several people, including Amory Lovins, John Sawhill, and Arthur Rosenfeld, independently developed the general approach in the late 1970s. However, Alan Meier, along with Janice Wright and Arthur Rosenfeld, systematized the concepts and procedures in the early 1980s. This article introduces the cost of conserved energy and supply curves of conserved energy, and explains their application to energy-efficiency issues.

## THE COST OF CONSERVED ENERGY

Energy conservation typically involves making an investment that results in lower energy running costs. An investor (or policymaker) is often confronted with a list of possible conservation measures. The investor needs a way to rank the measures and then decide which are worth undertaking. He or she ranks the measures with the help of an investment metric, such as the simple payback time, the benefit-cost ratio, or return on investment. The investment metric provides a means of ranking the opportunities, and then separates the attractive investments from those in which the money would be better invested elsewhere.

Each investment metric has strengths and limitations. For example, the simple payback time indicates the time required to recover the investment, but it ignores any benefits that may occur after the payback time, so measures offering many years of benefits appear no better than short-lived ones. A common drawback of these investment metrics is that the price of energy must be assumed. If the energy price changes, then the payback time must be recalculated.

The CCE spreads the investment over the lifetime of the measure into equal annual payments with the familiar capital recovery factor. The annual payment is then divided by the annual energy savings to yield a cost of saving a unit of energy. It is calculated using the following formula: where I is the investment or cost of the measure; ΔE is the energy savings (per year); d is the real discount rate; n is lifetime of measure.

The CCE is expressed in the same units as the cost and the energy savings. For example, if the investment is entered in dollars and the savings are in gigajoules (GJ), then the CCE will have the units \$/GJ.

For example a consumer wishes to buy a new refrigerator. The high-efficiency model (offering services identical to the standard model) costs \$60 more but uses 400 kWh/year less electricity. The consumer expects to keep the refrigerator for ten years and has a discount rate of 5 percent. The cost of conserved energy in this case is calculated as follows: Here of the cost of conserving a kilowatt hour is much less than the typical residential electricity price \$0.08/kWh.

A collection of conservation measures can be ranked by increasing CCE. The measures with the lowest CCE are the most economically attractive. A measure is cost-effective if its cost of conserved energy is less than the price of the energy it displaces. For example, if a lighting retrofit has a CCE of 3 cents/kWh, then it will be worth doing wherever the electricity tariffs are above 3 cents/kWh. Note that the price of energy does not enter into the CCE calculation, only the decision about economic worthiness.

## SUPPLY CURVES OF CONSERVED ENERGY

A supply curve of conserved energy is a devices for displaying the cumulative impact of a sequence of conservation measures. It shows the potential energy savings and CCE of each measure. Figure 1 is an example of a supply curve of conserved electricity for a commercial refrigerator. Each step represents a conservation measure. The step's width is its energy savings and the height is its cost of conserved energy.

The supply curve is useful because it shows which measures should be selected first—the ones on the left—and the cumulative energy savings. Measures with CCEs less than the price of the saved energy are cost-effective. In the example, an energy price line has been drawn to show the cut off point; those measures below the energy price line are cost-effective.

Behind the supply curve approach is a consistent bookkeeping framework. The same data for each conservation measure must be collected and the same CCE calculation performed. This encourages comparison among measures and is important when trying to assess the overall impact of many small measures. Consistent treatment also permits generalizations about the impact of alternative sequences of measures and errors in estimates of energy savings, and minimizes double-counting of energy savings. For example, if a measure is implemented before its position in the sequence shown on the curve, then the energy savings will equal or exceed those indicated, and the CCE will be lower than in the original calculation. These features make the overall approach and results more robust even when some numbers are not accurately known.

The supply curve of conserved energy is useful when trading off the benefits of additional supply against reduced demand through energy conservation, such as homes operating on photovoltaic power systems. There, the costs of supplying additional electricity can easily be compared to the costs of reducing electricity demand because both are expressed in same units, that is, cents/kWh. The economically optimal system will occur when the costs of supply and conservation are equal.

## MACRO SUPPLY CURVES OF CONSERVED ENERGY

Figure 1 depicts a micro supply curve of conserved electricity for a single device; however, it is also useful to make macro supply curves of conserved energy, showing the potential cost and energy savings from widespread installation of conservation measures. Figure 2 shows an example of a supply curve of conserved electricity for the U.S. residential sector. Again, each step represents a conservation measure, but here the savings apply to the entire stock rather than to a single unit. This figure shows the technical potential and should not be confused with a forecast.

These aggregated, or macro, curves are especially useful for policymakers because they show the potential tradeoffs between energy conservation policies and investments in new supplies. This is otherwise difficult because most energy conservation measures are small, highly dispersed, and cannot be instantly undertaken, while energy supplies (such as power plants) typically appear in a few large units.

Consistent bookkeeping is also an important feature of the macro supply curve of conserved energy. Each measure requires, in addition to the data used to calculate the CCE data on the stocks of equipment, turnover rates, etc. The consistent inputs encourage confidence in comparisons among measures and in their cumulative impacts.

## LIMITATIONS OF THE CCE AND SUPPLY CURVES

Some conservation measures do not easily fit into the form of an initial investment followed by a stream of energy savings because there will be other costs and benefits occurring during the measure's operating life. Furthermore, it is difficult to incorporate peak power benefits into the CCE approach. In these situations, a more precise analysis will be necessary. However, the CCE and supply curve approaches provide first-order identifications of cost-effective conservation, those measures that should be implemented first, and the overall size of the conservation resource.

Alan K. Meier Arthur H. Rosenfeld

## BIBLIOGRAPHY

American Council for an Energy-Efficient Economy. (1986). Residential Conservation Power Plant Study. Washington, DC: ACEEE.

Hunn, B. D.; Baughman. M. L.; Silver, S. C.; et al. (1986). Technical Potential for Electrical Energy Conservation and Peak Demand Reduction in Texas Buildings. Austin, TX: Center for Energy Studies, University of Texas.

Interlaboratory Working Group. (1997). Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy-Efficient and Low-Carbon Technologies by 2010 and Beyond. ORNL-444. Oak Ridge, TN: Oak Ridge National Laboratory.

Meier, A. K. (1982). "Supply Curves of Conserved Energy." Ph.D. diss. University of California, Berkeley.

Meier, A. K. (1983). "What is the Cost to You of Conserving Energy?" Harvard Business Review 61(1):36–38.

Meier, A. K.; Wright, J.; and Rosenfeld, A. H. (1983). Supplying Energy Through Greater Efficiency. Berkeley, CA: University of California Press.

Panel on Policy Implications of Greenhouse Warming of the National Academy of Sciences. (1992). Policy Implications of Greenhouse Warming: Mitigation, Adaptation, and the Science Base. Washington, DC: National Academy Press.

Ruegg, R. T., and Marshall, H. E. (1990). Building Economics: Theory and Practice. New York: Van Nostrand Reinhold.