KCP&L thermostat program shows how regulatory design can make or break DSM

In the utility's Missouri service territory, its partnership with Nest is going strong. But in Kansas, regulators are wary of the program's costs.

Kansas City Power & Light continues to build on a smart thermostat program in its Missouri service territory, offering hefty customer rebates to attract interest while leaning on the an innovative regulatory framework to make the program pencil out.

However, in its nearby Kansas service territory the utility's efficiency efforts have been more modest, the result of a lengthy debate over how the program's benefits are calculated.

KCP&L partnered with Nest on its "Rush Hour Rewards," aiming to replace 35,000 older one-way devices in the first phase of the program. The utility launched Missouri's first thermostat offering in 2004, but according to Vice President of Public Affairs Chuck Caisley the first gen devices were actually "dumb."

"The old thermostats took too much effort," he told Commissioner Scott Rupp during an episode of the Missouri regulator's Simplifying Energy podcast.

Rupp, who has served on the Public Service Commission since 2014, produces the podcast to inform consumers and simplify complex energy policy issues. (Interestingly, because the commission regulates KCP&L, the first regulated utility to appear on the podcast, a monitor was present during the interview).

Caisley discussed the appeal of Nest's thermostats and some of the reasons behind the programs success. KCP&L was able to roll out more than 8,000 thermostats last year, more than doubling its first year goal and, and was tapped for a Thought Leader award by the Peak Load Management Alliance. 

"Even when they're not sure why they want one, they do," said Caisley. "It's probably because Nest is as much form as it is function.”

There is some irony in the fact that what attracts customers to the device is not what is significant to KCP&L. Caisley said the biggest customer attractions are being able to remotely monitor and control their homes thermostat, "which is really not one of the things that is the most important."

Older programmable thermostats required a hefty amount of work from the user — making changes with the seasons, adjusting for shifting schedules. But Nest “doesn't take the effort," said Caisley. "And that's really where, if you're going to have effective energy efficiency programs, if you're going to have effective smart homes, that's where it's going to be in the future — where you can set it and forget that a computer is optimizing around you with very little effort."

KCP&L offers a a tempting lineup of incentives to attract customers to the program. The thermostat is free, participation is worth an annual $25 bill credit, and then there are energy savings. And if customers can install the thermostat themselves, it's another $50.

That may seem like a lot, but the program has been rolled out under the Missouri Energy Efficiency Investment Act (MEEIA) which allowed the utility to recover its investment by accounting for multiple value streams beginning in 2014.

“If you can reduce usage, if you can schedule a little bit and collectively reduce usage, what we can do is push out the need to build additional plants," said Caisley. "We can push out the need to build additional electric infrastructure."

The thermosat program is "cheaper than if we had to go out and build a natural gas peaking plant," he said. "Everybody benefits."

Kansas advocate skeptical of efficiency costs

Last year, KCP&L proposed rolling out similar demand-side management programs and cost recovery options in its Kansas territory, but so far has been rebuffed. The Kansas Corporation Commission took comment on the proposal last month, and is preparing to make a decision.

“The regulatory framework in Missouri is a little unique," said Jeff Hamel, who heads up energy partnerships for Nest. The company has partnered with 100 utilities in some form, and has been working with KCP&L for two years now. 

Missouri's structure "allows them to capitalize on both the kW — the capacity value delivered through the Nest thermostat — as well as the kWh energy efficiency value," he told Utility Dive. "Because of that, it allows Missouri utilities to develop programs such as this."

The structure Kansas regulators are considering is a direct spinoff of the MEEIA initiative. 

"We're hoping to bring same framework over to Kansas," Hamel said. "Fingers crossed — we're really hopeful the KCC will approve that," he said, which would allow the utility to offer more efficiency programs in the state.

In Missouri, KCP&L accounts for 1.2 kW of capacity value from each thermostat it installs, he said, along with adjusting for 400 kWh in anticipated savings. 

"Those two value streams allow the economics to work out," said Hamel. But in Kansas, the program remains stalled.

That's because consumer advocates say the efficiency programs are not cost-effective, and therefore do not qualify for approval under the Kansas Energy Efficiency Investment Act (KEEIA), a mirror of the enabling legislation in Missouri.

"The calculation of avoided capacity costs vastly affects the issue of whether or not the KCP&L [energy efficiency] programs are cost-effective," the Citizens' Utility Ratepayer Board said in testimony filed last month. "Thus, the proper calculation of avoided capacity costs is vital to the protection of ratepayers from [efficiency] programs which are not cost-effective."

CURB said it opposed the initial proposal of KEEIA recovery because the program's are not affordable and the utility "affords no ground for reasonable compromise."

While the actual numbers are confidential, CURB said the differences between the parties' avoided capacity cost
calculations are "vast," and called on regulators to reject the proposal in its entirety in order to restart negotiations between the utility and customer advocates.

But Hamel said the MEEIA and KEEIA structures are similar to work being done in New York and in California to overhaul utility business models and revenue opportunities.

"Right now there is a lot of attention and energy going into helping regulatory frameworks catch up to technology and customer purchase patterns," said Hamel. "The MEEIA framework is a great example … a lot of regulatory frameworks only allow the utility to capture just energy efficiency or just capacity."

Declining capacity values create a challenge for DSM

Much has been made of PJM Interconnection's auction results last month, which broadly showed a decline in the cost of capacity and the difficulty of demand side management programs to participate under new rules. RTO-wide capacity cleared at about $76.50/MW-day, about a 25% decline from the previous auction — though higher in more populated and constrained areas. 

There are any number of factors pushing the broad wholesale market dynamic, Hamel said, but "generally the industry is becoming long on energy." That could create difficulties for efficiency and demand response providers, who are seeing system inefficiencies slowly drained from the market. But on the whole, it also marks a positive change.

"There are some very positive things driving the wholesale energy market situation," said Hamel. "Building codes really work," he said, pointing to increased efficiency standards for new-start construction and the growth of connected homes.

"The value of capacity may be lessening over time as we remain fairly energy long," he said, but "there's a ton of factors that go into that. And we're growing our demand response business very heavily."

Much of that is because the industry is focused on utility partnerships, a trend which has been growing for a couple of years now, Hamel said. Power companies are transitioning from older legacy systems, like KCP&L's one-way thermostats, to third-party systems which leverage big data and cloud computing.

"Partnering is the name of the game today .... our core focus is technology and customer experience," said Hamel. "But there are benefits the utility can leverage, like those kWh savings and peak capacity reductions, and it's the ultimate win-win."

"You can design the world's best program, but if you can't convert and deliver it, it's useless," he said.

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Filed Under: Efficiency & Demand Response Regulation & Policy
Top image credit: Nest