All demand-side resources (energy efficiency, demand response, and distributed generation) undergo a cost-effectiveness analysis. While the specific tests and the applications of those tests varies among the resources, the foundation of cost-effectiveness analysis for all demand-side resources is based in the Standard Practice Manual.

Standard Practice Manual 

The Standard Practice Manual contains the Commission’s method of evaluating energy saving investments using various cost-effectiveness tests. The four tests described in the Standard Practice Manual (i.e., the Total Resource Cost (TRC), Program Administrator Cost (PAC), Ratepayer Impact Measure (RIM), and Participant Cost Test (PCT)) assess the costs and benefits of demand-side resource programs from different stakeholder perspectives, including participants and non-participants.


The Energy Efficiency Policy Manual requires that the energy efficiency portfolio as a whole has higher benefits than costs for both the TRC and PAC tests. The Standard Practice Manual defines the TRC test as the measurement of the net benefits and costs that accrue to society, which is defined as a program administrator (usually a utility) and all of its customers. It compares the benefits, which are the avoided cost of generating electricity and supplying natural gas, with the total costs, which include program administration and customer costs. The TRC does not include the costs of incentives. On the other hand, the PAC test does not include the costs incurred by participating customers but does include incentives paid to participating customers. The PAC test measures the benefits and costs that accrue to the program administrator, which is usually, but not always, the utility.

Avoided Cost Update

The primary benefits of demand-side resources are the avoided costs related to generation and distribution of energy from conventional power plants and natural gas lines. The avoided costs of electricity are modeled based on the following components: generation energy, generation capacity, ancillary services, transmission and distribution capacity, environment (i.e., avoided greenhouse gases), and avoided renewable portfolio standard. The avoided cost model is periodically updated to improve the accuracy of how benefits of demand-side resources are calculated. The most recent update was completed in 2011.


 In 2005, Energy + Environmental Economics (E3) developed the Avoided Cost Calculator to model the avoided costs of energy saved in energy efficiency programs. The Avoided Cost Calculator can be downloaded here.

The E3 Calculator

The “E3 Calculator” is an Excel-based tool used by all California investor-owned utilities to compute the cost-effectiveness of demand-side programs. Inputs to the E3 Calculator include the energy savings and costs of each measure proposed in a demand-side program, the anticipated installation rate of each measure, and costs related to program administration and implementation. The avoided cost model is built into the E3 Calculator such that the outputs of the E3 Calculator include the anticipated energy savings, emission reductions, and the TRC, PAC, and RIM test results


The utilities’ cost-effectiveness calculators can be downloaded here.

Updates to the Cost Effectiveness Framework

The CPUC Energy Division is currently working on updating the cost-effectiveness framework to ensure that costs and benefits of demand-side resources are accurately captured. To accomplish this task, the Energy Division is holding a series of workshops and seeking stakeholder input to determine which modifications are most important to adopt in the cost-effectiveness framework. This effort is considering the following topics:

  • All Demand-side resources: Addresses inputs to cost-effectiveness analysis that are common to all demand-side resources. Workshops were held on June 28 and 29, 2012 (see below) to discuss the cost-effectiveness framework as it applies to all demand-side resources.
  • Energy Efficiency – Addresses the cost-effectiveness framework for energy efficiency resources. A workshop was held on September 9, 2012 to address this topic (see materials below).
  •  Demand Response – Addresses the cost-effectiveness framework outlined in the 2010 Demand Response Cost-Effectiveness Protocols. A workshop was held on October 19, 2012 to address this topic (see link below).
  • Low Income – Addresses the cost-effectiveness framework for energy efficiency programs in the Energy Savings Assistance Program (ESAP).
  • Permanent Load Shifting – Permanent Load Shifting programs are currently under development. On September 18, 2012, Energy Division held a workshop to discuss Permanent Load Shifting program design, which included a discussion of the cost-effectiveness framework. Energy Division is working on tailoring the cost-effectiveness framework to account for the costs and benefits specific to permanent load shifting programs.
  • Net Energy Metering/Distributed Generation – A Cost-Benefit Study is currently underway to assess the impacts related to net energy metering. The study is focused on the ratepayer impacts of net energy metering rather than on whether or not the cost-effectiveness framework should be modified to assess net energy metering/distributed generation resources.