Electric Utility Integrated Resource Planning (IRP)

Copyright © 2014 The Brattle Group, Inc.

ELECTRIC UTILITY INTEGRATED RESOURCE PLAN (IRP)Demand-Side Resources

THAI ENERGY REGULATORY COMMISSION, OERC, AND UTILITIES DELEGATIONBoston, Massachusetts

ROMKAEW BROEHMMARIKO GERONIMO

Ju ly 16 , 2014

PRESENTED TO

PRESENTED BY

Thai Energy Regulatory Commission

Confidential—Not for Public Distribution| brattle.com1

Agenda  Purpose and Process of Integrated Resource Planning (IRP)

 Modeling Demand‐Side Resources in IRPs▀ PacifiCorp Case Study▀ Connecticut Case Study

Note: This presentation reflects the thoughts and observations of the authors alone, and does not necessarily represent those of The Brattle Group or its clients.



Purpose of IRP An IRP is a utility long‐term plan, with a focus on meeting forecasted annual peak and energy demand, plus planning reserve margin through existing and planned mix of resources

▀ Supply‐side resources ▀ Demand‐side resources▀ Transmission

 Utility has an obligation to its ratepayers to minimize its system cost

▀ Evaluate and balance the expected cost, risk of candidate portfolios, and long‐run public policy goals to choose the portfolio with the best cost‐risk combination



IRP Process

Load Forecast

Identify Goals Existing Resources

Need for New Resources

SocialEnvironmental

Factors

Define Suitable Resource Mixes

UncertaintyAnalysis

Public Review/PUC Approval

Monitor Acquire Resources Action Plans

Power PricesPower Prices

Supply Demand T&D Rates Fuel PricesFuel Prices



Existing IRP Requirements  IRP requirements vary by state. But the plan is generally required to:

▀ Identify and evaluate all existing and new resource options to meet policy objectives, including renewable portfolio standards, distributed generation, energy efficiency requirements

▀ Address costs for compliance with current and projected environment regulations and electricity market conditions

▀ Lay out the method and assumptions for assessing potential resources▀ Identify and assess risks of key drivers, such as load forecasts, costs of demand‐side management measures and power supply, and fuel prices

▀ Explain the procedures for soliciting public comments



IRP Modeling Approach▀ Planners cannot assume a single long‐run equilibrium condition ▀ They must understand key drivers and explore potential turning points for shifts in an outlook that could alter preferred technology so that they could manage expectations

▀ To choose the best portfolio plan, uncertainty in input assumptions must be tested with a range possible high and low cases



Modeling Demand-Side Resources in IRP  For most utilities, demand‐side resources are included only up to the point that statutory goals are met

▀ Two methods have been used by utilities when incorporating demand response and energy efficiency in IRPs

Create supply curves by type of demand‐side resources so that they can be modeled against competing supply alternatives—PacifiCorp IRP

Make adjustments (reductions) to their load forecasts—Connecticut IRP



PacifiCorp Case Study



PacifiCorp 2013 IRP Case Study  PacifiCorp (PAC) is a utility in Pacific Northwest of the U.S.

▀ It operates across six states—Oregon, Washington, California, Idaho, Utah, and Wyoming

▀ PAC’s 2013 IRP is a 20‐year plan but focuses on a 10‐year outlook▀ PAC projects capacity needs, starting in 2013



PacifiCorp's 2013 IRP Resource Option  PAC assesses a wide variety of resource options, including interruptible load (Class 1), EE (Class 2), and DR (Class 3)

▀ 19 scenarios were applied across five different transmission scenarios, yielding 94 different variations of resource portfolios



Supply Curves of Demand-Side Resources  PAC developed a demand‐side resource supply curve▀ Resource quantity available in each year (MW)

▀ Resource daily and seasonal energy limits (MWh)

▀ Levelized resource costs ($/kW‐year)− Class 2 DSM resource costs were

levelized using utility costs (incentive and non‐incentive program costs) instead of total resource costs

− Classify Class 2 into bundles, using ranges of levelized costs to reduce the number to a more manageable level PAC created 27 cost bundles for its Class 2

DSM

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

0 20 40 60 80 100 120 140

Levelized

Cost ($/kW

‐Year)

Cummulative MW

Illustrative Supply Curve of Demand‐Side Resources

Supply Curve of DSM Resources



PacifiCorp’s Preferred Portfolio  PAC’s IRP outcome is to focus on accelerating acquisition of cost effective DSM measures to mitigate price risks from purchase power



Connecticut Case Study



Regulatory and Market Framework  Connecticut is a “deregulated” state with dense population centers▀ Relatively strict separation of transmission and

generation; retail customers can choose wholesale power provider (with restrictions)

▀ With Massachusetts, largest load among six New England states

  The state is a leader in EE policies▀ Ranked #5 in national study (2013 AAEE

scorecard)

  The state is part of a regional marketplace▀ Member of ISO‐NE

− Independent system operator− Administrator of energy, ancillary service, and

capacity markets▀ Regional renewables marketplace▀ Regional Greenhouse Gas Initiative (CO2 cap‐

and‐trade system)▀ Natural gas‐dominated electricity supply, with

the highest gas prices in the countrySource: Federal Energy Regulatory Commission, North American Regional Transmission Organizations, http://www.ferc.gov/market‐oversight/mkt‐electric/overview/elec‐ovr‐rto‐map.pdf, updated February 3, 2014.

Source: U.S. Energy Information Administration, Status of Electricity Restructuring by State, http://www.eia.gov/electricity/policies/restructuring/restructure_elect.html, as of September 2010.



Regulatory Construct for Evaluating and Implementing New Energy Efficiency

▀ Connecticut’s IRP focuses on “ratepayer‐funded” electric EE− Separately, utilities must submit 3‐year electric Conservation and Load

Management (C&LM) Plans; the regulator (DEEP) has the authority to review, approve, modify, or reject EE must be “cost‐effective” (benefit > cost) DEEP approved the 2013‐2015 Electric and Natural Gas C&LM Plan

• ~$180MM annual electric budget, recovered through up to $0.006/kWh conservation charge on retail rates, outcome of 2012 IRP

• Does not include direct customer costs• Prior C&LM plan was an input to the 2012 IRP’s Base Case

− Periodic EE potential studies identify additional cost‐effective measures to achieve deeper levels of savings Potential study is an input to the IRP’s evaluation of EE resource strategy

▀ Other EE is also important (but not the focus of this case study)− Includes other state and federal programs, building codes and appliance standards− Accounts for a significant share of “total” EE



Objectives and Process▀ Purpose is to develop resource strategies consistent with policy objectives− 10‐yr Base Case outlook on markets− Identify resource requirements and

needs under different scenarios; analyze a variety of related policy issues

− Evaluate resource solutions

▀ Collaborative effort among DEEP, electric utilities, stakeholders, and Brattle− Brattle is currently working on its 5th

consecutive IRP with the state− Ultimately a DEEP product, providing

policy direction for the state



Future Projections Considered  Base Case  Projection of known market trends and regulations, “business as usual”

 Market Scenarios  Projection of alternative futures given uncontrollable market uncertainties

▀ High gas prices

▀ Low gas prices

▀ Tight supply conditions

▀ Abundant supply conditions

  Resource Strategies  Projection of controllable but currently unplanned resource development; see impact on Base Case and Market Scenarios

▀ Expanded energy efficiency programs

▀ More renewables development for Renewables Portfolio Standards (RPS)

▀ New “cost of service” conventional gas‐fired generation

  Each resource strategy is evaluated within the Base Case and each market scenario▀ Years 3, 5, and 10 are studied in detail (evaluated

years 2015, 2017, and 2022 for the 2012 IRP)▀ Can lead to a large number of cases in the IRP

modeling system: 3 strategies x 5 scenarios (including Base Case) x 3 study years = 45 cases



1. Develop Base Case10‐year outlook on future market

fundamentals and planned resources

Outlook on: Energy market Capacity market Supply and market for renewables

2. Identify Needsfor new

unplanned resources

3. Evaluate Resource Solutionsto meet needs

Impact on: Generation economics and market prices Customer retail rates Electric Sector emissions

EE Assumptions in Modeling Framework

Projected savings from new EE programs

(MW and MWh)

ISO‐NE forecast of electricity consumption assuming no new EE(MW and MWh)

Analysis of key market risks

Alternative outlooks under

Market Scenarios

Additional achievable

cost‐effective EE

New renewables

New conventional generation

EE potential study

Utility analysis for Conservation &

Load Management Plan



Modeling DR  In the IRP cases, wholesale demand response (DR) is modeled “supply side”

▀ Planned DR, based on capacity market results (3 years forward), then held constant

▀ Modeled DR economic entry and exit in capacity market, based on DR supply curve

− Calibrated to available (but sparse) market data

− DR entry/exit considers fixed + variable cost and expected hours of dispatch, versus expected capacity payments

− DR up to about 10% of peak load expected to be available as low cost supply in the capacity market; delays the need for major new generator builds, stabilizes capacity prices



Modeling EE  In the IRP cases, any assumed energy efficiency (EE) is modeled “demand side”

▀ Planned EE, based on latest approved C&LM plan− Utilities estimate peak hour (MW) and annual energy (GWh) savings “Bottom‐up” analysis of EE measures; $ per MW and MWh that can be extrapolated

− Savings applied as load reductions to hourly load forecast; input to IRP analysis

▀ Proper accounting of EE in demand forecast is crucial− Embedded historical effects of EE in load forecasting models

− Account for future non‐utility programs, capacity market participation and possible attrition, codes and standards

− Consider how to treat expiring measures, diminishing marginal returns, changes in customer behavior due to changes in energy prices or total bills

− In the 2012 IRP, the ISO‐NE demand forecast and accounting of EE cleared in the capacity market was found to already include Base Case levels of EE; no additional adjustments to the ISO‐NE forecast was made



2012 IRP Base Case Energy Efficiency▀ At the time of the 2012 IRP, utility program funding was about $100MM per year− This was the foundation for developing Base Case energy efficiency− Resulted in about 30 MW & 200 GWh in annual incremental savings from new

programs in each year− Reduces peak and energy load growth by about 0.5%− Cumulative EE savings build up over time, due to 10+ year EE measure lives− Recovered as a fixed $0.003/kWh (“3 mills per kWh”) fee on customer bills

2012 IRP Base Case Energy Efficiency

Source: Connecticut Department of Energy & Environmental Protection, 2012 Integrated Resource Plan for Connecticut, June 14, 2012.



Resource Adequacy to Meet Peak Load  Connecticut was expected to be quite long on supply, through the study horizon

▀ “Passive DR” = EE; 2012 IRP did not “count” levels beyond what was cleared in the Forward Capacity Auction (FCA) due to potential double‐counting in demand forecast discussed previously

2012 IRP Base Case Resource Adequacy Outlook under Connecticut Local Requirement (MW)


Planned DRPlanned EE

Modeled DR

CapacitySurplus



Additional Achievable Cost-Effective EE  The IRP analyzed additional achievable cost‐effective EE, based on results from a recent EE Potential Study

▀ Requires about $100MM additional funding, through expanded or new utility programs▀ Accounting issues like expiring measures, diminishing marginal returns for every dollar

spent on EE programs, and rebound/snapback become increasingly important▀ Used as input for EE Resource Strategy

2012 IRP Expanded Energy Efficiency




Impacts of EE Resource Strategy on Market  The EE Resource Strategy creates a less constrained system

▀ Lower energy and capacity prices▀ Reduces need for renewables for RPS (since defined as % of MWh consumption)▀ May drive economic retirements or prevent new economic builds

2012 IRP Expanded Energy EfficiencyMarket Impacts




Impacts of EE Resource Strategy on Customer Costs  The EE Resource Strategy reduces total cost to customers

▀ Increases cost of utility EE programs, but▀ Decreases generation service costs by even more (positive benefit/cost ratio)▀ May increase average retail rates, since kWh demand is lower (i.e., higher rates per kWh

but lower total bills for customers)

2012 IRP Expanded Energy EfficiencyCustomer Cost Impacts




EE Total Resource Test

  Benefits vs.  net present value over life of the EE  measure

▀ avoided energy costs▀ avoided generation capacity▀ avoided distribution and transmission▀ energy and capacity price suppression benefits− i.e., Demand Reduction Induced Price

Effect (DRIPE)

▀ other: fossil fuel avoided costs, water savings, reduced maintenance costs to the participant, and additional environmental benefits not already internalized

  Cost

▀ Utility cost, i.e., program cost− up to $0.006/kWh charge− market revenues (FCM/REC/RGGI)

▀ Customer “out‐of‐pocket” costs

Utilities must demonstrate that benefits of new EE programs are greater than the costs (i.e., Benefit ÷ Cost > 1)

Sources:Connecticut Department of Energy and Environmental Protection, Final Decision 2013‐2015 Electric and Natural Gas Conservation and Load Management Plan, October 31, 2013.Connecticut electric and gas utilities, 2013‐2015 Electric and Natural Gas Conservation and Load Management Plan, November 1, 2012.



Appendix



Example of Total Resource Test

Source:Connecticut electric and gas utilities, 2013‐2015 Electric and Natural Gas Conservation and Load Management Plan, Page 29, Table B2, November 1, 2012.

Connecticut Total Resource Costs and Benefits for C&LM Programs2013



Impacts of EE Resource Strategy  The EE Resource Strategy can materially decrease emissions

▀ Depends on type of fossil generation displaced, both for baseload and during high‐demand peak hours

2012 IRP Expanded Energy EfficiencyImpacts on Emissions




Presenter InformationROMKAEW P. BROEHMPrincipal │ [email protected] +1.617.864.7900

Dr. Broehm is an economic expert in the electric utility industry. She specializes in the areas of market competition, impacts of regulatory policies on wholesale power markets and power assets and valuation, price forecasting, demand response programs, and the evaluation of power procurement. She has assisted clients in both litigation and consulting settings.

Dr. Broehm has submitted testimony in a number of market‐based rate (MBR) proceedings before the Federal Energy Regulatory Commission (FERC). She has analyzed potential competitive impacts of M&A transactions on wholesale power markets for both horizontal and vertical market power aspects in various power markets, such as ISO‐NE, NYISO, PJM, SERC, FRCC, SPP, Entergy System, and WECC. She has also led numerous studies related to price forecasting and short‐ and long‐term marginal costs, and advised utilities on how potential demand‐side management and demand response programs could impact both integrated resource planning and economic evaluations of generation and transmission expansions.

Dr. Broehm has experience analyzing and testifying on potential market manipulation allegations. She co‐authored comments submitted to the Commodity Futures Trading Commission (CFTC) that proposed a practical definition of market manipulation. She has also presented on navigating the complexities of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which focuses on how energy companies should address the economic, governance, regulatory, and transaction issues they will face as they begin implementing the requirements of the Act.

In addition, Dr. Broehm provides to her clients analyses and litigation support on the prudence of particular investment decisions and power procurement decisions, as well as the valuation of “provider of last resort” supplies. Her experience in pricing and ratemaking includes designing and evaluating dynamic pricing programs, such as a real‐time pricing programs and block rate designs. She has implemented demand simulation models to analyze changes in net economic benefits due to changes in rate design.

Prior to joining The Brattle Group, Dr. Broehm taught Economics and Statistics at the University of Wisconsin‐Milwaukee and Cardinal StritchCollege.



Presenter InformationMARIKO GERONIMOSenior Associate │ [email protected] +1.617.864.7900

Ms. Geronimo has over eight years of experience addressing electricity industry topics in the context of litigation, regulatory proceedings, and company‐internal consulting services. Her work has focused on investigating a variety of strategic, regulatory, and environmental issues related to long‐term system resource planning, wholesale market design and performance, and project‐specific resource valuation.

Specific work includes integrated resource planning to meet reliability, environmental, and cost effectiveness goals; evaluation of the effectiveness of RTO market rules and design to address stakeholder concerns and region‐specific issues; valuation of generation projects given market and regulatory uncertainties; estimation and evaluation of the benefits of transmission projects; development of strategic organizational structure of T&D utilities given costs, performance, and potential industry developments; and estimation of actual or potential wholesale market manipulation. Ms. Geronimo has also worked extensively in the area of nuclear spent fuel storage, providing contract damages litigation support and evaluating U.S. spent fuel storage policy and fuel storage program design.



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