1 INTEGRATED RESOURCE PLANNING IN THE PACIFIC NORTHWEST Issues and Challenges August 10, 2006 Dan Seligman, Attorney-at-Law Columbia Research Corporation.

1

INTEGRATED RESOURCE PLANNING IN THE PACIFIC NORTHWEST

Issues and ChallengesAugust 10, 2006

Dan Seligman, Attorney-at-LawColumbia Research CorporationP.O. Box 99249Seattle, WA 98139(206) 493-2320

2

OVERVIEW

Part I: The basics of Integrated Resource Planning

Part II: How realistic are the regional planning assumptions? The myth of the easy fix

Part III: Rethinking the conservation option The importance of retail incentives

3

Part I: The Basics of Integrated Resource Planning What is it?

A process to evaluate the costs and benefits of supply

options (i.e., new power plants) and demand options

(i.e., conservation)

4

Why Bother?

To discourage overbuilding and reduce adverse environmental impacts;

To encourage smarter use of natural resources and reduce risk to both utilities and customers over the long-term;

To make the utility resource acquisition process more transparent.

5

The Planning Process:

Describe the existing power system and its ability to meet current needs;

Describe historic conservation efforts – what you’ve saved to date;

Identify realistic scenarios for load growth – what the future is likely to bring;

Identify new sources of generation (the supply option);

6

The Planning Process (cont.)

Identify new sources of conservation (the efficiency option);

Identify changes that will reduce existing generating capacity and/or the way the power system is operated today;

Identify the “risks” of certain options – do you want insurance against bad outcomes and, if so, how much?

Integrate supply and demand options into a single analysis – a plan that identifies a “least cost” path (a portfolio) to pursue.

7

The Pacific Northwest Framework:

The “region” is Washington, Oregon, Idaho, and western Montana – the Columbia River watershed. But we’re not an island.

We’re the only part of the country with a regional integrated resource planning (“IRP”) mechanism for electricity.

The Northwest Power Act of 1980 created the Northwest Power and Conservation Council to prepare an IRP - a “regional power plan.”

The governors of the four Pacific Northwest states each appoint 2 members to the Council.

8

The Political Setting in 1970s

and 1980s:

The paradigm: The region would need more electricity, and the Bonneville Power Administration (“BPA”) would acquire power from new coal and nuclear plants.

These plants were too expensive and risky for utilities to build on their own.

How many plants? The 7% solution.

BPA agreed to pay for three nuclear power plants – no matter what they cost.

9

The Political Setting in 1970s and 1980s (cont.)

The Northwest Power Act attempted to balance the competing choices of “build” and “conserve.”

Divided responsibilities: BPA acquires; the Council advises. The Council has no regulatory authority.

The Council cannot override the states, which have their own

IRP processes for state-regulated utilities.

10

Northwest Electricity Generation at a Glance

Capacity:52,000 MW

Wind2%

Pump storage1%

Nuclear2%

Biomass2%

Natural gas14%

Petroleum0%

Coal15%

Hydro64%

68% of capacity is renewableSource: Northwest Power and Conservation Council, 2005

11

Northwest Electricity Generation at a Glance

Energy:32,000 aMW* Nuclear

3%

Wind1%

Hydro53%

Biomass2%

Petroleum0%

Coal20%

Natural Gas21%

56% of energy is renewable*1 aMW = 8,760 MWH

Source: Northwest Power and Conservation Council, 2005

12

The Council’s Priorities:

First, conservation;

The Northwest Power Act defines conservation as:

“any reduction in electric power consumption as a result of increases in the efficiency of energy use, production, or distribution.”

16 U.S.C. 839 § a(3).

Second, renewable resources;

Third, high fuel conversion efficiency;

13

The Council’s Priorities (cont.)

Fourth: all other resources.

Commonly called “the resource stack.”

16 U.S.C. 839 § b(e)(1)

Coal and nuclear are last on the list.

Conservation – the top priority -- has a 10% cost advantage.

14

The Council’s Plan:

It looks forward for 20 years and is revised every 5 years.

The Council’s 5th Power Plan (May 2005) shows:

Average load growth since 1980 has been 1.2% per year.

The Pacific Northwest has saved 2,500 aMW through conservation since 1980 at a cost of about $25 per MWH (2.5¢ per kwh);

The potential exists for 700 aMW more in the next 5 years, and 2,800 aMW in the next 20 years;

15

The Council’s Plan (cont.)

Conservation is about half the cost of renewables;

The Northwest can add 5,000 MW of wind in the next

20 years;

The combination of conservation and renewables is sufficient for most load-growth scenarios until 2013;

But utilities should start planning now for 400 MW of new coal plants sited and permitted (but not constructed) by 2009.

16

PART II: How Realistic Are the Regional Planning Assumptions?

The political reality today is that BPA’s role is diminished;

Instead, we have merchant non-utility power plants;

Increased interest by utilities in building their own generation – something we haven’t seen in 20 years.

That means you have more outside actors and variables that can affect the Council’s plan. The conflicts are real.

17

Can We Do All of the Following Things?

Add large quantities of new wind?

Shrink even more the capabilities of the existing federal power system?

Impose state-by-state mandates to build new renewables?

Reduce CO2 emissions?

And simultaneously keep retail rates low?

18

The answer is no.

We have hard choices.

There’s no easy fix.

19

Issue 1: How Much Wind Can We Bring On-line? We are not sure.

Wind has enormous potential, but it is an intermittent resource that poses particular problems.

Wind is a good match for hydro and gas.

The Council’s goal of 5,000 MW would increase by 2.5 times the capacity now in operation or under construction. That

sounds like a lot. But wind is on a fast track.

20

Issue 1: How Much Wind Can We Bring On-line? (cont.)

BPA, however, has suspended its wind “integration” product – too much uncertainty about the nature of future hydro operations.

There are transmission constraints.

The costs of wind power generation are now higher than they were several years ago. The same is true for other sources, too.

21

What’s Happened to Wind Costs?

Construction costs increased 40-50% since 2000.

That means delivered energy is in the $45-100 MWH range, according to the Council.

Why?

Weakened dollar.

Increased commodity and energy costs.

High demand = “temporary” equipment shortages.

22

The Problem

23

Issue 2: The Federal Power System Has Shrunk

What we’ve removed since the early 1990s from the federal

power system for fish:

-3000

-2500

-2000

-1500

-1000

-500

0

500

1000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Annual Average = -1,000 aMW

-3000

-2500

-2000

-1500

-1000

-500

0

500

1000

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Annual Average = -1,000 aMW

24

Issue 2: The Federal Power System Has Shrunk (cont.)

The reality: removing four Snake River dams will probably speed up the need for new coal and natural gas plants.

The irony: if you are a global warming skeptic, then this scenario isn’t so bad.

On the other hand…the law of unintended consequences…

25

Issue 3: What Are the Costs of New State Mandates?

Under Initiative 937 in Washington (proposed renewable portfolio standards), utilities must pursue conservation and invest in renewables even if they don’t need them.

3% by 2012 9% by 2016 15% by 2020

26

Issue 3: What Are the Costs of New State Mandates? (cont.)

Latest estimate of wind costs shows a significant increase. $100 per MWH? That’s three times what BPA charges for power from the federal power system.

Rapid wind development may force utilities to build or buy from gas-fired plants to “firm up” the resource.

27

PART III: Rethinking the Conservation Option Conservation, according to the Council, is half the cost of

renewables.

It’s the least cost option – the thing you’d do more of -- if you paid close attention to the Council’s Plan.

But what’s on paper has to be translated “on the ground.”

We need more retail incentives (i.e., utility rebates, tax credits and deductions) to accelerate conservation and reduce volatility.

28

PART III: Rethinking the Conservation Option (cont.)

Waiting for prices to rise – the passive approach – creates political risk.

The market may sort things out – but watch out for the

ratepayer rebellion.

If we miss the Council’s targets, we may see more coal.