The Council’s Regional Portfolio Model

1. The Council’s Regional Portfolio Model Michael Schilmoeller for the Northwest Power and Conservation Council Generation Resource Advisory Committee Thursday, September 25, 2008

2. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Model operation 2

3. Different Kind of Risk Modeling • Imperfect foresight and use of decision criteria for capacity additions • Adaptive plans that respond to futures • Primarily options to construction power plants or to take other action • May include policies for particular resources • “Scenario analysis on steroids” • 750 futures, strategic uncertainty • Frequency that corresponds to likelihood 3 Planning Principles

4. Sources of Uncertainty • Fifth Power Plan • Load requirements • Gas price • Hydrogeneration • Electricity price • Forced outage rates • Aluminum price • Carbon allowance cost • Production tax credits • Renewable Energy Credit (Green tag value) • Sixth Power Plan • All of those to the left, except, perhaps, aluminum price • Power plant construction costs • Technology availability • Conservation costs 4 Planning Principles

5. Additions in Megawatts Beginning of year 2008 2010 2012 2014 2016 2018 2020 CCCT 0.00 0.00 0.00 0.00 0.00 610.00 1,220.00 SCCT 0.00 0.00 0.00 0.00 0.00 100.00 800.00 Coal 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Demand Response 500.00 750.00 1,000.00 1,250.00 1,500.00 1,750.00 2,000.00 Wind_Capacity 0.00 100.00 1,500.00 2,400.00 4,400.00 5,000.00 5,000.00 IGCC 0.00 0.00 425.00 425.00 425.00 425.00 425.00 Conservation cost- effectiveness premium over market 10.00 5.00 avg New Conservation 443 746 1071 1416 1774 2020 2198 Most Elements of the Resource Plan Are Options To Construct 5 Planning Principles

6. Why Use a Schedule of Construction Options for a Resource Plan? • More realistic! • Necessary for capturing construction risk • Consistent with earlier Council Plans 6 Planning Principles

7. Operating Costs 7 Model Overview

8. Spinner Graphs • Illustrates “scenario analysis on steroids,” one plan, across all futures • Link to Excel Spinner Graph Model 8 Model Overview

9. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Model operation 9

10. Avg Cost 10000 12500 15000 17500 20000 22500 25000 27500 30000 32500 Risk and Expected Cost Associated With A Plan Risk = average of costs> 90% threshold Likelihood (Probability) Power Cost (NPV 2004 $M)-> 10 Selection of Resource Plans

11. Feasibility Space Increasing Risk Increasing Cost 11 Selection of Resource Plans

12. Space of feasible solutions Efficient Frontier Feasibility Space Increasing Risk Increasing Cost 12 Selection of Resource Plans

13. A C B D Efficient Frontier 13 Selection of Resource Plans

14. Risk: Importance of Multiple Perspectives • Standard deviation • VaR90 • 90th decile • Loss of load probability (LOLP) • Resource - load balance • Incremental cost variation • Average power cost variation (rate impact) • Maximum incremental cost increase • Exposure to wholesale market prices • Imports and exports 14 Selection of Resource Plans

15. Resource Plan Selection • Trade-off between economic cost and risk • Rate impacts and volatility • Exposure to market prices • Non-economic costs and risks, including associated carbon emissions • Meeting reliability standards • Difficulties with changing the resource plan 15 Selection of Resource Plans

16. How Do We Interpret and Use a Schedule of Construction Options? • As a ceiling for what should be sited and licensed • To develop signposts for re-evaluation Siting and Licensing Early Construction Committed Construction In Service 16 Selection of Resource Plans

17. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Resource construction flexibility • Valuation calculation • Thermal resource dispatch • Decision criteria • Supply curves for conservation and price-responsive hydro • Model operation 17

18. Power Resource RisksCosts and Considerations • Commercial Availability Risk • Construction Risk • Responding fast enough to capture value • Sunk siting and permitting costs • Construction materials cost • Mothball and cancellation costs • Operation Risk • Fuel, maintenance, and labor costs • Retirement Risk • Carrying the forward-going fixed cost of an unused plant • Undervaluing and retiring a plant that may have value in the future 18 Resource construction flexibility

19. The Construction Cycle • After an initial planning period, there typically large expenditures, such as for turbines or boilers, that mark decision points. 9 months 9 months 18 months Cash expenditures 19 Resource construction flexibility

20. Planning Committed construction Construction In service Delay Construction Optionality Capacity time 20 Resource construction flexibility

21. New Fixed Cost Capabilities 21 Resource construction flexibility

22. New Fixed Cost Capabilities 22 Resource construction flexibility

23. New Fixed Cost Capabilities • We will work our way through a pdf file that illustrates the logicVisio-Logic_v080925.pdf 23 Resource construction flexibility

24. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Resource construction flexibility • Valuation calculation • Thermal resource dispatch • Decision criteria • Supply curves for conservation and price-responsive hydro • Model operation 24

25. Computation 25 Valuation calculation

26. Traditional Costing Hourly variable cost calculation: 26 Valuation calculation

27. “Valuation” Costing Complications arise when we use extended time periods price Loads (solid) & resources (grayed) 27 Valuation calculation

28. “Valuation” Costing Average loads and resources are the same, but in the first case, our system has net cost and in the second it has net benefit. 28 Valuation calculation

29. “Valuation” Costing N*(N+1)/2 correlations (upper triangular matrix) 29 Valuation calculation

30. “Valuation” Costing 30 Valuation calculation

31. “Valuation” Costing Only correlations are now those with the market 31 Valuation calculation

32. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Resource construction flexibility • Valuation calculation • Thermal resource dispatch • Decision criteria • Supply curves for conservation and price-responsive hydro • Model operation 32

33. Dispatchable Resources 33 Thermal resource dispatch

34. Gross Value of Resources 34 Thermal resource dispatch

35. Gross Value of Resources 35 Thermal resource dispatch

36. Gross Value of Resources Using Statistical Parameters of Distributions Assumes prices are lognormally distributed 36 Thermal resource dispatch

37. Estimating Energy Generation 37 Thermal resource dispatch

38. Estimating Energy Generation 38 Thermal resource dispatch

39. Estimating Energy Generation Applied to equation (4), this gives us a closed-form evaluation of the capacity factor and energy. 39 Thermal resource dispatch

40. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Resource construction flexibility • Valuation calculation • Thermal resource dispatch • Decision criteria • Supply curves for conservation and price-responsive hydro • Model operation 40

41. Example of Decision Criterion for Construction: CCCT and SCCT • Projected economic value, from the construction, fixed, and variable costs and values from simulated forward curves: • the electricity forward price is an average of flat electricity prices over the preceding 18-months • the natural gas forward price is also such an 18-month average • Project the energy adequacy at the end of the construction cycle. If the system would otherwise be inadequate, build this unit if it is the least cost among the options available. 41 Decision criteria

42. Logic Flow for Decisions Stop Does the resource pay for itself? Go yes Is the resource least cost of alternatives? Is forecast requirement on or before the earliest on-line date? no yes no 42 Decision criteria

43. + On On - - Line! Line! criterion criterion construction phase - optional cancellation period time time evaluation phase Decision Criteria For Construction 43 Decision criteria

44. Example of DecisionCriterion for Retirement • Forecast the value of the unit using the forward-going fixed cost only (fixed fuel transportation and salaries) • Mothball (de-staff, sell fixed fuel contracts) after pre-specified number of periods • Permanently decommission (convert the site to other purposes) if the plant remains in mothball status for some period 44 Decision criteria

45. Overview • Planning Principles • Selection of Resource Plans • Key techniques • Resource construction flexibility • Valuation calculation • Thermal resource dispatch • Decision criteria • Supply curves for conservation and price-responsive hydro • Model operation 45

46. Supply Curves 46 Supply curves

47. Supply Curves 47 Supply curves

48. δ Conservation Supply Curve 48 Supply curves

49. Components of Cost Reduction Additional conservation at $50/MWh SCCT deferral Reduced market prices Total System Costs 49 Supply curves

50. Price-takers Still See Benefits Additional conservation at $50/MWh SCCT deferral Total System Costs 50 Supply curves