INTEGRATED RESOURCE PLANNING IN THE PACIFIC NORTHWEST

1. INTEGRATED RESOURCE PLANNING IN THE PACIFIC NORTHWEST Issues and Challenges August 10, 2006 Dan Seligman, Attorney-at-Law Columbia Research Corporation P.O. Box 99249 Seattle, 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 68% of capacity is renewable Source: Northwest Power and Conservation Council, 2005

11. Northwest Electricity Generation at a Glance 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:

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.