Avoided Cost and E3 Calculator Update Workshop

1. Avoided Cost and E3 Calculator Update Workshop March 14-15, 2006

2. Agenda – Day 1 • Introduction 10:00 – 10:25 • Discussion of major issues • Peak definitions 10:25 – 11:40 • Load shape development 11:40 – 12:00 • Lunch break • Critical and super peak periods 1:00 – 2:30 • Break • Capacity adder and peak reshaping 2:45 – 4:30 • Natural gas price update 4:30- 5:00

3. Agenda – Day 2 • Housekeeping from Day 1 9:30 – 9:45 • Miscellaneous issues 9:45 - 11:00 • Application of E3 tool • Recommendation for future tools • Overhead double counting • EE forecast in resource plans (net vs. gross) • Applicability to demand response • Other • Recap of consensus / non-consensus 11:00 – 12:00 • Lunch • Action Plan / Next Steps 1:00 – 2:30 • Break • Load shape development 2:45 – 5:00

4. Introduction • Scope and purpose for the 2006 update (ALJ Gottstein) • See handout entitled Purpose and Scope of 2006 Update (per December 27, 2005 ALJ ruling) • Workshop focus and approach (E3) • Near term changes for rebalancing, tracking achievements and performance basis setting. • Recommendations for longer term changes for the 2009-2011 program cycle. • Broader consistency across proceedings/ resource types? • Help to identify phase III issues. • Working workshop second half of day 2 (load shape development) • Approach to discussion • Brief summary of E3 findings and recommendations • Summary of party positions and discussion • Identify areas of consensus / non consensus • Alternatives for ALJ consideration • Consider both near term and long term

5. Peak Definitions • Peak definitions for EE are needed for • MW goals, • tracking the achievements of goals, • evaluation of portfolios to reach goals, and • determining performance basis. • Consistency within EE applications • Consistency with peak definitions for other resources or in other proceedings (DR, DG, RA). • Consider both near and longer term definitions as well as the data requirements.

6. Peak Metrics – 1

7. Peak Metrics – 2

8. Peak Metrics – 3

9. E3 Recommendation for EE Proceedings • E3 recommends two options for determining peak demand reduction in the near term: • Report DEER kW (deemed kW) where available, and utility best estimates in other cases. • Use load factors by end use categories. • Longer term: (not addressed in the Draft Report) • Move toward a concident peak measure that uses a weighted average of many hours. • The number of hours will depend upon the extent to which the impact data and cost data are aligned. The better the alignment, the fewer hours needed.

10. Summary of Party Positions:Peak Definitions and Load Shapes

11. Consensus Non Consensus Consensus/ Non Consensus items

12. Peak Definition across applications • Discuss as a group

13. Consensus Non Consensus Consensus/ Non Consensus items

14. Load shape development • Requirements for • Peak kW metric • EE valuation • Representation of EE in other applications • Calibration issues • Working session to develop action plan, second half of day 2.

15. Load Shapes • E3 recommends a research effort to develop calibrated load shapes for use in the 2009-2011 program cycle. • Shapes should be impact shapes (not building shapes) that are hourly in resolution • Shapes should reflect diversified impacts at the grid level and reflect run time averages • Potential data sources • DEER • CEUS? • Building simulations, such as those used for Title-24. • Issues • Calibration • Alignment of loads with generation costs

16. Sample Impact Shape Results • Res A/C is the PG&E residential end use shape • DEER AC eff is the DEER impact shape • Both shapes normalized so that total annual reductions sum to 1.0

17. Sample Commercial Impact Shape • Office Cool is the PG&E end use shape (CZ 13) • DEER Chiller Eff is the corresponding impact shape • Note that the DEER reduction is 0 in the second chart

18. Comparison of TOU Shares • Commercial shares are comparable • Normalized Residential DEER shape has higher on-peak %, partly because of negative amounts in other periods.

19. Summary of Party Positions:Load Shapes

20. Consensus Non Consensus Consensus/ Non Consensus items

21. Need for critical or super peak periods • Definitional needs • kW and TOU shares for use in other proceedings? • Recommended definitions • Valuation issues • Adders to TOU average avoided costs? • Short term options and long term ideal

22. E3 Recommendation • Critical peak metric not necessary for non-dispatchable (EE) programs. • Super peak periods could reduce the undervaluation of measures like Res AC that occur with the use of TOU average costs. BUT this would require that utilities could develop super peak impact profiles. E3 recommends that super peak periods not be used in the near term because • Shape development would be difficult • The examples in the Draft Report are based on PG&E’s building end use shapes, not impact shapes • Value could be added directly to programs such as Res AC without the construction of super peak periods.

23. Super Peak Results:PG&E Generation Avoided Costs & Building End Use Shapes • CZ13 • CZ3

24. Summary of Party Positions:Critical Peak Periods

25. Consensus Non Consensus Consensus/ Non Consensus items

26. Capacity adder and peak reshaping • Capacity Adder • Need to increase peak avoided costs? • Methods to calculate a capacity adder • Peak Reshaping • TOD profiles • Methods to allocate capacity adder to hours • Phase 3 issues?

27. Draft Report • E3 does not believe the LRMC methodology should be modified to require entrant of a CT • If the price shapes must accommodate a CT, the capacity adder would be $40-50/kW-yr. • This may represent a fundamental change in methodology • The LRMC is a full hedged physical product, so no hedge value adder is needed • TOD factors should not replace the PX shape because • They lack granularity • Represent a fundamental change to the avoided cost methodology --- move to phase 3.

28. Draft Report Residual Capacity Adder • Using flat annual gas price • Using daily spot gas prices

29. Impact of $50/kW-yr capacity adder on EE valuation • Average avoided costs and hourly shapes • Average avoided costs using TOU shapes

30. Summary of Party Positions:Capacity Adder & Peak Reshaping

31. Consensus Non Consensus Consensus/ Non Consensus items

32. Natural Gas Update • Updated natural gas forecast with EIA Outlook 2006 forecast and the CEC’s IEPR forecast • NYMEX values were not updated in the report (but should be updated with the most recent data available)

33. Gas Price Change • New forecasts are about 6-9% higher than the existing prices.

34. Generation Avoided Cost Change • Updated gas price increases electric generation avoided costs by 4-5% • The electric avoided cost increase is dampened by O&M and capital costs that do not change. SP-15

35. Latest NYMEX Forecasts Note: 60 day average prices for all contract on or after April 2006 have been calculated using 60 calendar days of data up to 3/10/2006, as available.

36. Summary of Party Positions:Natural Gas Update

37. Consensus Non Consensus Consensus/ Non Consensus items

38. Day 2 • Other Issues • Application of E3 tool • Recommendation for future tools • Overhead double counting • EE forecast in resource plans (net vs. gross) • Applicability to demand response • Other • Action Plan / Next Steps • Load Shape Development

39. Draft Report • No need to depart from E3 calculator in near term • E3 requires no modifications to conform to SPM • Overhead cost double counting is a caused by reporting rules. • Calculator improvements such as links to DEER and load shapes should be held until the next program cycle when new load shape data is available.

40. Consensus Non Consensus Consensus/ Non Consensus items

41. Summary of Party Positions:Tool-related Comments

42. Consensus Non Consensus Consensus/ Non Consensus items

43. Summary of Party Positions:Other Issues

44. Consensus Non Consensus Consensus/ Non Consensus items

45. Tool changes • Changes in reporting categories