The Cost-Effectiveness Premium for Conservation

1. The Cost-Effectiveness Premium for Conservation Michael Schilmoeller Thursday May 19, 2011 SAAC

2. Outline • The construction of conservation supply curves • Fifth Power Plan findings • Sources of premium value • Sixth Power Plan findings

3. Construction and Representation • Construction of Supply Curves • Lost opportunity • Discretionary • Implementing the Supply Curves

4. Discretionary Conservation“Raw” Values, Sixth Power Plan Final

5. Discretionary ConservationSampled Values, Sixth Power Plan Final

6. Sampling the Discretionary Conservation • Conservation Premium\Olivia Conservation 090421.xls

7. Lost Opportunity ConservationSixth Power Plan Final

8. Accessing the Supply Curves Lost opportunity Discretionary

9. Accessing the Supply Curves

10. Sources of Value • It is well-understood that much of the value of energy efficiency stems from its below-market cost. In the Sixth Power Plan, for example, the Council estimates the availability of over 2200 MWa of conservation in the Region at or below $30/MWh. C:\Backup\Plan 5\Portfolio Work\Olivia\SAAC 2010\110519 SAAC Meeting\Conservation Premium\The sources of premium value 101206 1600.lnk

11. δ The Premium

12. Analysis

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

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

15. SCCT Deferral • Why does conservation defer single cycle combustion turbines? • Low-capital cost resources are the traditional solution for risk management • SCCT have low capital cost • Conservation has high capital cost • Under what conditions does conservation hold an advantage over SCCTs?

16. SCCT Deferral

17. Value of Capacity From the previous slide, it is evident that in this plan SCCT and conservation • Operate under circumstances of relatively lower electricity market prices and volatility • This is the consequence of having the additional resources that give us protection against uncertainty • Do not even pay for themselves • If we want to reduce risk, we have to pay the insurance premium of extra capacity that may not be used frequently enough to cover costs.

18. Value of Capacity • Conservation performs better than SCCT under these circumstances, because it gives value under low market prices. • Additionally • The quality of capacity is better than conventional resources, because it is not subject to forced outages • In particular, the quality of conservation capacity is better than wind, the “other” resource candidate without fuel cost

19. Sources of Premium Value • Capacity deferral • Protection from fuel and electricity price excursions, in particular due to carbon risk • Short-term price reduction • Purchases at below-average prices (“dollar-cost averaging”) • Opportunity to develop and resell conservation energy C:\Backup\Plan 5\Portfolio Work\Olivia\SAAC 2010\110519 SAAC Meeting\Conservation Premium\The sources of premium value 101206 1600.lnk

20. Capacity Deferral • If a utility anticipates capacity requirements for energy or for risk mitigation (reserves), conservation capacity has value • Shape of conservation: the greater the on-peak conservation contribution, the greater the deferral on a per-MWh or average MW energy basis. Because energy efficiency tends to have greatest effect when requirements are large, it tends to have more reduction on-peak than off-peak

21. Capacity Deferral • Conservation recovers its value at all price levels. In futures with anticipated low price, due perhaps to RPS legislation or technology innovation, dispatchable resources would dispatch very infrequently and have less opportunity to cover their fixed cost. (More generally, see the next bullet.) • The high-risk futures for the region are those with high load requirements/high prices for electricity and low requirements/low prices. Neither of these makes high-heat rate dispatchable resources (SCCTs) attractive as a risk-mitigation measure, regardless of their “expected” capacity factor.

22. Operating Value Excursions • The fixed cost of conservation protects utilities short of resources* from electricity price risk • An uncertain future carbon penalty, which would only increase these prices, contributes significantly to this value • All utilities subject to fuel price volatility benefit * Electricity price risk mitigation can shrinks, disappear, or actually increase if the amount of conservation (or other non-dispatchable resource) exceeds a utility’s minimum load requirement.

23. Short-term power price reduction • Even in a market, such as that in the PNW, that is surplus most of the time, reducing prices can reduce costs • The net cost is determined by the timing of sales and purchases relative to market prices. If the PNW sells off-peak in the spring – at low prices – and buys on-peak in the winter – at high prices, it is more likely to see these effects • Off-peak sale prices are constrained below by zero, while on-peak purchase prices are unconstrained

24. Conservation acquisition at below-average prices • If the supply curve for conservation is convex, rather than linear, there is a “constant dollar averaging” effect. • A premium minimizes our foregoing acquisition of inexpensive conservation during periods of low wholesale market prices for electricity • This effect is especially important to lost opportunity conservation *If the supply curve were to have an exponential shape (p=eq), the effect would be exactly constant dollar averaging.

25. Opportunity to develop and resell conservation energy • Many utilities maintain that their avoided cost is much lower than the wholesale market for electricity, and consequently, there is little incentive for them to develop their conservation up to wholesale market prices • Given that other utilities seek energy at market (or at a premium over market), a resell opportunity may exist. Sales to other utilities reduce total cost. • There is anecdotal evidence that even full-requirements customers of BPA can enjoy benefits from developing conservation in their service territory for use by other utilities

26. Conclusion • Above-market conservation provides more cost-effective risk mitigation than alternative resources • For low-risk plans, cost effectiveness of conservation may be higher than long-term view of average wholesale market price for electricity

27. Outline • The construction of conservation supply curves • Fifth Power Plan findings • Sources of premium value • Sixth Power Plan findings

28. Effect of Premium on Conservation Energy and Cost

29. End