Economic Value of Stabilizing Regional Conservation Investments

1
Economic Value of Stabilizing Regional
Conservation Investments

• Analytical Approach and Preliminary Results

2
Goal of the Analysis

• Determine whether there is a net economic value
  to the regions power system that could result
  from stabilizing the annual level of conservation
  resource acquisition
• Identify and evaluate conservation deployment
  strategies that provide the best net economic
  value to the regional power system considering
  practical limitations on program ramp rates and
  market volatility

3
Summary of Problem

• Past Plans have called for stable annual regional
  conservation acquisitions
• Utility investments in conservation have varied
  widely in response to short-run market and
  industry regulatory conditions
• Question How does the cyclic investment in
  conservation impact its economic value to the
  region?

4
Analytical Approach Selected Step 1

• Use AURORA model to generate future market prices
  under three conditions
• Average Water Resource development proceeds
  in response to average water conditions
• Random Water - Resource develop proceeds in
  response to average water, but market prices vary
  due to year-to-year hydro conditions
• Critical Water - Resource develop proceeds in
  response to average water, but market prices vary
  due to assumed critical-water hydro conditions
  between 2005 and 2010

5
Analytical Approach Selected Step 2

• Use ConSOD model to simulate two responses to
  variations in future market prices
• Sustained Orderly Development (SOD) -
  Conservation acquisitions are deployed in uniform
  annual increments based on long-run avoided
  costs
• Market Price Response (MPR) - Conservation
  acquisitions are deployed based on rolling
  average of short-term market prices

6
Analytical Issues Required Data and Assumptions

• Major Assumptions
• Relationship between rolling average Market
  Prices and Annual Level of conservation
  acquisition
• Relationship between Ramp Rate and Total Resource
  Cost of conservation acquisitions
• Rate at which conservation acquisitions can be
  Ramped Up and Down
• Amplitude and Frequency and Duration of wholesale
  market price spikes

7
Is There A Relationship between Market Prices and
Annual Level of conservation acquisition?
8
Utility Conservation Investments Are Strongly
Correlated to Total Conservation Acquisitions
9
Annual Conservation Acquisitions are Negatively
Correlated to Same-Years Market Prices
10
Annual Conservation Acquisitions are More
Strongly and Positively Correlated to
Last-Years Market Prices
11
Changes in Annual Conservation Acquisition Are
Strongly correlated to Changes in Prior Years
Market Prices
12
Relationship between Market Prices and Annual
Level of conservation acquisition

• Rationale
• Conservation acquisitions lag market prices due
  to the inertia intrinsic in
• Budget cycles
• Infrastructure response
• Project/Program lead times
• Assumption Ramp ups in conservation
  acquisitions lag the rolling average monthly
  market price changes by 0 36 months, with a
  expected value lag of 6 months

13
Is There A Relationship between Ramp Rate and
Total Resource Cost of conservation acquisitions?
NO DATA on TRC Used Utility Cost
14
Cost/aMW and Magnitude of Annual Conservation
Acquisitions Are Only Weakly Correlated
15
Year-to-Year Changes in Conservation Acquisitions
are Not Correlated to Utility Acquisition Costs
16
Relationship between Ramp Rate and Utility Cost
of conservation acquisitions

• Possible Rationale
• Utility conservation acquisition costs (/aMW)
  are higher when ramping up than when ramping down
• Administrative costs are higher/unit savings in
  the beginning of programs than when programs are
  mature
• Retail rate increases lag wholesale market
  price increases, so utility financial incentives
  must be higher during ramp up periods than
  ramp down periods
• Assumption
• There is only a very weak relationship between
  ramp rates (up or down) and utility conservation
  acquisition costs

17
Rate at which conservation acquisitions can be
Ramped Up and Ramped Down

• History
• Conservation can be ramped up
• 30 40 aMW/yr
• OR 50 of prior years acquisitions
• Conservation can be ramped down
• 40 50 aMW/yr
• OR 60 of prior years acquisitions
• Assumption Create Five Price Blocks,
  constrain ramp rate to respond to monthly
  availability of next next higher cost block.

18
Amplitude, Duration and Frequency of wholesale
market price spikes

• Wholesale market prices will fluctuate as a
  result of
• Over/Under building
• Extreme weather events (hot or cold)
• Hydro-system availability
• Short-run economic/business cycles
• AssumptionRandomize the forecast of future
  price spikes in response to hydro-system
  availability, ignore short-run weather
  business cycles