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04/21/23 1

Economic Value of Economic Value of Stabilizing RegionalStabilizing Regional

Conservation Investments Conservation Investments

Issues and Proposed Analytical ApproachIssues and Proposed Analytical Approach

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04/21/23 2

Goal of the Analysis

Determine whether there is a net economic Determine whether there is a net economic value to the region’s power system that could value to the region’s power system that could result from stabilizing the annual level of result from stabilizing the annual level of conservation resource acquisitionconservation resource acquisition

Identify and evaluate conservation Identify and evaluate conservation deployment strategies that provide the best deployment strategies that provide the best net economic value to the regional power net economic value to the regional power system considering practical limitations on system considering practical limitations on program ramp rates and market volatilityprogram ramp rates and market volatility

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Regional Utility Program Conservation Acquisitions 1978 - 2001

0

20

40

60

80

100

120

140

Con

serv

atio

n A

cqui

siti

ons

(aM

W)

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

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04/21/23 4

Regional Utility Conservation Resource Acquisition Investments 1991 - 2000

$0

$50

$100

$150

$200

$250

$300

$350

Ann

ual I

nves

tmen

ts (

Nom

inal

$)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 -Prelim.

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04/21/23 5

Regional Utility Conservation Acquisitions vs. Council Plan Targets 1997 – 2001

0

20

40

60

80

100

120

Ave

rage

Meg

awat

ts

1997 1998 1999 2000 2001

Regional Plan Target for Acquisitions Utility Acquisitions

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Fourth Power Plan’s Conservation Acquisition Schedule 2000 - 2015

0

20

40

60

80

100

120

Ave

rage

Meg

awat

ts

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

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04/21/23 7

Summary of Problem

Past Plans have called for stable annual Past Plans have called for stable annual regional conservation acquisitionsregional conservation acquisitions

Utility investments in conservation have Utility investments in conservation have varied widely in response to short-run market varied widely in response to short-run market and industry regulatory conditionsand industry regulatory conditions

Question – How does the cyclic investment in Question – How does the cyclic investment in conservation impact its economic value to conservation impact its economic value to the region?the region?

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Possible Analytical ApproachesPossible Analytical Approaches

Use AURORA model to compare two portfolio Use AURORA model to compare two portfolio management strategies:management strategies:

““Dollar-cost Averaging”Dollar-cost Averaging” - Conservation - Conservation acquisitions are deployed in uniform acquisitions are deployed in uniform annual increments based on long-run annual increments based on long-run avoided costsavoided costs

““Market Timer”Market Timer” - Conservation acquisitions - Conservation acquisitions are deployed based on short-term market are deployed based on short-term market prices and near-term resource prices and near-term resource supply/demand balancesupply/demand balance

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Analytical Issues – Required Data and Assumptions

Major AssumptionsMajor Assumptions

– Relationship between Relationship between Market PricesMarket Prices and and AnnualAnnual Level Level of conservation acquisitionof conservation acquisition

– Relationship between Relationship between Ramp RateRamp Rate and and Total Total Resource Cost Resource Cost of conservation of conservation acquisitionsacquisitions

– Rate at which conservation acquisitions Rate at which conservation acquisitions can be can be Ramped Ramped Up Up and and DownDown

– AmplitudeAmplitude and and FrequencyFrequency of wholesale of wholesale market price spikesmarket price spikes

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Is There A Relationship between Is There A Relationship between Market PricesMarket Prices and and AnnualAnnual Level Level of of conservation acquisition?conservation acquisition?

0

20

40

60

80

100

120

140

160

1997 1998 1999 2000 2001

Av

era

ge

Pri

ce

($

/MW

h)

$0

$40

$80

$120

$160

$200

Uti

lity

Inv

es

tme

nts

(M

illio

ns

$)

Average Mid-C Market Price ($/MWh)

Utility Investments (Millions$)

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Relationship between Relationship between Market PricesMarket Prices and and AnnualAnnual Level Level of conservation of conservation acquisitionacquisition

Assumptions:Assumptions:

– Conservation acquisitions lag market Conservation acquisitions lag market prices due to the inertia intrinsic inprices due to the inertia intrinsic in» Budget cyclesBudget cycles

» Infrastructure responseInfrastructure response

» Project/Program lead timesProject/Program lead times

Question – How far behind market price Question – How far behind market price changes do changes in acquisition levels changes do changes in acquisition levels lag?lag?

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Is There A Relationship between Is There A Relationship between Ramp RateRamp Rate and and Total Resource Total Resource Cost Cost of conservation acquisitions?of conservation acquisitions?

NO DATANO DATA

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Is There A Relationship between Is There A Relationship between Ramp RateRamp Rate and and Utility Cost Utility Cost of of conservation acquisitionsconservation acquisitions??

0

25

50

75

100

125

150

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

An

nu

al A

cq

uis

itio

ns

(a

MW

)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Av

era

ge

Uti

lity

Co

st

(mill

ion

$/a

MW

)

aMW Utility Cost/aMW

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Relationship between Relationship between Ramp RateRamp Rate and and Utility Cost Utility Cost of conservation of conservation acquisitionsacquisitions

Assumption –Assumption –

– Utility conservation acquisition costs ($/aMW) are Utility conservation acquisition costs ($/aMW) are higher when ramping up than when ramping downhigher when ramping up than when ramping down» Administrative costs are higher/unit savings in the Administrative costs are higher/unit savings in the

beginning of programs than when programs are beginning of programs than when programs are “mature”“mature”

» Retail rate increases “lag” wholesale market price Retail rate increases “lag” wholesale market price increases, so utility financial incentives must be increases, so utility financial incentives must be higher during “ramp up” periods than “ramp down” higher during “ramp up” periods than “ramp down” periodsperiods

Questions –Questions –

– How large is the “ramp up” premium? How large is the “ramp up” premium?

– How large is the “ramp down” discount?How large is the “ramp down” discount?

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What is the Rate at which conservation What is the Rate at which conservation acquisitions can be acquisitions can be RampedRamped UpUp and and RampedRamped DownDown (aMW)?(aMW)?

-60

-40

-20

0

20

40

60

Ye

ar-

to-Y

ea

r C

ha

ng

e in

aM

W

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

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What is the Rate at which What is the Rate at which conservation acquisitions can be conservation acquisitions can be RampedRamped Up Up and and RampedRamped DownDown (%)?(%)?

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Ye

ar-

to-Y

ea

r C

ha

ng

e in

Pe

rce

nt

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

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Rate at which conservation Rate at which conservation acquisitions can be acquisitions can be RampedRamped Up Up and and RampedRamped DownDown

Assumptions –

–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

Question – Is Conservation REALLY this Question – Is Conservation REALLY this flexible?flexible?

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What’s the Conservation Hedge Worth?

$1

$10

$100

$1,000

$10,000

May

-96

Au

g-9

6

No

v-96

Feb

-97

May

-97

Au

g-9

7

No

v-97

Feb

-98

May

-98

Au

g-9

8

No

v-98

Feb

-99

May

-99

Au

g-9

9

No

v-99

Feb

-00

May

-00

Au

g-0

0

No

v-00

Feb

-01

May

-01

Au

g-0

1

Dai

ly A

vera

ge

Fir

m P

rice

($/

MW

h)

Daily average Mid-Columbia

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04/21/23 19

What’s the Conservation Hedge Worth?

0

500

1,000

1,500

2,000

2,500

3,000

5/1/

96

8/1/

96

11/1

/96

2/1/

97

5/1/

97

8/1/

97

11/1

/97

2/1/

98

5/1/

98

8/1/

98

11/1

/98

2/1/

99

5/1/

99

8/1/

99

11/1

/99

2/1/

00

5/1/

00

8/1/

00

11/1

/00

2/1/

01

5/1/

01

8/1/

01

Dai

ly A

vera

ge

Fir

m P

rice

($/

MW

h)

Daily average Mid-Columbia

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04/21/23 20

What will be theWhat will be the AmplitudeAmplitude, , DurationDuration and and FrequencyFrequency of wholesale market price of wholesale market price spikes?spikes?

Boom/Bust Illustrative Scenario of On-Peak Prices

$0

$50

$100

$150

$200

$250

Jan-0

1

Jan-0

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Jan-0

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Jan-0

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Jan-0

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Jan-0

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Jan-0

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Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

Ma

rke

t P

ric

e (

20

00

$/M

Wh

)

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04/21/23 21

What will be theWhat will be the AmplitudeAmplitude, , DurationDuration and and FrequencyFrequency of wholesale market price of wholesale market price spikes?spikes?

Chronic Capacity Shortage Illustrative Scenario

$0

$50

$100

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$200

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$300

Jan-0

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Jan-0

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Jan-0

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Jan-0

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Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Jan-1

4

Jan-1

5

Jan-1

6

Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

Ma

rke

t P

ric

e (

20

00

$/M

Wh

)

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04/21/23 22

What will be theWhat will be the AmplitudeAmplitude, , DurationDuration and and FrequencyFrequency of wholesale market price of wholesale market price spikes?spikes?

Boom/Bust Cycle w/Drought Illustrative Scenario

$0

$50

$100

$150

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$250

Jan-0

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Jan-0

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Jan-0

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Jan-0

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Jan-0

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Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

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Jan-1

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Jan-1

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Jan-1

5

Jan-1

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Jan-1

7

Jan-1

8

Jan-1

9

Jan-2

0

Ma

rke

t P

ric

e (

20

00

$/M

Wh

)

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04/21/23 23

AmplitudeAmplitude, , DurationDuration and and FrequencyFrequency of wholesale market of wholesale market price spikesprice 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

No Question: It isn’t possible to accurately No Question: It isn’t possible to accurately predict any of the above, so we need to predict any of the above, so we need to “randomize” the forecast of future “price “randomize” the forecast of future “price spikes”spikes”

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04/21/23 24

What We Need from the Committee

Does the proposed Analytical Analytical Approach Approach make sensemake sense– Is it objective/unbiased?Is it objective/unbiased?

–Do we have sufficient data to Do we have sufficient data to support it?support it?

–Are the required Are the required data data and and assumptions assumptions reasonable/realistic?reasonable/realistic?

–Other issues/considerationsOther issues/considerations