1 Proposed Input Assumptions to RTF Cost-Effectiveness Determinations February 2, 2010

Overview of Council Conservation Analysis Methodology (1) Build Supply Curves (2) Schedule Availability (3) Adjust NLO Supply Curve for Program Deployment (4) Shape Savings by Season & Hi/Lo (5) Regional Portfolio Model (6) Strategy for Least-Cost & Least-Risk (Cons Market Price Adder) (7) Conservation Build-Out over 750 futures (8) Conservation Targets & Action Plan RTF >Translate Targets into Cost-Effective Portfolio of Measures and Programs

3 Objectives of this “Translation” Establish a cost-effectiveness limit for conservation that: –Is high enough to secure sufficient resources to meet near-term and long-term conservation targets –Is low enough to avoid acquiring conservation resources that have a high risk of costing more than 110% of generating resources over their expected lives (i.e., accounts for risk) –Is shaped like market prices so that savings are appropriately valued

4 Alternative Approaches 1.Use “110 % of Avoided Resource” cost to establish maximum levelized cost for conservation Problems Assumes perfect foresight Not “shaped” 2.Use average amount of conservation acquired by RPM and supply curves to establish maximum levelized cost for conservation Problems Assumes all conservation is shaped the same May hide underlying “pacing constraints” 3.Use “medium value” wholesale market price as “value of savings” to establish limit Problems Assumes perfect foresight Wholesale market prices do not reflect full cost of new generation

5 Option 1 – Use 110% of Cost of New Generation – But Which One? Assumptions : Efficiency Cost = Average Cost of All Conservation in Draft 6 th Power Plan Under $100 MWh Transmission cost & losses to point of LSE wholesale delivery 2020 service - no federal investment or production tax credits Baseload operation (CC - 85%CF, Nuclear 87.5% CF, SCPC 85%) Medium NG and coal price forecast (6 th Plan draft) 6 th Plan draft mean value CO2 cost (escalating, $8 in 2012 to $47 in 2029).

Even If We Pick A Resource, What is 110% of its Cost?

7 Option 2 - Match Median Conservation RPM “Build Out” – Lost Opportunity Resources 3130 MWa by 2030

Lost-Opportunity Supply Technically Achievable Supply Curve RPM Acquires 3130 MWa by This amount is technically available between $100 and $110/MWH

9 Option 2 - Match Median Conservation RPM “Build Out” – Non-Lost Opportunity Resources– But Which One? 2830 MWa by MWa by 2026

Non-Lost Opportunity Supply Technically Achievable Supply Curve RPM Acquires 2640 MWa by This amount is technically $90/MWH

11 Unfortunately, A Single Levelized Cost Does Not Reflect On and Off Peak Value

12 Option 3 – Use Wholesale Prices To Determine Cost-Effectiveness

Which Wholesale Market Price Should Be Used?

Method for Selecting the “Appropriate” Market Price Forecast The “Right” Market Price forecast is one that results in the pace and amount of conservation identified as cost-effective by the Resource Portfolio Model (RPM) over 20-yrs Use either the Aurora Mid-C medium market price forecast with or without carbon control cost (or any other price forecast) Adjust Aurora price with “adders” to reflect carbon control price included in forecast until “mini-RPM” builds same level of conservation as full RPM

15 Proposed Calibration Goal – Match Average Conservation “Build Out” From RPM 2640 MWa by MWa by 2030

16 What’s the “mini-RPM” Identical to full Resource Portfolio Model (RPM) except all inputs are “deterministic” –Average price forecast for gas and electricity –Average load growth forecast –Expected value cost for resources, forced outage rates, dispatch order –Average carbon control cost and timing Can be run with or without median carbon cost in market price

17 What’s The “Market Price Adder” Wholesale market prices no longer represent the full cost of new generation –State mandated RPS increase WECC system wide energy surplus, which reduces value of wholesale market RPM uses 750 different wholesale market prices to establish the value and risk of acquiring new resources, including conservation Procost cost-effectiveness uses a single market price forecast which does not reflect uncertainty

18 Expected Value Market Price Forecast without Carbon Control Cost

19 Expected Value of CO 2 Cost Across Futures Modeled in RPM

20 Expected Value Market Price Forecast with Expected Value CO 2 Control Cost

21 Input Options Use Aurora market price forecast, including median carbon cost. –Primary Advantage: Reflects impact of carbon cost on the resource dispatch –Primary Disadvantage: Embeds specific carbon cost assumptions in market price forecast (limits flexibility and reduces transparency) Use Aurora market price forecast, input carbon cost separately –Primary Advantage: Allow for explicit input of carbon cost assumptions (increases flexibility and transparency) –Primary Disadvantage: Does not reflects impact of carbon cost on the resource dispatch

22 What’s the “Calibration Adder” RPM uses 750 futures – Procost models only a single future RPM’s market prices and carbon cost are “volatile” –Procost’s prices are not “volatile” RPM futures are not “normally distributed,” hence the median values are not the average values RPM uses a single load shape for conservation –Procost models each measure’s load shape

23 Market Price Adders for Conservation Cost- Effectiveness for Average Conservation Shape

Proposed Final Input Assumption Choices Resource Type Carbon Cost Modeled Pounds CO2 per kWh RPM Adder ($/MWH) Calibration Adder ($/MWH) Total LO Adder ($MWH) Lost Opportunity Procost adds carbon lbs/kWh $50$18$68 Non-Lost Opportunity Procost adds carbon lbs/kWh $35$18$53 Lost Opportunity Aurora price w/carbon Per Aurora Dispatch $50$8$58 Non-Lost Opportunity Aurora price w/carbon Per Aurora Dispatch $35$8$43 All of the above input produce identical TRC B/C Ratio’s for the weighted average conservation load shape and 13 year measure life.