1. The Regulatory Assistance Project 177 Water St. Gardiner, Maine USA 04345 Tel: 207.582.1135 Fax: 207.582.1176 50 State Street, Suite 3 Montpelier, Vermont USA 05602 Tel: 802.223.8199 Fax: 802.223.8172 Website: http://www.raponline.org Energy Policy Challenges Facing Vermont 28 January 2004 Frederick Weston

2. Introduction Regulatory Assistance Project RAP is a non-profit organization, formed in 1992, whose principals are former utility regulators from Maine, Vermont, and New Mexico. RAP provides workshops and educational and policy assistance to government officials on electric utility regulation. RAP is funded by, among others, the Energy Foundation, US EPA, and US DOE.

3. Energy Policy Context: Limits and Opportunities  Cost  Environment  Geography  Markets  Alternatives

4. Electricity Policy Context: Vermont  Electricity Cost  High compared with national figures  Moderate compared with regional figures  Environment  Vermont’s electric power commitments: relatively low emissions, low climate impact  No policy in place assures this will continue  Future regulatory uncertainties

5. Electricity Policy Context: Vermont  Geography  Vermont is at the end of the energy pipeline  This is one reason why energy efficiency is so desirable  Markets  Electric power is dispatched in New England based bids in commodity markets, not on the costs of production (should be equal, or nearly so, if the markets are truly competitive)  New electric power has to make sense regionally and locally

6. Generation Alternatives  Nuclear  Gas  Coal  Oil  Renewable Energy  Hydro, Biomass, Wind, Solar  Build, Buy, or “Rent”

8. Slow growth in annual peak, summer peak rising faster

9. Electricity sales- slow growth

10. Positive Steps  Since 1984 peak demand in VT has risen by ~125 MW, all met by new, in-state renewables  40 MW - small hydro, IPP, WEC, GMP  88 MW - McNeil and Ryegate wood chip plants  6 MW - Searsburg wind project  small landfill gas projects – Brattleboro and Burlington  Vermont utilities’ energy efficiency efforts, including Efficiency Vermont, have saved over 80 MW of demand  Bottom line – current portfolio mix is very high in renewables, and America’s lowest in CO2  BUT – VT still imports a large % of our electricity

11. Other Resource Alternatives  Transmission  Exports the generation siting issue  Creates a new siting issue  Demand Side Resources  Energy efficiency  Demand response  Customer-sited generation  Can local resources avoid power lines?

12. Cost  Generation markets are competitive  Cost data are harder to get – markets bid-based  Natural Gas Combined Cycle  ~4 cents per kWh  Highly dependent on the volatile cost of gas  Other generation sources: very location-specific  Wind in New England: 5-6 cents per kWh  Efficiency: 3 cents per kWh (peak and energy growth persists)

13. Other Key Elements of Vermont’s Situation  Growth:  Significant growth in electric demand in the summer (can this be controlled?)  Transmission:  Current $150 million proposal  Likely other improvements needed if demand growth continues  Local weaknesses  Demand resources and local generation could significantly reduce need for transmission

14. Synthesis  It is prudent to control demand because:  End-use efficiency and demand response are cheapest and environmentally most preferable  Vermont is so reliant on out-of-state supply  In-state resources also help balance Vermont’s need for out-of-state supply  If climate change regulation becomes a reality, power economics will change dramatically  Technology can surprise us (happily or un-)

15. The Broader Context  What about the larger context?  Regional, national, global issues  As usual, things are more complicated than they seem:  Costs and risks in utility decision-making  Choices among “goods”  Price, long-term cost, environmental quality, climate change, risk management

16. New England Electricity Mix

17. Load Densities - Southern New England Location Matters: The Geography of Congestion

18. Factors Affecting Vermont’s Resource Decisions VermontSlow growth, but future resource gaps Low emissions NE RegionSurplus capacity; year of need ~2010 Moderate emissions USRapid growth, gas crunch coming High emissions GlobalWorld demand affects fuel prices Global warming concerns

19. How Will We Serve US Load Growth?  Sales up 31% during the last decade. Will it be another 37% this decade?  Peak loads are growing rapidly, currently >800,000 MW  Summer peak increased 56,000 MW in last 4 years  NERC predicts >160,000 MW, 1999-2010  We’re adding the electrical equivalent of an entire New England every 14 to 18 months  DOE forecast: adding the equivalent of Japan and Germany to the US grid by 2020  Can we build and run over 300,000 MW of new capacity? What are the transmission, environmental, and cost consequences of such an expansion?

21. Generation mix US and selected regions

22. DOE’s Forecast in 2001: Coal or Gas? Both!

23. And the Winner Is? DOE’s Forecast in 2003

24. U.S. CO 2 Emissions

25. Decision-Making: Potential Benefits of Wind  Mitigates Fuel Price Risk  Reduces Natural Gas Prices  Reduces Wholesale Power Prices (through “bid stack effect”)  Displaces Emissions & Mitigates Future Environmental Compliance Risk  Promotes Local Economic Development  National and Global Contributions

26. But…Concerns  Is wind a higher priced resource?  Intermittent resource – does this mean it’s not reliable?  Can Vermont wind make a difference or would we be better doing something else?  Siting: electrical, aesthetic, and environmental impacts  Local economic harms?

27. Major Resource Options for Vermont  VT Yankee  Shift to Fossil Plants  New Cogeneration and Distributed Gen in VT  Efficiency and Load Management  Ride the Spot Market  Add Renewables  Imported Hydro (HQ or Lower Churchill)  Connecticut and Deerfield River Dams  Blended Balance

28. Lots of Uncertainty  Gas prices  Nuclear and Hydro conditions  Load Growth  Production Tax Credit  CO 2 Taxes (trading?)  Interest Rates  Efficiency potential  Old Approach  Make one assumption for each area of uncertainty. Calculate a least-cost mix.  New Risk Analysis Approach  Calculate probability- weighted portfolio cost, volatility, and standard deviations; use judgment with final results.

29. The devil is in the details “But what if we do switch to gas, and then the cost goes through the roof?”

30. Gas Prices Have Increased

31. Market Prices Likely to Rise

32. Winter Monthly Gas and Electric Prices Synapse Energy Economics

33. How Much Do Renewables Cost? Compared to What?  SUMMARY OF VARIOUS PRICE FORECASTS  Nominal Market Price (in Dollars per MWh, including energy and ICAP)  SponsorDate200420062008201020112012  DPS2000Apr-00$39.74$42.03$44.54$47.52$50.72$52.52  DPS2000aDec-00$46.94$43.04$45.68$48.74$52.19$54.09  GMP 2/01Feb-01$37.72$35.19$33.66$35.65$37.05$39.00  GMP 7/01Jul-01$42.05$39.18$37.45$37.63$41.29$43.50  CVPS 01Jul-01$45.85$43.04$39.07 $41.29$43.67$45.03  DPS2001Jan-02$38.84$36.34$37.66$44.25$50.85$52.74  CLFJan_02$35.18$32.65$31.12$31.28$34.51$36.46$38.54  GMP 1/02Jan-02$30.68$26.36$26.52$28.92$31.68$33.80  CVPS 02Feb-02$30.87$31.44$32.48$35.26$41.55$42.86  Source: Vermont PSB Vermont Yankee transfer docket

34. Wind Cost  Production tax credit is very important to wind economics today (reauthorization?)  Production cost is dropping with larger units and more production  Unclear when PTC will no longer be needed  Location affects cost  Wind in Texas can be 2-3 cents/kWh cheaper!  Prospects for off-shore wind?

35. Puget Sound Energy Least Cost Plan March 2003 Comment Draft, P. X-30 Assumed CO2 Regulation in 2008

36. Effect of Production Tax Credit and/or Carbon Tax

37. How Much Are We Willing to Pay?

38. Is Economic Activity Correlated to Electricity Prices? Source: Bureau of Labor Statistics

39. How Much Do Renewables “Cost”? Bid Stack Effect How the single-price wholesale market works: Renewables with low operating costs will bump higher- cost marginal resources out of the “bid stack,” leading to lower clearing prices Two studies of NY RPS (17% to 25%) measure this: Joint Utilities: -$1/MWh by 2013 NYSERDA: -$1.3/MWh by 2013 >Same is true of efficiency

40. Intermittence of Wind  Wind power is generated when wind is sufficient (25-40% of full capability)  Produces more often, but at less than full output  High coincidence with winter peak  Low coincidence with summer peak  Energy value varies with time of production  Capacity value: estimated in some markets to be 20% of rated capacity

41. Intermittence of Wind  Most volatile part of the electric delivery chain: Demand unpredictability >> wind generation  System operators must adjust region’s generators in real time to follow our consumption of electricity  “Intermediate” generators do this job well, might run +  Intermittence of wind matters when it changes the system operators’ task  Need far more wind than is in development now in New England before mitigating steps are required

42. Efficiency is cheaper

43. Slow Down!

44. Business As Usual

45. Concluding Thoughts  What do we want in the portfolio?  Not just wind v. gas & nukes  Wind, hydro, biomass, CHP, efficiency, and the rest are all competing for our investment $  Whose needs are we trying to meet?  Who is taking what risks?  Consumers, regulated utilities, or market participants?  Can we improve our methods of assessing risks?  Can we be creative with the siting process and community solutions?  The choices aren’t always easy.