1. 1 Fuel Choice Study Results Michael Schilmoeller and Tom Eckman Northwest Power and Conservation Council WebCast Friday, March 18, 2011

2. 2 Overview Study approach Interpreting the RPM results Next Steps

3. 3 Study Approach Basic concepts Data preparation for the RPM The simulation –Representation of segment group “classes” based on energy profiles –How the model tries to find “the best” policy with respect to appliance choice RPM results

4. 4 Premise of the Study As a space heater is nearing the end of its life, a customer considers alternatives for replacement Some decision maker (probably not the customer) makes their best guess about future natural gas and electricity prices, about future carbon mitigation policies, and so forth. They want to minimize total societal cost (“total resource cost” or TRC). The customer, somehow influenced by the policy maker’s decision, buys and installs the appliance(s). Their actual cost depends on whatever carbon penalty, and natural gas and electricity prices occur.

5. 5 New Segment Groups

6. 6 20 New Segment Groups Associated with FAF Electric and Electric DHW Determine retrofit baseline

7. 7 New Segments

8. 8 20 segments Associated with Electric FAF and Electric DHW → Gas FAF Electric and Instant Gas DHW

9. 9 Translation: The existing appliances are a gas forced air furnace (FAF) and gas water heater with a tank holding no more than 55 gallons. The single family structure has no basement, existing gas service, and no air conditioning. The default retrofit for this segment group is replacement in kind (gas forced air furnace and water heater). C:\Backups\Plan 6\Studies\Model Development\Direct Use of Gas\Presentations\110318 RTF Webinar - First results\illustrations\FCM 08 XSN for illustrations.xlsm

10. 10 C:\Backups\Plan 6\Studies\Model Development\Direct Use of Gas\Presentations\110318 RTF Webinar - First results\illustrations\FCM 08 XSN for illustrations.xlsm

11. 11 C:\Backups\Plan 6\Studies\Model Development\Direct Use of Gas\Presentations\110318 RTF Webinar - First results\illustrations\FCM 08 XSN for illustrations.xlsm

12. 12 Table of Least-Cost Choices

13. 13 Tables Not Shown fixed costs ($/hr) natural gas use (MMBTU/h) electricity use (MWh/h) electric energy (MWh/h) one for each of six profiles There are nine other 25 x 25 tables used to describe segment group 43. These are incremental* changes in * These are incremental in two ways: they reflect how much can be added in the model’s decision time period (standard quarter) and how different from the assumed replacement-in-kind values. That is, if replacement-in- kind is the least-cost option for a given gas and power price, the entry corresponding to that combination is zero in all tables.

14. 14 Energy Distributions On- and off-peak distribution of energy Seasonal distribution Five principal distributions –Model will carry along electric energy assumptions and results data for each one

15. 15 Roll-Up The RPM uses 10 “roll-up” tables representing sums across the 95 segment groups If the selection criterion is based solely on electricity and natural gas price, we can come back and “drill down” into results by segment group to see the detailed conversion behavior. This assumes, of course, a fixed appliance selection policy.

16. 16 Simulation

17. 17 The Selector The RPM “plan optimizer” needs knobs it can tweak to test appliance pair selection The selection is an event that occurs over and over as the simulation marches chronologically through each future. (Remember, RPM plan and policy decisions cannot know the future.) The rule for appliance selection can be anything –The test is, “Does it work?” (i.e., lower cost or risk) –Need not be tied to economics, although that is what we think most policy makers would use.

18. 18 The Selector There are many ways to do this, for example, –Changing relative fixed cost of appliances in the selection process –Letting the optimizer test every option for each segment group and tracking If the decision is influenced by perceptions of likely future economics, let’s use that We already model electricity and gas price uncertainty Use the “diagonal” nature of the typical boundary between gas and electric appliances

19. 19 C:\Backups\Plan 6\Studies\Model Development\Direct Use of Gas\101004 Study\FCM 05.xlsm

20. 20

21. 21 Show the L814e and L814d Feasibility Spaces selector

22. 22 L814d Plans Colored By DUG Premium Level selector

23. 23 Plan Comparisons selector

24. 24 Plan Comparisons selector

25. 25 Effect of the Selector on the Move to Gas

26. 26 Overview Study approach Interpreting the RPM results Next Steps

27. 27 System Effects Operating (Fuel) Costs ELEC TANK 93% EFF COMBUSTION TURBINE 48% EFF (7100 BTU/kWh) GAS TANK 70% EFF

28. 28 System Effects Operating (Fuel) Costs The higher thermal efficiency of the natural gas appliance has several important implications to operating cost –The operating cost of the gas appliance will always be lower, regardless of the price of electricity and of natural gas –The gas appliance will produce less CO2, unless additional carbon capture technologies are introduced

29. 29 System Effects How Conservative is Use of Turbine Costs? Non-dispatchable resources and resources with very low variable cost (hydrogeneration) are (almost*) never on the margin in the long-term Consequently, changes to electric load affect dispatchable, fossil-fuel resources This places a lower limit on the generation efficiencies in the previous slide * Ok, ok, system operation can produce some additional amount of hydrogeneration spill. Hopefully, this is rare and of little long-term consequence.

30. 30 $74.69 /yr, RL 2006$ $/yr=($/kWyr)*(kW), and $/kWyr = 195 RL $79.74/yr, RL 2006$, Average kW=0.38 Average BTU/h= 1.30 $125.02/yr, RL 2006$ Average BTU/h= 1.90 System Effects Fixed Costs per Year assuming same end-use energy Gas Main (MF) $373.30/yr, RL 2006$ Gas Extension (MF) $183.59/yr, RL 2006$

31. 31 No Systems Effect

32. 32 Turbine operating cost The likelihood of carbon penalties and curtailed coal plant production make these prices unlikely in the next decade. These are all heat pump water heaters with gas FAF.

33. 33 Turbine Operating and Fixed Cost

34. 34 Preliminary Observations (to be disavowed if attributed) The initial RPM selection probably got over 75% of the 130,000 per year of households correct: –Homes with gas appliances that might otherwise move to electric appliances (50,000+ per year) should stay with gas appliances (NEW FINDING), but … If we do not expect to displace future generation turbines then electric heat pump water heaters may be better than gas water heating appliances. (Work forthcoming….) –Small, multi-family households in areas that would require a gas main are probably best served with electric zonal space heating and resistance hot water tanks The “best plan” selector value did not change this outcome

35. 35 Where the initial selection criterion probably got it wrong: –Some households were converted to gas when, in fact, they would have been best served by electric appliances Larger single-family homes (26,000 per year) requiring gas mains –Some households were converted to gas, although the best outcome will depend on displacing new turbines in the future CO2 emissions were about the same, irrespective of the conversions Preliminary Observations (to be disavowed if attributed)

36. 36 CO2 Emissions selector

37. 37 Overview Study approach Interpreting the RPM results Next Steps

38. 38 Remaining Work and Questions We will try an alternative selection method that provides the optimizer with better granularity: –Lock down selections that we feel are pretty stable –Aggregate segment groups that appear to be sensitive to similar issues, such as opportunity to defer new turbines –Provide the optimizer several knobs for picking the best outcomes for each aggregate group Are there load forecast implications we have not considered? How closely does our underlying load forecast match our replacement-in-kind values?

39. 39 Remaining Work and Questions What will be the impact of revised conservation supply curves? –These currently assume a specific replacement policy Conversion to more efficient electric appliances introduces double-counting Conversion to gas removes the opportunity entirely –This will result in some take-back of benefits of remaining on or converting to natural gas Would alternative market-purchase power carbon loading assumptions change the results? What are the oxides of nitrogen emission implications? –The only emission we valued was CO2

40. 40 Remaining Work and Questions What are the current impediments and incentives for modifying consumer behavior? –Retail rate structure –Tax deductions and credits How well aligned are these with the least-cost and risk choices we have identified? How well is the market doing?

41. 41 Questions?

42. 42

43. 43 Reserve Slides

44. 44 Power Distribution for Domestic Hot Water

45. 45 Power Distribution for Domestic Hot Water Average on- peak requirement to off-peak* requirement: 1.93 *Sunday is all off-peak C:\Backups\Plan 6\Studies\Model Development\Direct Use of Gas\101004 Study\hourly_res_loads\[Residential Water Heating load shapes and hourly consumptions sent to KC on Dec 30 2008_MJS.xlsx]DWH

46. 46 Energy Distributions Winter water heating on- to off-peak ratio: 1.70 (=1.373/.0820)

47. 47 Average MWh/h Increase Across Futures

48. 48 What’s Going On Here? CCCT 1,2 costs Levelized fixed cost 3 : $195/kWyr ($22.31/MWh ) 7100 BTU/kWh heat rate; energy cost at $5/MMBTU for gas, $37.32/MWh (= 35.5 ng + 1.82 VOM) Levelized total: $59.63/MWh 1Sixth Power Plan, L813 (source: C:\Backups\Plan 6\Studies\L814\L814d DUG 110125\Analysis\RL construction costs.xls) 22006 dollars 3Ignores overnight construction cost uncertainty

49. 49 What’s Going On Here? Fuel Fidelity 1 Costs Segment Group 43 Segment 713 (Replacement in Kind) –Gas FAF/Gas Tank –MMBTU/h = 32.50; RL fixed $/h = 224.76; kWh/h = 0 Segment 714 –Electric FAF/Electric Resistance –MMBTU/h = 0; RL fixed $/h = 108.25; kWh/h = 8,032.25 (MMBTU/h = 27.41) –Levelized opportunity fixed cost 3 : $14.50/MWh ($127.07/kWyr) –Opportunity heat rate 4 : 4,046 MBTU/kWh –Levelized total ($5/MMBTU for gas): $34.73/MWh 1Societal opportunity costs for refraining from switching to less costly electric appliances from gas appliances. 22006 dollars 3[FCM 05.xls]!’all segments’: $/MWh =[  fixed $/h]/[  kWh/h*1000] ($/kWyr =$/MWh*8760/1000) 4[FCM 05.xls]!’all segments’: BTU/kWh =[  MMBTU/h]*[BTU/MMBTU]/[  kWh/h]

50. 50 A Brief Digression … Want to compare two alternatives economically We will take two perspectives, –a consumer or “conversion opportunity” perspective, and –a system’s or societal perspective

51. 51 Conversion Opportunity Values Situation one: electric appliance pair Situation two: a gas appliance pair providing the same service If we want to compare these economically, we look at sum of the “fixed” (investment) cost and the operating cost of each …

52. 52 Gas Appliances Electric Appliances

53. 53 Observation: Cost Savings or Opportunity Costs If $ g /yr > $ e /yr, then we would choose the electric appliances, The conversion savings would be $ g /yr - $ e /yr If we chose not to convert, for some other reason, we would refer to $ g /yr - $ e /yr as our opportunity cost of conversion To economists, opportunity cost are even more important than direct cost

54. 54 Systems or Societal Perspective If we chose the electric appliances, we would have to produce the electricity for them Assume that generation is from a fraction of a CT, and match the kW of the appliances to the CT fraction

55. 55 CT Cost We are assuming we are selling the power into the same market, and at the same price ($/MWh) e, as the electric customer is purchasing it

56. 56 Electric Appliance from a System’s Perspective We have matched the kW from the CT with the appliances’ load, and we have assumed that the price of electricity is the same for both. Consequently, the operating cost term for the appliance equals the revenue term for the CT, and

57. 57 A “Simplification” Suppose we wanted to eliminate the price of natural gas from our economic evaluation. We might be able to do this by separating the fixed costs from the operating costs. That is, $ g /yr < ($ e /yr)’ if both $ f,g /yr - $ f,e /yr < $ f,t /yr and

58. 58 System’s View… continued Or, We could refer to the left-hand side of the last inequality as the “conversion heat rate” or “customer’s opportunity heat rate” of conversion, if we now elected to stay with gas instead of choose electric appliances and the CCCT. Similarly, $ f,g /yr - $ f,e /yr could be called the “conversion fixed cost” or “customer’s opportunity fixed cost” of conversion.