1. Northwest Power and Conservation Council Slide 1 Direct Use of Natural Gas Economic Fuel Choices from the Regional Power System and Consumer’s Perspective November 1, 2011

2. Northwest Power and Conservation Council Slide 2 Study Objectives Determine which residential space and water heating systems are least-cost (TRC) and least-risk for the region’s power system given; Determine which residential space and water heating systems are least-cost (TRC) and least-risk for the region’s power system given; –The diversity of space conditioning and water heating systems and existing housing characteristics –A large number of combinations of space conditioning and water heating systems to select from –That carbon emissions as well as their economic risk are a consideration Determine whether the retail market will lead consumers to chose the space conditioning and water heating systems that are also least cost and least risk for the region’s power system Determine whether the retail market will lead consumers to chose the space conditioning and water heating systems that are also least cost and least risk for the region’s power system

3. Northwest Power and Conservation Council Slide 3 Significance Council’s existing policy on fuel choice/fuel switching has not be thoroughly reviewed since 1996 Council’s existing policy on fuel choice/fuel switching has not be thoroughly reviewed since 1996 Council’s analysis and policy recommendations are of intense interest to the natural gas industry, as well as electric utilities in the region Council’s analysis and policy recommendations are of intense interest to the natural gas industry, as well as electric utilities in the region Of the 3.6 million existing PNW households Of the 3.6 million existing PNW households –2.6 million will replace their space conditioning and water heating system over the next 20 years –130,000 annual “fuel choice” decisions Potential for conversion of existing appliances: Potential for conversion of existing appliances: –Electricity to gas: Reduce load by 1,500 MWa –Gas to electricity: Increase load by 2,500 – 5,000 MWa

4. Northwest Power and Conservation Council Slide 4 Two Perspectives Regional Power System Regional Power System –Space conditioning and water heating system selection based on wholesale electricity and gas prices –Considers total system “cost” and “risk” (i.e., consideration of individual space and water heating conversion costs and performance alone does not account for the cumulative effects of these systems on the need for new resources) Consumer Perspective Consumer Perspective –Space conditioning and water heating system selection based on retail electricity and gas prices –Does not consider for “system” level impacts slide 4

5. Northwest Power and Conservation Council Slide 5 Observations From Regional Power System Perspective In the Council’s Resource Portfolio model’s “least cost/least risk” plan new gas-fired turbines are deployed to serve load growth beyond that met with conservation and renewable resources In the Council’s Resource Portfolio model’s “least cost/least risk” plan new gas-fired turbines are deployed to serve load growth beyond that met with conservation and renewable resources –Consideration of these costs make some conversions to natural gas economically preferable However, most homes (~75%) should stay with their current space heating and water heating systems However, most homes (~75%) should stay with their current space heating and water heating systems –Improvements in the efficiency of electric space heating and water heating systems is a lower cost (TRC) option than converting most homes without existing gas access to gas space and/or water heating –Extending gas service is an economic hurdle to converting all-electric households to gas space and/or water heating

6. Northwest Power and Conservation Council Slide 6 Summary-TRC Perspective Energy Impacts Over 20 years Over 20 years –560 MWa decline in regional electricity use »225 MWa from improvements in electric efficiency »335 MWa from conversion to gas space and/or water heating –7 x 10 12 BTUs per year decrease in regional natural gas use »13.1 x 10 12 BTUs per year increase in direct gas use »20.1 x 10 12 BTUs per year decrease in gas used for power generation

7. Northwest Power and Conservation Council Slide 7 Summary-TRC Perspective Households Over 20 years Over 20 years –2,593,839 Existing households with electric or gas space or water heating (excludes 20% of without “gas access” via main or line extension) –1,896,000 Retain existing electric space and/or water heating systems, but upgrade efficiency –698,000 convert from electric space and/or water heating to natural gas (424,000 water heating, 115,000 space and water heating) –125,000 convert from gas to electric water heating (HPWH)

8. Northwest Power and Conservation Council Slide 8 slide 8 No. Segments No. Housholds/yr20-year Total Share of Total Change in Use (MWa- 20th yr) Change in Use (Trillion BTU- 20th yr) Replace w/Same Fuel & Same Equipment20 48,412 968,23537.3% - - w/Higher Efficiency Space Heating Equipment Only14 1,807 36,1451.4% (10) - w/Higher Efficiency Water Heating Equipment Only10 33,439 668,78525.8% (118) - w/Higher Efficiency Space & Water Heating Equipment14 11,142 222,8358.6% (95) - Sub-Total58 94,800 1,895,99973.1% (223) - Conversions from Electricity to Gas - Space Heating only11 1,520 30,4001.2% (31) 1.14 Water Heating only6 21,197 423,94016.3% (161) 7.29 Space & Water Heating6 5,745 114,9004.4% (166) 6.62 Sub-Total23 28,462 569,24021.9% (358) 15.05 Conversions from Gas to Electricity - Space Heating only0 - -0.0% - - Water Heating only6 6,262 125,2404.8%24 (1.97) Space & Water Heating0 - -0.0% - - Sub-Total6 6,262 125,2404.8% 24 (1.97) Conversions to Gas Space Heating and Electric Water Heating (from Electric Space Heating and Gas Water Heating)8 168 3,3600.1% (3) 0.07 Totals95 129,692 2,593,839100% (559) 13.15 Changes Net of Efficiency Improvements37 34,892 697,84027% (336) 13.15

9. Northwest Power and Conservation Council Slide 9 Summary – TRC Perspective Emissions Regional emissions of CO2 are about the same under a scenario that maintains gas space and water heating market shares or a scenario that results in conversion to electric space and water heating systems Regional emissions of CO2 are about the same under a scenario that maintains gas space and water heating market shares or a scenario that results in conversion to electric space and water heating systems –While existing electric appliances produce more CO2 than gas appliances due to the inefficiency of the overall power system, conversion to heat pumps for space and water heating produce roughly equivalent emissions –Moreover, the limited potential for economic conversions to natural gas make the impact negligible

10. Northwest Power and Conservation Council Slide 10 Consumer Perspective Given current retail electricity and natural gas prices and forecast future retail prices, would consumers likely select the space and water heating systems found to be economically preferable from a regional (TRC) perspective Given current retail electricity and natural gas prices and forecast future retail prices, would consumers likely select the space and water heating systems found to be economically preferable from a regional (TRC) perspective Is there evidence that consumers are selecting the space and water heating systems that are economical preferable from a TRC perspective? Is there evidence that consumers are selecting the space and water heating systems that are economical preferable from a TRC perspective? slide 10

11. Analytical Approach Compare the “first cost” and “life cycle cost” of alternative space conditioning and water heating systems using: Compare the “first cost” and “life cycle cost” of alternative space conditioning and water heating systems using: –Utility specific retail electricity and natural gas prices –6 th Plan forecast of future retail price escalation rates –“Average” system installation and operation and maintenance cost –Representative range of housing sizes and climates »1500 – 2250 sq.ft. »Portland, Seattle, Boise, Spokane, Kalispel slide 11

12. Northwest Power and Conservation Council Slide 12 Analytical Approach The “best” space conditioning and water heating system options for consumers is dependent upon the difference between their retail prices for electricity and natural gas The “best” space conditioning and water heating system options for consumers is dependent upon the difference between their retail prices for electricity and natural gas In order to represent this diversity the life cycle cost model was run using the retail rates for all gas and electric utilities in the region that serve the same general geographic area In order to represent this diversity the life cycle cost model was run using the retail rates for all gas and electric utilities in the region that serve the same general geographic area – “service territory” matching was not done slide 12

13. Northwest Power and Conservation Council Slide 13 Consumer Life Cycle Cost Model Designed to compare: Designed to compare: –First cost (Installed cost of system excludes gas line extension cost) –First year space conditioning and water heating cost –Life cycle space conditioning and water heating cost –“Annual Levelized cost” of space conditioning and water heating User can model specific utilities and climates User can model specific utilities and climates Users with “Crystal Ball” can model distributions of climate zones and utility rates Users with “Crystal Ball” can model distributions of climate zones and utility rates slide 13

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20. Northwest Power and Conservation Council Slide 20 First Cost of Space Conditioning Systems slide 20

21. Northwest Power and Conservation Council Slide 21 First Cost of Water Heating Systems slide 21

22. Northwest Power and Conservation Council Slide 22 Cumulative Distribution of LCC for Gas Furnace w/Condensing Gas DHW slide 22

23. Northwest Power and Conservation Council Slide 23 Cumulative Distribution of LCC for Gas Furnace w/HPWH DHW slide 23

24. Northwest Power and Conservation Council Slide 24 Cumulative Distribution of LCC for Gas Furnace w/AC w/Condensing Gas DHW slide 24

25. Northwest Power and Conservation Council Slide 25 Cumulative LCC for Heat Pump w/ HPWH DHW slide 25

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30. Northwest Power and Conservation Council Slide 30 slide 30 LCC Scenario A assumes gas access (line or line and main extension) cost are paid directly by consumer. LCC Scenario B assumes gas access cost are recovered in all residential retail rates.

31. Northwest Power and Conservation Council Slide 31 LCC Scenario A assumes gas access (line or line and main extension) cost are paid directly by consumer. LCC Scenario B assumes gas access cost are recovered in all residential retail rates. LCC Scenario B1 is identical to Scenario B, except that water heating systems within 1% of the lowest LCC system are considered “equivalent.”

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33. Northwest Power and Conservation Council Slide 33 slide 33 LCC Scenario B assumes gas access cost are recovered in all residential retail rates. LCC Scenario B1 is identical to Scenario B, except that water heating systems within 1% of the lowest LCC system are considered “equivalent.”

34. Northwest Power and Conservation Council Slide 34 Summary of Findings Alignment Between Regional (TRC) and Consumer (LCC) Results The space heating systems found to be economically preferable from a regional (TRC) perspective are generally also be the lowest life cycle (LCC) systems The space heating systems found to be economically preferable from a regional (TRC) perspective are generally also be the lowest life cycle (LCC) systems The high efficiency gas and electric water heating systems found to be economically preferable from consumer (LCC) perspective were also found to be economically competitive from a regional (TRC) perspective The high efficiency gas and electric water heating systems found to be economically preferable from consumer (LCC) perspective were also found to be economically competitive from a regional (TRC) perspective slide 34

35. Northwest Power and Conservation Council Slide 35 Summary of Findings Alignment Between Regional (TRC) and Consumer (LCC) Results The regional (TRC) analysis includes the full cost of gas service access (i.e., line or main and line extensions) in each space and/or water heating equipment selection The regional (TRC) analysis includes the full cost of gas service access (i.e., line or main and line extensions) in each space and/or water heating equipment selection The consumer (LCC) analysis considered two scenarios for recovering the cost of gas service. The consumer (LCC) analysis considered two scenarios for recovering the cost of gas service. –Scenario A – Assumed gas access cost are recovered directly from the household converting –Scenario B – Assumed gas access cost are recovered entirely through residential rates The “fuel choice” results from Scenario A & B generally “bracket” those observed from the TRC analysis The “fuel choice” results from Scenario A & B generally “bracket” those observed from the TRC analysis slide 35

36. Northwest Power and Conservation Council Slide 36 Summary of Findings Consumer Perspective Market Evidence NEEA surveys indicate that consumers selected the space and water heating systems that are economical preferable from a TRC perspective NEEA surveys indicate that consumers selected the space and water heating systems that are economical preferable from a TRC perspective Continued decline in electric space and water heating market share indicate that where gas is available consumers are converting to gas space and/or water heating systems Continued decline in electric space and water heating market share indicate that where gas is available consumers are converting to gas space and/or water heating systems –Limited recent surveys of conversions slide 36

37. Northwest Power and Conservation Council Slide 37 Backup Slides slide 37

38. Northwest Power and Conservation Council Slide 38 Similarity of Appliance Performance Example for Gas Tank (2) in Water Heating Choices Slide

39. Northwest Power and Conservation Council Slide 39 Water Heating Choices 129,693 households per year 31,202 households/yr 13,379 households/yr 15,010 households/yr 6,430 change to electricity -101.4 BTUs 10^9/yr 64,356 households/yr 21,197 change to gas 364.5 BTUs 10^9/yr 5,745 households/yr 5,745 change to gas 99.7 BTUs 10^9/yr T T T T

40. Northwest Power and Conservation Council Slide 40 Similarity of Appliance Performance Example for HPWH (1) in Water Heating Choices Slide

41. Northwest Power and Conservation Council Slide 41 Space Heating Choices 129,693 households per year 15,343 households/yr 4,111 households/yr 19,275 households/yr 72,919 households/yr 799 change to gas 31.6 BTUs 10^9/yr 4,793 households/yr 67 households/yr 6,019 households/yr 491 households/yr 6,177 households/yr 6,136 change to gas 247.2 BTUs 10^9/yr 499 households/yr 499 change to gas 15.7 BTUs 10^9/yr T T T T T T T T T

42. Northwest Power and Conservation Council Slide 42 Summary of TRC Results Gas and electric appliances for space and water heating have become competitive both in terms of efficiency and cost Gas and electric appliances for space and water heating have become competitive both in terms of efficiency and cost –Where the model selects a particular appliance, there are typically appliances using the alternative fuel with similar performance –Given the precision of our calculations, there is no clear winner The total number of space heating conversions is small (7,434 annually or less than 6 percent of households) and are to gas from electricity. These households either The total number of space heating conversions is small (7,434 annually or less than 6 percent of households) and are to gas from electricity. These households either –Use or will use gas for water heating anyway, or –Do not value the air conditioning that heat pumps can provide and require only a service extension for natural gas (not a main extension) The total number of water heating conversions to gas from electricity is significant (26,942 annually or about 21 percent) The total number of water heating conversions to gas from electricity is significant (26,942 annually or about 21 percent) –These households either already have natural gas for space heating or will add it to convert their space heating The total number of water heating conversions to electricity from gas is small (6,430 annually or less than 6 percent) The total number of water heating conversions to electricity from gas is small (6,430 annually or less than 6 percent) –These households have water heaters of greater than 55 gallon capacity and therefore must add a more efficient appliance. They select heat pump water heaters over gas water heat technology. –Again, the competition between gas and electric appliances is close. If condensing gas were chosen in lieu of a heat pump water heater, the effect over 20 years would be to lower the electric savings to 240 MWa from 340 MWa. From a regional planning perspective, this is small.