1. The Council’s Regional Portfolio Model Michael Schilmoeller for the Northwest Power and Conservation Council Generation Resource Advisory Committee Thursday, September 25, 2008

2. 2 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Model operation

3. 3 Different Kind of Risk Modeling  Imperfect foresight and use of decision criteria for capacity additions  Adaptive plans that respond to futures  Primarily options to construction power plants or to take other action  May include policies for particular resources  “Scenario analysis on steroids”  750 futures, strategic uncertainty  Frequency that corresponds to likelihood Planning Principles

4. 4 Sources of Uncertainty  Fifth Power Plan  Load requirements  Gas price  Hydrogeneration  Electricity price  Forced outage rates  Aluminum price  Carbon allowance cost  Production tax credits  Renewable Energy Credit (Green tag value)  Sixth Power Plan  All of those to the left, except, perhaps, aluminum price  Power plant construction costs  Technology availability  Conservation costs Planning Principles

5. 5 Most Elements of the Resource Plan Are Options To Construct 1071 Additions in Megawatts Beginning of year2008201020122014201620182020 CCCT0.00 610.001,220.00 SCCT0.00 100.00800.00 Coal0.00 Demand Response500.00750.001,000.001,250.001,500.001,750.002,000.00 Wind_Capacity0.00100.001,500.002,400.004,400.005,000.00 IGCC0.00 425.00 Conservation cost- effectiveness premium over market 10.005.00 avg New Conservation4437461416177420202198 Planning Principles

6. 6 Why Use a Schedule of Construction Options for a Resource Plan?  More realistic!  Necessary for capturing construction risk  Consistent with earlier Council Plans Planning Principles

7. 7 Operating Costs Model Overview

8. 8 Spinner Graphs  Illustrates “scenario analysis on steroids,” one plan, across all futures  Link to Excel Spinner Graph ModelExcel Spinner Graph Model Model Overview

9. 9 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Model operation

10. 10 Risk and Expected Cost Associated With A Plan Likelihood (Probability) Avg Cost 100001250015000175002000022500250002750030000 32500 Power Cost (NPV 2004 $M)-> Risk = average of costs> 90% threshold Selection of Resource Plans

11. 11 Feasibility Space Increasing Risk Increasing Cost Selection of Resource Plans

12. 12 Space of feasible solutions Feasibility Space Increasing Risk Increasing Cost Efficient Frontier Selection of Resource Plans

13. 13 A B C D Efficient Frontier Selection of Resource Plans

14. 14 Risk: Importance of Multiple Perspectives  Standard deviation  VaR90  90th decile  Loss of load probability (LOLP)  Resource - load balance  Incremental cost variation  Average power cost variation (rate impact)  Maximum incremental cost increase  Exposure to wholesale market prices  Imports and exports Selection of Resource Plans

15. 15 Resource Plan Selection  Trade-off between economic cost and risk  Rate impacts and volatility  Exposure to market prices  Non-economic costs and risks, including associated carbon emissions  Meeting reliability standards  Difficulties with changing the resource plan Selection of Resource Plans

16. 16 How Do We Interpret and Use a Schedule of Construction Options?  As a ceiling for what should be sited and licensed  To develop signposts for re- evaluation Siting and Licensing Early Construction Committed Construction In Service Selection of Resource Plans

17. 17 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Resource construction flexibility  Valuation calculation  Thermal resource dispatch  Decision criteria  Supply curves for conservation and price- responsive hydro  Model operation

18. 18 Power Resource Risks Costs and Considerations  Commercial Availability Risk  Construction Risk  Responding fast enough to capture value  Sunk siting and permitting costs  Construction materials cost  Mothball and cancellation costs  Operation Risk  Fuel, maintenance, and labor costs  Retirement Risk  Carrying the forward-going fixed cost of an unused plant  Undervaluing and retiring a plant that may have value in the future Resource construction flexibility

19. 19 The Construction Cycle  After an initial planning period, there typically large expenditures, such as for turbines or boilers, that mark decision points. Cash expenditures 18 months 9 months Resource construction flexibility

20. 20 Construction Optionality Capacity Planning Construction Committed construction In service time Delay Resource construction flexibility

21. 21 New Fixed Cost Capabilities Resource construction flexibility

22. 22 New Fixed Cost Capabilities Resource construction flexibility

23. 23 New Fixed Cost Capabilities  We will work our way through a pdf file that illustrates the logic Visio-Logic_v080925.pdf Visio-Logic_v080925.pdf Resource construction flexibility

24. 24 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Resource construction flexibility  Valuation calculation  Thermal resource dispatch  Decision criteria  Supply curves for conservation and price- responsive hydro  Model operation

25. 25 Computation Valuation calculation

26. 26 Traditional Costing Valuation calculation Hourly variable cost calculation:

27. 27 “Valuation” Costing Valuation calculation Complications arise when we use extended time periods price Loads (solid) & resources (grayed)

28. 28 “Valuation” Costing Valuation calculation Average loads and resources are the same, but in the first case, our system has net cost and in the second it has net benefit.

29. 29 “Valuation” Costing Valuation calculation N*(N+1)/2 correlations (upper triangular matrix)

30. 30 “Valuation” Costing Valuation calculation

31. 31 “Valuation” Costing Valuation calculation Only correlations are now those with the market

32. 32 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Resource construction flexibility  Valuation calculation  Thermal resource dispatch  Decision criteria  Supply curves for conservation and price- responsive hydro  Model operation

33. 33 Dispatchable Resources Thermal resource dispatch

34. 34 Gross Value of Resources Thermal resource dispatch

35. 35 Gross Value of Resources Thermal resource dispatch

36. 36 Gross Value of Resources Using Statistical Parameters of Distributions Thermal resource dispatch Assumes prices are lognormally distributed

37. 37 Estimating Energy Generation Thermal resource dispatch

38. 38 Estimating Energy Generation Thermal resource dispatch

39. 39 Estimating Energy Generation Thermal resource dispatch Applied to equation (4), this gives us a closed-form evaluation of the capacity factor and energy.

40. 40 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Resource construction flexibility  Valuation calculation  Thermal resource dispatch  Decision criteria  Supply curves for conservation and price- responsive hydro  Model operation

41. 41 Example of Decision Criterion for Construction: CCCT and SCCT  Projected economic value, from the construction, fixed, and variable costs and values from simulated forward curves:  the electricity forward price is an average of flat electricity prices over the preceding 18-months  the natural gas forward price is also such an 18- month average  Project the energy adequacy at the end of the construction cycle. If the system would otherwise be inadequate, build this unit if it is the least cost among the options available. Decision criteria

42. 42 Logic Flow for Decisions no Does the resource pay for itself? yes Go Stop Is the resource least cost of alternatives? yes Is forecast requirement on or before the earliest on-line date? no Decision criteria

43. 43 Decision Criteria For Construction time criterion On-Line! construction phase optional cancellation period evaluation phase time criterion On-Line! Decision criteria

44. 44 Example of Decision Criterion for Retirement  Forecast the value of the unit using the forward-going fixed cost only (fixed fuel transportation and salaries)  Mothball (de-staff, sell fixed fuel contracts) after pre-specified number of periods  Permanently decommission (convert the site to other purposes) if the plant remains in mothball status for some period Decision criteria

45. 45 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Resource construction flexibility  Valuation calculation  Thermal resource dispatch  Decision criteria  Supply curves for conservation and price- responsive hydro  Model operation

46. 46 Supply Curves Supply curves

47. 47 Supply Curves Supply curves

48. 48 Conservation Supply Curve δ Supply curves

49. 49 Components of Cost Reduction Additional conservation at $50/MWh Total System Costs SCCT deferral Reduced market prices Supply curves

50. 50 Price-takers Still See Benefits Additional conservation at $50/MWh Total System Costs SCCT deferral Supply curves

51. 51 SCCT Deferral  Why does conservation defer single cycle combustion turbines?  Low-capital cost resources are the traditional solution for risk management  SCCT have low capital cost  Conservation has high capital cost  Under what conditions does conservation hold an advantage over SCCTs? Supply curves

52. 52 SCCT Deferral Supply curves

53. 53 Price Responsive Hydro Supply curves

54. 54 Price Responsive Hydro: Gross Value Supply curves

55. 55 Price Responsive Hydro: Net Value or Cost Supply curves At right, value associated with use of hydro to meet higher market price. At left, value to return hydro using purchased market power at lower price.

56. 56 Supply Curves Supply curves Supply curve representations also include constraints on utilization rate and on upper and lower prices.

57. 57 Conventional Hydro  User-defined lookup function, with a random draw from 50 hydro years each simulation year  Derived from Genesys BPAREGU.OUT file and 2000 Bi-Op and includes independents and the three non-PNCA Idaho hydro units  Estimates of east-side and west-side generation by month, by hydro condition  Estimates of on- and off-peak generation (6x16 definition) Not! Supply curves

58. 58 Overview  Planning Principles  Selection of Resource Plans  Key techniques  Model operation  Equilibrium search  Order of calculations

59. 59 Energy Balance  First Law of Thermodynamics: In a closed system, energy may not be created or destroyed.  generation = loads – imports (+exports)  We assure balance by controlling generation through electricity price. The model finds a suitable price by iteration. Model operation

60. 60 Equilibrium search Model operation

61. 61 Computation Model operation

62. 62 End

63. 63 Predictors  Demand Response and Wind: identical logic for fixed and variable costs for the unit, except  the size of the plant is 1MW,  the electricity price is an period average of flat electricity prices Decision criteria

64. 64 Predictors  Coal: identical logic for fixed and variable costs for the unit, except  the size of the plant is 1MW,  the electricity price is an period average of flat electricity prices  There was no variation or uncertainty in coal prices Decision criteria

65. 65 Predictors  Conservation  Discretionary  Annual, energy-weighted average of year before last’s flat electricity price (lagged for budgeting)  Optional premium over market  Lost Opportunity  Energy-weighted average of last five year’s electricity prices  Ratchets upward to reflect represents such things as market transformation and the implementation of codes and standards  Optional premium over market Decision criteria