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 September 8, 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 Preliminary Observations From Regional Power System Perspective (1) Most homes should stay with their current space heating and water heating systems Most homes should stay with their current space heating and water heating systems –Extending gas service is an economic hurdle to converting all-electric households to gas –The overall efficiency of inexpensive electric space heating and water heating systems is an economic hurdle that limits the viability of converting existing gas systems to electricity There are exceptions There are exceptions –Converting gas water heaters to electric heat pump water heaters appears to be economically attractive in many cases The economic potential of gas-to-electric conversions is dependent upon whether new gas-fired turbines are needed to serve these new loads or whether existing turbines could support conversions to electric appliance The economic potential of gas-to-electric conversions is dependent upon whether new gas-fired turbines are needed to serve these new loads or whether existing turbines could support conversions to electric appliance

6. Northwest Power and Conservation Council Slide 6 Preliminary Observations From Regional Power System Perspective (1) 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 –With the exception of heat pumps, electric appliances produce more CO2 than gas appliances due to the inefficiency of the overall power system –However, the small potential for economic conversions simply make the impact negligible

7. Northwest Power and Conservation Council Slide 7 Remaining Analytical Work from Region Power System Perspective Assess the impact of the interaction between “fuel conversions” and the amount of conservation available (e.g. increased market share of natural gas space heating reduces the potential for residential weatherization, heat pump efficiency upgrades, etc.) Assess the impact of the interaction between “fuel conversions” and the amount of conservation available (e.g. increased market share of natural gas space heating reduces the potential for residential weatherization, heat pump efficiency upgrades, etc.) Assess whether consideration of the cooling benefits provided by heat pumps alters the selection of space conditioning systems Assess whether consideration of the cooling benefits provided by heat pumps alters the selection of space conditioning systems Refine the granularity of results for specific market segments Refine the granularity of results for specific market segments Add a heat pump-with-gas forced air furnace backup hybrid space heating option Add a heat pump-with-gas forced air furnace backup hybrid space heating option

8. Northwest Power and Conservation Council Slide 8 Consumer Perspective Alignment of Incentives Analysis using the Resource Portfolio Model (RPM) revealed that existing homes employing natural gas for space and water heating would convert to electric space and water heating systems based on life-cycle costs using wholesale electricity and natural gas prices Analysis using the Resource Portfolio Model (RPM) revealed that existing homes employing natural gas for space and water heating would convert to electric space and water heating systems based on life-cycle costs using wholesale electricity and natural gas prices If this were to occur, it would increase the Northwest power system’s cost and risk, which reflect generation plant and operation cost If this were to occur, it would increase the Northwest power system’s cost and risk, which reflect generation plant and operation cost

9. Northwest Power and Conservation Council Slide 9 Is This Scenario Highly Probable? Given current retail electricity and natural gas prices and forecast future retail prices, would consumers likely convert from natural gas space and water heating systems to electric space and water heating systems? Given current retail electricity and natural gas prices and forecast future retail prices, would consumers likely convert from natural gas space and water heating systems to electric space and water heating systems? If this is the case, should the Council modify its current policy on fuel choice/switching? If this is the case, should the Council modify its current policy on fuel choice/switching? slide 9

10. 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 10

11. Northwest Power and Conservation Council Slide 11 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 11

12. Northwest Power and Conservation Council Slide 12 Input Assumptions Space and water heating systems are “converted” at the same time Space and water heating systems are “converted” at the same time Conversions are financed Conversions are financed –6% interest rate –15 years Tested alternative assumption where consumer pay cash Tested alternative assumption where consumer pay cash – Results were nearly identical slide 12

13. Northwest Power and Conservation Council Slide 13 RPM Results Focused Consumer Economic Analysis Resource Portfolio Model (RPM) revealed that eighteen of 95 existing market segments represented 80% of the likely “fuel shifts” from gas-to-electric systems Resource Portfolio Model (RPM) revealed that eighteen of 95 existing market segments represented 80% of the likely “fuel shifts” from gas-to-electric systems Segments are characterized by Segments are characterized by –Housing Type (Single Family or Multifamily) –Existing space heating system –Existing water heating system & storage tank capacity –Presence of existing central air conditioning –Foundation type –Natural gas service access slide 13

14. Northwest Power and Conservation Council Slide 14 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 14

15. Northwest Power and Conservation Council Slide 15 Consumer Life Cycle Cost Model User inputs: User inputs: –Climate (5 locations across region) –Utility specific or climate specific distribution of retail electric and gas rates –Utility specific or regional forecast of escalation rates for retail rates –Existing and converted space conditioning and water heating system configurations –Five home sizes (2 – MF, 3-SF) slide 15

16. Five Segments Represent Over 50% of the Potential Change in Gas or Electric Load slide 16 Existing Space Conditioni ng System Existing Water Heating System Water heater capacity (gals) House Type & Size (sq.ft.)Basement? Gas Access Share of Total Converted Electric Load Converted Load (Mwa) Converted Load (MMBtu) Gas FAF Gas Storage TankX<=55SF - 1900NoExisting19%321 (1,111,661) Gas FAF Gas Storage TankX<=55SF-2250YesExisting13%215(775,632) Gas FAF Electric Resistance Storage TankX<=55SF-1900NoExisting9%153 (530,703) Gas FAF Electric Resistance Storage TankX<=55SF-2250YesExisting7%115 (414,670) Gas FAF w/Central AC Gas Storage TankX<=55SF-1900NoExisting6%96 (332,507)

17. Northwest Power and Conservation Council Slide 17 Results for Largest Market Segments Existing Homes with Gas Furnaces and Gas or Electric Water Heating slide 17

18. Northwest Power and Conservation Council Slide 18 Results for Largest Market Segments w/ Limited Standard Deviation Existing Homes with Gas Furnaces and Gas or Electric Water Heating slide 18

19. Northwest Power and Conservation Council Slide 19 Results for Largest Market Segments Existing Homes with Basements using Gas Furnaces and Gas or Electric Water Heating slide 19

20. Northwest Power and Conservation Council Slide 20 Results for Largest Market Segments w/ Limited Standard Deviation Existing Homes with Basements using Gas Furnaces and Gas or Electric Water Heating slide 20

21. Northwest Power and Conservation Council Slide 21 Results for Largest Market Segments Existing Homes with Gas Furnaces and Central AC and Gas Water Heating slide 21

22. Northwest Power and Conservation Council Slide 22 Results for Largest Market Segments w/ Limited Standard Deviation Existing Homes with Gas Furnaces and Central AC and Gas Water Heating slide 22

23. Northwest Power and Conservation Council Slide 23 Preliminary Findings (1) Conversion of existing water heaters, whether gas or electric, to heat pump water heaters appears to be preferable on a life cycle cost basis Conversion of existing water heaters, whether gas or electric, to heat pump water heaters appears to be preferable on a life cycle cost basis –However, gas condensing water heaters have life cycle cost that are very nearly as low and heat pump water heaters Air Source heat pumps appear to be preferable on a life cycle cost basis when air conditioning is desired, except in zonal electric homes where “ductless” heat pumps have lower LCC Air Source heat pumps appear to be preferable on a life cycle cost basis when air conditioning is desired, except in zonal electric homes where “ductless” heat pumps have lower LCC slide 23

24. Summary of Results Existing Systems with Lower Life Cycle Cost Options Requiring Fuel Conversion slide 24 Existing Space Cond. System Existing Water Heating System Minimum LCC Space Cond. System Minimum LCC Water Heating System SH Fuel Conversion WH Fuel Conversiion Share of Total Potential Electric Conversions Electric FAF Electric ResistanceGas FAFHPWHYesNo5.5% Gas FAF Gas CondensingGas FAFHPWHNoYes4.2% Gas FAF Gas Storage TankGas FAFHPWHNoYes32.0% Gas FAFHPWHGas FAFHPWHNo 1.2% Gas FAF w/CAC Electric ResistanceHeat PumpHPWHYesNo4.6% Gas FAF w/CAC Gas Storage TankHeat PumpHPWHYes 8.6%

25. Northwest Power and Conservation Council Slide 25 Preliminary Findings (2) Conversion of existing electric water and gas heating systems to higher efficiency systems (heat pump water heaters and heat pumps when air conditioning is desired) appears to be preferable to conversion to natural gas space heating and water heating from a life cycle cost perspective Conversion of existing electric water and gas heating systems to higher efficiency systems (heat pump water heaters and heat pumps when air conditioning is desired) appears to be preferable to conversion to natural gas space heating and water heating from a life cycle cost perspective However, this finding is not applicable to all consumers due to variations in retail electricity and gas prices across the region However, this finding is not applicable to all consumers due to variations in retail electricity and gas prices across the region slide 25

26. Northwest Power and Conservation Council Slide 26 Summary of Results Existing Systems with Lower Life Cycle Cost Options Requiring Efficiency Upgrades slide 26 Existing Space Cond. System Existing Water Heating System Minimum LCC Space Cond. System Minimum LCC Water Heating System Share of Total Potential Electric Conversions Electric FAF w/CACElectric ResistanceHeat PumpHPWH1.3% Electric ZonalElectric ResistanceElectric ZonalHPWH3.0% Electric ZonalElectric ResistanceDuctless HPHPWH5.6% Gas FAFElectric ResistanceGas FAFHPWH16.0%

27. Northwest Power and Conservation Council Slide 27 Life Cycle Cost of Each Space Conditioning and Water Heating System Vary Across the Region slide 27

28. The Life Cycle Cost Heat Pumps and Gas Furnaces with Central AC Are Distributed Differently Across the Region slide 28

29. Northwest Power and Conservation Council Slide 29 Therefore, Only Limited Generalizations About Which System Has the Lowest Life Cycle Cost Are Possible (or Prudent) slide 29

30. Northwest Power and Conservation Council Slide 30 Consideration of “Variance” Changes the Results Retail electricity prices differ more across the region than retail natural gas prices Retail electricity prices differ more across the region than retail natural gas prices –Electricity prices range from 2.3 cents/kWh to 12.3 cents/kWh (530%) –Gas prices range from $8.54/MMBtu to $16.13/MMBtu (190%) Selecting the systems with the lowest life cycle cost and limiting the “standard deviation” increases the likelihood that natural gas space heating systems are the best economic choice Selecting the systems with the lowest life cycle cost and limiting the “standard deviation” increases the likelihood that natural gas space heating systems are the best economic choice –Heat pump hot water heaters are still selected slide 30

31. Summary of Results Existing Systems with Lower Life Cycle Cost Options Requiring Fuel Conversion When “Variance” is Considered slide 31 Existing Space Cond. System Existing Water Heating System Minimum LCC Space Cond. System Minimum LCC Water Heating System SH Fuel Conversion WH Fuel Conversiion Share of Total Potential Electric Conversions Electric FAF Electric ResistanceGas FAFHPWHYesNo5.5% Gas FAF Gas CondensingGas FAFHPWHNoYes4.2% Gas FAF Gas Storage TankGas FAFHPWHNoYes32.0% Gas FAFHPWHGas FAFHPWHNo 1.2% Gas FAF w/CAC Electric Resistance Gas FAF w/CACHPWHYesNo4.6% Gas FAF w/CAC Gas Storage Tank Gas FAF w/CACHPWHYes 8.6%

32. Northwest Power and Conservation Council Slide 32 Results for Other Segments slide 32 Existing Space Conditioning System Existing Water Heating System Water heater capacity (gals) House Type & Size (sq.ft.)Bsmnt? Lowest LCC w/o Std Dev Limit Lowest LCC w/Std Dev Limit Electric Zonal Electric or Gas Storage TankX<=55MF - 1050No Electric Zonal with Gas Tankless (EF82) Capacity <=55 gals Electric Zonal Electric or Gas Storage TankX<=55MF - 1450No Electric Zonal with Gas Tankless (EF82) Capacity <=55 gals Ductless HP with Gas Tankless (EF82) Capacity <=55 gals Electric Zonal Electric or Gas Storage TankX<=55SF - 1500No Electric Zonal with HPWH (EF2.0) Capacity <=55 gals Ductless HP with HPWH (EF2.0) Capacity <=55 gals Electric FAF Electric or Gas Storage TankX<=55SF-1900No Gas FAF with HPWH (EF2.0) Capacity <=55 gals Electric FAF w/CAC Electric or Gas Storage TankX<=55SF-1900No Heat Pump with HPWH (EF2.0) Capacity <=55 gals Gas FAF w/CAC with HPWH (EF2.0) Capacity <=55 gals

33. Northwest Power and Conservation Council Slide 33 Results for Other Segments slide 33 Existing Space Conditioning System Existing Water Heating System Water heater capacity (gals) House Type & Size (sq.ft.)Bsmnt? Lowest LCC w/o Std Dev Limit Lowest LCC w/Std Dev Limit Heat Pump Electric or Gas Storage TankX<=55SF - 1900No Heat Pump with HPWH (EF2.0) Capacity <=55 gals Gas FAF w/CAC with HPWH (EF2.0) Capacity <=55 gals Heat Pump Electric or Gas Storage TankX>55SF -1900Yes Heat Pump with HPWH (EF2.0) Capacity >55 gals Gas FAF w/CAC with HPWH (EF2.0) Capacity >55 gals Gas FAF w/CAC Electric or Gas Storage TankX<=55MF - 1450No Ductless HP with Gas Tankless (EF82) Capacity <=55 gals Electric or Gas FAF Electric or Gas Storage TankX>55SF-22500Yes Gas FAF with HPWH (EF2.0) Capacity >55 gals

34. Northwest Power and Conservation Council Slide 34 Next Steps Solicit Your Input on updated “Regional Power System” and “Consumer Life Cycle Cost Model” Findings Solicit Your Input on updated “Regional Power System” and “Consumer Life Cycle Cost Model” Findings Review Implications for Council’s Current Policy of Direct Use of Gas Review Implications for Council’s Current Policy of Direct Use of Gas Develop staff recommendation for Council consideration Develop staff recommendation for Council consideration slide 34