Benefit Cost Study

KEC Electricity Committee, March 12, 200KEC Electricity Committee, March 12, 20088

Benefit Cost Study of the Benefit Cost Study of the Governor’s 2015 Wind Governor’s 2015 Wind

Challenge:Challenge: 1,000 MW by 20151,000 MW by 2015

Bob GlassBob GlassKCC Utilities Division, Economic Policy & PlanningKCC Utilities Division, Economic Policy & Planning


Benefit Cost Study Benefit Cost Study

Traditional Approach to Investment Traditional Approach to Investment EvaluatingEvaluating

Benefit/Cost Model from the point of view Benefit/Cost Model from the point of view of the ratepayerof the ratepayer

Cost of Service MethodologyCost of Service Methodology

Net Present Value (NPV) CriteriaNet Present Value (NPV) CriteriaNPV > 0 NPV > 0 Good for Ratepayers Good for RatepayersNPV < 0 NPV < 0 Bad for Ratepayers Bad for RatepayersNPV = 0 NPV = 0 Neutral Neutral


Major Concern: Major Concern: UncertaintyUncertainty

Uncertain of the values of variables and Uncertain of the values of variables and parametersparameters

We could not make the uncertainty go We could not make the uncertainty go awayaway

So we tried to quantify the uncertaintySo we tried to quantify the uncertainty


What Does Wind What Does Wind Energy Compare to?Energy Compare to?

Wind is neither controllable or Wind is neither controllable or dispatchable.dispatchable.Because of this, wind energy is not a Because of this, wind energy is not a substitute for capacity-based energy: substitute for capacity-based energy: wind energy does not substitute for firm wind energy does not substitute for firm energy.energy.Wind energy provides fuel, not capacity, Wind energy provides fuel, not capacity, savings. savings. We assumed wind substituted for the We assumed wind substituted for the utility’s fuel mix.utility’s fuel mix.We did, however, include a 7% capacity We did, however, include a 7% capacity credit for wind energy (per SPP rating).credit for wind energy (per SPP rating).

Costs per MWhPurchase

Power Agreement

Utility Own

Utility’s Stand Alone Cost $48 - $49 $77 - $78

Integration Cost $8.00 $8.00

Levelized Cost $56 - $57 $77 - $78

Average Retail Rate Change

$0.98 $1.90

Threshold External Cost $27 - $28 $51 - $52

Threshold CO2 Tax $37 - $38 $68 - $69

Threshold CO2 Tax with $20 External Costs

$10 - $11 $41 - $42

Total Cost without PTC $74 - $75 $95 - $96

January 2008 Update[in 2005 constant dollars per MWh]

Cost of Wind Energy


Increase in MWh Benefit Necessary to Make NPV = 0Utility Ownership Case

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

$10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110

Mean = $50.67Max = $111.85Min = $11.76


Increase in MWh Benefit Necessary to Make NPV = 0Purchase Power Agreement Case

0%

2%

4%

6%

8%

10%

12%

$0 $10 $20 $30 $40 $50 $60 $70

Mean = $27.79Max = $68.31Min = -$5.90


Benefit Cost Study Benefit Cost Study

Results shed light on the question of Results shed light on the question of whether an investment in 1,000 whether an investment in 1,000 MW of wind energy by 2015 is MW of wind energy by 2015 is likely to be a good deal for likely to be a good deal for Kansans.Kansans.

And the answer is that it depends...And the answer is that it depends...


Is Wind Energy a Good Is Wind Energy a Good Deal?Deal? (internal cost perspective)(internal cost perspective)

For average Kansas ratepayers, the For average Kansas ratepayers, the answer is likely to be “no.” answer is likely to be “no.”

Under most forecast scenarios, wind-Under most forecast scenarios, wind-based electricity costs more than based electricity costs more than electricity from conventional electricity from conventional sources, and is likely to result in sources, and is likely to result in higher rates and, thus, higher higher rates and, thus, higher electric bills. electric bills.


Is Wind Energy a Good Is Wind Energy a Good Deal?Deal? ((internal cost perspective)internal cost perspective)

The average ratepayer is likely to pay The average ratepayer is likely to pay $0.98 to $1.90 more per MWh, $0.98 to $1.90 more per MWh, resulting in annual bills that are resulting in annual bills that are $11.76 to $22.80 higher (based on $11.76 to $22.80 higher (based on 11 MWh/yr average usage).11 MWh/yr average usage).

Over the 29-year term of the Over the 29-year term of the investment, the typical residential investment, the typical residential customer is likely to pay an extra customer is likely to pay an extra $341 to $661 as a result of the $341 to $661 as a result of the Challenge.Challenge.


Is Wind Energy a Good Is Wind Energy a Good Deal?Deal? (total cost perspective)(total cost perspective)For average Kansans concerned about For average Kansans concerned about

health & environmental costs of health & environmental costs of burning fossil fuels, the answer is burning fossil fuels, the answer is “maybe.” “maybe.”

Though wind energy is more costly, if Though wind energy is more costly, if Kansans are willing and able to pay Kansans are willing and able to pay the the wind premium,wind premium, then meeting then meeting the Challenge could be beneficial the Challenge could be beneficial overall. overall.


Is Wind Energy a Good Is Wind Energy a Good Deal?Deal? (total cost perspective)(total cost perspective)Depends on the value of Depends on the value of external external

cost savings cost savings thatthat resultresult from wind from wind energy displacing conventional energy displacing conventional electric generation.electric generation.

Unfortunately, very little good data Unfortunately, very little good data exists to quantify pollution-related exists to quantify pollution-related external costs in Kansas. external costs in Kansas.


Is Wind Energy a Good Is Wind Energy a Good Deal?Deal? (total cost perspective)(total cost perspective)If external cost savings are large If external cost savings are large

enough—if they more than offset enough—if they more than offset the higher utility bills—then the the higher utility bills—then the Challenge would be a good deal for Challenge would be a good deal for Kansas.Kansas.

Just how high do the external cost Just how high do the external cost savings need to be for wind to savings need to be for wind to break even?break even?

$27/MWh to $52/MWh$27/MWh to $52/MWh


Key Result 1Key Result 1

In terms of internal cost, wind-based In terms of internal cost, wind-based electricity is more expensive than electricity is more expensive than conventional generation. conventional generation.

How much more?How much more?

If acquired through a typical PPA, If acquired through a typical PPA, wind costs about $28/MWh more; if wind costs about $28/MWh more; if acquired through utility investment, acquired through utility investment, wind costs about $51/MWh more.wind costs about $51/MWh more.



In terms of total generation cost, In terms of total generation cost, wind-based electricity may cost wind-based electricity may cost less, less, provided the external cost provided the external cost savings reach the threshold levelsavings reach the threshold level

$28/MWh for wind acquired $28/MWh for wind acquired through PPAthrough PPA

$51/MWh for wind acquired $51/MWh for wind acquired through utility investmentthrough utility investment



It’s likely to be less expensive for It’s likely to be less expensive for ratepayers if the utility ratepayers if the utility buysbuys (acquires wind-based electricity (acquires wind-based electricity through a PPA) than if it through a PPA) than if it buildsbuilds (invests in its own capacity).(invests in its own capacity).

As installation costs increase, the As installation costs increase, the buybuy option is even more competitive.option is even more competitive.



Meeting the Challenge is likely to Meeting the Challenge is likely to increase the average retail rate of increase the average retail rate of electricity in Kansas by electricity in Kansas by $0.98/MWh, if met entirely with $0.98/MWh, if met entirely with PPAs (the buy option), and by PPAs (the buy option), and by $1.90/MWh, if met entirely by $1.90/MWh, if met entirely by utility investment.utility investment.


Net Benefit is UncertainNet Benefit is Uncertain

Whether the Challenge yields a Whether the Challenge yields a positive net benefit to Kansans positive net benefit to Kansans largely depends on the external largely depends on the external cost savings attributable to wind-cost savings attributable to wind-based electricity.based electricity.

Based on January 2008 data, external Based on January 2008 data, external cost savings need to be at least cost savings need to be at least $40/M Wh for the Challenge to be $40/M Wh for the Challenge to be cost effective (includes PTC).cost effective (includes PTC).


Net Benefit is UncertainNet Benefit is Uncertain

Uncertainty of costs:Uncertainty of costs: wind installation and O&M costswind installation and O&M costs performance of turbines, etcperformance of turbines, etc

Uncertainty of benefits Uncertainty of benefits potential carbon regulation potential carbon regulation overall value of reduced power overall value of reduced power

plant emissionsplant emissions


A PDF version of the “Benefit Cost Study A PDF version of the “Benefit Cost Study of the Governor’s 2015 Wind of the Governor’s 2015 Wind Challenge” is available on the KEC web Challenge” is available on the KEC web site:site:

http://www.kec.kansas.gov/http://www.kec.kansas.gov/reports/reports/

2008_wind_report.pdf2008_wind_report.pdf

Benefit Cost Study

Documents

Transcript of Benefit Cost Study