Tucson Electric Power 2016 Preliminary Integrated Resource Plan ...

TucsonElectricPowerCompany

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TucsonElectricPower

2016PreliminaryIntegratedResourcePlan

March1,2016


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Foreword New environmental regulations, emerging technologies and changing energy needs have reinforced the importance of long‐term resource planning to Tucson Electric Power (“TEP”) and other electric utilities. Whatever the future may bring, our 2016 preliminary Integrated Resource Plan (“IRP”) outlines our plan to ensure that TEP’s safe, affordable and reliable service remains a constant in our complex, evolving industry. We will continue to expand our use of cost‐effective renewable energy resources and energy efficiency programs for customers. We expect our renewble energy portfolio to exceed 370 megawatts (“MW”) by the end of 2016. We also will expand our energy effficiency resources through several new programs available this year. In the future, demand response partnerships with customers could help TEP manage peak load demands while reducing the need for new infrastructure. As requested by the Commission, this preliminary IRP report addresses the status of emerging resource options like energy storage technologies and small nuclear reactors. Two 10‐MW storage projects will be installed on TEP’s local distribution system in 2016, and we will continue to evaluate the potential for other new technologies as part of our resource planning process. We will study how natural gas‐fired resources can be best used to replace existing coal capacity. While we remain open to the possibility of using additional natural gas power plants to meet base load requirements, we will also study fast‐response generating resources like reciprocating natural gas engines, which can be used to stabilize intermittent renewable resources. While the status of the Clean Power Plan (“CPP”) is in question after the U.S. Supreme Court issued a stay suspending its enforcement pending further ligitation,TEP continues to evaluate its potential impact. The resource plan outlined in this document should put us in a strong position to comply with the new rules, which would require a 32‐percent reduction in carbon dioxide (“CO2”) emissions from Arizona power plants. Our drive to reduce CO2 emissions must be balanced against our continued need for reliable, cost‐effective generating resources, such as Springerville Generating Station (“SGS”). Although we previously decided to acquire half of Unit 1 upon the expiration of TEP’s long‐term lease, we are preparing for the potential acquisition of the other half as part of the resolution of ongoing legal disputes with the other co‐owners of that 387‐MW unit. TEP also owns Unit 2 at that eastern Arizona facility, so this would anchor our long‐term baseload resource in our newest and most efficient coal plants. TEP will continue to look for opportunities to economically reduce its interest in its other coal‐fired facilities. Strategies may include changes in plant ownership shares, unit shutdowns or the sale of generation assets. We remain committed to a long‐term strategy that diversifies our energy resource portfolio as demonstrated by recent coal plant retirement commitments at our Sundt and San Juan generating stations. TEP will continue to look for new resource options and cost‐effective ways of providing reliable electric service to our customers. We intend to provide more robust resource planning information in TEP’s final IRP in 2017. David G. Hutchens President and CEO


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Acknowledgements

TucsonElectricPowerCompanyIRPTeam

VictorAguirre,Manager,ResourcePlanningJeffYockey,Manager,EnvironmentalandLong‐TermPlanningKevinBattaglia,LeadResourcePlannerLucThiltges,LeadResourcePlannerGregStrang,SeniorForecastingAnalystStephanieBrowne‐Schlack,SeniorForecastingAnalystDeniseRicherson‐Smith,Director,CustomerServices&Programs,CustomerCareCenterRonBelval,Manager,TransmissionPlanningJimTaylor,SeniorDirector,T&DOperationsJeffKrauss,Manager,RenewableEnergyJoeBarrios,Supervisor,MediaRelations&RegulatoryCommunicationsErikBakken,SeniorDirector,TransmissionandEnvironmentalServicesMikeSheehan,SeniorDirector,FuelsandResourcePlanning

IRPConsultantsandForecastingServices

PaceGlobalhttp://www.paceglobal.com/GaryW.Vicinus,ExecutiveVicePresident,‐ConsultingServicesMelissaHaugh‐ConsultingServicesAnantKumar‐ConsultingServicesWoodMackenzie‐ConsultingServiceshttp://public.woodmac.com/public/homeEPIS‐AuroraXMPSoftwareConsultingServiceshttp://epis.com/


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TABLEOFCONTENTSForeword............................................................................................................................................................................................................3Acknowledgements........................................................................................................................................................................................4

CHAPTER1‐EXECUTIVESUMMARY2016PreliminaryIntegratedResourcePlan......................................................................................................................................9UpdatesonTEP’sResourcePlanningStrategySincethe2014IRP.......................................................................................10CoalResources...............................................................................................................................................................................................10NaturalGasResources................................................................................................................................................................................13TransmissionResources............................................................................................................................................................................13Targeting30%Renewablesby2030...................................................................................................................................................14SupportingFutureRenewableIntegration.......................................................................................................................................14NaturalGasReciprocatingEngines......................................................................................................................................................14BatteryStorage..............................................................................................................................................................................................152016EnergyEfficiencyImplementationPlan.................................................................................................................................15CompliancewiththeCleanPowerPlan..............................................................................................................................................16EnergyEfficiencyintheCleanPowerPlan........................................................................................................................................20PowerGenerationandWaterImpactsofResourceDiversification......................................................................................22

CHAPTER2‐LOADFORECASTGeographicalLocationandCustomerBase.......................................................................................................................................25LoadForecastProcess................................................................................................................................................................................27RetailEnergyForecast................................................................................................................................................................................28PeakDemandForecast...............................................................................................................................................................................29DataSourcesUsedinForecastingProcess........................................................................................................................................29

CHAPTER3‐LOADSANDRESOURCESFutureLoadObligations............................................................................................................................................................................34SystemResourceCapacity........................................................................................................................................................................35PreliminaryLoadsandResourceAssessment.................................................................................................................................36CommunityScaleRenewablesandDistributedGeneration......................................................................................................37OverviewoftheUNSRenewablePortfolio........................................................................................................................................39EnergyEfficiency..........................................................................................................................................................................................40Transmission..................................................................................................................................................................................................42PinalCentraltoTortolita500kVTransmissionUpgrade..........................................................................................................43


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CHAPTER4‐EMERGINGTECHNOLOGIESSmallModularNuclearReactors...........................................................................................................................................................45ReciprocatingInternalCombustionEngines....................................................................................................................................47TheFutureoftheDistributionGrid......................................................................................................................................................49EnergyStorage...............................................................................................................................................................................................51TEPEnergyStorageProject.....................................................................................................................................................................54Lazard’sStorageAnalysis:KeyFindings............................................................................................................................................55CostCompetitiveStorageTechnologies.............................................................................................................................................55FutureEnergyStorageCostDecreases...............................................................................................................................................56

CHAPTER5‐OTHERRESOURCEPLANNINGTOPICS

EnergyImbalanceMarket.........................................................................................................................................................................57NaturalGasStorage.....................................................................................................................................................................................58TheIntegrationofRenewables...............................................................................................................................................................60UtilityOwnershipinNaturalGasReserves.......................................................................................................................................62

CHAPTER6‐FUTURERESOURCEASSUMPTIONSFutureResourceOptionsandMarketAssumptions.....................................................................................................................65GenerationResources–MatrixofApplications..............................................................................................................................66ComparisonofResources..........................................................................................................................................................................67LevelizedCostComparisons....................................................................................................................................................................68RenewableTechnologies–CostDetails.............................................................................................................................................69ConventionalTechnologies–CostDetails.........................................................................................................................................70Lazard’sLevelizedCostofEnergyAnalysis:KeyFindings.........................................................................................................71CostCompetivenessofAlternativeEnergyTechnologies..........................................................................................................71TheNeedforDiverseGenerationPortfolios.....................................................................................................................................72TheImportanceofRationalandTransparentEnergyPolicies................................................................................................72RenewableElectricityProductionTaxCredit(“PTC”).................................................................................................................73EnergyInvestmentTaxCredit(“ITC”)................................................................................................................................................74ImpactsofDecliningTaxCreditsandTechnologyInstalledCosts.........................................................................................76ImpactsofDecliningPTCandTechnologyInstalledCosts........................................................................................................77


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CHAPTER7‐MARKETASSSUMPTIONS&SCENARIOSMarketAssumptions...................................................................................................................................................................................78PermianNaturalGas...................................................................................................................................................................................78PaloVerde(7x24)MarketPrices...........................................................................................................................................................78EnergyStorageCase....................................................................................................................................................................................79SmallNuclearReactorsCase....................................................................................................................................................................79LowLoadGrowthCaseandExpandedEnergyEfficiency..........................................................................................................79ExpandedRenewablesCase.....................................................................................................................................................................80MarketBasedReferenceCase.................................................................................................................................................................80HighLoadGrowthCase‐LargeIndustrialCustomerExpansions..........................................................................................80FullCoalRetirementCase.........................................................................................................................................................................80

CHAPTER8‐RISKANALYSISANDSENSITIVITIESFuel,MarketandDemandRiskAnalysis............................................................................................................................................81PermianNaturalGasPrices......................................................................................................................................................................82PaloVerde(7x24)MarketPrices...........................................................................................................................................................83LoadGrowthSensitivity............................................................................................................................................................................84CoalPriceSensitivity...................................................................................................................................................................................85

CHAPTER9‐ACTIONPLAN2016–2017ActionPlan...........................................................................................................................................................................87


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Executive Summary

Introduction

TucsonElectricPowerCompany’s(TEP’sortheCompany’s)2016preliminaryIntegratedResourcePlan(“IRP”)introducesanddiscussestheissuesthatTEPplanstoanalyzeindetailforthefinal2017IntegratedResourcePlan.Thepurposeofthisreportistoprovideregulators,customersandotherinterestedstakeholdersanopportunitytounderstandthecurrentplanningenvironmentandprovidefeedbackontheCompany’sfutureresourceplanspriortothe2017finalIRPsubmittalonApril1,2017.InadditiontoprovidingasnapshotofTEP’scurrentloadsandresources,thisreportprovidesanoverviewofcurrentresourcecostassumptions,forwardmarketconditionsaswellasadiscussiononsomenewemergingtechnologies.ThisreportalsohighlightsanumberofchangesintheCompany’sresourceplanssincethe2014IRPanddiscussessomeofthenewinfrastructurerequirementsandpolicydecisionsthatmustbeaddressedoverthenextfewyears.

2016PreliminaryIntegratedResourcePlanRequirements

InaccordancewithDecisionNo.75269(DocketNo.E‐00000V‐15‐0094),theCommissionorderedtheArizonaloadservingentitiestofileapreliminaryIRPonMarch1,2016withthefinalIRPreportdueApril1,2017.ThisorderstipulatedthatthepreliminaryIRPincludesthefollowingtopics;

LoadForecast

LoadandResourceTable(includingtechnologydiscussion)

SourcesofAssumptionsandTechnologiesEvaluated

StatusupdateonCompany’splantoparticipateintheEnergyImbalanceMarket(“EIM”)

ScenariosRequestedin2014IRPDecision(No.75068)

EnergyStorage

SmallNuclearReactors

ExpandedRenewables(includingdistributedresources):biogas,solar,wind,geothermal,etc.

ExpandedEnergyEfficiency/demandresponse/integratedemandsidemanagement(whichshallincludetheeffectofmicro‐gridsandcombinedheatandpower)

ProposedSensitivities

FutureActionPlan

Chapter1


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Updates on TEP’s Resource Planning Strategy Since the 2014 IRP

Coal Resources

H.WilsonSundtGeneratingStation

In2015,thedepletionoftheCompany’sexistingcoalinventoryattheSundtGenerationStationandlownaturalgaspricessupportedthetransitiononSundtUnit4fromcoaltonaturalgastwoandhalfyearsaheadoftheDecember2017deadlineinitsagreementwiththeEnvironmentalProtectionAgency(“EPA”).ThistransitiontonaturalgaswillreduceTEP’snear‐termfuelsupplycostsforcustomersandmarkstheendofSundt’stwentysevenyearsofoperationsoncoal.

SanJuanGeneratingStation

AkeycomponentofTEP’s2014IRPwastheplannedreductionofcoalcapacityattheSanJuanGeneratingStation(“SanJuan”).InOctober2014,theEPApublishedafinalruleapprovingarevisedStateImplementationPlan(“SIP”)coveringBestAvailableRetrofitTechnology(“BART”)requirementsforSanJuan,whichincludestheclosureofUnits2and3byDecember2017andtheinstallationofSelectiveNon‐CatalyticReduction(“SNCR”)onUnits1and4.InJanuary2016,anewcoalsupplyandparticipantrestructuringagreementsbecameeffective,whichenablesTEPtoreduceitscoalcapacityatSanJuanfrom340MWto170MWbytheendofDecember2017.ThesenewagreementsenabletheCompanytotakeadvantageofsignificantlylowercoalsupplycostsforthenextsevenyearswhileprovidingacommerciallyviableoptiontoexitSanJuanUnit1inJuly2022.

FourCornersPowerPlant

Aspartoftheprevious2014IRPfiling,TEP’sresourceplansassumedthattheCompanywouldmaintainitsownershippositionsinUnits4and5attheFourCornersPowerPlant(“FCPP”)throughJuly2031.Thisdecisionwasaresultofthenegotiationsbetweentheco‐ownersatFourCornersandtheEPAthatresultedinanalternativeBARTcomplianceplanthatrequiredthepermanentclosureofUnits1,2,and3byJanuary1,2014andinstallationandoperationofSelectiveCatalyticReduction(“SCR”)controlsonUnits4and5byJuly31,2018.TEPexpectstheplantoperatortocompletetheSCRupgradesonbothunitsbyApril2018.

BarringanyfutureenvironmentalregulationsontheNavajoNationthatwouldsignificantlychangetheeconomicsoftheplant,TEPplanstoremainaplantparticipantthroughthetermofitsexistingcoalsupply(“CSA”)agreement,whichisJuly2031.TEPwillcontinuetoevaluatethelong‐termviabilityofitscoaloperationsatFCPPandwilldeterminewhetherornotitwillremaininthefacilitybeyond2031insubsequentIRPplanningcycles.TEPowns110MWor7%ofFourCornersUnits4and5.

NavajoGeneratingStation

InFebruary2013,theEPAissuedaproposedBARTrulefortheNavajoGeneratingStation(“NGS”)undertheRegionalHazeRuleoftheCleanAirAct.EPA'sproposalrequiredSCRemissioncontroltechnologytobeinstalledonallthreeNGSunitsby2018.GiventhedirecteconomicimpactsapotentialclosureofNGSwouldhaveontheNavajoandHopiTribes,theEPAinvitedtheplantownerstosubmita“Better‐than‐Bart”alternativethatwouldresultingreateremissionreductionsthanEPA’soriginalproposal.Asaresult,aTechnicalWorkGroup(“TWG”)wasformedandconsistedofrepresentativesfromtheCentralArizonaWaterConservationdistrict,theEnvironmentalDefenseFund,theGilaRiverIndianCommunity,theNavajoNation,SaltRiverProject,theU.S.DepartmentoftheInterior,andWesternResourceAdvocates.InJuly2013,theTWGsubmitted


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analternativeplantotheEPAforfinalconsideration.TheTWGproposalincludedtwoemissionreductionalternativesthatwouldachieve“Better‐than‐BART”results.Basedonthecurrentstatusofnegotiationswiththeowner‐participantsofNGS,bothLosAngelesDepartmentofWaterandPower(“LADWP”)andNVEnergy(“NVE”)havemadecommitmentstoexittheprojectbytheendof2019.WiththedepartureofLADWPandNVE,theremainingNGSparticipantswillceaseoperationsofoneofthree750MWunitsatthepowerplantbyJanuary1,2020andconsolidatetheremainingownershipintotheothertworemainingunits.Inaddition,thealternativethatTWGproposedrequiresSCRcontrolstobeinstalledby2030inorderforthefacilitytoremainin‐servicebeyondthatdate.InlightofthepotentialenvironmentalemissionguidelinesundertheCleanPowerPlan,andthesignificantcostofSCRinvestmentsrequiredtokeeptheplantinoperationbeyond2030,theCompanywillevaluatetheviabilityofitscoaloperationsatNGSandwilldeterminewhetherornotitwillremaininthefacilitybeyond2030insubsequentIRPplanningcycles.TEPowns168MWor7.5%ofNGSUnits1‐3.

SpringervilleGeneratingStation

Priorto2015,TEPoperated387MWor100%ofSpringervilleUnit1(“SGSUnit1”)underoperatingleasesandpursuanttoprojectagreementsenteredintoin1986.Today,TEPowns192MWor49.5%ofSGSUnit1.Theremaining195MWor50.5%ofSGSUnit1isownedbytwothird‐partyowners(the“Co‐Owners”).TEPcontinuestooperate100%ofSGSUnit1pursuanttoagreementsenteredintoin1986.

Aspartofthe2014IRP,TEPwasplanningtouseitsexpiringleaseobligationstoreduceitscoalcapacitycommitmentsonSGSUnit1from387MWto192MWattheendof2014.Beginninginlate2014,theCo‐OwnersinstitutedvariouslegalproceedingsagainstTEPregardingSGSUnit1.Additionally,sinceJanuary2015,theCo‐OwnershavefailedtopaytheirshareofO&MandcapitalexpensesofSGSUnit1.Inresponse,TEPfiledaseparatelegalproceedingtorecovertheseamounts.InFebruary2016,thepartiesagreedtoasettlementoftheselegalmatters,thetermsofwhichincludeTEP’sacquisitionoftheCo‐OwnersinterestinUnit1,subjecttoFERCapproval.ThisacquisitionwouldresultinatemporaryincreaseinTEP’scoal‐firedcapacity.

OverviewofCoal‐FiredGenerationinArizonaandNewMexico

Chapter5providesadetailedsummaryontheremainingeightcoal‐firedgeneratingplantslocatedinArizonaandNewMexico.ThissummaryonPage63providesanoverviewofcurrentplantoperations,ownershipparticipationaswellasanupdateonthestatusofcurrentoperatingandcoalsupplyagreements.


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TEP’sLong‐TermResourceDiversificationStrategy

AsshowninFigure1below,TEP’sexistinggenerationfleetfacesanumberofuncertaintiestiedtoplantparticipationandfinaloutcomesonStateImplementationPlanstiedtotheCleanPowerPlan(“CPP”).Giventhisuncertainty,TEPmayconsideroptionsthatincludechangesinplantownershipshares,unitshutdownsorsaleofgenerationassetstothirdparties.TEPiscommittedtofollowthroughonitslong‐termportfoliodiversificationstrategytotakeadvantageofothernear‐termopportunitiestoreduceitscoalexposureathighercostTEPownedcoalfacilities.TEPplanstofilemoredetailsonitsdiversificationstrategyinthefinalIRPthatisdueApril1,2017.

Figure1‐TEP’sLongTermResourceDiversificationStrategy


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Natural Gas Resources

GilaRiverUnit3

InDecember2014,TEPandUNSElectricacquiredUnit3attheGilaRiverGeneratingStationfor$219million.GilaRiverUnit3isa550MWnaturalgascombined‐cyclepowerplantlocatedinGilaBend,Arizona.Today,lownaturalgaspricesmakeGilaRiverUnit3oneoflowestcostgenerationassetsforbothTEPandUNSElectric.GilaRiver’sfastrampingcapabilities,alongwithitsreal‐timeintegrationintoTEP’sbalancingauthority,providebothTEPandUNSElectricwithanidealresourcetosupporttheintegrationoffuturerenewables.

Transmission Resources

PinalCentraltoTortolita500kVTransmissionUpgrade

InNovember2015,TEPenergizeditsnewest500kVtransmissionexpansionprojectatPinalCentral.ThePinalCentraltoTortolitalinewillhelpmeetTucson’sfutureenergydemandsbyaddingasecondextrahighvoltage(“EHV”)transmissionconnectionbetweenTucsonandthePaloVerdewholesalepowermarket.ThislinetiesintheexistingSaltRiverProjectSoutheastValleytransmissionprojectthatextendsfromPaloVerdetoPinalCentralintoTortolita.ThisnewtransmissioninterconnectionwillfurtherimproveTEP’saccesstoawiderangeofrenewableandwholesalemarketresourceslocatedinthePaloVerdeareawhileimprovingTEP’ssystemreliability.

Figure2‐TortolitaSubstation


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Targeting30%Renewablesby2030

AsstatedinTEP’sIRPfilingsandTEP’scurrentratecase,theCompanyplanstomeetatargetof30%ofTEP’sretailenergyneedswithrenewableenergyresourcesby2030.ThistargetisdoublethatofthecurrentArizonaRenewableEnergyStandardthattargets15%by2025(A.A.C.R14‐2‐1804).

Figure3–TEPPortfolioEnergyMix

SupportingFutureRenewableIntegration

AspartofthisIRPplanningcycle,TEPisevaluatinganumberoftechnologiestosupportTEP’srampupinrenewableresources.Technologiessuchasreciprocatingenginesandbatterystoragearetwotechnologiesbeingconsideredtosupportrenewableintegration.

NaturalGasReciprocatingEngines

Reciprocatingengines,whilenotnewtechnology,areemergingaspotentialalternativesinlarge‐scaleelectricgeneration.Advancesinengineefficiencyandtheneedforfast‐responsegenerationmakereciprocatingenginesaviableoptiontostabilizevariableandintermittentelectricdemandandrenewableresources.AspartoftheCompany’scommitmenttotargethigherlevelsofrenewables,TEPisevaluatingthecostandoperationalcharacteristicsofreciprocatingenginesasanalternativetobothframeandaeroderivativenaturalgascombustionturbines.Aspartofthe2017IRPfiling,TEPplanstoprovideanin‐depthanalysisoncosts,usesandpotentialbenefitsofthistechnologytosupportrenewableintegration.


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BatteryStorage

Inthespringof2015,TEPissuedarequestforproposals(“RFP”)forthedesignandconstructionofutility‐scaleenergystoragesystems.CurrentlyTEPisworkingwithtwovendorstofinalizetheplansfortwo10MWlithiumionbatterystorageprojects.While20MWrepresentsonly1%ofTEP’speakretailload,theseprojectsarelargeenoughtohaveameasurableimpactonsupportinggridoperations.Assumingtheperformancefromthesefirsttwoinstallationsisfavorable,TEPwouldthenconsiderfutureenergystorageprojectsasaviableoptionforregulationandfrequencyresponsetosupporttheexpandeduseofrenewableresources.BothoftheseprojectsawaitCommissionapprovalthroughTEP’s2016RenewableEnergyStandardandTariffImplementationPlan(A.A.C.R14‐2‐1813)(DocketE‐01933A‐15‐0239).Ifapproved,TEPanticipatesthatthependingstorageprojectswillbeinserviceduringtheearlypartof2017.Chapter6providesmoredetailontheseTEPspecificprojectsalongwithanin‐depthanalysisbyLazard1onstoragetechnologiesthathighlightstoragecosts,end‐usesandtechnologycombinations.

EnergyEfficiencyImplementationPlan

TEP’s2016EnergyEfficiencyImplementationPlan,approvedinFebruary2016bytheArizonaCorporationCommission,includesnewprogramsandmeasuresthatcanhelpcustomerssavemoney,reduceimpactsontheenvironment,andlimitthelong‐termneedfornewenergyresources.

Thenewofferings,whichwillbecomeavailableinthecomingmonths,includeaprogramtohelpschoolsimprovetheirenergyefficiency.WhileschoolsmayparticipateinotherTEPEnergyEfficiencyprograms,thisnewprogramwillbedevelopedspecificallyfortheirneeds.Preferencewillbegiventoschoolsthathavenotrecentlyinstalledenergyefficiencymeasures.

Inaddition,TEPcustomerscannowreceiverebatesforthepurchaseofenergyefficientvariable‐speedpoolpumpsfromqualifiedpoolprofessionals.Variable‐speedpumpslastlongerthanregularpoolpumpsastheycanbeprogrammedtooperateathighspeedonlywhennecessary.Withpropercalibration,variable‐speedpumpscanreduceenergyuseby70percent.

AnothernewprogramwillprovideinstantdiscountsforresidentialcustomerswhopurchasecertainEnergyStar‐certifiedproductsfromparticipatingretailers,includingairconditionersandwashingmachines.

Newincentiveswillbeavailabletohomeownersandapartmentownerswhoimprovetheefficiencyoftheirexistingheating,ventilationandairconditioning,orHVAC,systemswith“advancedtune‐up”measures.“Tuningup”anexistingHVACsystemcancostsignificantlylessthanbuyinganewunit.HomeownerswhoarrangeforaTEP‐qualifiedHVACprofessionaltoperformathoroughHVACtune‐upwillreceiveadiscountthroughthenewprogramandwillbeeligibletopurchasesmartthermostatsatadiscount.

Since2011,TEPhashelpedcustomerssavemorethan812,000megawatt‐hours,enoughenergytopowernearly78,000homesforayear.ThesesavingshelpTEPworktowardthegoalsintheArizonaElectricEnergyEfficiencyStandards(“EEStandard”),whichcallsonutilitiestoachievecumulativeenergysavingsof22percentby2020.

1 Lazard is a preeminent financial advisory and asset management firm. More information can be found at https://www.lazard.com


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CompliancewiththeCleanPowerPlan

OnOctober23,2015,theEPApublishedafinalruleregulating,forthefirsttime,“CO2”emissionsfromexistingpowerplants.Ingeneral,thisfinalrule,referredtoasthe“CleanPowerPlan”(“CPP”),aimstoreduceCO2emissionsfromU.S.powerplantsby32%from2005levelsby2030.Morespecifically,theruleestablishesemissionguidelinesbasedonEPA’sdeterminationofthe“bestsystemofemissionreductions”,whichstatesandtribes(heretoreferredtoas“states”)mustusetosetstandardsapplicabletotheaffectedplantsintheirjurisdictions.

Arizonaisoneof27stateschallengingtheEPA’srulemakingauthorityandArizonahasfiledsuitagainsttheEPA.OnFebruary9,2016,theUnitedStatesSupremeCourtissuedastayoftheCPP2meaningthattherulehasnolegaleffectpendingtheresolutionofthestateandindustrychallengetotherule.ThatchallengeiscurrentlybeforetheU.S.CourtofAppealsfortheD.C.Circuit,whichwillhearoralargumentsonJune2,2016.Inalllikelihood,thismeansaD.C.Circuitdecisionwillnotbeissueduntilearlyfall,attheearliest.Givenallthat’satstake,eitherenbancreviewontheD.C.Circuitorapetitionforcertiorarilikelywillfollow.

TheCPPestablishesemissiongoalsfortwosubcategoriesofpowerplantsintheformofanemissionrate(lbs/MWh)thatdeclinesovertheperiodfrom2022to2030.Thosesubcategoriesare:

Fossilfiredsteamelectricgeneratingunits(“SteamEGUs”)‐includescoalplantsandoilandnaturalgas‐firedsteamboilers

Naturalgas‐firedcombined‐cycleplants(“NGCC”)Thenusingtheserates(“SubcategoryRates”)andtheproportionalgenerationfromsteamEGUsandNGCCplantsineachstate,theCPPderivesstatespecificgoals(“StateRates”).TheCPPalsoconvertstheseemissionrategoalstototalmass(i.e.shorttons)goalsforeachstate.EachstateisrequiredtodevelopaStatePlanthatwillregulatetheaffectedplantsintheirjurisdiction.TEPhasaffectedplantsinthreeseparatejurisdictions,Arizona,NewMexico,andtheNavajoNation,andtherefore,willbesubjecttothreeStatePlans.Table1belowshowstheapplicablerategoals.

Table1–CPPRateGoals

CO2Rate(lbs/MWh) 2022‐2024 2025‐2027 2028‐2029 2030+

SubcategorizedRate‐SteamEGUs 1,671 1,500 1,308 1,305SubcategorizedRate‐NGCC 877 817 784 771

StateRate‐Arizona 1,263 1,149 1,074 1,031StateRate‐NewMexico 1,435 1,297 1,203 1,146StateRate‐NavajoNation 1,671 1,500 1,380 1,305

TherearethreeprimaryformsoftheStatePlanavailabletostates(withsub‐options):

Rate Plantsarerequiredtomeetanemissionratestandard(lbs/MWh)equaltotheplant’semissionsdividedbythesumofitsgenerationandthegenerationfromqualifying

2http://www.supremecourt.gov/orders/courtorders/020916zr3_hf5m.pdf


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renewableenergyprojectsand/orverifiedenergyefficiencysavings.Arateplancouldbeadministeredthroughtheuseofemissionratecredits(“ERCs”),wheresourceswithemissionsabovethestandardgeneratenegativeERCswhentheyoperate,andsourceswithemissionsbelowthestandard(ornoemissions)generatepositiveERCs.Attheendofacomplianceperiod,eachaffectedplantmusthaveatleasta“zero”balanceofERCs.

Undertherateapproach,stateshavetheoptionofmeasuringcomplianceagainsttheStateRateortheSubcategoryRates.

Mass Plantsareallocated(orotherwiseacquire)allowances,thetotalofwhichequalsthestate’smassgoal,andeachplantmustsurrenderanallowanceforeachtonofCO2emittedduringacomplianceperiod.Ownersofplantsthatdonothavesufficientallowancescanreduceemissionsbycurtailingproduction,re‐dispatchingtoaloweremissionresource,orretiringtheplantandre‐distributingallowancestotheirremainingplants.

StateMeasures Insteadofregulatingpowerplantsdirectly,astatecouldimplementpoliciesthatwillhavetheeffectofreducingemissionsintheirstatesuchasbuildingcodes,renewableenergymandatesorenergyefficiencystandards.Complianceismeasuredbasedonemissionsfromtheaffectedplants.

NavajoNation

IntheproposedFederalPlanandModelRules3,EPAaskedforcommentsonwhetheritwas“necessaryorappropriate”toregulateEGUsontheNavajoNationundertheCPP.TEP’sparentcompany,UNSEnergyCorporation,submittedcommentsstatingthatitwasnotappropriateornecessarytoregulatetheEGUsontheNavajoNationbecauseEGUretirementsthathavealreadyoccurredorareplannedpriorto2022willachieveessentiallythesameemissionreductionsaswillbeachievedthroughimplementationoftheCPP.

IftheEPAdeterminesthatitisinappropriateorunnecessarytoregulateEGUsontheNavajoNation,thenTEPwillberelievedofanyCPPrequirementsfortheNavajoGeneratingStationandtheFourCornersPowerPlant.IfEPAelectstoproceedwithregulatingtheseEGUsundertheCPP,detailsofthatregulationwillbeprovidedinthefinalFederalPlan,whichisexpectedlaterin2016.

NewMexico

RatherthanbesubjecttoaFederalImplementationPlan,theStateofNewMexicointendstosubmitaStateImplementationPlan(“SIP”)aswell,believingthataNewMexicodevelopedSIPwillprovidetheflexibilityneededtominimizecostspassedontoitscitizens.Ithasinitiatedaseriesofoutreachmeetingsatdifferentlocationsthroughthestate.TEPattendedameetingonNovember13,2015forownersoftheaffectedplants.TheStateofNewMexicoistheearlystagesoftheirstateplanningprocessandintendstosubmitaninterimplaninSeptember2016,witharequestforatwo‐yearextension.However,thetimingofthissubmittalwillbedelayedinlightoftheU.S.SupremeCourtstayoftherule.

3FederalPlanRequirementsforGreenhouseGasEmissionsforElectricUtilityGeneratingUnitsConstructedonorBeforeJanuary8,2014;ModelTradingRules;AmendmentstoFrameRegulations;ProposedRule[80FR64966]datedOctober23,2015


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Arizona

TheStateofArizonahasbeenproactiveinplanningforCPPcompliance.FollowingsubmittalofcommentstoEPA’sproposedrule,andpriortotheEPAissuingthefinalrule,theArizonaDepartmentofEnvironmentalQuality(“ADEQ”)continuedworkingwithstakeholders,andthroughaseriesofmeetingsaccumulatedalistofPotentialComplianceStrategies4.Afterthefinalrulewasissued,ADEQcontinuedtomeetwithstakeholdersandoneofitsinitialstepswastodevelop10PrincipalsofanArizonaResponsetotheCleanPowerPlan5.DuringthisphaseofCPPplanningADEQformedaTechnicalWorkingGrouptoassistinevaluatingtechnicalaspectsoftheplan.

TheStateofArizonahaspreviouslystateditiscommittedtodevelopingaStatePlan.DuetothecomplexitiesinherentindevelopingaStatePlan,theStateofArizonaalsoindicatedthatitwouldfileaninterimplanpriortoSeptember6,2016,andrequestatwo‐yearextensionforfilingthefinalStatePlan.However,thistimingwillbedelayedinlightoftheU.S.SupremeCourtstayoftherule.

Inpreparingfortheinitialplansubmittal,ADEQorganizedtheoptionsfortheformofaStatePlanintosubsetsofRateorMass,andhasexpressedaninterestinfocusingonthemostlikelyoptions.

Chart1–ADEQRegulatoryFrameworkOptions6

4http://www.azdeq.gov/environ/air/phasetwo.html5http://www.azdeq.gov/environ/air/phasethree.html6Ibid,ADEQ“EPA’sFinalCleanPowerPlan:Overview,SteveBurr,AQD,SIPSection,September1,2015


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PACEGlobalArizonaCPPAnalysis

TohelpevaluatetherelativebenefitsofRateversusMassforArizona,theArizonautilitieshiredPACEGlobal(“PACE”)toconductamodelingassessmentoftherelativecompliancepositioncomparedtotheStateRateandMassgoalsbasedonabasecaseoutlook.Theresults7ofthatassessmentindicatethatArizonawouldlikelyfallshortoftheallowancesneededtocoveremissionsusingamassapproach.However,Arizonawasabletomeettherategoalsforthevastmajorityofthecomplianceperiodstudied.Aratebasedplan,ingeneral,betteraccommodatestheneedtomeetfutureloadgrowthwithexistingplants,andthesubcategoryrateapproachisgenerallyconsideredbetterforresourceportfolioswithahighpercentageofcoal‐firedgeneration.

Figure4–PACEGlobalArizonaCPPAnalysis

WhilethefinallegalstatusoftheCPPhasyettobedetermined,itisworthnotingthatTEP’songoingresourcediversificationplanisconsistentwiththegoalsoftheCPPincludingreducedrelianceoncoal,andgreateruseofnaturalgas,renewableenergy,andenergyefficiency.

7MoreinformationcanbefoundatADEQ’swebsitehttp://www.azdeq.gov/environ/air/phasethree.html#technical


Page‐20

Energy Efficiency in the Clean Power Plan

Inthefinalrule,EPAidentifiesavarietyofenergyefficiencymeasures,programs,andpoliciesthatcancounttowardcomplianceoftheCPP.Theseincludeutilityandnonutilityenergyefficiencyprograms,buildingenergycodes,combinedheatandpower,energysavingsperformancecontracting,stateapplianceandequipmentstandards,behavioralandindustrialprograms,andenergyefficiencyinwaterandwastewaterfacilities,amongothers.

EnergyEfficiencyunderMassBasedComplianceProgramsUnderamassbasedapproach,energyefficiencyinherentlycountstowardcomplianceandstatescanuseanunlimitedamounttohelpachievetheirstategoals.Energyefficiencyinherentlycountstowardcomplianceunderamassbasedapproachsinceitdisplacesactualfossilgenerationandtheassociatedemissionsunderamasscap,freeingupallowancesforsourcesusetowardstheirremainingeffectedEGUsortotrade.Thereisnolimitontheuseofenergyefficiencyprogramsandprojects,andenergyefficiencyactivitiesdonotneedtobeapprovedaspartofastateplan,therefore,Evaluation,MeasurementandVerification(EM&V)isgenerallynotrequiredformassbasedapproachesundertheCleanPowerPlan.

EnergyEfficiencyunderRateBasedComplianceProgramsUnderratebasedplans,quantifiedandverifiedmegawatthours(MWh)fromeligibleenergyefficiencymeasuresinaratebasedstatecanbeusedtogenerateERCsandadjusttheCO2emissionrateofanaffectedEGU,regardlessofwheretheemissionreductionsoccur.EnergyefficiencyunderateratebasedplanmustundergoEM&V.ThefinalCPPgivesstateswithratebasedplanstheabilitytodesigntheirprogramssothattheyarereadyforinterstatetradingofERCs,includingthoseissuedforenergyefficiency,withouttheneedforformalarrangementsbetweenindividualstates.ThesestateplansrecognizeERCsissuedbyanystatethatalsousesaspecifiedEPAapprovedorEPAadministeredtrackingsystem.

EnergyEfficiencyandtheCleanEnergyIncentiveProgram(“CEIP”)EPAhasalsoproposedanearlycreditoptionforstatescalledtheCEIP.TheCEIPawardsearlycreditforlow‐incomeenergyefficiencyprogramsandcertainrenewableenergyprojectsimplementedin2020and2021.Theprogramoffersatwo‐to‐onematchforstateenergyefficiencysavingsinordertoincenttheseeffortspriortothestartofthecomplianceperiod.Thefinalrulealsorequiresstatestoincorporatetheneedsoflow‐incomeandunderservedcommunitieswithintheircomplianceplans,andfullyengagethesecommunitiesalongwithotherstakeholdersduringtheplanningprocess.

TransmissionandDistributionEfficiencyMeasuresEPA’sfinalrulealsoallowstransmissionanddistribution(“T&D”)measuresthatimprovetheefficiencyoftheT&Dsystemtocounttowardsemissionreductionsandcomplianceoptions.ThisincludesT&Dmeasuresthatreducelinelosses8ofelectricityduringdeliveryfromageneratortoanend‐userandT&Dmeasuresthatreduceelectricityuseattheend‐user,suchasconservationvoltagereduction(CVR)9.

8 T&Dsystemlosses(or‘‘linelosses’’)aretypicallydefinedasthedifferencebetweenelectricitygenerationtothegridandelectricitysales.TheselossesarethefractionofelectricitylosttoresistancealongtheT&Dlines,whichvariesdependingonthespecificconductors,thecurrent,andthelengthofthelines.TheEnergyInformationAdministration(EIA)estimatesthatnationalelectricityT&Dlossesaverageabout6percentoftheelectricitythatistransmittedanddistributedintheU.S.eachyear. 9 Volt/VAroptimization(VVO)referstocoordinatedeffortsbyutilitiestomanageandimprovethedeliveryofpowerinordertoincreasetheefficiencyofelectricitydistribution.VVOisaccomplishedprimarilythroughtheimplementationofsmartgridtechnologiesthatimprovethereal‐timeresponsetothedemandforpower.TechnologiesforVVOincludeloadtapchangersandvoltageregulators,whichcanhelpmanagevoltagelevels,aswellascapacitorbanksthatachievereductionsintransmissionlineloss.


Page‐21

PlanningfortheFutureofEnergyEfficiency

TEP'senergyefficiencyprogramswillcontinuetocomplywiththeArizonaEnergyEfficiencyStandardthattargetsacumulativeenergysavingsof22%by2020.Infutureplanningcycles,TEPplanstoexpanditsenergyefficiencyresourceportfoliotobecompliantreadyundertheprovisionsoftheCPP.TEPplanstopartnerwithstatesandlocalorganizationstoleverageEPA’sCEIPtoidentifyopportunitiestoimproveenergyefficiencyforlowandmoderateincomecustomerswhilesupportingprivatesectorandfoundationinitiatives.Inthe2017FinalIRP,TEPplanstohighlightthecompany'sstrategyonhowitplanstomakethistransition.ThistransitionfromthecurrentArizonaEnergyEfficiencystandardtocomplianceundertheCPPwillplayakeyroleinachievinglowcostenergyalternativesforTEP'scustomers.


Page‐22

PowerGenerationandWaterImpactsofResourceDiversification

TheCPPachievesCO2emissionreductionsprimarilybyreplacinggenerationfromhigheremittingcoal‐firedresourceswithacorrespondingamountofgenerationfromloweremittingNGCCplantsandzero‐emissionrenewableresources10.Fortunately,wateruseamongthesepowergenerationtechnologiesisanalogoustotheirrespectiveCO2emissions.SeeChart2belowforaveragewaterconsumptionratesforvariouselectricitygenerationtechnologies.Basedonthesewaterconsumptionrates,implementationoftheCPPshouldresultinlowerwaterconsumptionforpowergenerationoverall.

Chart2–LifeCycleWaterUseforPowerGeneration11

However,unlikeCO2emissions,waterconsumptionhasamuchmorelocalizedenvironmentalimpact.Theavailabilityofwaterthatiswithdrawnfromsurfacewaters,asinthecaseoftheNavajoGeneratingStation(LakePowell),theFourCornersPowerPlant(MorganLakeandtheSanJuanRiver),andtheSanJuanGenerating(SanJuanRiver),ishighlydependentonprecipitationandsnowpack,aswellasotheruses.

10EnergyEfficiencyisalsoanimportanttoolforachievingtheCO2emissionreductionscalledforundertheCPP.11AdaptedfromMeldrumet.al.“Lifecyclewateruseforelectricitygeneration:areviewandharmonizationofliteratureestimates”,publishedMarch3,2013,http://iopscience.iop.org/article/10.1088/1748‐9326/8/1/015031


Page‐23

Similarly,theavailabilityofwaterthatiswithdrawnfromgroundwateraquifers,asinthecaseofSpringerville,Sundt,GilaRiver,andLunapowerplants,isdependentontherechargetoandotherwithdrawalsfromtheaquifer,butisalsoafunctionofthehydrogeologicalcharacteristicsoftheaquiferitself.

Totheextentthatthe“replacement”powergenerationislocatedatorneartothecoal‐firedgenerationitisreplacing,wateravailabilitywillbecomelessofanissueunderCPPimplementation.However,ifthe“replacement”powergenerationislocatedelsewhere,thewateravailabilityinthatareamayneedtobeevaluated.

Thereisover6,000MWofexistingNGCCcapacitylocatedwestofPhoenix,Arizona(inproximitytothePaloVerdeNuclearGeneratingStation)thatislikelytoseeasignificantincreaseingenerationasaresultofCPPimplementation.Whilethesegeneratingfacilitiesareexpectedtohavetherequisitelegalrightstowithdrawtheamountofwaternecessarytomeetexpectedhigherdemandforelectricity,theriskassociatedwiththecumulativeimpactofhighergroundwaterwithdrawalonhydrogeologicalavailabilityshouldbeassessed.TEPplanstoincludeaqualitativeassessmentaspartofthe2017FinalIRP.


Page‐24


Page‐25

LOAD FORECAST IntheIRPprocess,itiscrucialtoestimatetheloadobligationsthatexistingandfutureresourceswillberequiredtomeetforbothshortandlongtermplanninghorizons.Asafirststepinthedevelopmentoftheresourceplan,alongtermloadforecastisproduced.ThischapterwillprovideanoverviewoftheanticipatedlongtermloadobligationsatTEP,adiscussionofthemethodologyanddatasourcesusedintheforecastingprocess,andasummaryofthetoolsusedtodealwiththeinherentuncertaintysurroundinganumberofkeyforecastinputs.

GeographicalLocationandCustomerBase

TEPcurrentlyprovideselectricitytomorethan400,000customersintheTucsonmetroarea(PimaCounty).PimaCountyhasexperiencedpositivegrowthoverthelastdecadeandisnowestimatedtohaveapopulationofapproximately1,000,000people.Tucsonisthesecond‐largestcityinArizonaandtheseatofPimaCounty.ItislocatedinthesoutheastpartofthestateontheSantaCruzRiver.Tucsonisagrowing,importantandpopularvacationdestination.Visitorsareattractedtoitssunny,warm,anddryclimate,makingtourismanimportantcomponentofthecity’seconomy.TEPprovideselectricservicetomajorindustriesinaerospaceanddefensesystemsandalsotolargeelectronic,biotechnology,opticsandmanufacturingcompaniesinTucson.Tucsonalsoservesasamajorcommercialanddistributioncenterforagriculturalandminingindustries.ThecityisalsohometotheUniversityofArizona,PimaCommunityCollegeandotherinstitutionsofhigherlearning.

CustomerGrowth

Inrecentyears,populationgrowthinPimaCountyandcustomergrowthatTEPhavesloweddramaticallyasaresultofthesevererecessionandsubsequenteconomicweakness.Whilecustomergrowthiscurrentlyreboundingfromitsrecessionarylows,itisnotexpectedtoreturntoitspre‐recessionlevel.Chart3outlinesthehistoricalandexpectedcustomergrowthintheresidentialrateclassfrom2000‐2030.AscustomergrowthisthelargestfactorbehindgrowthinTEP’sload,thecontinuingcustomergrowthwillnecessitateadditionalresourcestoservetheincreasedloadinthemediumterm.

Chapter2


Page‐26

Chart3‐EstimatedTEPCustomerGrowth2000‐2030

RetailSalesbyRateClassIn2015,TEPexperiencedaretailpeakdemandofapproximately2,214MWwithapproximately9,026GWhofsales.Approximately68%of2015retailenergywasprovidedtotheresidentialandcommercialrateclassesandapproximately32%soldtotheindustrialandminingrateclasses.Chart4depictsadetailedbreakdownoftheestimated2016retailsalesbyrateclass.

Chart4–Estimated2016RetailSales%byRateClass

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

Growth, %

Residen

tal Customers

Average Annual Residential Customers % Growth

Residential42.56%

Commercial25.22%

Industrial23.43%

Mining8.41%

Other0.39%


Page‐27

Load Forecast Process

Methodology

TheloadforecastpresentedinthisPIRPwasderivedusinga“bottomup”approach.Amonthlyenergyforecastwaspreparedforeachofthemajorrateclasses(residential,commercial,industrial,andmining).Asthefactorsimpactingusageineachoftherateclassesvarysignificantly,themethodologyusedtoproducetheindividualrateclassforecastsalsovaries.However,theindividualmethodologiesfallintotwobroadcategories:

1) Fortheresidentialandcommercialclasses,forecastsareproducedusingstatisticalmodels.Inputsmayincludefactorssuchashistoricalusage,weather(e.g.averagetemperatureanddewpoint),demographicforecasts(e.g.populationgrowth),andeconomicconditions(e.g.grosscountyproductanddisposableincome).

2) Fortheindustrialandminingclasses,forecastsareproducedforeachindividualcustomeronacasebycasebasis.Inputsincludehistoricalusagepatterns,informationfromthecustomersthemselves(e.g.timingandscopeofexpandedoperations),andinformationfromTEPstaffwhoworkcloselywiththeminingandindustrialcustomers.

Aftertheindividualmonthlyforecastsareproduced,theyareaggregated(alongwithanyremainingmiscellaneousconsumption)toproduceamonthlyenergyforecastforthecompany.

Afterthemonthlyenergyforecastforthecompanywasproduced,theanticipatedmonthlyenergyconsumptionwasusedasaninputforanotherstatisticalmodelusedtoestimatethepeakdemand.Thepeakdemandmodelisbasedonhistoricalrelationshipbetweenhourlyloadandweather,calendareffects,andsalesgrowth.Oncetheserelationshipsareestimated,morethan60yearsofhistoricalweatherscenariosaresimulatedtogenerateaprobabilisticpeakforecast.


Page‐28

RetailEnergyForecast

AsillustratedinChart5,aftertheperiodofrelativelyrapidgrowthfrom2005to2008,TEPsweather‐normalizedretailenergysalesexperiencedagradualdecrease.Whileusepercustomerisexpectedtoremainweakoverthenear‐term,thelargestimpactonnear‐termsalesistheanticipatedcurtailmentofcopperminingoperationsrecentlyannouncedbyTEP’slargestretailcustomer.TEP’sforecastassumesthatcommoditypriceswilleventuallyrecoverandthatminingloadswillincreaseduetotheresumptionofexistingminingoperationsandtheanticipatedadditionoftheRosemontcoppermine.After2020,salesgrowthisdominatedbyresidentialandcommercialsalesbutatapacebelowthehistoricalaverage.

Chart5‐RetailEnergySales(WeatherNormalized)

RetailEnergyForecastbyRateClass

Theretailenergysalesforecastassumessignificantshort‐termchangesforthenextfewyearsfollowedbyslowsteadygrowthbeginningin2020.However,thegrowthratesvarysignificantlybyrateclass.TheenergysalestrendsforeachmajorrateclassaredetailedinChart6.

Chart6‐RetailEnergySalesbyRateClass

6,000

7,000

8,000

9,000

10,000

11,000

12,000

2005 2008 2011 2014 2017 2020 2023 2026 2029

Retail Sales, GWh

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2005 2008 2011 2014 2017 2020 2023 2026 2029

TEP Retail, GWh

Residential Commercial Industrial Mining

2020 ‐ 2030 Long Term Growth Average Annual Rate of 0.7%

History Forecast


Page‐29

Afterexperiencingconsistentyear‐over‐yeargrowththroughoutthepast,bothresidentialandcommercialenergysalesfellorremainedflatfrom2008to2015.BothclassesareassumedintheRetailEnergySalesForecasttoincreasesteadilyafter2016.However,industrialenergysalesareexpectedtoincreasemuchmoreslowlythanthoseineithertheresidentialorcommercialclasses.Inaddition,miningsalesareassumedtosignificantlyfallinthecomingyearsduetotheknownminecurtailmentrelatedtolowcommodityprices,andthenreboundasthesepricesreturntomorehistoricalaverages.

PeakDemandForecast

AsshowninChart7below,afterdecliningfrom2007to2015,demandisexpectedtodropin2016.Thisislargelyattributedtotheminingclass.Afterward,TEP’sretailpeakdemandisexpectedtogrowovertime.

Chart7‐PlanPeakDemand

DataSourcesUsedinForecastingProcess

Asoutlinedabove,thedevelopmentoftheloadforecastisdependentonabroadrangeofinputs(demographic,economic,weather,etc.)andsources.Forinternalforecastingprocesses,TEPutilizesanumberofsourcesforthesedata:

IHSGlobalInsight

TheUniversityofArizonaForecastingProject

ArizonaDepartmentofCommerce

U.S.CensusBureau

NationalOceanicandAtmosphericAdministration (“NOAA”)

WeatherUndergroundForecastingService

2,000

2,050

2,100

2,150

2,200

2,250

2,300

2,350

2,400

2,450

2005 2008 2011 2014 2017 2020 2023 2026 2029

TEP Retail Peak Dem

and, M

W

2020 – 2030 Long Term Growth

Average 0.47%


Page‐30

FirmWholesaleEnergyForecastInadditiontoretailsalesdirectlytocustomers,TEPiscurrentlyundercontracttoprovidewholesaleenergyanddemandtofiveelectricpowercustomers:

1) SaltRiverProject(“SRP”)throughMay2016

2) NavajoTribalUtilityAuthority(“NTUA”)throughDecember2021

3) TohonoO’odhamUtilityAuthority(“TOUA”)throughAugust2019

4) TricoElectricCooperative(“TRICO”)throughDecember2024

5) ShellthroughDecember2017

6) NavopacheElectricCooperative(“Navopache”)fromJanuary2017throughDecember2041

TEP’s100MWon‐peaksalescontractwithSaltRiverProjectexpiresinMayof2016.Inthefallof2015,TEPsignedanewwholesalesalesagreementwithNavopacheElectricCooperativetoprovidewholesaleenergybeginninginJanuary2017.TEP’sexpectedfirmwholesaleobligations,coincidenttopeakretaildemand,aredetailedTable2below.Itisimportanttonotethatcontractextensionshavenotbeenassumed.However,thereisapossibilitythatanyorallagreementscouldbeextended.Thiswouldrequirecurrentresourceplanstoberevisedtoaccountfortheadditionalenergysalesandpeaksummerloadrequirements.

Table2‐FirmWholesaleRequirements

Firm Wholesale, GWh 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

SRP 205

NTUA 253 262 266 277 288 291

TOUA 26 26 26 17

TRICO 40 31 83 112 133 127 163 182 185

Shell 355 234

Navopache 315 401 401 403 401 401 401 403 401 401

Total Firm Wholesale Sales 879 868 776 807 824 819 564 583 588 401 401

Coincident Peak Demand, MW 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

NTUA 51 53 53 53 53 53

TOUA 4 4 4 4

TRICO 50 50 85 85 85 85 85 85 85

Shell 100 100

Navopache 44 44 44 44 44 44 44 44 44 44

Total Firm Demand 205 251 186 186 182 182 129 129 129 44 44


Page‐31

SummaryofLoadForecast

AsummaryoftheRetailandFirmWholesaleLoadForecastinpresentedinTable3,includingreductionsinloadduetotheimpactofdistributedgenerationandenergyefficiency.

Table3‐TEPForecastSummary

Retail Sales, GWh 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Customer Count, 000 420 426 432 438 444 449 455 460 466 471 475

Residential 3,608 3,638 3,679 3,727 3,767 3,817 3,869 3,921 3,969 4,012 4,043

Commercial 2,138 2,158 2,185 2,221 2,258 2,295 2,334 2,366 2,401 2,438 2,464

Industrial 1,986 1,980 1,995 1,993 1,993 1,988 1,988 1,987 1,988 1,983 2,003

Mining 713 617 735 1,317 1,833 1,813 1,813 1,813 1,818 1,813 1,813

Other 33 33 33 33 33 33 33 33 33 33 33

Total Retail 8,477 8,425 8,627 9,290 9,883 9,946 10,036 10,120 10,209 10,279 10,356

Residential Sales Growth % ‐2.4% 0.8% 1.1% 1.3% 1.1% 1.3% 1.4% 1.3% 1.2% 1.1% 0.8%

Commercial Sales Growth % 0.5% 0.9% 1.3% 1.7% 1.6% 1.7% 1.7% 1.4% 1.4% 1.5% 1.1%

Industrial Sales Growth % ‐3.5% ‐0.3% 0.8% ‐0.1% 0.0% ‐0.2% 0.0% 0.0% 0.0% ‐0.3% 1.0%

Mining Sales Growth % ‐35.9% ‐13.4% 19.1% 79.2% 39.2% ‐1.1% 0.3% ‐0.3%

Other Sales Growth % 0.6%

Total Retail Sales Growth % ‐6.1% ‐0.6% 2.4% 7.7% 6.4% 0.6% 0.9% 0.8% 0.9% 0.7% 0.8%

Firm Wholesale Sales, GWh 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

SRP 205

NTUA 253 262 266 277 288 291

TOUA 26 26 26 17

TRICO 40 31 83 112 133 127 163 182 185

Shell 355 234

Navopache 315 401 401 403 401 401 401 403 401 401

Total Firm Wholesale 879 868 776 807 824 819 564 583 588 401 401

Retail Peak Demand, MW 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Retail Demand 2,109 2,122 2,153 2,336 2,414 2,417 2,424 2,439 2,446 2,479 2,512

Retail Demand Growth % 4.76% 0.62% 1.49% 8.47% 3.34% 0.14% 0.29% 0.64% 0.29% 1.34% 1.33%

Firm Wholesale Peak Demand, MW 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

NTUA 51 53 53 53 53 53

TOUA 4 4 4 4

TRICO 50 50 85 85 85 85 85 85 85

Shell 100 100

Navopache 44 44 44 44 44 44 44 44 44 44

Total Firm Demand 205 251 186 186 182 182 129 129 129 44 44

Total Retail & Firm Peak Demand, MW 2,314 2,372 2,339 2,521 2,595 2,599 2,553 2,568 2,575 2,523 2,537


Page‐32


Page‐33

TEP Loads and Resources

AcriticalcomponenttotheIRPplanningprocessistheassessmentoffirmloadobligationscomparedtoautilitiesfirmresourcecapacity.AspartofTEP’slong‐termplanningprocess,theCompanytargetsa15%reservemargininordertocoveranysystemcontingenciesrelatedtounplannedoutagesonitsgenerationandtransmissionsystem.

Table4–FirmLoadObligations,SystemPeakDemand(MW)onPage34summarizesTEPgrossretailpeakdemandsbyyearbasedonitsJanuary2016loadforecastprojections.ThesedemandsarebrokendownbycustomerclassandtheCompany’sassumptionsoncoincidentpeakloadreductionsfromdistributedgenerationandenergyefficiency.Inaddition,TEPincludesasummaryofprojectedfirmwholesalecustomerdemandsalongwithdemandassociatedwithsystemlosses.Finally,Table4summarizestheCompany’sreservemarginpositionsbasedonthecapacityresourcesshowninTable5.

Table5onPage35summarizesTEP’sfirmresourcecapacitybaseditscurrentplanningassumptionsrelatedtoitscoalandnaturalgasresources.Table5alsoreflectsTEP’splantosource30%ofTEP’sretailloadsfromrenewablegenerationresourcesby2030.Additionalresourcessuchasdemandresponseprograms,short‐termmarketpurchasesalongwithcapacitysourcedfromitsproposedbatterystorageprojectarealsoshownintheTEPresourceportfolio.BasedonTEP’sassumptionsinthisMarch1,2016filing,theCompanyisshowing15%reservemarginforboth2016and2017.Beyond2017,TEPplanstofileitsReferenceCaseplaninApril2017thatwilldetailitsstrategytomeetbothitsshortandlong‐termresourcerequirementsoverthefifteenyearIRPplanninghorizon.Chart8onPage36showsavisualdepictionoftheCompany’sloadsandresourceassessment.

Chapter3

2016Prelim

inaryIntegratedResourcePlan

Page‐34

Future Load

Obligations

Thetablesshownonthenexttw

opagesprovideadatasum

maryonTEP’sloadsandresources.Table4below

showsTEP’sprojectedfirmload

obligationswhichincludesretail,firmwholesale,systemlossesandplanningreserves.

Table4–FirmLoadObligations,SystemPeakDem

and(MW)

Dem

and, M

W

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Residen

tial

1,139

1,101

1,115

1,212

1,259

1,269

1,281

1,296

1,308

1,332

1,354

1,377

1,401

1,425

1,455

1,473

1,494

Commercial

508

479

475

516

536

540

545

552

557

567

576

586

596

606

619

627

636

Industrial

485

444

443

482

500

504

509

515

520

529

538

547

557

566

578

586

594

Mining

124

292

337

366

380

383

387

392

395

402

409

416

423

430

439

445

451

Other

28

5

5

5

5

5

5

6

6

6

6

6

6

6

6

6

6

Gross Retail Peak Dem

and

2,284

2,321

2,375

2,581

2,680

2,703

2,728

2,760

2,785

2,836

2,882

2,933

2,983

3,034

3,097

3,137

3,182

Distributed Gen

eration

‐32

‐35

‐39

‐42

‐45

‐48

‐51

‐54

‐56

‐58

‐59

‐60

‐62

‐63

‐65

‐68

‐69

Energy Efficiency

‐143

‐163

‐183

‐202

‐221

‐237

‐253

‐268

‐283

‐299

‐312

‐327

‐341

‐356

‐383

‐394

‐411

Net Retail Peak Dem

and

2,109

2,122

2,153

2,336

2,414

2,417

2,424

2,439

2,446

2,479

2,512

2,546

2,580

2,615

2,650

2,676

2,702

Firm

Wholesale Dem

and

205

251

186

186

182

182

129

129

129

44

44

44

44

44

44

0

0

System

Losses

209

211

214

232

240

240

241

242

243

246

249

253

256

260

263

266

268

Total Firm Load

Obligations

2,524

2,583

2,552

2,754

2,835

2,839

2,794

2,810

2,818

2,769

2,806

2,843

2,880

2,919

2,957

2,942

2,970

Reserve Margin

432

457

74

‐108

‐159

‐144

‐243

‐246

‐227

‐166

‐169

‐206

‐211

‐244

‐250

‐402

‐541

Reserve Margin, %

15%

15%

3%

‐4%

‐6%

‐5%

‐10%

‐10%

‐9%

‐6%

‐6%

‐8%

‐8%

‐9%

‐9%

‐16%

‐22%

TucsonElectricPow

er

Page‐35

System Resource Cap

acity

Table5showsTEP’sprelim

inaryfirmresourcecapacitybasedonaresource’scontributiontosystempeak.

Table5–CapacityResources,SystemPeakDem

and(MW)

Firm

Resource Cap

acity (MW)

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Four Corners

110

110

110

110

110

110

110

110

110

110

110

110

110

110

110

110

Navajo

168

168

168

168

168

168

168

168

168

168

168

168

168

168

168

San

Juan

340

340

170

170

170

170

Springerville

598

793

793

793

793

793

793

793

793

793

793

793

793

793

793

793

793

Rem

ote Coal Resources

1216

1411

1241

1241

1241

1241

1071

1071

1071

1071

1071

1071

1071

1071

1071

903

793

Sundt 1‐4

422

422

422

422

422

422

422

422

422

422

422

422

422

422

422

422

422

Luna En

ergy Facility

185

185

185

185

185

185

185

185

185

185

185

185

185

185

185

185

185

Gila River Power Station

374

374

374

374

374

374

374

374

374

374

374

374

374

374

374

374

374

DeM

oss Petrie CT

75

75

75

75

75

75

75

75

75

75

75

75

75

75

75

75

75

North Loop CT 1‐4

95

95

95

95

95

95

95

95

95

95

95

95

95

95

95

95

95

Sundt CT 1‐2

49

49

49

49

49

49

49

49

49

49

49

49

49

49

49

49

49

Total N

atural G

as Resources

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

1200

Utility Scale Ren

ewables

97

110

136

149

176

189

215

228

255

268

301

301

334

334

367

367

367

Dem

and Response

19

24

29

35

40

45

45

45

45

45

45

45

45

50

50

50

50

Total Ren

ewable & EE Resources

116

134

165

184

216

234

260

273

300

313

346

346

379

384

417

417

417

Short‐Term

Market Resources

425

275

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Future Storage Resources

0

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

Total Firm Resources

2956

3040

2626

2645

2677

2695

2551

2564

2591

2604

2637

2637

2670

2675

2708

2540

2430

2016Prelim


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Prelim

inary Load

s an

d Resource Assessm

ent

Chart8–TEP’s2016PreliminaryLoadsandResourceAssessm

ent

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Community Scale Renewables and Distributed Generation

RenewableOverview

Overthelastseveralyears,TEPhasconstructedorenteredintopowerpurchasedagreements(“PPAs”)forsolarandwindresourcestoproviderenewableenergyforitsserviceterritory.ThisispartofTEP’scommitmenttomeetingtheArizonaAnnualRenewableEnergyRequirementof15%by2025assetforthinA.A.C.R14‐2‐1804(the“AnnualRenewableEnergyRequirement”).Table6belowlistsTEP’sexistingandplannedrenewableresources.

Table6–TEP’sExistingRenewableResources

Resource‐ Counterparty Owned/PPA Location Operator‐

Manufacturer

Completion/Estimated

Date Capacity MW

Fixed Photovoltaic

Springerville Owned Springerville, AZ Various Dec‐2010 6.4

Solon UASTP III Owned Tucson, AZ Solon Jan‐2012 5

Gato Montes PPA Tucson, AZ Astrosol Jun‐2012 6

Solon Prairie Fire Owned Tucson, AZ Solon Oct‐2012 5

TEP Warehouse Owned Marana, AZ Various 2012 0.5

Ft Huachuca I Owned Sierra Vista, AZ Solon Dec‐2014 17.2

Ft Huachuca II Owned Sierra Vista, AZ Solon Q3 2016 5

Community Solar Owned Tucson, AZ TBD Q4 2016 5

Single‐Axis Tracking Photovoltaic

Solon UASTP I Owned Tucson, AZ Solon Dec‐2010 1.6

E.On UASTP Owned Tucson, AZ Suntech Dec‐2010 6.6

FRV Picture Rocks PPA Tucson, AZ MEMC Oct‐2012 25

NRG Solar Avra Valley PPA Tucson, AZ First Solar Oct‐2012 35

E.On/TEP Valencia PPA Tucson, AZ Areva Jul‐2013 13.2

Avalon Solar I PPA Sahuarita, AZ Avalon Dec‐2014 35

Red Horse Solar PPA Willcox, AZ Torch Sep‐2015 51.25

Avalon Solar II PPA Sahuarita, AZ Avalon Feb‐2016 21.53

Concentrated Photovoltaic

Amonix UASTP II PPA Tucson, AZ Amonix Apr‐2011 2

Cogenera PPA Tucson, AZ Cogenera Jul‐2014 1.38

Areva Solar Owned Tucson, AZ Areva Dec‐2014 5

Wind

Macho Springs PPA Deming, NM Element Power Nov‐2011 50.4

Red Horse Wind PPA Willcox, AZ Torch Sep‐2015 30

CommunityScaleRenewables

TEP’scurrentrenewableacquisitionstrategyfocusesondevelopinganumberofsmalltomid‐scalerenewableprojectsdiversifiedacrossawide‐rangeoftechnologies,projectsandcounterparties.ThetableaboveliststheexistingandcontractedrenewableenergyprojectsinTEP’sresourcemix.Inthe2014IRP,TEPhadacombinedtotalofapproximately157MWofrenewableprojectsinserviceasoftheApril1,2014filing.Sincethen,TEPhasaddedanadditional161MWofrenewableprojectsandplanstohaveapproximately328MWofrenewableprojectsonlinebytheendof201612.TEPiscurrentlyover‐compliantontheRESandexpectstocontinuetomeetorexceedthestandard.The2017FinalIRPtobefiledinAprilof2017willdetailTEP’sexpandedcommitmenttorenewableenergy.

12 Project totals represent AC capacities of owned and contracted renewable resources.


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LocationsofUNSRenewablesProjects

Figure5–UNSRenewableProjects

DistributedGeneration

Bytheendof2015,TEPhadapproximately86MWofrooftopsolarPVandsolarhotwaterheatingcapacity.Distributedgenerationisexpectedtosupplyatleast159GWhofenergyin2016.OnlyasmallportionofthisgenerationisattributabletoTEP’srooftopsolarplanthatwasinitiatedin2015.

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OverviewoftheUNSRenew

ablePortfolio


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Energy Efficiency

Overview

ThissectionisanoverviewoftheDemand‐SideManagement(“DSM”)programsthattargettheresidential,commercialandindustrial(“C&I”)sectors,aswellastheirassociatedproposedimplementationcosts,savings,andcost‐benefitresults.

TEPrecognizesthatenergyefficiencycanbeacost‐effectivewaytoreduceourrelianceonfossilfuels.TEPoffersavarietyofenergysavingoptionsforcustomers,fromsimpleconsultationtoincentivesthatencouragebothhomeownersandbusinessestoinvestinefficientheatingandcoolingandotherenergyefficiencyupgrades.

TEP,withinputfromotherpartiessuchasNavigantConsulting,Inc.(“Navigant”)andtheSouthwestEnergyEfficiencyProject(“SWEEP”),hasdesignedacomprehensiveportfolioofprogramstodeliverelectricenergyanddemandsavingstomeettheannualDSMenergysavingsgoalsoutlinedintheStandard.Theseprogramsincludeincentives,direct‐installandbuy‐downapproachesforenergyefficientproductsandservices;educationalandmarketingapproachestoraiseawarenessandmodifybehaviors;andpartnershipswithtradealliestoapplyasmuchleverageaspossibletoaugmentthereturnofrate‐payerdollarsinvested.

ThroughTEP’sDSMprogramsTEPcontinuestomakegreatstridestowardmeetingtheaggressivegoalsintheStandard.TheStandardcallsoninvestor‐ownedelectricutilitiesinArizonatoincreasethekilowatt‐hoursavingsrealizedthroughcustomerratepayer‐fundedenergyefficiencyprogramseachyearuntilthecumulativereductioninenergyachievedthroughtheseprogramsreaches22percentby2020.

CurrentImplementationPlan,Goals,andObjectives

TEP’shigh‐levelenergyefficiency‐relatedgoalsandobjectivesareasfollows:

Implementcost‐effectiveenergyefficiencyprograms.

Designandimplementadiversegroupofprogramsthatprovideopportunitiesforparticipationforallcustomers.

Whenfeasible,maximizeopportunitiesforprogramcoordinationwithotherefficiencyprograms(e.g.,SouthwestGasCorporation,ArizonaPublicServiceCorporation)toyieldmaximumbenefits.

Maximizeprogramenergysavingsataminimumcostbystrivingtoachievecomprehensivecost‐effectivesavingsopportunities.

ProvideTEPcustomersandcontractorswithwebaccesstodetailedinformationonallefficiencyprograms(residentialandcommercial)forelectricitysavingsopportunitiesatwww.tep.com.

Expandtheenergyefficiencyinfrastructureinthestatebyincreasingthenumberofavailablequalifiedcontractorsthroughtrainingandcertificationinspecificfields.

Usetrainedandqualifiedtradealliessuchaselectricians,HVACcontractors,builders,architectsandengineerstotransformthemarketforefficienttechnologies.

Educatecustomerstomodifybehaviormodificationsthatenablethemtouseenergymoreefficiently.

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ProgramPortfolioOverviewAsillustratedinTable7,TEP’sportfolioofprogramscanbedividedintoresidential,behavioral,C&I,support,andutilityimprovementsectors,withadministrativefunctionsprovidingsupportacrossallprogramareas.WiththeCommission’sapprovalofTEP’s2016EEPlan,TEPhasaddednewprogramsandmeasureswithinexistingprogramsincludingenergystarappliances,smartthermostats,homeenergyreports,schools(pilotprogram),HVAC,andlightingmeasures.

Table7‐TEPPortfolioofPrograms

Residential Sector

Appliance Recycling

Energy Star Appliances

Existing Homes

Home Energy Reports

Low Income Weatherization

Multi‐Family Homes

New Construction

Shade Trees

Behavioral Sector Community Education

K‐12 Energy Education

Commercial & Industrial

Sector

C&I Comprehensive

Small Business Direct Install/Schools

Commercial New Construction

Bid for Efficiency

Retro‐Commissioning

Combined Heat & Power

Support Sector Consumer Education and Outreach

Energy Codes and Standards Enhancement

Utility Improvement Sector

Conservation Voltage Reduction

Generation Improvement and Facilities Upgrade

C&I Direct Load Control


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Transmission

Overview

TransmissionresourcesareakeyelementinTEP’sresourceportfolio.AdequatetransmissioncapacitymustexisttomeetTEP’sexistingandfutureloadobligations.TEP’sresourceplanningandtransmissionplanninggroupscoordinatetheirplanningeffortstoensureconsistencyindevelopmentofitslong‐termplanningstrategy.Onastatewidebasis,TEPparticipatesintheACC’sBiennialTransmissionAssessment(“BTA”)whichproducesawrittendecisionbytheACCregardingtheadequacyoftheexistingandplannedtransmissionfacilitiesinArizonatomeetthepresentandfutureenergyneedsofArizonainareliablemanner.

TEPactivelyparticipatesintheregionaltransmissionplanningandcostallocationprocessofWestConnectasanenrolledmemberoftheTransmissionOwnerswithLoadServiceObligations(“TOLSO”)sectorincompliancewithFERCOrderNo.1000(“FERCOrder1000”).ThisfinalrulereformsFERC’selectrictransmissionplanningandcostallocationrequirementsforpublicutilitytransmissionproviders.WestConnectiscomposedofutilitycompaniesprovidingtransmissionofelectricityinthewesternUnitedStatesworkingcollaborativelytoassessstakeholderandmarketneedsanddevelopcost‐effectiveenhancementstothewesternwholesaleelectricitymarket.

Figure6‐FERCOrder1000TransmissionPlanningRegions

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SinceFERCOrder1000,WestConnectwentthroughitsfirstone‐yearregionalplanningandcostallocationprocessuponcompletionandapprovalofthe2015RegionalTransmissionPlaninDecember2015.Noprojectsubmittals,andthereforenocostallocationwasrequiredsincenoregionaltransmissionneedswereidentifiedinthisabbreviated2015cycle.

PreparationforthefirstWestConnectbiennialregionaltransmissionplanningandcostallocationprocesscoveringtheperiodJanuary1,2016throughDecember31,2017beganinthelastquarterof2015.Preparationincludedinitiationofthe2016‐17RegionalStudyPlanprocessandscenariostobeevaluatedforinclusioninthestudyplanweresubmittedpriortoDecember31,2015.WestConnectconductsanassessmentoftransmissionplanningmodelsincorporatingthesescenariostoidentifytheneedfornewtransmission.Thekeydeliverableisaregionaltransmissionplanthatselectsregionaltransmissionprojectstomeetidentifiedreliability,economic,publicpolicy,orcombinationthereof,transmissionneeds.

ToassistwithArizona’sCPPstateplanningefforts,TEPparticipatedwithAPS,SRP,SouthwestTransmissionCooperativeandUNSElectriconascenariobasedonmodelingofaCPPcomplianceplan,andpreparedandsubmittedajointArizonaUtilityGroup(“AUG”)studyrequesttoWestConnecttobeincludedinthe2016‐17RegionalPlanningProcess.WorkingthroughtheregionalplanningprocessisthemostefficientmethodofachievingacredibleoutcomebecauseitisaccomplishedincoordinationwiththeotherthreewesternPlanningRegions(CaliforniaIndependentSystemOperator(“CAISO”),ColumbiaGridandNorthernTierTransmissionGroup)andthereforeincoordinationwithotherstates.AkeyobjectiveistohaveaccesstotheWestConnectpowerflowbasecasetoperformamorecrediblereliabilityanalysisontheArizonatransmissionsystemassessingtheimpactoftheCPPandmeetingBTAplanningrequirements.

PinalCentraltoTortolita500kVTransmissionUpgrade

InNovember2015,TEPenergizedits500kVtransmissionexpansionprojectbetweenPinalCentralSubstationandTortolitaSubstation.ThePinalCentraltoTortolitalinewillhelpmeetTucson’sfutureenergydemandsbyaddingasecondextrahighvoltage(“EHV”)transmissionconnectionbetweenTucsonandthePaloVerdewholesalepowermarket.ThislinetiesintheexistingSaltRiverProjectSoutheastValleytransmissionproject(TEPisaparticipant)fromPinalCentralintoTortolita.ThisnewtransmissioninterconnectionwillfurtherimproveTEP’saccesstoawiderangeofrenewableandwholesalemarketresourceslocatedinthePaloVerdeareawhileimprovingTEP’ssystemreliability.

Map1‐PinalCentral‐Tortolita500kVProject


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EMERGING TECHNOLOGIES

Small Modular Nuclear Reactors

Smallmodularnuclearreactors(“SMR”),approximatelyone‐thirdthesizeofcurrentnuclearplants,are

compactinsize(300MWorless)andareexpectedtooffermanybenefitsindesign,scale,andconstruction

(relativetothecurrentfleetofnuclearplants)aswellaseconomicbenefits.Asthenameimplies,being

modularallowsforfactoryconstructionandfreighttransportationtoadesignatedsite.Thesizeofthefacility

canbescaledbythenumberofmodulesinstalled.Capitalcostsandconstructiontimesarereducedbecausethe

modulesareself‐containedandreadytobe“dropped‐in”toplace.

AWorldNuclearAssociation2015reportonSMRstandardizationoflicensingandharmonizationofregulatory

requirements,saidthattheenormouspotentialofSMRsrestsonanumberoffactors:

Becauseoftheirsmallsizeandmodularity,SMRscouldalmost becompletelybuiltinacontrolledfactorysettingandinstalledmodulebymodule,improvingthelevelofconstructionqualityandefficiency.

Theirsmallsizeandpassivesafetyfeaturesmakethemfavorabletocountrieswithsmallergridsandlessexperiencewithnuclearpower.

Size,constructionefficiencyandpassivesafetysystems(requiringlessredundancy)canleadtoeasierfinancingcomparedtothatforlargerplants.

Moreover,achieving‘economiesofseriesproduction’foraspecificSMRdesignwillreducecostsfurther.

TheWorldNuclearAssociationliststhefeaturesofanSMR,including:

Smallpower,compactarchitectureandusuallyemploymentofpassiveconcepts(atleastfornuclearsteamsupplysystemandassociatedsafetysystems).Therefore,thereislessrelianceonactivesafetysystemsandadditionalpumps,aswellasACpowerforaccidentmitigation.

Thecompactarchitectureenablesmodularityoffabrication(in‐factory),whichcanalsofacilitateimplementationofhigherqualitystandards.

Lowerpowerleadingtoreductionofthesourcetermaswellassmallerradioactiveinventoryinareactor(smallerreactors).

Potentialforsub‐grade(undergroundorunderwater)locationofthereactorunitprovidingmoreprotectionfromnatural(e.g.seismicortsunamiaccordingtothelocation)orman‐made(e.g.aircraftimpact)hazards.

Themodulardesignandsmallsizelendsitselftohavingmultipleunitsonthesamesite.

EmergingTechnologyChapter4


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Lowerrequirementforaccesstocoolingwater–thereforesuitableforremoteregionsandforspecificapplicationssuchasminingordesalination.

Abilitytoremovereactormoduleorin‐situdecommissioningattheendofthelifetime

TheWorldNuclearAssociationwebsitehasdetailedinformationrelatedtoSMRs.Thewebsiteislocatedat:http://www.world‐nuclear.org/info/nuclear‐fuel‐cycle/power‐reactors/small‐nuclear‐power‐reactors/

NuScalePowerTMisdeveloping50MWemodulesthatcanbescaledupto600MWe(12modules).ThescalabilityofSMRsallowsforsmallutilitieslikeTEPtoconsidertheirviabilitywhilelesseningthefinancialrisk.InDecemberof2013,NuScalewasawardedagrantbytheDepartmentofEnergy(“DOE”)thatwouldcoverhalf(upto$217million)tosupportdevelopmentandreceivecertificationandlicensingfromtheNuclearRegulatoryCommission(“NRC”)onasinglemodule.

Inthefallof2014,NuScalesignedteamingagreementswithkeyutilitiesintheWesternregion,whichincludeEnergyNorthwestinWashingtonStateandtheUtahAssociationofMunicipalPowerSystems(“UAMPS”),representingmunicipalpowersystemsinUtah,Idaho,NewMexico,Arizona,Washington,Oregon,andCalifornia.Thisinitialproject,knownastheUAMPSCarbonFreePowerProject,wouldbesitedineasternIdahoandisbeingdevelopedwithpartnersUAMPS,whichwillbetheplantowner,andEnergyNorthwest,whichwillbetheoperator.Theteamexpectsthatthe12‐moduleSMRwillbeoperationin2024.

NuScaleCross‐sectionofTypicalNuScaleReactorBuilding

50MWeNuScalePowerModule

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Reciprocating Internal Combustion Engines

ReciprocatingInternalCombustionEngines(“RICE”)aresimplycombustionenginesthatareusedin

automobiles,trucks,railroadlocomotives,constructionequipment,marinepropulsion,andbackuppower

applications.Moderncombustionenginesusedforelectricpowergenerationareinternalcombustionengines

inwhichanair‐fuelmixtureiscompressedbyapistonandignitedwithinacylinder.RICEarecharacterizedby

thetypeofcombustion:spark‐ignited,likeinatypicalgaspoweredvehicleorcompression‐ignited,alsoknown

asdieselengines.

Figure7–Wartsila‐50DF

Anemergingandpotentiallybeneficialuseoftheseenginesisinlarge‐scaleelectricutilitygeneration.The

combustionengineisnotanewtechnologybutemergingadvancesinefficiencyandtheneedforfast‐response

generationmakeitaviableoptiontostabilizevariableandintermittentelectricdemandandresources.RICE

hasdemonstratedanumberofbenefits;

FastStartTimes–Theunitsarecapableofbeingon‐lineatfullloadwithin5minutes.Thefastresponseisidealforcyclingoperation.RICEcanbeusedto‘smooth’outintermittentresourceproductionandvariability.

RunTime‐Theunitsoperateoverawiderangeofloadswithoutcompromisingefficiency,andcanbemaintainedshortlyaftershutdown.Aftershutdown,theunitmustbedownfor5minutes,ataminimumtoallowforgaspurging.

ReducedO&M–CyclingtheunithasnoimpactonthewearofRICE.Theunitisimpactedbyhoursofoperationandnotbystartsandcyclingoperationsasisthecasewithcombustionturbines.

FastRamping–Atstart,theunitcanramptofullloadin2minutesonahotstartandin4minutesonawarmstart.Oncetheunitisoperational,itcanrampbetween30%and100%loadin40seconds.Thisrampingiscomparabletotheratethatmanyhydrofacilitiescanrampat.

MinimalAmbientPerformanceDegradation–ComparedtoAeroderivativeandFrametypecombustionturbines,RICEoutputandefficiencyisnotasdrasticallyimpactedbytemperature.ThesitealtitudedoesnotsignificantlyimpactoutputonRICEbelow5,000feet.


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GasPressure–RICEcanrunonlowpressuregas,aslowas85PSI.MostCT’srequireacompressorforpressureat350PSI.

ReducedEquivalentForcedOutageRate(“EFOR”)–EachRICEhasanEFORoflessthan1%.AfacilitywithmultipleRICEwillhaveacombinedEFORthatisexponentiallylessbyafactorofthenumberofunitsatthefacility.

LowWaterConsumption–RICEuseaclosed‐loopcoolingsystemthatrequiresminimumwater.

Modularity–EachRICEunitisbuiltatapproximately2to20MWsandisshippedtothesite.

AnintriguingapplicationforRICEisitspotentialforregulatingthevariabilityandintermittencyof

renewableresources.InthefinalIRP,TEPwillexplorethepossibilityofnaturalgaspoweredRICEinits

proposedscenarios.

Figure8–ReciprocatingInternalCombustionEngineFacility

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DELIVERY TECHNOLOGY

TheFutureoftheDistributionGrid

Changesinthesupply,demand,anddeliveryofelectricityareremodelingelectricdistributionsystemsatmostNorthAmericanutilities.DistributedEnergyResources(“DERs”)areleadingmanyofthesechanges.Bycreatingenergysupplyinnew,small,intermittent,anddistributedlocationsacrossthegrid,DERshaverequirednewlevelsofsystemflexibility.DERshavealsocreatednewopportunitiesforelectricutilitiestoimproveperformance,tolowercosts,andtoimprovecustomersatisfaction.

ToaccommodateDERsandotherinnovations,electricutilitiesneedtodomorethanmaketheirdistributionsystemsbigger.Instead,utilitiesneedtomaketheirdistributionsystemssmarter.Smartdistributionsystemsprovideflexibility,capability,speedandresilience.Toachievenewlevelsofperformance,thesesmartdistributionsystemsincludenewtypesofsoftware,networks,sensors,devices,equipment,andresources.Toachievenewlevelsofeconomicvalue,thesesmartdistributionsystemsoperateaccordingtonewstrategiesandmetrics.WithmoredistributedgenerationresourcesbeingdeployedonTEP’sdistributionsystem,higherdemandsandlowerenergyconsumptionisoccurringtoday.Thisputsdemandsonthetransmissionanddistributionsystemsthatwerenotcontemplatedintheoriginaldesignsandrequirementsofthesystem.Tomeetthesenewdemands,newmethodsandtechnologyneedstobedevelopedandimplemented.TEPisinvestigatingtechnologytoaddmoresensingandmeasurementdevicesandnewmethodsformanagingandoperatingthedistributionsystem.Thisapproachturnsadistributionfeederintoaneffectivemicrogridsystem.

Figure9–SmartGridSystems


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Withincreaseddemandandlowerenergyconsumption,newtechniquesandstrategiesneedtobedevelopedandimplementedtoeffectivelymanagecosts.Byaddingadditionalmeasurementandsensingcapabilitiesthesituationalawarenessofthedistributionsystemwillbeincreased.Thesituationalawarenessallowsforrealtimeoperationsandplanningopportunitiesforefficiencyandproductivitychanges.Toutilizetheexistingdistributionsystemmoreefficiently,TEPisinvestigatingtheuseofDERs,energystorage,energyefficiency,andtargeteddemandresponsecapabilitiesinconjunctionwithoptimizationsoftwaretoreducetheinfrastructureadditionsrequiredduetohighercustomerdemand.Thisstrategyismuchdifferentthanhowthedistributionsystemhasbeenmanagedinthepast.WearenowusingabottomupplanninganddesignprocessthatneedstobeintegratedwiththeIRPprocess.Newtoolsandcapabilitieswillberequiredasaresultofthenewopportunitiesandcapabilitiesenvisioned.

Atthecoreofthesechangesistheneedforacommunicationsnetworkthatallowsforintelligentelectronicdevicestobeinstalledonthedistributionsystem.Thecommunicationsnetworkallowsforthebackhaulofinformationfromtheintelligentelectronicdevicestocentralizedsoftwareandcontrolapplications.Simplycollectinganddisplayingmoresensingandmeasurementinformationwon’tprovidetheneededbenefits.Anintegratedapproachtotheinstallationoffielddevices,softwareapplicationsandhistoricaldatamanagementwillbeneeded.Adistributionmanagementsystem(“DMS”)isthecentralsoftwareapplicationthatprovidesdistributionsupervisorycontrolanddataacquisition(“SCADA”),outagemanagementandgeographicalinformationintoasingleoperationsview.Bycombiningtheinformationfromallthreeofthesesystemsintoasingleviewanelectricaldistributionsystemmodelcanbecreatedforbothrealtimeapplicationsandplanningneeds.Thesingleviewprovidessituationalawarenessofthedistributionsystemthathasnotbeenpossibleinthepast.Italsocreatesaplatformfromwhichadditionalapplicationscanbelaunchedtocontinuetoprovidevalueandnewopportunities.Thehistoricalinformationalsocreatesanewopportunitytodrivevalueanddecisionsbasedonsystemperformanceanddynamicsimulations.

WiththedevelopmentofmultipledistributionmicrogridfeedersandDERsystems,thechallengeofresourcedispatchingwilldevelop.Asolutiontodispatchacrossafleetofresourcesofexistingcentralizedgeneration,purchasedpowerfromthemarketandtheintermittencyofDERsystemstocustomerdemandwillberequired.Thespeedinwhichtheresourcepoolwillneedtochangeandoptimizeforefficiencyandcostwillrequirethesystemtobeautomated.Thedistributionmicrogridfeederconceptisintendedtohelpmanagethedistributionlevelintermittencybutwouldneedtobemonitoredandmanagedbytheautomatedsystemforresourcemanagement.Tomanagesuchalargeanddynamicsystemasoutlinedisasubstantialchallenge.Thistypeofautomatedsystemisnotcurrentlyavailablewithintheutilityindustry.

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Energy Storage

Theelectricindustryhasalwayshadaninterestinthepossibilityofstoringenergy.Utilitieshavealwaysstrivedtomaintainasafe,reliableandcosteffectiveelectricgrid.Newchallenges,suchastheemergenceofrenewablegenerationhasgeneratedagreaterinterestinelectricenergystorage.ThetopicofEnergyStorageSystems(“ESS”)coversmanydifferenttypesoftechnology.Eachtechnologyhasspecificattributesandapplicationthatleadtousingthembasedonindividualsystemrequirementsforanidentifiedneed.Theenergystoragetechnologiesaremadeupofsystemssuchaspumpedhydro,compressedairenergystorage,varioustypesofbatteries,andflywheels.

PumpedHydro‐Power‐Thistechnologyhasbeeninusefornearlyacenturyworldwide.PumpedhydroaccountsformostoftheinstalledstoragecapacityintheUnitedStates.Pumpedhydroplantsuselowercostoff‐peakelectricitytopumpwaterfromalow‐elevationreservoirtoahigherreservoir.Whentheutilityneedstheelectricityorwhenpowerpricesarehigher,theplantreleasesthewatertoflowthroughhydroturbinestogeneratepower.

Typicalpumpedhydrofacilitiescanstoreupto10ormorehoursofwaterforenergystorage.Pumpedhydroplantscanabsorbexcesselectricityproducedduringoff‐peakhours,providefrequencyregulation,andhelpsmooththefluctuatingoutputfromothersources.Pumpedhydrorequiressiteswithsuitabletopographywherereservoirscanbesituatedatdifferentelevationsandwheresufficientwaterisavailable.Pumpedhydroiseconomicalonlyonalarge(250‐2,000MW)scale,andconstructioncantakeseveralyearstocomplete.

Theround‐tripefficiencyofthesesystemsusuallyexceeds70percent.Installationcostsofthesesystemstendtobehighduetositingrequirementsandobtainingenvironmentalandconstructionpermitspresentsadditionalchallenges.Pumpedhydroisaproventechnologywithhighpeakusecoincidence.ForTEP,itisalessviableoptionduetolimitedavailablesitesandwaterresources.

CompressedAirEnergyStorage(“CAES”)–Aleadingalternativeforbulkstorageiscompressedairenergystorage.CAESisahybridgeneration/storagetechnologyinwhichelectricityisusedtoinjectairathighpressureintoundergroundgeologicformations.CAEScanpotentiallyoffershorterconstructiontimes,greatersitingflexibility,lowercapitalcosts,andlowercostperhourofstoragethanpumpedhydro.ACAESplantuseselectricitytocompressairintoareservoirlocatedeitheraboveorbelowground.Thecompressedairiswithdrawn,heatedviacombustion,andrunthroughanexpansionturbinetodriveagenerator.Thedispatchtypicallywilloccurathighpowerpricesbutalsowhentheutilityneedstheelectricity,

CAESplantsareinoperationtoday—a110‐MWplantinAlabamaanda290‐MWunitinGermany.Bothplantscompressairintoundergroundcavernsexcavatedfromsaltformations.TheAlabamafacilitystoresenoughcompressedairtogeneratepowerfor26hoursandhasoperatedreliablysince1991.

CAESplantscanuseseveraltypesofair‐storagereservoirs.Inadditiontosaltcaverns,undergroundstorageoptionsincludedepletednaturalgasfieldsorothertypesofporousrockformations.EPRIstudiesshowthatmorethanhalftheUnitedStateshasgeologypotentiallysuitableforCAESplantconstruction.Compressedaircanalsobestoredinabove‐groundpressurevesselsorpipelines.Thelattercouldbelocatedwithinright‐of‐waysalongtransmissionlines.Respondingrapidlytoloadfluctuations,CAESplantscanperformrampingdutytosmooththeintermittentoutputofrenewablegenerationsourcesaswellasprovidespinningreserveandfrequencyregulationtoimproveoverallgridoperations.

Batteries–Severaldifferenttypesoflarge‐scalerechargeablebatteriescanbeusedforESSincludingleadacid,lithiumion,sodiumsulfur(NaS),andredoxflowbatteries.Batteriescanbelocatedindistributionsystems


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closertoenduserstoprovidepeakmanagementsolutions.Anaggregationoflargenumbersofdispersedbatterysystemsinsmart‐griddesignscouldevenachievenearbulk‐storagescales.

Inaddition,ifplug‐inhybridelectricvehiclesbecomewidespread,theironboardbatteriescouldbeusedforESS,byprovidingsomeofthesupportingor“ancillary”servicesintheelectricitymarketsuchasprovidingcapacity,spinningreserve,orregulationservices,orinsomecases,byprovidingload‐levelingorenergyarbitrageservicesbyrechargingwhendemandislowtoprovideelectricityduringpeakdemand.

Flywheels–Theserotatingdiscscanbeusedforpowerqualityapplicationssincetheycanchargeanddischargequicklyandfrequently.Inaflywheel,energyisstoredbyusingelectricitytoacceleratearotatingdisc.Toretrievestoredenergyfromtheflywheel,theprocessisreversedwiththemotoractingasageneratorpoweredbythebrakingoftherotatingdisc.

Flywheelsystemsaretypicallydesignedtomaximizeeitherpoweroutputorenergystoragecapacity,dependingontheapplication.Low‐speedsteelrotorsystemsareusuallydesignedforhighpoweroutput,whilehigh‐speedcompositerotorsystemscanbedesignedtoprovidehighenergystorage.Amajoradvantageofflywheelsistheirhighcyclelife—morethan100,000fullcharge/dischargecycles.

Scale‐powerversionsofthesystem,a100kWversionusingmodifiedexistingflywheelswhichwasaproofofconceptonapproximatelya1/10thpowerscale,performedsuccessfullyindemonstrationsfortheNewYorkStateEnergyResearchandDevelopmentAuthorityandtheCaliforniaEnergyCommission.

EnergyStorageApplicability

Althoughthelistofenergystoragetechnologiesdiscussedaboveisnotall‐inclusive,itbeginstoillustratethepointthatnoteverytypeofstorageissuitableforeverytypeofapplication.Typicaluseapplicationsforenergystoragetechnologiesmayinclude:

EnergyManagement–Batteriescanbeusedtoprovidedemandreductionbenefitsattheutility,commercialandresidentiallevel.Batteriescanbeidealordesignedtoreplacetraditionalgaspeakingresources.Theycanalsobeusedasshort‐termreplacementduringemergencyconditions.

LoadandResourceIntegration–Energystoragesystemscanbedesignedtosmooththeintermittencycharacteristicsofspecificloadsand/orsolarsystemsduringcloudmigrations.

AncillaryServices–Flywheelsandbatterieshavethepotentialtobalancepowerandmaintainfrequency,voltageandpowerqualityatspecifiedtolerancebands.

GridStabilization–PumpedHydro,CAESandvariousbatteriescanimprovetransmissiongridperformanceaswellasassistwithrenewablegenerationstabilization.

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Becauseofthedifferentusecasepotentialsthetechnologiescanbeimplementedinaportfoliostrategy.Therearefourchallengesrelatedtothewidespreaddeploymentofenergystorage:

CostCompetitiveEnergyStorageTechnologies(includingmanufacturingandgridintegration)

ValidatedReliability&Safety

EquitableRegulatoryEnvironment

IndustryAcceptance

TEPshowstheneedtodevelopaportfoliooffuturestoragetechnologiesthatwillsupportlong‐termgridreliability.Theneedforfuturestoragetechnologiesisfocusedonsupportingtheneedforquickresponsetimeancillaryservices.Theseservicesarelistedbelow:

LoadFollowing/Ramping

Regulation

VoltageSupport

PowerQuality

FrequencyResponse


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TEPEnergyStorageProject

TheprimaryadvantageofanEnergyStorageSystem,inthecontextofalargeutility,isofteninitsabilitytoveryrapidlychangepoweroutputlevels,muchfasterthantheproportionalgovernorresponserateofanyconventionalthermalgenerationsystem.ThisnaturallyleadstotheusagecasesofanESSbeingcenteredonshorttermbalancing‐typeactivities.AnadditionalstrengthisthatoperatingcostsofanESSaregenerallyfixedandindependentofusage.Incontrast,gasturbinesystemshavealimitednumberofstartandstopcyclesandthereforehaveanappreciablecosttoactivate,noraretheynecessarilyonlinewhenneeded.

Inthespringof2015,TEPissuedarequestforproposalsfordesignandconstructionofautility‐scaleenergystoragesystem.TEPsoughtaprojectpartnertobuildandowna10MWstoragefacilityundera10‐yearagreement.TEPwaslookingforacost‐effective,provenenergystoragesystemthatwouldhelpintegraterenewableenergyintoitselectricgrid.

Figure10–LithiumIonBatteryStoragePlant

Theaggressivenatureofthebiddingcompaniesfarexceededexpectations.InitssolicitationTEPreceivedatotalof21bids;20bidsforbatterytechnologyandonebidforflywheeltechnology.Withinthebatterycategory,therewere7differentbatterytypesproposed.Ultimately,TEPwasabletoselecttwowinningbids.Onecompanywillprovidea10MW,LithiumNickel‐Manganese‐Cobaltfacility;andaseparatecompanywillprovidea10MW,LithiumTitanatefacilitytogetherwitha2MWsolarfacility.EachoftheseprojectsrepresentsasignificantopportunityforTEP,whowillbeabletoobtainupto20MWoftotalstoragecapacityforlessthantheoriginalcostestimatetoacquire10MW.Additionally,TEPwillbeabletoassesstheoperationalimpactsoftwoofthepredominantLithiumtechnologiesavailabletoday.

While20MWsrepresentsonlyapproximately1%ofTEP’sloadatanygiventime,itislargeenoughtohavemeasurableimpactonthegrid.Assumingtheperformancefromthesefirsttwoinstallationsisfavorable,TEPwouldthenconsiderESSasanoptionforancillarysupportand/orinsupportofexpandedrenewableapplications.TEPanticipatesthatthestorageprojectswillbeinserviceduringtheearlymonthsof2017.

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ThefollowingisanarrativefromLazard’sfirstversionofitsLevelizedCostofEnergyAnalysis13.Lazard’sfirstversionofitsLevelizedCostofStorageAnalysis(“LCOE1.0”)providesanindependent,in‐depthstudythatcomparesthecostsofenergystoragetechnologiesforparticularapplications.14Thestudy’spurposeistocomparethecost‐effectivenessofeachtechnologyonan“applestoapples”basiswithinapplications,andtocompareeachapplicationtoconventionalalternatives.15KeyfindingsofLCOS1.0include:1)selectenergystoragetechnologiesarecost‐competitivewithcertainconventionalalternativesinanumberofspecializedpowergridusesand2)industryparticipantsexpectcoststodecreasesignificantlyinthenextfiveyears,drivenbyincreasinguseofrenewableenergygeneration,governmentalandregulatoryrequirementsandtheneedsofanagingandchangingpowergrid.

LAZARD’S STORAGE ANALYSIS: KEY FINDINGS

CostCompetitiveStorageTechnologies

Selectenergystoragetechnologiesarecost‐competitivewithcertainconventionalalternativesinanumberofspecializedpowergriduses,butnonearecost‐competitiveyetforthetransformationalscenariosenvisionedbyrenewableenergyadvocates.

Althoughenergystoragetechnologyhascreatedagreatdealofexcitementregardingtransformationalscenariossuchasconsumersandbusinesses“goingoffthegrid”ortheconversionofrenewableenergysourcestobaseloadgeneration,itisnotcurrentlycostcompetitiveinmostapplications.However,someusesofselectenergystoragetechnologiesarecurrentlyattractiverelativetoconventionalalternatives;theseusesrelateprimarilytostrengtheningthepowergrid(e.g.,frequencyregulation,transmissioninvestmentdeferral).

Today,energystorageappearsmosteconomicallyviablecomparedtoconventionalalternativesinusecasesthatrequirerelativelygreaterpowercapacityandflexibilityasopposedtoenergydensityorduration.Theseusecasesincludefrequencyregulationand—toalesserdegree—transmissionanddistributioninvestmentdeferral,demandchargemanagementandmicrogridapplications.Thisfindingillustratestherelativeexpenseofincrementalsystemdurationasopposedtosystempower.Putsimply,“batterylife”ismoredifficultandcostlytoincreasethan“batterysize.”Thisislikelywhythepotentiallytransformationalusecasessuchasfullgriddefectionarenotcurrentlyeconomicallyattractive—theyrequirerelativelygreaterenergydensityandduration,asopposedtopowercapacity

LCOS1.0findsawidevariationinenergystoragecosts,evenwithinusecases.Thisdispersionofcostsreflectstheimmaturityoftheenergystorageindustryinthecontextofpowergridapplications.Thereisrelativelylimitedcompetitionandamixof“experimental”andmorecommerciallymaturetechnologiescompetingattheusecaselevel.Further,seeminglyasaresultofrelativelylimitedcompetitionandlackofindustrytransparency,somevendorsappearwillingtoparticipateinusecasestowhichtheirtechnologyisnotwellsuited

13Lazardisapreeminentfinancialadvisoryandassetmanagementfirm.Moreinformationcanbefoundathttps://www.lazard.com14LazardconductedtheLevelizedCostofStorageanalysiswithsupportfromEnovationPartners,anleadingenergyconsultingfirm.15Energystoragehasavarietyofuseswithverydifferentrequirements,rangingfromlarge‐scale,powergrid‐orientedusestosmall‐scale,consumer‐orienteduses.TheLCOSanalysisidentifies10“usecases,”andassignsdetailedoperationalparameterstoeach.Thismethodologyenablesmeaningfulcomparisonsofstoragetechnologieswithinusecases,aswellasagainsttheappropriateconventionalalternativestostorageineachusecase.


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FutureEnergyStorageCostDecreases

Industryparticipantsexpectcoststodecreasesignificantlyinthenextfiveyears,drivenbyincreasinguseofrenewableenergygeneration,governmentpoliciespromotingenergystorageandpressuringcertainconventionaltechnologies,andtheneedsofanagingandchangingpowergrid.

Industryparticipantsexpectincreaseddemandforenergystoragetoresultinenhancedmanufacturingscaleandability,creatingeconomiesofscalethatdrivecostdeclinesandestablishavirtuouscycleinwhichenergystoragecostdeclinesfacilitatewiderdeploymentofrenewableenergytechnology,creatingmoredemandforstorageandspurringfurtherinnovationinstoragetechnology

CostdeclinesprojectedbyIndustryparticipantsvarywidelybetweenstoragetechnologies—lithiumisexpectedtoexperiencethegreatestfiveyearbatterycapitalcostdecline(~50%),whileflowbatteriesandleadareexpectedtoexperiencefiveyearbatterycapitalcostdeclinesof~40%and~25%,respectively.Leadisexpectedtoexperience5%fiveyearcostdecline,likelyreflectingthefactthatitisnotcurrentlycommerciallydeployed(and,possibly,theoptimismofitsvendors’currentquotes)

Themajorityofnear‐tointermediate‐costdeclinesareexpectedtooccurasaresultofmanufacturingandengineeringimprovementsinbatteries,ratherthaninbalanceofsystemcosts(e.g.,powercontrolsystemsorinstallation).Therefore,usecaseandtechnologycombinationsthatareprimarilybattery‐orientedandinvolverelativelysmallerbalanceofsystemcostsarelikelytoexperiencemorerapidlevelizedcostdeclines.Asaresult,someofthemost“expensive”usecasestodayaremost“levered”torapidlydecreasingbatterycapitalcosts.Ifindustryprojectionsmaterialize,someenergystoragetechnologiesmaybepositionedtodisplaceasignificantportionoffuturegas‐firedgenerationcapacity,inparticularasareplacementforpeakinggasturbinefacilities,enablingfurtherintegrationofrenewablegeneration

Seethefullreportathttps://www.lazard.com/media/2391/lazards‐levelized‐cost‐of‐storage‐analysis‐10.pdf

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OTHER RESOURCE PLANNING TOPICS

Energy Imbalance Market

Energyimbalanceonanelectricalgridoccurswhenthereisadifferencebetweenreal‐timedemand,orloadconsumption,andgenerationthatisprescheduled.Priortotheemergenceofrenewableenergytechnologyonthegrid,balancingoccurredtocorrectoperatinglimitswithin30minutes.Flowsareoftenmanagedmanuallybysystemoperatorsandtypicallybilaterallybetweenpowersuppliers.Theintermittentcharacteristicsofwindandsolarresourceshaveraisedconcernsabouthowsystemoperatorswillmaintainbalancebetweenelectricgenerationanddemandinsmallerthanthirtyminuteincrements.EnergyImbalanceMarkets(“EIMs”)createamuchshorterwindowmarketopportunityforbalancingloadsandresources.AnEIMcanaggregatethevariabilityofresourcesacrossmuchlargerfootprintsthancurrentbalancingauthoritiesandacrossbalancingauthorityareas.Thesubhourlyclearing,insomecasesdownto5minutespotentiallyprovideseconomicadvantagetoparticipantsinthemarket.EIMsproposetomoderate,automateandeffectivelyexpandsystem‐widedispatchwhichcanhelpwiththevariabilityandintermittencyofrenewableresources.EIMsboasttocreatesignificantreliabilityandrenewableintegrationbenefitsbysharingresourcereservesacrossmuchlargerfootprints.

CAISO–EIM

OnNovember1,2014,theCAISOwelcomedPacifiCorpintothewesternEIM.Nevada‐basedNVEnergybeganactiveparticipationintheEIMonDecember1,2015.ThisvoluntarymarketserviceisavailabletoothergridsintheWest.SeveralWesternutilitieshavecommittedtojointheEIM.Meanwhile,workisunderwayforPugetSoundEnergyinWashingtonandArizonaPublicServicetoenterthereal‐timemarketinOctober2016.Inthefallof2015,PortlandGeneralElectricandIdahoPowereachannouncedtheirintentionstopursueEIMparticipation.

ParticipantsintheEIMexpecttorealizeatleastthreebenefits:

Produceeconomicsavingstocustomersthroughlowerproductioncosts

ImprovevisibilityandsituationalawarenessforsystemoperationsintheWesternInterconnection

Improveintegrationofrenewableresources

TEPhascontractedwiththeenergyconsultingfirmE3toperformastudytoevaluatetheeconomicbenefitsofTEPparticipatingintheenergyimbalancemarket.E3willevaluateEIMbenefitstoTEPbasedonasetofstudyscenariosdefinedthroughdiscussionswithTEPtoreflectTEPsysteminformation,includingloads,resources,andpotentialtransmissionconstraintsforaccesstomarketsforreal‐timetransactions.TheprojectanalysisbeganinFebruary2016andisexpectedtobecompletedbytheendofJune,2016.TEPwillthenevaluatetherelevantcostsandbenefitsofjoiningthewesternEIM.

Chapter5


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Natural Gas Storage

Naturalgasisafuelsourcethatproduceslesscarbondioxidethancoalforagivenunitofenergygeneration.Naturalgas‐poweredelectricgenerationcanalsobemoreresponsivetoandsupportiveofthevariabilityandintermittencyofrenewablegeneration.Naturalgasusagehashistoricallyundergoneseasonalflucutationswithhigherconsumptionisduringthewintermonthsduetoresidentialandcommercialheating.Thedisplacementofcoalandtheemergenceofrenewablegenerationwilllikelyshiftgasdemandincreasestothesummermonths.Asutilitiespotentiallybegantoleanmoretowardnaturalgas‐poweredelectricgeneration,anensuingissueorconcernistheabilityofsupplyanddeliverabilitytomeetthisincreaseddemand,thusnaturalgasstorageisbeingconsidered.

Naturalgasispivotalinmaintainingareliableelectricgrid.Naturalgasstorageprovidesareliabilitybackstoptoamultitudeofdisruptionsthatmayimpactthedeliveryofnaturalgas.Storagehelpstolevelthebalanceofproduction,whichisrelativelyconstant,andtheseasonallydrivendemandorconsumption.Gascanbeinjectedintostoragewhiledemandislowandreleasedforconsumptionwhiledemandishighorwhiletherearedisruptionsinsupply.Muchlikewaterstoredbehinddamsallowsfortimelyirrigationofseasonalcrops.Naturalgasistypicallystoredundergroundandprimarilyinthreedifferentformations;depletedoiland/orgasreservoirs,aquifersandsaltcavernformations.

Figure11–NaturalGasStorageTypes

Source:EIAEnergyInformationAdministrationDepletedReservoirs–Thereservoirsresultfromthevoidremaininginalreadyrecoveredgasoroil.Depletedreservoirsaremorewidelyavailableandthemostutilized.Thisformofstorageisthemostcommonfornaturalgasstorage.Theiravailability,ofcourse,isdependentonthelocationofexistingwellsandpipelineinfrastructure.Tomaintainadequatewithdrawalpressure,upto50%ofthegascapacitybecomesunrecoverablecushiongas,thisdependsonhowmuchnativegasremainsinthereservoir.Injectionandwithdrawalratesarealsodependentonthegeologicalcharacteristicsofthesite.

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Aquifers–TheuseofaquifershasbeenmoreprevalentintheMidwesternUnitedStates.Inthecaseofdepletedgasandaquiferstoragereservoirs,theeffectivenessofstorageisprimarilydependentonthegeologicalconditions.Therockformationporosity,permeability,andretentioncapabilityareimportant.Asuitableaquiferisonethatisoverlaidwithimpermeable“cap”layer.Unlikedepletedreservoirs,whereexpensiveinfrastructurewasinstalledduringtheexplorationandextractionofoilandgas,aquifersrequireextensivecapitalinvestment.Sinceaquifersarenaturallyfullofwater,insomeinstancespowerfulinjectionequipmentmustbeused,toallowsufficientinjectionpressuretopushdowntheresidentwaterandreplaceitwithnaturalgas.Aquiferstypicallyoperatewithonewithdrawalperiodperyear;thisisbecauseofslowfilltopushwaterback.

SaltCaverns–ThebestopportunityfornaturalgasstorageinArizonaandintheSouthwestmightbeinsaltcaverns.Saltcavernsallowforhighwithdrawalandinjectionratesofnaturalgas.Thismakessaltcavernsidealtomeetdemandincreasesortooperateasemergencyback‐upsystems.Saltcavernsarecreatedthroughaprocesscalledsolutionmining;wherefreshwaterisblastedintosaltformationsandthemixtureisflushedtothesurfacecreatingachamber.Thechambersarestructurallystrongandextremelyairtight.Whilecushiongasisstillrequiredata20%to30%level,itislessthanrequiredfordepletedreservoirs.

Integration of Renewables

ThevalueandcostofrenewablesolarPVisestimatedtochangewithincreasedpenetration.TodeterminethevalueofsolarPV,it’simperativetounderstanditsrelationshiptoconsumerload.InthecaseofDistributedGeneration,mostrenewablesolarissited‘behindthemeter’oroncustomerfacilities.TherelationshipofaDGsolarinstallationataresidentialsiteisassumedtobedifferentthananinstallationatacommercialsite.Wecanassumethatresidentialpeakloadoccurssoonafterconsumersarrivehomefromwork.Commercialpeaktendstooccurduringtheearlytomid‐afternoonhours.Thisisanimportantdistinctioninthisdiscussionbecausethecostsandvaluevarybetweenthemultiplecustomertypes.However,forthisdiscussion,wewillreferonlytotheimpactonthesysteminitsentiretyandforsolarasawhole;DGandcommunity‐scaleinstallations.

Historically,electricutilitieswithpredominantairconditioningloadsetapeakdemandbetween4:00PMto5:00PMonasummerday.SolarPVcanhelpreducethispeakbutnotatthefullpotentialofitssolaroutput.Fixedarraysolarpeakproductionistypicallyat12:00to1:00PM,whilesingle‐axistrackingsystemscanexpanditspotentialtocoincidemorewiththeretailpeakdemand.TEP’scurrentrenewableportfolio(toincludeDGandwind)isatapproximately6%of2030retailenergyprojection.

Chart9belowdemonstratesthattheexistingpenetrationofsolaralreadyhasanobservablereductiontoretailpeakdemand.Closerexaminationalsorevealsthatthenetpeakisbeginningtoshifttotheright.Thereductiontothepeakin2030fromexistingsolarisapproximately3%.Whileareductiontoretailpeakisobserved,only30%ofthesolarinstalledcapacitycontributestothatreduction.

TEPiscommittedtomeetingthe15%RESby2025.Bymaintainingthatcommitmentthrough2030,thesolarcomponentoftherenewableportfolioreducespeakbyanother2.7%.Thoughthereisanobviousreductioninpeak,thetimethepeakissetisshiftingclosertothelastdiurnalhourofatypicalclear‐skysummerday(7:00to8:00PM).Itissignificantthentonotethatthoughweintroducea30%renewabletargetwithahighpenetrationofsolar,thereductiontothenewshifted(7:00PM)peakattributedtosolarisbeginningtodiminish.Weobservea1.8%reductiontoretailpeakbutasignificantdrop(from30%to18%)topeakcontributionfromtheincrementalsolarcapacityadditions.Asretailloadgrows,solarPV(withoutstoragecapabilities)cannotcontributetothereductionofpeakdemandbeyond7:00PM;regardlessofitspenetration.


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Chart9–ImpactofIncreasedSolarProduction(DuckCurve)

Whileitcanbearguedthatsolarmaycontributetoreducedlosses,toapportionedcapacityreductions(generationandtransmission),andcarbonemissionreductionsamongotherbenefits,wenotefromthechartabovethatotherchallengesarise.Asthesunisrising,electricloadstabilizesandbeginsanascenttowardthepeak.IncreasedpenetrationofsolarcreatesarapidnetdropinloadandTEPmusthavegeneratorsthatarecapableoframpingdownatafastrate.Mostbase‐loadunitssuchascoalandnaturalgas‐steamarechallengedtorespondtothisrampdownandsubsequentrampup.Itisatthispointthatthenetreductioninloadcancreatetheneedforrapidrespondinggeneratorstoregulatetheinitialsteepdeclineinloadfollowedbyanimmediaterise.Fromaresourceplanningcontext,withtheincreasingpenetrationofsolarsystems,wemusttakeintoconsiderationtherightcombinationofresourcestorespondtothevariabilityandintermittencyofrenewablesystems.Aportfoliowithahighpenetrationofsolarandotherrenewablesmaynecessitatetheinstallationofreciprocatinginternalcombustionenginesand/orstorageintheformofbatteriesornaturalgas.

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Natural Gas Reserves

Provenreservesofnaturalgasareestimatedquantitiesthatanalysesofgeologicalandengineeringdatahavedemonstratedtobeeconomicallyrecoverablefromknownreservoirsinthefuture.AccordingtoEIA,majoradvancesinnaturalgasexplorationandtechnologyhasincreasedreservesin2014to388.8trillioncubicfeet(Tcf)from354.0Tcfreservesin2013.

Table12–U.SProvedReservesandReserveChanges(2013to2014) Wet Natural Gas ‐Tcf

U.S. proven reserves at December 31, 2013 354.0

Total discoveries 50.5

Net revisions 1.0

Net Adjustments, Sales, Acquisitions 11.5

Production ‐28.1

Net additions to U.S. proved reserves 34.8

U.S. proven reserves at December 31, 2014 388.8

Percent change in U.S. proved reserves 9.8% Notes: Total natural gas includes natural gas plant liquids. Columns may not add to total because of independent rounding. Source: U.S. Energy Information Administration, Form EIA‐23L, Annual Survey of Domestic Oil and Gas Reserves

Provenreservesareaddedeachyearwithsuccessfulexploratorywellsandasmoreislearnedaboutfieldswherecurrentwellsareproducing.Theapplicationofnewtechnologiescanconvertpreviouslyuneconomicnaturalgasresourcesintoprovenreserves.U.S.provenreservesofnaturalgashaveincreasedeveryyearsince1999.Figure13illustratesthedistributionofthereservesbystateandoffshorearea.

Figure13–EIANaturalGasProvenReservesbyState/Area(2014)


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Utility Ownership in Natural Gas Reserves

AsTEPtransitionsitsgenerationportfolioawayfromcoal‐firedresourcestowardsmorerelianceoncleanermoreefficientnaturalgasresources,theCompanyhasbeenresearchingnewwaystolockinlong‐termfuelpricestabilityfornaturalgas.Onepotentialsolutionbeingexploredbyanumberofgasandelectricutilitiesistheinvestmentandownershipinphysicalnaturalgasreserves.

Overthelastfewyears,anumberofutilitieshavepartneredwiththirdpartynaturalgasproducerstodeveloppartnershipstoacquireanddevelopnaturalgasreserves.ThesepartnershipswereformedasanalternativeapproachtoexistingfinancialhedgingpracticesandwereseenasawayforCompaniestodevelopalong‐termphysicalhedgeforitsexpandinggasgenerationfleet.

Productionofoilandassociatednaturalgashasgrownsubstantiallyoverthelastseveralyearsleadingtoasupplysurplusthathasdepressednaturalgaspricestothelowesttheyhavebeenintwentyyears.Asaresult,thisenvironmentcreatesopportunitiesforutilitiesandotherlargegaspurchaserstoacquirenaturalgasreservesathistoriclows.ThefigurebelowhighlightsanumberofCompanieswhohavesuccessfullydevelopedpartnershipsaroundnaturalgasreserveownership.

Figure14‐OverviewofRecentUtility‐ThirdPartyGasReserveProjects

InthecontextofTEPcoaldiversificationstrategyanditsmovetorelyonmorenaturalgas,theCompanyplanstoexplorehowitmightpursuesimilarpartnershipswithregionalgasandelectricutilitiesinaneffortsecurelong‐termnaturalgaspricestabilityforitscustomers.

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Coal‐FiredPowerPlantsinAZandNM1


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FUTURE RESOURCE OPTIONS AND MARKET ASSUMPTIONS Inconsideringfutureresources,theresourceplanningteamevaluatesamixofrenewableandconventionalgenerationtechnologies.Thismixoftechnologiesincludedbothcommerciallyavailableresourcesandpromisingnewtechnologiesthatarelikelytobecometechnicallyviableinthenearfuture.TheIRPprocesstakesahigh‐levelapproachandfocusesonevaluatingresourcetechnologiesratherthanspecificprojects.Thisapproachallowstheresourceplanningteamtodevelopawide‐rangeofscenariosandcontingenciesthatresultinaresourceacquisitionstrategythatcontemplatesfutureuncertainties.Assumptionsoncostandoperatingcharacteristicsaretypicallygatheredfromseveraldatasources.BelowisalistofresourcesthatTEPreliesontocompilecapitalcostassumptionsforthermalandrenewableresources:

U.S.EnergyInformationAdministration‐https://www.eia.gov/forecasts/aeo/electricity_generation.cfm

WesternElectricityCoordinatingCouncil(asrecommendedbyE3)‐https://www.wecc.biz/Reliability/2014_TEPPC_Generation_CapCost_Report_E3.pdf

Black&Veatch‐http://bv.com/docs/reports‐studies/nrel‐cost‐report.pdf

NationalRenewableEnergyLaboratory‐http://www.nrel.gov/analysis/re_futures/index.html

Lazard‐https://www.lazard.com/media/2390/lazards‐levelized‐cost‐of‐energy‐analysis‐90.pdf;https://www.lazard.com/media/2391/lazards‐levelized‐cost‐of‐storage‐analysis‐10.pdf

TEPreliesonanumberofthird‐partydatasourcesandconsultantstoderiveassumptioninitson‐goingplanningpractices.Inaddition,informationgatheredthroughourcompetitivebiddingprocessorrequestforproposalprocesscanbeusedtoputbothself‐buildresourcesandmarket‐basedpurchasedpoweragreementsonacomparativebasis.

Chapter6


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Generation Resources – Matrix of Applications

Table8providesabriefoverviewofthetypesofgeneratingresourcesthatwillbeincludedandevaluatedintheresourceplanningprocessforthe2017FinalIRP.Foreachtechnologytypeabriefsummaryofpotentialrisksandbenefitsarelisted.Inaddition,attributessuchascosts,sitingrequirements,dispatchability,transmissionrequirementsandenvironmentalpotentialaresummarized.

Table8‐ResourceMatrix

Category Type

Zero or Low

Carbon Potential

State of Technology

Local Area Option

Intermittent Peaking Load

Following Base Load

Energy Efficiency Energy

Efficiency Yes Mature Yes

Demand Response

Direct Load Control

Yes Mature Yes

Renewables

Wind Yes Mature

Solar PV Yes Mature Yes

Solar Thermal Yes Mature Storage (1)

Conventional

Reciprocating Engines

Mature

Combustion Turbines

Mature Yes Combined

Cycle (NGCC) Mature Yes

Small Modular Nuclear (SMR)

Yes Emerging (1) NaturalGashybridizationorthermalstoragecouldallowresourcetobedispatchedtomeetutilitypeakloadrequirements.

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Comparison of Resources

Generationplanningandresourceanalysiscanbeperformedbyusingawidespectrum

oftoolsandmethodologies.Priortorunningdetailed

simulationmodelsforthe2017FinalIRP,theTEPresourceplanningteam

willcom

binethesourceinformationandsettleonthecostparam

etersforthe

varyingtechnologies.Table9andTable10show

nbelowdem

onstrateacom

parisonofcapitalcostestimates,usedbyTEPinthe2012and2014IRPs

versuscostspublishedbyThird‐PartySources,forthermalandrenew

ableresourcesrespectively.Thetablesdem

onstratethevaryingrangeofcosts,

evenwithineachtechnology.Inthe2017FinalIRP,theresourceplanninggroupwillincorporatetheinputfromthird‐partysources,stakeholdersand

otherdatasourcestoderiveareasonablesetofcostinputs(construction,EHV/interconnection,constructiontoincludeITC,fixedO&M,variableO&M,

andfuelcosts).

Table9–CapitalCostforThermalResources

Plant Construction Costs

Units

Small A

eroderivative

Combustion Turbine

Small Frame

Combustion

Turbine

Natural G

as

Reciprocating

Engines

Small M

odular

Reactor (SMR)

Natural G

as

Combined Cycle

(NGCC)

2012 IR

P

2012 $/kW

$1,156

$779

‐ ‐

$1,320

2014 IR

P

2014 $/kW

$1,062

$808

‐ ‐

$1,367

Third Party Source

2014 $/kW

$1,150

$825

$1,300

‐ $1,125

Third Party Source

2016 $/kW

$800 ‐ $1,000

$800 ‐ $1,000

$1,150

‐ $1,000 ‐ $1,300

Prelim

inary IRP Estim

ate 2016 $/kW

$1,250

$800

$1,200

$6,400

$1,300

Table10–CapitalCostforRenew

ableResources


Units

Solar Th

erm

al

6 Hour Storage

(100 M

W)

Solar

Fixed PV

(20 M

W)

Solar Single Axis Tracking

(20 M

W)

Wind Resources

(50 M

W)

2012 IR

P

2012 $/kW

$5,650

$2,350

$2,549

$2,400

2014 IR

P

2014 $/kW

$7,144

$1,993

$2,290

$2,278

Third Party Source

2014 $/kW

$7,100

$3,325

$3,800

$2,000

Third Party Source

2016 $/kW

$10,000 ‐ $10,300

$1,400 ‐ $1,500

$1,600 ‐ $1,750

$1,250 ‐ $1,700

Prelim

inary IRP Estim

ate 2016 $/kW

$10,000

$1,500

$1,600

$1,450


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LEVELIZED COST COMPARISONS

Thecalculationofthelevelizedcostofelectricity(“LCOE”)providesacommonmeasuretocomparethecostofenergyacrossdifferentdemandandsupply‐sidetechnologies.TheLCOEtakesintoaccounttheinstalledsystempriceandassociatedcostssuchascapital,operationandmaintenance,fuel,transmission,taxincentivesandconvertsthemintoacommoncostmetricofdollarspermegawatthour.ThecalculationfortheLCOEisthenetpresentvalueoftotalcostsoftheprojectdividedbythequantityofenergyproducedoverthesystemlife.

Becauseintermittenttechnologiessuchasrenewablesdonotprovidethesamecontributiontosystemreliabilityastechnologiesthatareoperatorcontrolledanddispatched,theyrequireadditionalsysteminvestmentforsystemregulationandbackupcapacity.Aswithanyprojection,thereisuncertaintyaboutallofthesefactorsandtheirvaluescanvaryregionallyandacrosstimeastechnologiesevolveandfuelpriceschange.Furtherresourceutilizationisdependentonmanyfactors;theportfoliomix,regionalmarketprices,customerdemandandmust‐runrequirementsaresomeconsiderationsoutsideofLCOE.

TheLCOEprojectioncontainsmanyfactorsthatwillvarybetweennowandwhenthefinalIRPisfiledonApril1,2017.Assuch,TEPwillderivethelevelizedcostsatthetimethatthecapitalcostsandotherinputsarepreparedforfinalanalysis.

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REN

EWABLE TEC

HNOLO

GIES – COST DETAILS

Table11includestherenewabletechnologycostsforthe2016Prelim

inaryIntegratedResourcePlan.

Table11‐Renew

ableResourceCostAssumptions


Units

Solar Th

erm

al

6 Hour Storage

(100 M

W)

Solar

Fixed PV

(20 M

W)

Solar Single Axis

Tracking

(20 M

W)

Wind Resources

(50 M

W)

Project Lead Tim

e

Years

4

2

2

2

Installation Years

First Year Available

2020

2018

2018

2018

Peak Capacity

MW

100

20

100

50

Plant Construction Cost

2016 $/kW

$9,800

$1,450

$1,550

$1,250

EHV/Interconnection Cost

2016 $/kW

200

50

50

200

Total Construction Cost

2016 $/kW

$10,000

$1,500

$1,600

$1,450

Operating Characteristics

Fixed

O&M

2016 $/kW

$80.00

$13.00

$10.00

$40.00

Typical Capacity Factor

Annual %

50%

29%

25%

33%

Expected Annual Output

GWh

438

110

127

145

Net Coinciden

t Peak

NCP%

85%

33%

51%

13%

Water Usage

Gal/M

Wh

800

0

0

0

ITC

Percent

30%

30%

30%

‐

PTC

$/M

Wh

‐ ‐

‐ $23.00

Levelized

Cost of En

ergy

$/M

Wh

$161

$54

$70

$49

2016Prelim


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CONVEN

TIONAL TECHNOLO

GIES – COST DETAILS

Table12includestheconventionalresourcecostassum

ptionsforthe2016Prelim

inaryIntegratedResourcePlan.

Table12‐ConventionalResourceCostAssumptions


Units

Small

Aeroderivative

Combustion

Turbine

Small Frame

Combustion

Turbine

Natural G

as

Reciprocating

Engines

Small

Modular

Reactor

(SMR)

Natural G

as

Combined

Cycle

(NGCC)

Project Lead Tim

e

Years

4

4

2

12

4

Installation Years

First Year Available

2020

2020

2018

2028

2020

Peak Capacity , M

W

MW

45

75

2

300

550

Plant Construction Cost

2016 $/kW

$1,200

$770

$1,070

$6,000

$1,135

EHV/Interconnection Cost

2016 $/kW

50

30

30

400

165

Total Construction Cost

2016 $/kW

$1,250

$800

$1,200

$6,400

$1,300

Operating Characteristics

Fixed O&M

2016 $/kW

$12.50

$13.25

$17.50

$29.30

$16.50

Variable O&M

2016 $/kW

$3.50

$3.75

$12.50

$5.00

$2.00

Gas Transportation

2016 $/kW

$16.80

$16.80

$16.80

‐ $16.80

Annual Heat Rate

Btu/kWh

9,800

10,500

9,000

10,400

7,200

Typical Capacity Factor

Annual %

15%

8%

45%

85%

50%

Expected Annual Output

GWh

59

53

8

2,234

2,409

Fuel Source

Fuel Source

Natural G

as

Natural G

as

Natural G

as

Uranium

Natural G

as

Unit Fuel Cost

$/m

mBtu

$5.67

$5.67

$5.67

$0.90

$5.67

Net Coincident Peak

NCP%

100%

100%

100%

100%

100%

Water Usage

Gal/M

Wh

150

150

50

800

350

Levelized

Cost of En

ergy

$/M

Wh

$247

$306

$135

$145

$103

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ThefollowingisanarrativefromLazard’sninthversionofitsLevelizedCostofEnergyAnalysis.Lazard’sninthversionofitsLevelizedCostofEnergyAnalysis(“LCOE9.0”)analysisprovidesanindependent,in‐depthstudyofalternativeenergycostscomparedtoconventionalgenerationtechnologies.Thecentralfindingsofthestudyare:1)thecostcompetitivenessandcontinuedpricedeclinesofcertainalternativeenergytechnologies;2)thenecessityofinvestingindiversegenerationresourcesforintegratedelectricsystemsfortheforeseeablefuture;and3)theimportanceofrationalandtransparentpoliciesthatsupportamodernandincreasinglycleanenergyeconomy.

Lazard‐https://www.lazard.com/media/2390/lazards‐levelized‐cost‐of‐energy‐analysis‐90.pdf

LAZARD’s LEVELIZED COST OF ENERGY ANALYSIS: KEY FINDINGS

CostCompetivenessofAlternativeEnergyTechnologies

Certainalternativeenergytechnologies(e.g.,windandutility‐scalesolar)continuetobecomemorecost‐competitivewithconventionalgenerationtechnologiesinsomeapplications,despitelargedecreasesinthecostofnaturalgas.Lazard’sanalysisdoesnottakeintoaccountpotentialsocialandenvironmentalexternalities(e.g.,thesocialcostsofdistributedgeneration,environmentalconsequencesofconventionalgeneration,etc.)orreliability‐orintermittency‐relatedconsiderations(e.g.,transmissionsystemorback‐upgenerationcostsassociatedwithcertainalternativeenergytechnologies)

Despiteasharpdropinthepriceofnaturalgas,thecostofallformsofutility‐scalesolarphotovoltaicandutility‐scalewindtechnologiescontinuetoremaincompetitivewithconventionalgenerationtechnologiesasillustratedbytheproliferationofsuccessfulbidsbyrenewableenergyprovidersinopenpowerprocurementprocesses.

Currently,rooftopsolarPVisnotcostcompetitivewithoutsignificantsubsidies,due,inpart,tothesmall‐scalenatureandaddedcomplexityofrooftopinstallation.However,theLCOEofrooftopsolarPVisexpectedtodeclineincomingyears,partiallyasaresultofmoreefficientinstallationtechniques,lowercostsofcapitalandimprovedsupplychains.Importantly,LazardexcludesfromtheiranalysisthevalueassociatedwithcertainusesofrooftopsolarPVbysophisticatedcommercialandindustrialusers(e.g.,demandchargemanagement,etc.),whichappearsincreasinglycompellingtocertainlargeenergycustomers.

Communitybasedsolarprojects,inwhichmembersofasinglecommunity(e.g.,housingsubdivisions,rentalbuildings,industrialparks,etc.)owndividedinterestsinsmall‐scaleground‐mountedsolarPVfacilities,isbecomingmorewidespreadandcompellingincertainareas.Theseprojects,whichallowparticipantstoreceivecreditsagainsttheirelectricbillseitherbystatestatuteornegotiatedagreementsbetweentheprojectsponsorsandlocalutilities,providesolarenergyaccesstoconsumerswithouttheeconomicmeansorpropertyrightstoinstallrooftopsolarPV.However,whilecommunitysolarprojectsbenefitfromincreasedscaleanddecreasedinstallationcomplexityascomparedtorooftopsolarPV,mostcommunityscaleprojectsarerelativelysmallcomparedtoutility‐scalePVprojects,andarethereforemoreexpensivecomparedtoutility‐scalesolarPV.

Thepronouncedcostdecreaseincertainintermittentalternativeenergytechnologies,combinedwiththeneedsofanagingandchangingpowergridintheU.S.,hassignificantlyincreaseddemandforenergystoragetechnologiestofulfillavarietyofelectricsystemneeds(e.g.,frequencyregulation,transmission/substationinvestmentdeferral,demandchargeshaving,etc.).Industryparticipantsexpectthisincreaseddemandto


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drivesignificantcostdeclinesinenergystoragetechnologiesoverthenextfiveyears.Increasedavailabilityoflower‐costenergystoragewilllikelyfacilitategreaterdeploymentofcertainalternativeenergytechnologies.

Energyefficiencyremainsanimportant,cost‐effectiveformofalternativeenergy.However,costsforvariousenergyefficiencyinitiativesvarywidelyandmayfailtoaccountfortheopportunitycostsofforegoneconsumption.

Verylarge‐scaleconventionalandrenewablegenerationprojects(e.g.,IGCC,nuclear,solarthermal,etc.)continuetofaceanumberofchallenges,includingsignificantcostcontingencies,highabsolutecosts,competitionfromrelativelycheapnaturalgasinsomegeographies,operatingdifficultiesandpolicyuncertainty.

TheNeedforDiverseGenerationPortfolios

Despitetheincreasingcost‐competivenessofcertainalternativeenergytechnologies,futureresourceplanningeffortswillrequirediversegenerationfleetstomeetbaseloadgenerationneedsfortheforeseeablefuture.Theoptimalsolutionformanyutilitiesistousealternativeenergytechnologiesasacomplementtoexistingconventionalgenerationtechnologies.Overall,theU.S.willcontinuetobenefitfromabalancedgenerationmix,includingacombinationofalternativeenergyandconventionalgenerationtechnologies.

Whilesomealternativeenergytechnologieshaveachievednotional“gridparity”undercertainconditions(e.g.,best‐in‐classwind/solarresources),suchobservationdoesnottakeintoaccountpotentialsocialandenvironmentalexternalities(e.g.,socialcostsofdistributedgeneration,environmentalconsequencesofconventionalgeneration,etc.),orreliability‐relatedconsiderations.

TheImportanceofRationalandTransparentEnergyPolicies

Therapidlychangingdynamicsofenergycostshaveimportantramificationsfortheindustry,policymakersandthepublic.IntheU.S.,acoordinatedfederalandstateenergypolicy,groundedincostanalysis,couldenablesmarterenergydevelopment,leadingtosustainableenergyindependence,acleanerenvironmentandastrongereconomicbase.

Alternativeenergycostshavedecreaseddramaticallyinthepastsixyears,driveninsignificantpartbyfederalsubsidiesandrelatedfinancingtools,andtheresultingeconomiesofscaleinmanufacturingandinstallation.Manyofthesesubsidieshavealreadyorareexpectedtostepdownorexpireforselectedalternativeenergytechnologies.Akeyquestionforindustryparticipantswillbewhetherthesetechnologiescancontinuetheircostdeclinesandachievewideradoptionwithoutthebenefitofsubsidies

ThepublicnarrativesurroundingalternativeenergytechnologiesremainsfocusedtoalargedegreeonrooftopsolarPV,notwithstandingitssignificantlyhigherLCOErelativetoutility‐scalesolarPVandwind,anditspotentiallyadversesocialeffectsinthecontextofexistingnetmeteringregimes(e.g.,high‐incomehomeownersbenefitingfromsuchregimeswhilestillrelyingonthebroaderpowergrid,andrelatedcosttransferstotherelativelylessaffluent).Thisfocus,combinedwiththeavailabilityofgovernmentincentivesforrooftopsolar,distortsintelligentsystem‐wideintegratedresourceplanningandpolicy.

Seethefullreportathttps://www.lazard.com/media/2390/lazards‐levelized‐cost‐of‐energy‐analysis‐90.pdf

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Renewable Electricity Production Tax Credit (“PTC”)

Thefederalrenewableelectricityproductiontaxcreditisaninflation‐adjustedper‐kilowatt‐hour(kWh)taxcreditforelectricitygeneratedbyqualifiedenergyresourcesandsoldbythetaxpayertoanunrelatedpersonduringthetaxableyear.Thedurationofthecreditis10yearsafterthedatethefacilityisplacedinserviceforallfacilities.

InDecember2015,theConsolidatedAppropriationsAct,2016extendedtheexpirationdatefortheproductiontaxcredittoDecember31,2019,forwindfacilitiescommencingconstruction,withaphase‐downbeginningforwindprojectscommencingconstructionafterDecember31,2016.TheActextendedthetaxcreditforothereligiblerenewableenergytechnologiescommencingconstructionthroughDecember31,2016.TheActappliesretroactivelytoJanuary1,2015.

Thetaxcreditamountisadjustedforinflationbymultiplyingthetaxcreditamountbytheinflationadjustmentfactorforthecalendaryearinwhichthesaleoccurs,roundedtothenearest0.1cents.TheInternalRevenueService(“IRS”)publishestheinflationadjustmentfactornolaterthanApril1eachyearintheFederalRegistrar.For2015,theinflationadjustmentfactorusedbytheIRSis1.5336.

Applyingtheinflation‐adjustmentfactorforthe2014calendaryear,aspublishedintheIRSNotice2015‐20,theproductiontaxcreditamountisasfollows:

$0.023/kWhforwind,closed‐loopbiomass,andgeothermalenergyresources $0.012/kWhforopen‐loopbiomass,landfillgas,municipalsolidwaste,qualifiedhydroelectric,and

marineandhydrokineticenergyresources.

ThetaxcreditisphaseddownforwindfacilitiesandexpiresforothertechnologiescommencingconstructionafterDecember31,2016.Thephase‐downforwindfacilitiesisdescribedasapercentagereductioninthetaxcreditamountdescribedabove:

Table13–ProductionTaxCreditPhaseDown

Construction Year (1) PTC Reduction

2017 PTC amount is reduced by 20%



(1)Forwindfacilitiescommencingconstructioninyear.

Notethattheexactamountoftheproductiontaxcreditforthetaxyears2017‐2019willdependontheinflation‐adjustmentfactorusedbytheIRSintherespectivetaxyears.Thedurationofthecreditis10yearsafterthedatethefacilityisplacedinservice.

Seehttp://energy.gov/savings/renewable‐electricity‐production‐tax‐credit‐ptcformoredetails.


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Energy Investment Tax Credit (“ITC”)

TheConsolidatedAppropriationsAct,signedinDecember2015,includedseveralamendmentstothefederalBusinessEnergyInvestmentTaxCreditwhichapplytosolartechnologiesandotherPTCeligibletechnologies.Notably,theexpirationdateforthesetechnologieswasextended,withagradualstepdownofthecreditsbetween2019and2022.

TheITChasbeenamendedanumberoftimes,mostrecentlyinDecember2015.Thetablebelowshowsthevalueoftheinvestmenttaxcreditforeachtechnologybyyear.Theexpirationdateforsolartechnologiesandwindisbasedonwhenconstructionbegins.Forallothertechnologies,theexpirationdateisbasedonwhenthesystemisplacedinservice(fullyinstalledandbeingusedforitsintendedpurpose).

Table14–InvestmentTaxCreditsbyYearandTechnology

Technology 2016 2017 2018 2019 2020 2021 2022 Future Years

PV, Solar Water Heating, Solar Space Heating/Cooling,

Solar Process Heat 30% 30% 30% 30% 26% 22% 10% 10%

Hybrid Solar Lighting, Fuel Cells, & Small Wind

30% ‐ ‐ ‐ ‐ ‐ ‐ ‐

Geothermal Heat Pumps, Microtubines,

Combined Heat and Power Systems

10% ‐ ‐ ‐ ‐ ‐ ‐ ‐

Geothermal Electric

10% 10% 10% 10% 10% 10% 10% 10%

Large 30% 24% 18% 12% ‐ ‐ ‐ ‐

Wind

SolarTechnologiesEligiblesolarenergypropertyincludesequipmentthatusessolarenergytogenerateelectricity,toheatorcool(orprovidehotwaterforusein)astructure,ortoprovidesolarprocessheat.Hybridsolarlightingsystems,whichusesolarenergytoilluminatetheinsideofastructureusingfiber‐opticdistributedsunlight,areeligible.Passivesolarsystemsandsolarpool‐heatingsystemsarenoteligible.

FuelCellsThecreditisequalto30%ofexpenditures,withnomaximumcredit.However,thecreditforfuelcellsiscappedat$1,500per0.5kilowatt(kW)ofcapacity.Eligiblepropertyincludesfuelcellswithaminimumcapacityof0.5kWthathaveanelectricity‐onlygenerationefficiencyof30%orhigher.

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SmallWindTurbinesThecreditisequalto30%ofexpenditures,withnomaximumcreditforsmallwindturbinesplacedinserviceafterDecember31,2008.Eligiblesmallwindpropertyincludeswindturbinesupto100kWincapacity.

GeothermalSystemsThecreditisequalto10%ofexpenditures,withnomaximumcreditlimitstated.Eligiblegeothermalenergypropertyincludesgeothermalheatpumpsandequipmentusedtoproduce,distributeoruseenergyderivedfromageothermaldeposit.Forelectricityproducedbygeothermalpower,equipmentqualifiesonlyupto,butnotincluding,theelectrictransmissionstage.

MicroturbinesThecreditisequalto10%ofexpenditures,withnomaximumcreditlimitstated(explicitly).Thecreditformicroturbinesiscappedat$200perkWofcapacity.Eligiblepropertyincludesmicroturbinesupto2MWincapacitythathaveanelectricity‐onlygenerationefficiencyof26%orhigher.

CombinedHeatandPower(“CHP”)Thecreditisequalto10%ofexpenditures,withnomaximumlimitstated.EligibleCHPpropertygenerallyincludessystemsupto50MWincapacitythatexceed60%energyefficiency,subjecttocertainlimitationsandreductionsforlargesystems.TheefficiencyrequirementdoesnotapplytoCHPsystemsthatusebiomassforatleast90%ofthesystem'senergysource,butthecreditmaybereducedforless‐efficientsystems.

Seehttp://energy.gov/savings/business‐energy‐investment‐tax‐credit‐itcformoredetails.


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Impacts of Declining Tax Credits and Technology Installed Costs

Chart10throughChart12shownbelowreflectsthenear‐termcapacitypricedeclinesona$/kWbasisfrom2016‐2022associatedwiththereductionintheinstalledcostsofsolartechnologiesrelativetothelevelizedcostrealizedona$/MWhassumingdifferentlevelsofinvestmenttaxcreditsbyyear.ThesolarITCassumptionsarebasedonthefederalinvestmenttaxcreditassumptionsshownonpage74.

Chart10–SolarPVFixed,ImpactsofDecliningTaxCreditsandTechnologyInstalledCosts

Chart11–SolarSAT,ImpactsofDecliningTaxCreditsandTechnologyInstalledCosts

$70

$67

$64

$62$63

$65

$74

$54

$56

$58

$60

$62

$64

$66

$68

$70

$72

$74

$76

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2016 2017 2018 2019 2020 2021 2022

LCOE, $/M

Wh

Installed Cost, $/kW

Solar PV ‐ Fixed Tilt (20 MW)

$/MWh $/KW

$54 $51 $49 $49 $51 $54

$61

‐$4

$6

$16

$26

$36

$46

$56

$66

$76

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2016 2017 2018 2019 2020 2021 2022

LCOE, $/M

Wh


Solar Single Axis Tracking (20 MW)

$/MWh $/KW

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Chart12–SolarThermal,ImpactsofDecliningTaxCreditsandTechnologyInstalledCosts

Impacts of Declining PTC and Technology Installed Costs

Chart13shownbelowreflectsthenear‐termcapacitypricedeclinesona$/kWbasisfrom2016‐2022associatedwiththereductionintheinstalledcostsofwindresourcesrelativetothelevelizedcostrealizedona$/MWhassumingdifferentlevelsofproductiontaxcreditsbyyear.ThewindPTCassumptionsarebasedonthefederalproductiontaxcreditassumptionsshownon73.

Chart13–Wind,ImpactsofDecliningProductionTaxCreditsandTechnologyPriceInstalledCosts

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2016 2017 2018 2019 2020 2021 2022

LCOE, $/M

Wh


Solar Thermal ‐ 6 Hour Storage (100 MW)

$/MWh $/KW

‐$4

$6

$16

$26

$36

$46

$56

$66

$76

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2016 2017 2018 2019 2020 2021 2022

LCOE, $/M

Wh


Wind (50 MW)

$/MWh $/KW


Page‐78

MARKET ASSUMPTIONS

PermianNaturalGas

TEP’scurrentforwardpriceforecastforPermiannaturalgasstartsat$2.86/MMBtuin2016,andescalatesto$8.93/MMBtuin2035.Chart14‐PermianBasinNaturalGasPricesshowsthe20yearnaturalgaspriceprojectionsinnominaldollars.

Chart14‐PermianBasinNaturalGasPrices

PaloVerde(7x24)MarketPrices

TEP’scurrentforwardpriceforecastfor7x24PaloVerdewholesalemarketpricesstartsat$28.76/MWhin2016,andescalatesto$87.35/MWhin2035.Chart15showsthe20yearwholesalepowerpriceprojectionsinnominaldollars.

Chart15‐PaloVerde(7x24)MarketPrices

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

$/m

mBtu

‐

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

$/M

Wh

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2016 IRP SCENARIOS

Thefollowingsectionprovidesadescriptionofthedifferentscenariostobeanalyzedinthe2017FinalIRPwhichisdueonApril1,2017.Thereareatotalof7scenariosthatwillbepresentedintheIRP.Thescenariosarelistedandgroupedasfollows;

ScenariosRequestedbyDecisionNo.75068(2014IRP)o EnergyStorageCasePlano SmallNuclearReactorsCasePlano ExpandedEnergyEfficiencyCasePlano ExpandedRenewablesCasePlan

AdditionalProposedScenarioso MarketBasedReferenceCasePlano HighLoadGrowthCasePlano FullCoalRetirementCasePlan

Scenarios Requested in Decision No. 75068 (2014 IRP)

EnergyStorageCase

Inthiscase,TEPwillexplorethepotentialofEnergyStorageSystems(“ESS”)asameansforsolvingrenewablegenerationintermittencyandvariability.Thecasewillbedesignedtofullymeetrenewableandenergyefficiencystandardsandtotheextentthatpeakingcapacityisrequired,ESSwillbeanalyzedasaresourcetocoverpeakdemandrequirements.ThepotentialandapplicabilityofESSisdescribedinthestoragesectioninChapter4.

SmallNuclearReactorsCase

SmallNuclearReactors(“SMRs”)areatechnologythatcanbeutilizedtolowercarbondioxide(“CO2”)emissions,aswellasotherpollutants,whileprovidingreliable,sustainedandefficientpoweroutput.Inthiscase,TEPwillstudytheimpactofSMRsasaresourcetosupplantretiringbaseloadcoalassets.Thiscasewillbedesignedtofullymeetrenewableandenergyefficiencystandards.ThiscasewillalsobecompliantwiththeCleanPowerPlan.

LowLoadGrowthCaseandExpandedEnergyEfficiency

Forpurposesofthisscenario,itisassumedthatTEPrealizesadditionalenergyefficiencyanddistributedgenerationtargets(abovetheEEstandard).Underthisscenario,TEP’sEEprogramsareexpandedbyprogramdesignand/orbytechnologyefficiencyimprovements.Inaddition,anypotentialminingexpansionswillbeexcludedaswell.

Chapter7


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ExpandedRenewablesCase

TEPwillpresentthisscenariotostudytheimpactofexpandedrenewabledevelopment.Underthisscenario,TEPwillincrementallydevelopacommunity‐scalerenewableportfoliothatultimatelyresultsinTEPserving30%ofitsretailloadby2030(withrenewableresources).Inthisscenario,TEPanticipatesthatcomplementaryresourceswillbeneededtomaintainreliabilityandtoachieveresponsivenesstotheintermittentandvariablecharacteristicsofsolarandwindresources.Acombinationofdifferenttechnologies(orindividualtechnologies)willbetestedtocomplementtherenewablesassumptions.

AshigherpercentagesofrenewableresourcesareaddedtoTEP’sresourceportfolio,TEPanticipatestheneedforfutureinvestmentsintransmission,quick‐startgeneration,energystoragedevicesandsmartgridtechnologiesinordertomaintainreliablegridoperations.Forpurposesofreliability,the2016FinalIRPwillstudytheexpansionofbatterystoragetechnology,reciprocatinginternalcombustionenginesandothertechnologytosupportfutureancillaryservicerequirementsforthegrid.

Additional Proposed Scenarios

MarketBasedReferenceCase

Forpurposesofthe2016FinalIRP,TEPwillagaindevelopaMarketBasedReferenceCaseplan.Underthisscenario,itisassumedthatTEPreliesonthewholesalemarketforlimitedamountsoffirmwholesalepurchasedpoweragreementstomeetitsfuturesummerpeakingrequirements.ThisscenarioprovidessomeinsightsintohowTEP’sresourceportfoliomightlookifthereisadequatesupplyofmerchantresourcecapacitywithintheDesertSouthwestregionoverthelong‐term.Forpurposesofthisscenario,itisassumedthatTEPdevelopsaportfoliooflongandshort‐termpurchasedpoweragreementstocoveritssummerpeakingrequirements.ItisassumedthatTEPlimitsitsrelianceonfirmmarketcapacitypurchasesto400MWperyear.Allotherassumptionsincludingtransmission,CPPcompliance,andrenewabletechnologyupgradesarethesameastheReferenceCaseplan.

HighLoadGrowthCase‐LargeIndustrialCustomerExpansions

Forpurposesofthisscenario,itisassumedthatTEP’speakdemandincreasessignificantlyoverthenextfiveyearsduetoanexpansionofaneworexistinglargeindustrialcustomer.Underthisscenario,TEP’speakdemandincreasesby125MWin2018andagainin2020by125MW(foratotalof250MW,a10%increaseinretaildemand).Thischangeintheforecastwouldresultintheadvancementofbothtransmissionandgenerationresourcesinthenearterm.Giventhehighloadfactorsassociatedwiththesetypesofcustomers,thisscenariowouldlikelyshowtheneedforadditionalbaseloadandintermediateresources.

FullCoalRetirementCase

AsorderedbytheACCinthe2012IRP,TEPgeneratedascenariocalled“FullCoalRetirementCase”.Thiscasewasstudiedinthe2014IRPinanticipationofpotentialalternativeoutcomesresultingfromEPARegionalHazemandates.Forthe2016preliminaryIRP,TEPwillmodelasimilarscenariothatreplaces100%orapproximately1,500MWofTEP’sexistingcoalcapacitywithnewresourcesby2031.

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Fuel, Market and Demand Risk Analysis

Forthe2017FinalIRP,TEPplanstodevelopedexplicitmarketriskanalyticsforeachcandidateportfoliothroughtheuseofcomputersimulationanalysisusingAuroraXMP16.Specificallyastochasticbaseddispatchsimulationwillbeusedtodevelopaviewonfuturetrendsrelatedtofuelprices17,wholesalemarketprices,andretaildemand.Theresultsofthismodelingwillthenbeemployedtoquantifytheriskuncertaintyandevaluatethecostperformanceofeachportfolio.Thistypeofanalysisensuresthattheselectedportfolionotonlyhasthelowestexpectedcost,butisalsorobustenoughtoperformwellagainstawiderangeofpossibleloadandmarketconditions.

AspartoftheCompany’s2017resourceplan,TEPplanstoconductriskanalysisaroundthefollowingkeyvariables:

NaturalGasPrices

WholesaleMarketPrices

RetailLoadandDemand

DeliveredCoalPrices

AsummaryoftheinputdistributionsareshownforallthesevariablesonChart16throughChart19below:

16AURORAxmpisastochasticbaseddispatchsimulationmodelusedforresourceplanningproductioncostmodeling.AdditionalinformationaboutAURORAxmpcanbefoundathttp://epis.com/17Bothnaturalgasandcoal.

Chapter8


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NATURAL GAS & WHOLESALE MARKET PRICE SENSITIVITY

PermianNaturalGas

Chart16showsboththeexpectedforwardmarketpricesaswellastheexpectedpricedistributionsfornaturalgassourcedfromthePermianBasin.

Chart16‐PermianBasinNaturalGasPriceDistributions

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

$/m

mBtu

Mean 5th Pct 25th Pct 50th Pct 75th Pct 95th Pct

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PaloVerde(7x24)MarketPrices

Chart17showsboththeexpectedforwardwholesalemarketpricesaswellastheexpectedpricedistributionsforpowersourcedfromthePaloVerdemarket.

Chart17‐PaloVerde(7x24)MarketPriceDistributions

WhenconsideringChart16andChart17fromabove,itisimportanttonotethatthesummarystatisticsareaggregationsratherthanindividualpricepaths.ForinstancetheP95numberforagivenyearrepresentsthepointwhich95%ofsimulatedvaluesfallbelow.Individualpricepathsmimicrealisticbehaviorbybeingsubjecttotheprice“spikes,”meanreversion,anduneventrendobservedinactualmarkets.

‐

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

$/M

Wh



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LOAD GROWTH SENSITIVITY

Chart18showsboththeexpectedretailpeakdemandaswellastheexpecteddemanddistributionsforTEP’sretailcustomers.

Chart18–TEPPeakRetailDemandDistributions

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

3,100

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

Peak Retail Deman

d, M

W


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COAL PRICE SENSITIVITY

TEPcurrentlyhasownershipsharesinfourcoal‐firedpowerplantsinArizonaandNewMexico,mostofwhichareunderlong‐termcontractsforcoalsupply.

SanJuan:Theplantisamine‐mouthfacilitythatreceivescoalfromtheSanJuanmine.Ithasrecentlysignedashort‐termcontractthroughJuly2022.

Springerville: The plant has access to local coal from the El Segundomine in NewMexico via raildeliveries.SpringervillecanburnbothWesternsubbituminouscoalaswellascoalsourcedfromPowerRiverBasin.

Navajo:TheplantreceivescoalfromtheKayentaminewhichisadjacenttotheplant.TEPisunderalong‐termcoalsupplyagreementthrough2030.

FourCorners:TheFourCornersPowerplantissourcedfromtheNavajoCoalmine,whichismine‐mouthfacility,operatedbytheNavajoTransitionalEnergyCompany.TheFourCorners’CSArunsthrough2031.

TEPplanstomodelcoalpricesbasedoncontractidiociesandescalatorsthataredrivenbythecoalmarketoutlooktoestablishcoalpriceprojectionsfortheTEPfleet.Chart19reflectstherangeofcoalpricingbasedoncurrentassumptions.

Chart19–TEPCoalPriceDistributions

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

2016 2018 2020 2022 2024 2026 2028 2030 2032 2034

$/m

mBtu



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2016 – 2017 Action Plan

InaccordancewithDecisionNo.75269,this2016PreliminaryIRPintroducesanddiscussestheissuesthatTEPmayanalyzeindetailforthe2017FinalIRP.TEPwillcontinuetodevelopafinalIRPinaccordancewiththescheduleoutlinedinDecisionNo.75269.Thescheduleincludesthefollowingmilestones,whichTEPwillmeet.

File2016PreliminaryIntegratedResourcePlan March1,2016

SubmitPreliminaryIntegratedResourcePlanUpdate October1,2016

Pre‐filingWorkshoponFinalIntegratedResourcePlan November2016

File2017FinalIntegratedResourcePlan April3,2017

Thedecisiontodeferthedeadlineforfilingafinal2017IRPwaslargelyduetotheimpactthattheCPPisanticipatedtohaveonfutureresourceplans,andthehighdegreeofuncertainlyaroundhowtheCPPwillbeimplementedinthejurisdictionswheretheregulatedload‐servingentitieshavefacilities.TheEPAhasresponsibilityforpreparinganimplementationplanfortheNavajoNation18(includingNavajoandFourCorners),andEPAintendstofinalizeaFederalPlanbySeptember6,2016.MuchofthedetailregardingCPPimplementationontheNavajoNationwillbeincludedintheFederalPlan19.Asdescribedpreviously,theUSSupremeCourthasissuedastayoftheCPPpendinglitigationintheDCCircuitCourtandincludingpotentialUSSupremeCourtreview.Duringthestay,StatesarenotobligatedtobeginworkonStatePlans,andthedeadlinesforthoseplans,aswellascompliancetimelinesforaffectedunits,willneedtobeadjustediftheruleremainsinplacefollowinglitigation.ArizonaandNewMexicoarecurrentlyevaluatingifandhowtoproceedinlightofthestay.AfinalrulingontheCPPlitigationisnotexpectedpriortoJuneof2017,andmaynotbeissueduntil2018.

The2017FinalIRPwillbeduepriortothecompletionofalloftheStatePlansgoverningCPPimplementation,therefore,TEPanticipatesthatthe2017FinalIRPwillhavetoaccommodatesignificantuncertaintywithregardtoCPPimplementation.Scenariosand/orsensitivitiestoaddressthisuncertaintywillbepresentedintheOctober2016IRPUpdate,totheextenttheyhavebeenidentified.

TEPhasdevelopedashort‐termactionplanbasedontheresourcedecisionsthatmustbeimplementedinparallelwithdevelopmentofthe2017FinalIRP.Underthisactionplan,additionaldetailedstudyworkwillbeconductedtovalidatealltechnicalandfinancialassumptionspriortoanyfinalimplementationdecisions.

18IncommentsfiledonJanuary21,2016,inresponsetoEPA’sproposedFederalPlanandModelTradingRules[80FR64966],UNSEnergyonbehalfofTEPcommentedthatitisnot“necessaryorappropriate”toregulateaffectedplantsontheNavajoNation,andEPAshouldnotdoso.19IncommentsfiledonJanuary21,2016,inresponsetoEPA’sproposedFederalPlanandModelTradingRules[80FR64966],theArizonaUtilitiesGroupcommentedthatpromulgating“model”FederalPlansdoesnotrelieveEPAoftheresponsibilitytoprovideadequatepublicnoticeandcommentoftheagency’sintenttoimposeaFederalPlanonaspecificstateortribe.

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TEP’sneartermactionplanincludesthefollowing:

TEPisinvolvedinlitigationwiththetwoCo‐OwnersofSpringervilleUnit1overvariousissuesregardingUnit1.TEPhascontestedallallegationsandvigorouslyadvocateditspositionsinthesematters.TheCo‐OwnershavefailedtopayanyofthecostsandexpensesrelatingtotheirshareofownershipinSpringervilleUnit1sincetheleasesendedinDecember2014.Alloftheseproceedingsareongoing,butarecurrentlystayedincidenttoasettlementagreedtobythepartiesinFebruary2016..Asaresultoftheresolutionoftheselegalmatters,TEPispreparingfortheacquisitionoftheun‐ownedportionofSpringervilleUnit1.TEP’scurrentshareofSpringervilleUnit1isavitalpieceofoursupplyportfolio.

TEPplanstocontinuewithitsutilityscalebuildoutofitscurrentrenewableenergystandardimplementationplans.TEPanticipatesthatanadditional1100MWofnewrenewablecapacitywillbein‐servicebytheendof2030raisingthetotaldistributedgenerationandutilityscalecapacityonTEP’ssystemtoapproximately1500MW.Bytheendof2016,renewableresourceswillmakeupcloseto13%ofTEP’stotalnameplategenerationcapacity.Asaresult,TEPiscurrentlyinvestingitstimeandresourcesintoanumberofresearchanddevelopmentactivitiesthatwilldeterminethefutureneedforstorageandsmartgridtechnologiestosupportthegrid,includingtwo10MWenergystorageprojectsslatedforinserviceby2018.

TEPwillcontinuetoimplementcost‐effectiveEEprogramsbasedontheArizonaEEStandard.TEPwillcloselymonitoritsenergyefficiencyprogramimplementationsandadjustitsnear‐termcapacityplansaccordingly.

Aspartofitsnear‐termportfoliostrategy,TEPwillcontinuetoutilizethewholesalemerchantmarketfortheacquisitionofshort‐termmarketbasedcapacityproducts.Inaddition,TEPwillcontinuetomonitorthewholesalemarketforotherresourcealternativessuchlong‐termpurchasedpoweragreementsandlowcostplantacquisitions.TEPwillalsomonitoritsnaturalgashedgingrequirementsasitreducesitsrelianceoncoalbasedgenerationinfavorofnaturalgasresourcesandmakerecommendationsonpotentialfuelhedgingchangesiftheybecomenecessary.

TEPplanstocommunicateanymajorchangeinitsanticipatedresourceplanwiththeACCaspartofitsongoingplanningactivities.TEPhopesthisdialogwillallowtheCommissionanopportunitytohelpshapeTEP’sfutureresourceportfoliooutcomeswhileprovidingTEPwithgreaterregulatorycertaintywithregardstofutureresourceinvestmentdecisions.

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