Wellington&Cira Law Seminars Presentation 072610

Confidential and Proprietary, ©2010 Navigant Consulting, Inc.Do not distribute or copy

Fred Wellington and Mark Cira

Navigant Consulting, Inc.Renewable Energy in the Pacific

NorthwestLaw Seminars International Conference

August 5, 2010

Navigant Consulting, Inc.One Market Street, Spear St. Tower, 12 FloorSan Francisco, CA 94114415.356.7132www.navigantconsulting.com

Financial Impacts of Renewable Energy

Policies in the Pacific Northwest

http://www.navigantconsulting.com/

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Navigant Consulting has extraordinary depth of expertise in issues that are central to the future of Clean Energy.

Introduction » Navigant’s Clean Energy Service Offerings

Clean Energy Policy & Regulation

Carbon market structure advisory; emissions analysis; policy integration

Navigant Consulting Clean Energy Service Offerings

Greenhouse Gas Business Strategy

Energy Efficiency

Renewable Strategy & Management

Cleaner Electric Generation, Transmission, & DistributionCleaner NG Production, Transport, & Marketing

Carbon market risk & opportunities; policy & regulatory response; macroeconomic analysis; market impact; investment opportunity assessment

Strategy; policy and standards; marketing & implementation (e.g., DSM); regulatory analysis/support

Strategy; RPS management; technology and market assessments: project/technology due diligence; investments/M&A advisory

Performance optimization; portfolio management; project due diligence; Smart Grid strategies; process improvements

Market risks and assessments; transport strategies; process improvements; product optimization


Navigant Consulting named "Best Advisory – Renewable Energy" in the 9th and 10th Annual Environmental Finance

and Carbon Finance Market Survey.

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This presentation will:

1. Provide an overview of RPS regulations in Oregon and Washington. Utilities in Washington and Oregon are required to supply 15%

(by 2020) and 25% (by 2025) of their energy requirement with renewable resources, respectively.

2. Assess available in-state wind resources to meet both native RPS requirements and exports to California. Projected RPS requirements coupled with current and future

exports to California can drain in-state wind resources needed to meet Pacific Northwest RPS requirements.

3. Demonstrate how wind resource availability can impact RPS compliance strategies and costs. Insufficient in-state wind resources can impact compliance costs

(i.e. revenue requirement) and procurement strategies


Introduction

Presentation Overview

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1 RPS Overview

RPS Gap Analysis

Strategic Options and Costs

2

3

Table of Contents


Conclusions4

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There are several structural variations of RPS regulations.


Renewable Portfolio Standard Structural VariablesWashington Oregon

Targets, Timing and

Scope

• 3% by 2012• 9% by 2016• 15% by 2020

• Large utilities 25% by 2025 (interim targets)

• Small utilities 10% by 2025 (no interim targets)

Rate Impact Limits / Off-

Ramp Provisions

• 4% max annual revenue requirement increase

• 4% max annual revenue requirement increase

• Exempt if RE purchases exceed load • Exempt if RPS requires utility to

substitute for sources other than coal.gas or oil or displace Columbia hydro

Eligible Technologies

• Hydro, solar, wind, geothermal, landfill gas, wave, tidal, sewage treatment, certain biodiesel, animal waste, woody biomass and dedicated energy crops

• Solar, wind, hydro, ocean thermal, wave, tidal, geothermal, hydrogen, MSW, biomass and biogas

Geographical Location of

Facility

• Located in Pacific Northwest or the electricity from the facility must be delivered into Washington state on real time basis.

• RE power from WECC or designated environmentally preferable by BPA

• RECs must come from US portion of WECC

REC Trading • Unlimited

• RECs can only meet 20% of large utilities and 50% of small utilities requirement.

• RECs must be WREGIS registered

Alternative Compliance or Penalty

• $50 /MWh penalty adjusted annually for inflation

• $50 /MWh Alternative Compliance Payment for 2011.

• PUC determines ACP rate thereafter

REC multipliers

• 2x multiplier for distributed generation • 2x multiplier for certain solar applications

RPS Overview

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Table of Contents


1 RPS Overview

RPS Gap Analysis


2

3

Conclusions4

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Washington and Oregon have good wind resources and have already developed 43% and 45% of economic wind potential respectively.1

Economic Wind Capacity by Class


Installed and Remaining Wind Capacity1

Washington Oregon0.0

2.0

4.0

6.0

8.0

10.0

77%68%

20%

23%

4%

9%

Class 5 Class 4 Class 3

TW

h

Source: Western Governors Association and DOE “Western Renewable Energy Zones – Phase 1 Report.” June 2009

Washington Oregon0.0

2.0

4.0

6.0

8.0

10.0

3.5 3.4

4.74.1

Remaining Wind Generation Capacity

TW

h

Source: Navigant Consulting, Inc. based on EIA data and Western Governors Association/DOE report “Western Renewable Energy Zones – Phase 1 Report.” June 2009

Available Wind Resources

1 Includes exports to California

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The remaining economic wind potential in Washington and Oregon is likely not enough to meet either state’s 2020 RPS requirements.


Available Wind Generation Capacity and 2020 RPS Targets

0.0

2.0

4.0

6.0

8.0

4.7

7.6

4.1 4.5

TW

h

Washington Oregon

Source: Navigant Consulting, Inc. based on Renewable Northwest Project 2009 analysis http://www.rnp.org/ (accessed July 11,2010) and AWEA Data http://www.awea.org/projects/ accessed July 11, 2010. RPS Gap estimates assume an average 30% capacity factors for projects installed in 2009.

This apparent wind resource shortage can lead to utilities acquiring in-state wind resources more quickly or to utilize

other renewable resources.

Remaining Wind Resources and RPS Requirements

http://www.rnp.org/

http://www.awea.org/projects/

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Table of Contents


1 RPS Overview

RPS Gap Analysis


2

3

Conclusions4

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Build / Buy Incrementally Using

Either In-State or Out of State Resources

• This strategy could mean that lower quality / higher cost resources would be used for compliance as some PNW wind resources are exported to CA.

• Higher quality resources could be imported from Montana or Wyoming, although this would include transmission costs.

Given the wind resource situation, utilities in Oregon and Washington have three basic RPS compliance options.


• This strategy could mean that better resources are developed at a lower cost per MWh, although it could result in excess power over load, leading to higher overall costs in the near term. However it could result in lower costs over the longer term.

Build / Buy Using In-State Resources In

Advance of RPS Targets

• Geothermal resources are relatively abundant in Oregon and biomass is relatively abundant in Washington.

• There are limitations on RECs for compliance in Oregon.

• REC supply from the broader WECC region could be constrained, especially if California allows TREC trading.

Rely on Non Wind Resources or REC

Imports from WECC

These options entail different costs. Navigant modeled potential revenue requirements of a hypothetical utility under three

different scenarios that rely on wind resources.

Option Comments

Basic RPS Compliance Options

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Navigant’s analysis compares RPS compliance costs1 of a theoretical utility with a generation portfolio that differs by the average quality and location of the wind contribution in the energy mix over time.


• Navigant Consulting constructed a theoretical generation portfolio of a utility with a peak load of 1,500 MW and annual energy requirements of approximately 7,200 MWh. We varied the fuel mix of the portfolios to isolate the impact that the quality and location of the wind resource has on revenue requirements over time.

• We constructed three portfolios that envision different compliance scenarios:

1.An Accelerated scenario that procures wind quickly, taking advantage of higher quality, Class 4 resources before they are depleted.

2.An Incremental scenario that procures wind incrementally and therefore relies on lower quality resources.

3.An Import scenario that relies on imports from Montana (including transmission) due to unavailable in-state resources after 2015.

Description of Theoretical Utilities in Analysis

34%

1%40%

7%0%

47%

2%Assumed Baseline Utility Resource Mix

Nuclear Biomass CoalCombined Cycle Combustion Turbine HydroWind

1 Includes a simplifying assumption that RPS requirements are met solely with wind resources

Structure of Analysis

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The three scenarios vary by the quality of the wind resource, the timing of its procurement and its geographical location.


In State Class 4In State Class 3Imports Class 4

0

20

40

60

80

100

120

ImportScenario1

IncrementalScenario

Accelerated Scenario

MW

s

Assumed Annual Wind Capacity Additions Under Each Scenario

1 Includes estimates of the cost of new transmission lines from Montana

Earlier Class 4 capacity leads to

lower future capacity needs

Delaying capacity additions means relying on Class 3

resources

Imports may not be

available for 5-7 years

Structure of Analysis » Wind Build Out Scenario

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Procuring higher quality wind earlier reduces costs over the long term…but at higher near-term costs – balancing the two is utility-specific.


Annual and Cumulative Percent Change in Revenue Requirement

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0%

5%

10%

15%

20%

25%

30%BaselineAccel-eratedIncre-mental

An

nu

al

Perc

en

t C

han

ge

Cu

mu

lati

ve P

erc

en

t C

han

geHigher rates

earlier lead to lower long term

costs

Lines on Right AxisBars on

Left Axis

Analysis Results » Revenue Requirement Increases

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Table of Contents


1 RPS Overview

RPS Gap Analysis


2

3

Conclusions4

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Imprudent decisions regarding renewable energy compliance can present shareholder or ratepayer risks for utilities.


Conclusion » Potential Shareholder Risks

• RPS compliance costs can increase revenue requirements over a BAU scenario – the degree to which is dependant on decision regarding the quality and location of resources in the energy mix.

Utilities that are aggressively procuring renewables early are less likely to see significant increases in revenue requirements later.

• Public utility commissions and public power utility boards will increasingly scrutinize renewable energy procurement decisions to determine whether compliance strategies are conducted in a cost effective manner.

• If utilities commissions decide that renewable energy compliance decisions are imprudent (i.e. not cost effective), this can lead to potential disallowance of cost recovery.

This can lead to financial risks insofar as shareholders (in the case of IOUs) are required to bear compliance costs and not ratepayers.

For POUs, this can impact credit quality insofar as rating agencies believe there is risk to cost recovery.

Potential Shareholder Risk From Poor RPS Compliance Decisions

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• Utilities will need increasingly require sophisticated decision-making tools to benchmark and justify the costs of their renewable energy strategies.

• There is no uniform strategy to increase the cost effectiveness of RPS compliance. Although at a minimum this would likely include:

Viewing RPS compliance in a more holistic manner alongside energy efficiency, distributed generation and carbon reduction.

Closer assessments of buy versus build decisions, especially as rating agencies more closely scrutinize long-term liabilities of power purchase agreements.

More competitive procurements of renewable PPAs to drive down costs.

More sophisticated benchmarking of REC prices – either to ensure best available prices for REC-only contracts or in evaluating lower cost options between REC-only or direct renewable energy purchases.

Pursuing new business models associated with distributed (i.e. rooftop) solar photovoltaics.

This necessitates a more strategic view of renewable energy procurement – with a focus on cost effective compliance options.


Conclusion » Cost Effective RPS Compliance Decisions

Examples of Options to Increase Cost Effectiveness of RPS Compliance


Questions?

Fred Wellington, CFAManaging ConsultantSan Francisco, CA 94105phone: [email protected]

Mark CiraSenior ConsultantChicago, IL 60606phone: 312-583-2722 [email protected]

mailto:[email protected]



Wellington&Cira Law Seminars Presentation 072610

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