Washington Electric Cooperative 2013 Resource Report

Washington Electric Cooperative 2013 Resource Report Prepared by La Capra Associates on behalf of Washington Electric Cooperative PO Box 8, 40 Church Street East Montpelier, VT 05651-0008 Date: January 24, 2013 1) Introduction The Washington Electric Cooperative (WEC) submits the following report to the Vermont Public Service Board and the Department of Public Service in compliance with Rule 5.206 (B), Reporting Power Supply Transactions. The information contained within this report summarizes WEC s power supply needs and future portfolio management strategy through the period from 2013 through 2017. This report also summarizes resource transactions the utility expects to enter into during the upcoming five years. 2) Utility Information In 2012 WEC s load requirement in the New England energy market was 76,504,343 kwh. It reached a peak of 15,850 kw on January 15, 2012 at hour ending 19:00. Over the past several years, WEC s load has fluctuated and is summarized in the following table. As displayed in the table, WEC s load declined by roughly 1.0% from 2011 to 2012. The reduction in load for 2012 is mainly due to warmer winter temperatures and moderate to average summer temperatures. La Capra Associates January 24, 2013 Page 1

Load Obligation (RTLO) Percent Increase (Decrease) Year Actual 2008 76,473,855 Actual 2009 76,862,354 0.5% Actual 2010 77,693,187 1.1% Actual 2011 77,293,942-0.5% Actual 2012 76,504,343-1.0% Projected 2013 76,718,555 0.3% Projected 2014 76,933,367 0.3% Projected 2015 77,148,780 0.3% Projected 2016 77,364,797 0.3% Projected 2017 77,581,418 0.3% WEC s energy needs are projected into the future based on past load trends, normalized weather, and known customer changes. Based on past data WEC s load is expected to grow at a modest rate to 77,581,418 kwh by 2017. Graphically, this modest load growth projection is displayed in the below chart. La Capra Associates January 24, 2013 Page 2

3) Market Conditions and New England Wholesale Price of Electricity Wholesale Electricity Markets Wholesale electricity costs have been extremely volatile since the advent of restructured wholesale energy markets. In addition, market prices for electricity have risen substantially since markets were fully regulated, though prices have been declining since 2009 due to recessionary economic conditions and lower natural gas prices. The first significant change to the power markets began in May, 1999 with the implementation of the First Effective Date. Changes to the power markets at that point included implementation of competitive bidding practices for electric power plants in the New England system. Prior to 1999, power plant offers were fully regulated and the rules required power plants to bid into the system based primarily on fuel costs. Beginning in May, 1999 restrictions on power plant bidding were changed to allow plants to submit offers based on market conditions and full plant costs. Plants are still dispatched to run in economic order, from lowest bid to highest, but today, competitive market forces set hourly wholesale prices based on local and regional supply and demand conditions, rather than a regulated market structure. In March, 2003 additional changes occurred to the New England power markets; these changes are referred to as Standard Market Design. A new structure of market rules established various clearing price points within the New England grid. The intent of the varying price points is to send accurate price signals to supply and demand at various locations throughout the New England region. The following chart displays real time wholesale monthly average energy prices over the last several years. Significant changes to market rules are identified by dashed vertical lines in the chart. La Capra Associates January 24, 2013 Page 3

After the implementation of new market rules, wholesale power market prices experienced substantial increases and considerable volatility. From 2009 through 2012, prices fell significantly, but as can be seen in the chart volatility remains. The rise in wholesale energy costs and volatility has created instability and lack of predictability in utility power portfolio costs, particularly for those with larger open energy positions. The need for hedging and portfolio management was heightened by the implementation of the new market rules. Wholesale Natural Gas Price Drive Electricity Prices The next chart shows the relationship between spot market electricity prices in New England and wholesale natural gas prices. Over the past year, gas and electricity prices have fallen substantially. The decline in power prices from 2008 to date was primarily due to two factors. First, the global economic recession significantly reduced energy demand, particularly in the industrial use sector. In addition, low natural gas prices have reflected strong domestic supply from shale gas plays throughout the U.S. La Capra Associates January 24, 2013 Page 4

As shown in the chart, a close relationship exists between electricity and natural gas prices. The historic data shows a 91% correlation between electricity and natural gas prices, as the New England grid has grown ever more dependent on natural gas fired generation. This association requires power planners to consider underlying fuels (natural gas and, to a lesser extent oil and coal, etc) as well as the generation mix of regional electricity markets in an effort to project future wholesale power prices. Wholesale Oil Prices After natural gas, oil is the next underlying fuel most likely to set marginal power prices in New England. In New England, many generators have the ability to fuel switch between natural gas and oil. While currently oil and gas prices are not tracking one another, there have been several periods in which natural gas and oil prices have followed similar price trends. Currently oil and gas prices are decoupled and oil prices are a substantial multiple to natural gas on an equivalent Btu basis, but oil remains an important fuel source to monitor. Crude oil averaged $94.11 per barrel in 2012 (as La Capra Associates January 24, 2013 Page 5

compared to $94.87 per barrel in 2011 and $79.40 in 2010). Prices have exhibited substantial upward momentum since the spectacular albeit temporary lows reached in February 2009 in which oil was at $39.09 per barrel. This was a 58 month low in 2009 but as of the end of 2012 prices have rebounded and closed at $87.86 per barrel. The dramatic fall in prices bottoming out in February 2009 has been attributed primarily to demand destruction for fossil fuels caused by the wider economic recession. Subsequent price increases can be attributed to global economic recovery, increasing fuel demand, and a return to market speculation. Regional Retail Electricity Prices The rate chart below shows the average retail electric rates in Vermont as compared to the New England regional average. For the state as a whole, since the markets were restructured in the early half of the last decade, Vermont s rates have been lower than average retail rates across New England. One of the reasons for the gap in recent years was Vermont s decision not to deregulate its electric industry - though in the most recent years the gap has closed with the fall of wholesale natural gas and electricity La Capra Associates January 24, 2013 Page 6

prices. Notably, customers in Vermont receive significant portions of their power from long-term, stably-priced contracts, whereas customers in the rest of New England are much more exposed to wholesale market price changes. With low natural gas prices and in turn low power prices regionally, the average retail rate between Vermont and New England has converged with prices in 2012 being very similar between all the New England states. 4) Existing Resources WEC s power supply portfolio is made up of generation resources and long-term power contracts. The portfolio was constructed to financially hedge the cost of serving WEC s load at the Vermont Zone in the ISO-NE market system. As shown in the following chart, in 2012 WEC s energy came predominantly from the Coventry landfill gas generation facility. In fact 55% of WEC s energy came from Coventry, while 19% came from the Hydro Quebec VJO contract, 11% was from NYPA, 3% was from VEPPI, 3% was provided by Wrightsville Hydro, 9% was from Sheffield Wind, and GMP System power accounted for less than 1% of WEC s energy portfolio. La Capra Associates January 24, 2013 Page 7

2012 Sources of Power MWH VEPPI (Hydro & Ryegate) 2,749 Wrightsville 2,803 HQ VJO 16,890 Coventry 49,394 NYPA 9,774 Sheffield Wind 8,083 GMP System Rate W 531 Total Supply Energy 90,223 WEC s current committed supply mix, which is made up of existing resources and committed contracts, is summarized in the following table. In addition, each resource is briefly described below the table. The key difference between WEC s prior Resource La Capra Associates January 24, 2013 Page 8

Report filings and the current report is the addition of the Sheffield Wind project and the approval by the Vermont Public Service Board of a new contract with Hydro Quebec which will begin in 2016. Most recently, construction of the Sheffield Wind project began in 2010 and it achieved commercial operation on October 19, 2011. WEC Committed Supply Asset Inventory Nameplate Name kw Start Date End Date Coventry LFG 8,000 7/1/2005 2038 NYPA 1,570 na Life of Contract HQ VJO Sch B 2,589 11/1/1995 10/31/2015 VEPPI 797 1984 2020 GMP Rate W 138 na Life of Contract Wrightsville Hydro 700 9/1/1985 Life of Unit Sheffield Wind 4,000 10/19/2011 10/19/2031 HQUS PPA 4,000 11/1/2016 10/31/2038 Coventry Landfill The Coventry landfill generating facility is located in Coventry, Vermont. The facility currently has a maximum generating capability of 8.0 MW, though average output has been between 5.5 6 MW over the past few years. Production is driven by the amount of methane gas produced at the landfill and based on the gas collection system s ability to capture and extract the gas. The facility started with three 1.6 MW engines in 2005 and WEC has since expanded the plant by adding two additional 1.6 MW engines. The generators burn landfill gas that is collected from gas wells at the Coventry landfill. New York Power Authority (NYPA) The New York Power Authority provides inexpensive federal preference hydroelectric power to the utilities in Vermont under two contracts. The first contract is a 31 kw entitlement to the Robert Moses Project (a.k.a. St. Lawrence ) located in Massena, New York. The second contract, known as the Niagara Contract, is for a 1,539 kw entitlement to the Niagara Project located at Niagara Falls, New York. The La Capra Associates January 24, 2013 Page 9

contract for St. Lawrence has been extended through April 30, 2017. The Niagara Contract has been extended through September 1, 2025. Hydro-Quebec/Vermont Joint Owners (VJO) Contract WEC s entitlement in the current HQ/VJO contract is 2,589 kw, provided under Schedule B. During the term of the contract, the parties had the ability to adjust the capacity factor up or down based on embedded options, but all capacity factor adjustment options have been exercised. HQ s annual energy deliveries are now set at a 75% annual capacity factor starting in the contract year November 1, 2007, and will remain at that level for the remainder of the contract through October 2015. Vermont Electric Power Producers, Inc. (VEPPI) WEC receives power from numerous Vermont independent power projects (IPPs) through the state mandated Rule 4.100 program administered by the appointed purchasing agent, VEPPI. There are currently twenty IPP generation resources in Vermont, nineteen are hydro and one is wood-fired. VEPPI assigns power to all Vermont utilities based on a pro-rata share of previous year s electric sales which is updated annually. WEC s current share of the resources is approximately 797 kw. Contracts between VEPPI and the independent power producers began to terminate in 2008. WEC anticipates the output from the largest IPP resource (the Ryegate wood-fired facility) will continue to be allocated to WEC and other Vermont utilities after 11/2012, which is the date the current Ryegate contract expires. The anticipated extension is due to legislation that was passed through Act 47 (see 8009 Baseload Renewable Power Portfolio Requirement for more details relative to the continued allocation of Ryegate power to the state s utilities). GMP System Power - Rate W WEC is provided a small portion of power to serve its Jones Brook circuit from GMP, purchased under GMP FERC-administered Wholesale Rate W tariff. The billing is determined monthly and is based on WEC load metered at GMP s Berlin substation. La Capra Associates January 24, 2013 Page 10

Wrightsville Hydro WEC s Wrightsville Hydro unit is a hydroelectric facility with limited ponding capability, and is located at the Wrightsville Dam on the North Branch of the Winooski River in Montpelier, Vermont. WEC owns and operates the facility and utilizes all of its output. The nameplate rating of the facility is 700 kw but energy production is determined by water flows. Wrightsville began creating power in September, 1985 and continues to be a valuable source of economic hydropower for WEC. Sheffield Wind WEC entered a contract to purchase power from the Sheffield Wind facility and has a 10% entitlement to power from the 40 MW project. The project was under construction in 2011 and achieved commercial operation on October 19, 2011 in Sheffield, Vermont. WEC s nameplate entitlement is 4,000 kw and WEC receives a proportionate share of renewable attributes associated with the output from the facility, as well as capacity. Energy production will vary with wind speeds which are seasonal and diurnal, but an annual capacity factor near 25% is projected for energy production at the facility. HQUS PPA WEC, along with other Vermont utilities, petitioned the Vermont Public Service Board in 2010 in Docket 7670 to approve various agreements related to obtaining power from H.Q. Energy Services (US) Inc. through a Purchase Power Agreement (HQUS PPA). WEC is participating as a buyer of power under the Vermont Public Power Supply Authority (VPPSA), through a sub-allocation arrangement. WEC will be allocated energy products from the HQUS PPA through VPPSA in the amount of 4.0 MW from November 1, 2016 through October 31, 2038. 1 1 WEC participated in the HQUS PPA in docket 7670 to obtain a portion of power from HQUS with its portion being allocated through the Vermont Public Power Supply Authority (VPPSA) for up to 4.0 MW. As part of the VPPSA agreement, WEC s energy quantity was equal to the following: The minimum energy quantity defined below plus such additional energy quantity that is defined below, up to a maximum of 4.0 MW. The minimum energy quantity was defined as follows: (1) 2.4 MW from November 1, 2016, through October 31, 2030, and 2.653 MW from November 1, 2030, through October 31, 2038 under the 218 MW La Capra Associates January 24, 2013 Page 11

The energy from this contract will be delivered 7 days a week from hour ending 08:00 to hour ending 23:00 on a firm basis through an Internal Bilateral Transaction (IBT) settled through the ISO-NE markets. There is no capacity associated with the energy but environmental attributes will be delivered with a minimum guarantee that 90% of the power will come from hydro resources. WEC has entered agreements to sleeve or allocate its shares of the HQUS PPA to the Vermont Electric Cooperative (VEC) until a shortfall of energy exists in its own power portfolio. In this way WEC will not be forced to take power from the HQUS PPA until a need actually exists and until it demonstrates that it is short energy relative to existing resources. 5) Market Position Energy WEC is projected to have sufficient power to meet its load requirements through 2017 from committed resources and contracts. The following graph displays WEC s projected energy resources, available from existing contracts and generating plants, through 2017. On the same graph is a forecast of load that WEC expects to serve over the same period. It should be noted that energy is the largest component of a utility s power costs. Below the chart is a summary of major milestones that have or will occur related to WEC s sources of power in the next several years. For this analysis WEC s load projections for the future are projected to rise only very modestly thereby giving WEC a relatively flat load trajectory through 2017. As a result of this load projection, WEC does not anticipate triggering the call back option for the HQ US PPA power through 2017. Therefore, all of WEC s 4.0 MW is assumed to be transferred to Vermont Electric Cooperative, and is therefore not included in the projections shown in the chart below. Highgate scenario; or (2) 2.4 MW from November 1, 2016, through October 31, 2030 and 2.724 MW from November 1, 2030 through October 31, 2038, under the 225 MW Highgate scenario. However, ultimately an additional energy quantity was provided to WEC with the final allocation being 4.0 MW. This increase occurred as some of the VPPSA participants under its Agreement declined to take all or a portion of their share of energy from the HQUS Agreement. WEC therefore will receive from VPPSA a pro rata amount of the unclaimed energy quantity which increased its allocation to 4.0 MW. La Capra Associates January 24, 2013 Page 12

Major Energy Milestones Shefffield Wind achieves full commercial operation on 10/19/2011. For planning purposes the minimum energy delivery of 9,000 MWH is modeled in the analysis. Ryegate power continues to be allocated to WEC after the VEPPI contract expires on October 2012 HQ VJO contract Schedule B expires in October 2015 HQUS PPA begins November 2016 Notice in the graph the relationship between forecasted energy needs and WEC s power supply resources. WEC has sufficient resources to cover its projected load needs through 2015 and has a moderate surplus in most months through 2015. Beginning in 2016 WEC is projected to see a slight but seasonal shortfall in its power needs due to the expiration of the HQ VJO contract which may signal the potential for an upcoming need in the near term. If the shortfall is large enough to trigger the call pack feature for the HQUS PPA power, WEC will reclaim a portion of its HQUS PPA allocation from VEC. More is discussed on the HQ US PPA and return of power from VEC in Section 7 (Future Long Term Resources). Based on the load profile used for this report WEC does La Capra Associates January 24, 2013 Page 13

not expect to trigger the call back of HQ US PPA power from VEC from now through 2017. WEC currently uses revenue generated from excess power sales in off-peak hours to offset shortfalls purchased during on-peak periods. WEC continues to look for opportunities to address energy needs resulting from future contract expirations. WEC s goal is to have its load sufficiently covered by committed energy from cost-effective resources such as Coventry and Sheffield Wind. WEC seeks to stabilize its budget, limit budget variances and to timely develop other longer term contractual or owned unit resources to cover load requirements later this decade when VEPPI production declines and when the 2.6 MW of HQ/VJO power terminates at the end of 2015. With the Vermont PSB s approval of the HQUS PPA and commencement of the Sheffield Wind project, WEC is well positioned to cover the bulk of its energy requirements for at least the next five years. 6) Capacity Position Capacity Capacity is the second largest cost driver in a utility s power costs. Capacity represents the capability to generate electricity and is used in the New England markets as a measure of system reliability and resource adequacy. In broad terms, capacity is important in providing reliability and avoiding price spikes during peak demand periods. The graph below shows WEC s capacity available from existing resources as compared to its projected capacity need. Below the chart is a summary of major milestones that have or will occur related to WEC s sources of power. As can be seen in the chart, WEC projects it will have a shortfall in capacity of approximately 1,700 kw in 2013. In addition, WEC will lose 2,589 kw of capacity resources once the HQ VJO contract expires in 2015, which will further increase WEC s need for capacity. By 2017, WEC is expected to be short roughly 4,600 kw of capacity relative to its needs. La Capra Associates January 24, 2013 Page 14

Major Capacity Milestones FCA 1 Implemented 6/1/2010 Ryegate Expiration 10/2012 but assume extended through planning period due to recent legislation VEPPI Hydro resources expire consistent with end of contracts HQ VJO Contract expiration 11/2015 Forward Capacity Market (FCM) The ISO-NE Forward Capacity Market reflects a relatively new and constantly changing market design for capacity that took effect in June 2010. Under FCM, WEC s generation is paid based on an annual auction clearing price. Conversely, WEC s capacity obligation is assessed based on its load relative to New England s peak, currently set based on the single hourly ISO-NE system peak (though ISO-NE has considered a proposal to lengthen the capacity obligation determination period). The following table provides a summary of FCM prices and auction clearing prices established under the FCM thus far. Note that due to the FCM market rules, there are differences between the price that load is charged, and the prices that generation is paid in La Capra Associates January 24, 2013 Page 15

the ISO-NE settlement system. FCA#1 (6/2010 to 5/2011) FCA#2 (6/2011 to 5/2012) FCA#3 (6/2012 to 5/2013) FCA#4 (6/2013 to 5/2014) FCA#5 (6/2014 to 5/2015) FCA#6 (6/2015 to 5/2016) Net ICR (MW) 32,305 32,528 31,965 32,127 33,200 33,456 Resources Cleared (MW) 34,077 37,283 36,996 37,501 36,918 36,309 Excess Capacity (MW) 1,772 4,755 5,031 5,374 3,718 2,853 Nominal FCA Clearing Price ($/kwmonth) $ 4.5000 $ 3.6000 $ 2.9510 $ 2.9510 $ 3.2090 $ 3.4340 Pro rated Clearing Price to Suppliers ($/kw month) $ 4.2540 $ 3.1190 $ 2.5350 $ 2.5160 $ 2.8550 $ 3.1290 7) Future Long-Term Resources Future Resources Based on WEC s projected energy consumption and the production of WEC s existing resources, it appears that by 2017 WEC will not yet need to take back a portion of its HQUS PPA allocation from VEC. The process of getting power back from VEC requires WEC to demonstrate a 97% coverage ratio or less (resources divided by load) over a prior 12 month period. Once WEC is below 97% then it will notify VEC of its need to take power one year hence. Based on current projections of existing resources and load, WEC will not be below 97% through 2017. In the event WEC reaches the 97% coverage ratio, WEC would then notify VEC that it will take back an amount of power within one year that will result in a WEC coverage ratio of 100%, the amount being available capped at WEC s full allocation of 4.0 MW. WEC s coverage ratio will be calculated monthly and the process of taking back power from VEC will continue until WEC s full allocation of the HQUS PPA is returned. Currently, the Vermont legislature is debating the creation of a Renewable Portfolio Standard (RPS) for Vermont load serving entities. Depending on what final legislative action is taken, WEC may be required to purchase additional sources of power to comply with this legislation. WEC is monitoring this legislation closely and will adjust its resources needs to achieve compliance as necessary. La Capra Associates January 24, 2013 Page 16

8) Anticipated Resource Transactions WEC will sell its excess energy into a combination of the ISO-NE spot market and bilaterally, to balance its position over the planning horizon. Contingent risks, such as Coventry impaired performance, suggest WEC sell only some of its length bilaterally to avoid situations where it must purchase replacement power at higher costs. WEC estimates from 2013 through 2017, sales between 2 and 4 MW off peak will occur through the spot market or bilaterally at then-prevailing wholesale spot or forward market prices. Forward market prices as of January 2013 are provided below as indicator of the potential market price available to WEC. Projected Forward Energy Prices HUB Average of Average of Average of Year On Peak Off Peak ATC 2013 $ 52.04 $ 39.46 $ 45.31 2014 $ 51.97 $ 39.80 $ 45.48 2015 $ 51.80 $ 39.65 $ 45.30 2016 $ 51.45 $ 39.35 $ 44.97 2017 $ 51.50 $ 39.60 $ 45.12 Prices quoted as of 1 17 2013 WEC will continue to explore options to purchase between 2 and 5 MW of capacity to meet its FCM capacity obligations. WEC seeks to purchase at or below prevailing market prices, which currently means it seeks to purchase at or below approximately $3.434 kw-month over the intermediate term horizon. In the event WEC cannot find capacity bilaterally at this price, it will allow its open capacity position to be met with purchases from the ISO-NE administered FCM market. WEC plans to sell its renewable energy certificates from the Coventry facility and the Vermont Wind project through 2017. RECs available for sale from Coventry are estimated to be between 50,000 55,000 annually from 2013 through 2017. In addition, La Capra Associates January 24, 2013 Page 17

the Sheffield Wind RECs are estimated to be between 8,000 and 11,500 over that same time frame. WEC seeks to sell its RECs for the highest price it can obtain, and generally sell to load-serving entities subject to the Renewable Portfolio Standard (RPS) requirements of Massachusetts, Connecticut, Rhode Island or New Hampshire. Current market estimates indicate RECs can be sold into these markets at between $40 and $60 per REC, over the period from 2013to 2017. La Capra Associates January 24, 2013 Page 18