Electric Energy Training

Electric Energy Training US EPA Region 10 Seattle, WA April 24, 2012 April 24, 2012 The Regulatory Assistance Project 50 State Street, Suite 3 Montpelier, VT 05602 Phone: 802-223-8199 web: www.raponline.org

Introducing RAP, Chris and Lisa RAP is a non-advocacy, non-profit organization providing technical and educational assistance to government officials on energy and environmental issues. RAP Principals all have extensive utility regulatory experience. 2

Introducing RAP, Chris and Lisa Chris James is a senior associate at RAP. He previously led Connecticut s climate and energy efforts at the CT DEP, and worked for EPA Region 10. Lisa Schwartz joined RAP in 2009. She previously worked for the Oregon Public Utility Commission and the Oregon Department of Energy. 3

Purpose & Goals of Training From RAP s Perspective: 1. Traditional energy sources and practices are expensive, polluting, and increasingly unsustainable. 2. Over their life cycle, energy efficiency (EE) and renewable energy (RE) are equal or lower cost, less polluting, and far more sustainable, and they boost reliability and security. 3. Environment and energy regulators have little communication, understanding of each other s work. 4. EPA is in a strong position to encourage EE/RE. 4

Training Outline- Morning Modular Training Format Overview of the US Electricity System (30 minutes) Transmission System (with emphasis on the Western Interconnection) (45 minutes) Renewable Energy and Its Benefits (45 minutes) Interactive Problem Solving Exercise (30 minutes) Lunch (60 minutes) 5

Training Outline- Afternoon Report out on Interactive Exercise (15 minutes) Energy Efficiency and Its Benefits (60 minutes) Calculating the Benefits of Renewable Energy and Energy Efficiency Policies (60 minutes) Putting the Pieces Together (30 minutes) Closing Remarks, Discussion, Possible Next Steps (30 minutes) 6

Overview: How Does Our Electric System Work? Electric Energy Training For US EPA Region 10 April 24, 2012 Presented by Chris James April 24, 2012 The Regulatory Assistance Project 50 State Street, Suite 3 Montpelier, VT 05602 Phone: 802-223-8199 web: www.raponline.org

Disclaimer Presentations by non-epa employees do not imply any official EPA endorsement of, or responsibility for, the opinions, ideas, data or products presented, or guarantee the validity of the information provided. Presentations by non-epa employees are provided solely as information on topics related to environmental protection that may be useful to EPA staff and the public. 8

U.S. Energy Sources Overall 9

U.S. Electricity-Only Coal and nuclear share ~triple that of gas Supply-Side Resources i.e., supply power to the grid to meet demand Fossil (coal, natural gas, oil) Nuclear Renewable (hydro, wind, solar, etc.) 10

Electric System Fundamentals (1) Today, most electricity is generated by combustion of fuels to produce steam or exhaust which in turn drives a turbine. This combustion process emits criteria and toxic air pollutants and greenhouse gases (GHG). 11

EIA Electricity Flow Diagram (Quads, 1999) 12

Electric System Fundamentals (2) Electricity demand ( load ) must be dynamically balanced with supply Electricity can t be stored in volume Minor exceptions (e.g., pumped storage) Every time a light, motor, or machine is turned on, its load must be satisfied by a power plant Creates peak load capacity problems Accompanying cost peaks, pollution peaks 13

Electric System Fundamentals (2) Dynamic balancing historically achieved by intensive management of supply-side resources Reserve capacity, spinning reserves, etc. Increasingly addressed by Demand-Side measures: Energy Efficiency Typically produces permanent load reductions Demand Response (DR) Typically temporary load curtailment 14

2008 BPA Load Duration Curve

BPA Peak 100 Hours 2008

Electric System Fundamentals (3) Power plants can be close to the electrical loads they serve, but are often tens or hundreds of miles away. 17

Source: EIA, National Energy Education Development Project http://www.eia.gov/energyexplained/index.cfm?page=electricity_delivery 18

Electric System Fundamentals Transmission & Distribution (T&D) electric grid systems: Impose T&D costs ($20-$30/MWH) Impact reliability (i.e., imposes storm and other risks, requires maintenance, etc.) Require additional generation due to line losses averaging at least 6.5% 19

Average Line Loss Components 20

Electric System Fundamentals (4) Electricity s Holy Grail: Reliability Analogous to attainment of NAAQS for air regulators Reliability means: 1. Adequate generation capacity to meet peak load plus a margin of safety; and 2. Reliable means to deliver it (T&D) 21

NERC: - Develops & enforces reliability standards; - Monitors the bulk power system; - Assesses adequacy via forecasts; - Audits owners, operators, and users for preparedness; - Trains industry personnel; - Helps ensure open access. Planning Standard: <1 day in 10 years 22

23

501 MW 24

Economic Dispatch Problems Generators bid prices don t include all costs, particularly environmental costs Emissions are considered externalities and not valued Newer (often cleaner) plants bear greater depreciation costs, so dispatched less Special exceptions exist, e.g., Reliability Must Run (RMR) 25

Economic Dispatch Opportunities Some states adopting preferential loading order requirements e.g., efficiency 1 st, renewables 2 nd, etc. China exploring Efficiency Power Plants in electricity modeling/planning Environmental dispatch In RAP terms, Clean First 26

Market Clearing Prices The bid price of the marginal unit necessary to satisfy the last bit of load is paid to all generators Avoids turmoil due to bid gaming, but Small load changes at the margin, especially near peak loads, yield very large cost differences, and Profits low-cost laggards most 27

Electricity Rates (Prices) vs. Bills Public/political attention had been trained to focus on electric rates or electricity prices, but Customers pay bills, not rates! 28

100% 90% Electricity Prices Generally Lower in Coal Country In general, lower electricity prices % of Coal in Electric Mix 80% 70% 60% 50% In general, higher electricity prices 40% 30% 20% 10% 0% 29

WY WV KY MS AL SC AR MT LA OK ID ND IN TN MO NE OH IA GA KS NC TX FL AZ SD NM WI NV VA PA OR WA MI US UT MN ME MD IL VT CO DE NH AK HI NJ RI MA CT CA DC NY Kwh per Chained (2000) Dollar Retail Sales of Electricity per Dollar of GSP 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 30

20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Average Retail Price Residential (c/kwh) Customers in many states with highprices have lower average bills: CA, IL, DC, NJ, MA, NY Customers in many states with low rates use a lot of energy leading to higher average bills: examples: ND, WV, KY, MO, TN, IN, NC, AL, GA HI CT NY AK MA NJ NH ME RI MD VT CA DE DC NV FL TX WI PA MI US IL AZ OH AL VA SC MS GA MN NM CO NC IA KS IN TN AR MT OR WY MO NE OK SD UT KY LA WV ID WA ND $1,800 Average Bill - Residential (Annual $) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- MD HI CT TX FL AL DE VA MS SC NV TN AZ GA NC AK NJ US LA MA NY NH AR PA DC KY IN OH OK MO RI OR WV ND SD KS IA VT NE CA ID WA WI IL ME MN MT WY MI CO UT NM Source: Sue Tierney, Analysis Group, 2011 31

Revenue Decoupling Traditionally utilities have throughput incentive A rate mechanism that separates (decouples) a utility s fixed cost recovery from the amount of electricity it sells. Under decoupling, utilities collect revenues Utilities are protected from sales declines due to efficiency, so are more likely to invest it (or less likely to resist) 32

How Changes in Sales Affect Earnings % Change in Sales 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% Revenue Change Pre-tax After-tax $9,047,538 $5,880,900 $7,238,031 $4,704,720 $5,428,523 $3,528,540 $3,619,015 $2,352,360 $1,809,508 $1,176,180 $0 $0 -$1,809,508 -$1,176,180 -$3,619,015 -$2,352,360 -$5,428,523 -$3,528,540 -$7,238,031 -$4,704,720 -$9,047,538 -$5,880,900 Impact on Earnings Net Earnings % Change Actual ROE $15,780,900 59.40% 17.53% $14,604,720 47.52% 16.23% $13,428,540 35.64% 14.92% $12,252,360 23.76% 13.61% $11,076,180 11.88% 12.31% $9,900,000 0.00% 11.00% $8,723,820-11.88% 9.69% $7,547,640-23.76% 8.39% $6,371,460-35.64% 7.08% $5,195,280-47.52% 5.77% $4,019,100-59.40% 4.47% 33

Utility Restructuring or Deregulation THEN: Central generating stations and T&D systems (poles & wires) were natural monopolies, thus regulated NOW: New options for electric generation (financial, technological, operational) enable merchant generation generation no longer a natural monopoly and should be competitive markets T&D still is, so wire companies remain regulated Distributed generation and nimble power may lead to more changes 35

States with Restructured Retail Electric Markets WA States that suspended restructuring and still have some residual customer choice and competitive retail supply. CA AK OR NV ID AZ UT MT WY CO NM ND SD NE KS OK TX MN IA MO AR LA WI NY MI PA OH IL IN WV VA KY NC TN SC MS AL GA FL VT NH DE MD ME MA CT RI NJ States that restructured their electric industry HI Source: EIA, as of September 2010. Restructured states as share of U.S.: = 34% of residential MWh sales = 38% of commercial sales 36

Some Impacts of Deregulation Utility Integrated Resource Planning (IRP) often abolished or weakened System benefits charge (SBC) for EE, lowincome aid, etc. weakened or restructured No automatic recovery of pollution control costs New approaches required to ensure resource adequacy or capacity 37

Future of Deregulation? Progress came to a halt with California s 2000-2001 experience Poor policy design, plus Enron market manipulation Technological, financial pressure building for further progress 38

Federal & State Roles Electricity is a political issue the world over, but especially so in. The debate over reform pits the central government against regional governors. Although controls wholesale electricity tariffs, the governors control retail prices. They are adamant about keeping this power so they can protect industries to which they have ties. Moreover, they are determined to maintain low electricity prices for households, which pay about $2 a month to keep their lights on, roughly the price of a cheap bottle of vodka. Source: RFF, Brennan, April 2003, citing The Economist, Aug. 31, 2002. 39

Federal & State Roles Federal Energy Regulatory Commission Wholesale electricity markets, i.e., interstate transmission, market design, pricing, etc. Some authority (as yet unexercised) re transmission siting Groundbreakers: 1996 Order 888 (open access) 1999 Order 2000 (RTOs) 2011 Order 1000 (include policy considerations in planning) 40

Federal & State Roles States (via Legislatures and Public Service Commissions): Retail rates Whether, when, and how choice of energy provider is offered 41

Federal & State Roles Note key differences in fed vs. state; energy vs. environment Environment (AQ) Strong federal oversight Federal (EPA) delegation; within federal law & regs; subject to review & approval (SIPs) Energy Complete freedom at retail History of state initiative/leadership EE, RE (RPS), siting, etc. 42

Agency Roles & Operation PSCs: Formal, quasi-judicial docket processes DEPs: Delegated authority (primarily) Notice-and-comment rulemaking SEOs: Typically non-regulatory; everything else Key implementing arms (e.g., ARRA); lead-byexample; research, review, and report issues & opportunities; assist economic development 43

What s the Take Home Message for AQ? ~1.4 EGUs => 4.2 (3x) emissions due to conversion losses Plus, all hands on deck means higheremitting EGUs run 44

+7.5% MW = +53% NOx 45

Is there any question why it s important for EPA and the states to encourage EE/RE/DR in environmental & energy regulation? (and we haven t even touched on savings, jobs, competitiveness or security benefits yet ) 46

About RAP The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power and natural gas sectors. RAP has deep expertise in regulatory and market policies that: Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers Learn more about RAP at www.raponline.org Ken Colburn, Senior Associate kcolburn@raponline.org 617-784-6975

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Additional Slides 49

Gas Forward Curve Has Continued Sliding Down and in Contango NYNEX NG Forward Curve Snapshots $9.00 $8.50 10/23/2008 ACTUAL LOCK 6/7/2009 8/13/2009 $8.00 11/24/2009 E-pre 4/1/2010 $7.50 $7.00 4/28/2010 Settle 8/22/2010 12/1/2010 4-18-2011 Midday 6/24/2011 mid-day $6.50 8/5/2011 morning $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 50

U.S. Electricity Consumption Source: CIA World Factbook, 2011, from http://www.indexmundi.com/g/g.aspx?c=us&v=81 51

EIA Electric Power Annual (Rev April 2011) 2009 Year in Review: Electricity generation down 4.1% Lowest level since 2003 Largest annual decline in 60 years Follows 0.9% drop in 2008 Reflects 2.6% decline in economy (GDP) Delta = -1.5%; indicator of paradigm shift? 52

While projected electricity consumption grows by 30% by 2035, the rate of growth has slowed percent growth (3-year rolling average) 14 12 10 History 2009 Period Annual Growth 1950s 9.8 1960s 7.3 1970s 4.7 1980s 2.9 1990s 2.4 2000-2009 0.5 2009-2035 1.0 8 Projections 6 4 2 0 1950 1960 1970 1980 1990 2000 2015 2025 2035-2 Source: EIA, Annual Energy Outlook 2011

BHAG vs. the Cost of Saved Energy 54