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Reading the Tea Leaves: Reading the Tea Leaves: How Utilities in the West Are Managing Carbon How Utilities in the West Are Managing Carbon Regulatory Risk in their Resource Plans Regulatory Risk in their Resource Plans Galen Barbose, Ryan

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Energy Analysis Department

Reading the Tea Leaves: Reading the Tea Leaves:

How Utilities in the West Are Managing Carbon How Utilities in the West Are Managing Carbon Regulatory Risk in their Resource Plans Regulatory Risk in their Resource Plans

Galen Barbose, Ryan Wiser, Amol Phadke, and Charles Goldman

Lawrence Berkeley National Laboratory March 2008

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SLIDE 2

Energy Analysis Department

Project Overview Project Overview

Motivation: Uncertainty about the nature and timing of future carbon dioxide regulations poses substantial financial risks for utility shareholders and ratepayers, but these risks can be managed through effective long-term resource planning Scope: A comparative analysis of the most recent resource plans issued by utilities in the Western U.S., focusing on issues related to carbon regulatory risk Two components

  • 1. Analysis of carbon regulatory risk: Comparison of utilities’

methods and assumptions used to assess carbon regulatory risk and risk management options

  • 2. Preferred resource portfolios: Comparison of preferred resource

portfolios selected by utilities and their carbon intensities

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SLIDE 3

Energy Analysis Department

Our Sample of Resource Plans Our Sample of Resource Plans

Utility IRP Year Avista 2007 Idaho Power 2006 LADWP 2006 Nevada Power 2006 NorthWestern Energy 2007 PacifiCorp 2007 PG&E 2006 PGE 2007 PSCo 2007 PSE 2007 SCE 2006 SDG&E 2006 Seattle City Light 2006 Sierra Pacific 2007 Tri-State G&T 2007

The most recent resource plans issued by 15 Western U.S. utilities Represents ~60% of Western utility sales Focus on largest utilities No utilities from Arizona (no formal IRP) or New Mexico (IRP just getting started)

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Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on utility

planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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Energy Analysis Department

Future Carbon Regulations Could Have Far Future Carbon Regulations Could Have Far-

  • Reaching Impacts for the Electricity Industry

Reaching Impacts for the Electricity Industry

EIA’s Analysis of: EIA Projection of U.S. Electric Sector Carbon Dioxide Emissions under Proposed Legislation Percent of Economy-Wide Greenhouse Gas Emission Reductions Obtained from the Electricity Sector

McCain-Lieberman 2003 (S.139) 76% decline from 2010 to 2025 48% decline from 2010 to 2030 11% increase from 2010 to 2030 (compared to a 31% increase in reference case) 68% McCain-Lieberman 2007 (S.280) 73% Bingaman/NCEP 2006 draft legislation 30%

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SLIDE 6

Energy Analysis Department

The Potential Impact on the Relative Economics The Potential Impact on the Relative Economics

  • f Electric Resources is Highly Uncertain
  • f Electric Resources is Highly Uncertain

Uncertainty in the relative impact on different resource options creates significant financial risk for utilities and their ratepayers Low-carbon resources offer a hedge against these risks

$0 $10 $20 $30 $40 $50 $60 $0 $10 $20 $30 $40 $50 Carbon Emission Price ($/short ton CO2) Incremental Operating Cost ($/MWh) EIA Projections of 2010-2030 Levelized Allowance Prices (2007$): Pulverized Coal IGCC w/o CCS CCGT IGCC w/ CCS EE, RE, Nuclear S.139 S.280 Bingaman/NCEP

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Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on utility

planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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Energy Analysis Department

Incorporating Carbon Costs into Resource Incorporating Carbon Costs into Resource Planning Analyses is Common Practice Planning Analyses is Common Practice

All utilities except LADWP modeled candidate portfolio costs subject to carbon regulations (beyond existing state laws)

  • Ten utilities assumed future carbon regulations in their base case
  • Eight utilities evaluated multiple future carbon regulations

Mandatory carbon reductions generally modeled by utilities as a carbon tax or cap-and-trade

  • No utilities specifically modeled a state or regional cap-and-trade programs

Specific carbon price projections based on:

  • PUC rules (OR, CA, NM)
  • Federal policy proposals (e.g., NCEP recommendations)

Limited consideration of other types of carbon regulations

  • PacifiCorp considered a multi-state generator emission performance

standard

  • PGE assumed that existing Oregon carbon mitigation law would be

expanded to cover coal

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SLIDE 9

Energy Analysis Department

Utilities’ Base Utilities’ Base-

  • Case and Alternate Carbon

Case and Alternate Carbon Emission Price Projections Emission Price Projections

Levelized Carbon Emission Price Projections (2010-2030)

$0 $10 $20 $30 $40 $50 $60 Avista Idaho Power LADWP Nevada Power NorthWestern PacifiCorp PG&E PGE PSCo PSE SCE SDG&E Seattle City Light Sierra Pacific Tri-State G&T 2010-2030 levelized price (2007$/short ton CO2)

Scenario Range (Min & Max) Base-Case Assumption McCain-Lieberman 2003 (S.139) McCain-Lieberman 2007 (S.280) Bingaman/NCEP 2006 Synapse (High) Synapse (Low) Synapse (Mid)

$0 $10 $20 $30 $40 $50 $60 Avista Idaho Power LADWP Nevada Power NorthWestern PacifiCorp PG&E PGE PSCo PSE SCE SDG&E Seattle City Light Sierra Pacific Tri-State G&T 2010-2030 levelized price (2007$/short ton CO2)

Scenario Range (Min & Max) Base-Case Assumption McCain-Lieberman 2003 (S.139) McCain-Lieberman 2007 (S.280) Bingaman/NCEP 2006 Synapse (High) Synapse (Low) Synapse (Mid)

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SLIDE 10

Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on utility

planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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Energy Analysis Department

Most Utilities Considered Aggressive Long Most Utilities Considered Aggressive Long-

  • Term EE Targets in their Resource Plans

Term EE Targets in their Resource Plans

Maximum Quantity of EE Evaluated in Candidate Portfolios (utility-funded programs over the planning period)

0.0% 0.5% 1.0% 1.5% 2.0% SDG&E SCE PG&E PGE Avista PSE NorthWestern LADWP Seattle City Light PSCo PacifiCorp Sierra Pacific Tri-State G&T Idaho Power Nevada Power Maximum Achievable Potential

  • Avg. Annual Savings (% of Load)

0% 25% 50% 75% 100% Cumulative Savings (% of Load Growth) Cumulative Savings as Percent of Load Growth (right axis) Average Annual Savings as Percent of Load (left axis) 0.0% 0.5% 1.0% 1.5% 2.0% SDG&E SCE PG&E PGE Avista PSE NorthWestern LADWP Seattle City Light PSCo PacifiCorp Sierra Pacific Tri-State G&T Idaho Power Nevada Power Maximum Achievable Potential

  • Avg. Annual Savings (% of Load)

0% 25% 50% 75% 100% Cumulative Savings (% of Load Growth) Cumulative Savings as Percent of Load Growth (right axis) Average Annual Savings as Percent of Load (left axis)

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Energy Analysis Department

Most Utilities Evaluated Candidate Portfolios Most Utilities Evaluated Candidate Portfolios with Aggressive Levels of Renewables with Aggressive Levels of Renewables

Maximum Quantity of New Renewables Evaluated in Candidate Portfolios (excludes already-planned resources and contract renewals)

0% 25% 50% 75% 100% Avista PacifiCorp Seattle City Light PGE LADWP SDG&E PG&E PSE PSCo SCE NorthWestern Nevada Power Sierra Pacific Idaho Power Tri-State G&T RPS No RPS Percent of Cand. Portfolio Supply 0% 10% 20% 30% 40% Percent of Retail Load Percent of Retail Load (right axis) Percent of Candidate Portfolio Supply Resources (left axis)

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Energy Analysis Department

Utilities’ Evaluation of other Types of Low Utilities’ Evaluation of other Types of Low-

  • Carbon Resource Options is More Limited

Carbon Resource Options is More Limited

0% 20% 40% 60% 80% 100% NorthWestern Seattle PGE PSE Nevada_Power Idaho Power PacifiCorp NorthWestern PGE PacifiCorp PSE Idaho Power PSCo NorthWestern NorthWestern Idaho Power NorthWestern PacifiCorp Idaho Power Seattle PG&E PSE Percent of Cand. Portfolio Supply 0% 20% 40% 60% 80% 100% Percent of Retail Load Percent of Retail Load (right axis) Percent of New Supply (left axis) IGCC w/o CCS IGCC w/ CCS Nuclear CHP CCGT w/ CCS PC w/ CCS

Maximum Quantity of IGCC with/without CCS, CCGT w/ CCS Nuclear, and CHP Evaluated in Candidate Portfolios

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Energy Analysis Department

Most Utilities Constructed Multiple Low Most Utilities Constructed Multiple Low-

  • Carbon Candidate Portfolios

Carbon Candidate Portfolios

Carbon Intensity of Utilities’ Candidate Portfolios and Preferred Portfolios (weighted-average emission rate of new supply- and demand-side resources)

500 1,000 1,500 2,000 Avista Idaho Power LADWP Nevada Power NorthWestern PacifiCorp PG&E PGE PSCo PSE SCE SDG&E Seattle City Light Sierra Pacific Tri-State G&T lbs CO2 per MWh

Preferred Portfolio Candidate Portfolios

sub-critical pulverized coal combined- cycle natural gas

500 1,000 1,500 2,000 Avista Idaho Power LADWP Nevada Power NorthWestern PacifiCorp PG&E PGE PSCo PSE SCE SDG&E Seattle City Light Sierra Pacific Tri-State G&T lbs CO2 per MWh

Preferred Portfolio Candidate Portfolios

sub-critical pulverized coal combined- cycle natural gas

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SLIDE 15

Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on

utility planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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Energy Analysis Department

Utilities Often Ignore Potentially Important Utilities Often Ignore Potentially Important Indirect Effects of Carbon Regulations Indirect Effects of Carbon Regulations

Utility Marginal Generation Costs in Wholesale Electricity Market Natural Gas Prices Air Pollutant Permit Prices Load Growth Coal Plant Retirement Regional Generation Expansion Regional Transmission Expansion Availability

  • f Federal

Incentives Generation Capital Costs and Technology Development

Avista

  • Idaho Power
  • LADWP

Nevada Power

  • NorthWestern
  • PacifiCorp
  • PG&E

*

PGE

  • PSCo
  • PSE
  • SCE

*

SDG&E

*

Seattle City Light

  • Sierra Pacific
  • Tri-State G&T

The absence of a check mark () indicates either that the utility did not account for a particular impact or that its resource plan did not provide sufficient detail to determine whether or not it accounted for that impact. Asterisks (*) shown for PG&E, SCE, and SDG&E indicate that these utilities did not account for carbon regulations in their electricity price forecast, but they did include their base-case carbon price as an adder when evaluating the cost effectiveness of energy efficiency and renewable energy resource acquisitions.

Elements of the Portfolio Analysis Varied with Carbon Regulations

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SLIDE 17

Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on utility

planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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Energy Analysis Department

Incorporating Carbon Risk into the Portfolio Incorporating Carbon Risk into the Portfolio Selection Process Selection Process

The “efficient frontier” of candidate portfolios across carbon price scenarios

Candidate portfolios can be compared in terms of:

  • Expected cost
  • Uncertainty in cost

Probabilistic uncertainties can be reduced to single stochastic risk metrics Carbon regulatory risks are less amenable to this type of approach

Expected Cost Stochastic Risk

Base-Case Carbon Price Low Carbon Price High Carbon Price

Two challenges in dealing with carbon regulatory risk

  • 1. How to characterize and compare candidate portfolios’ exposure to

carbon regulatory risk (given the absence of objectively-defined probabilities)

  • 2. How to make trade-offs between minimizing expected cost and

minimizing overall portfolio risk

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Energy Analysis Department

It Is Often Unclear How or Whether Carbon Risk It Is Often Unclear How or Whether Carbon Risk Informs Selection of the Preferred Portfolio Informs Selection of the Preferred Portfolio

Eleven utilities evaluated candidate portfolio costs across multiple carbon price scenarios... But only five clearly relied upon results from these scenarios in selecting their preferred portfolios:

  • Avista: Modeled carbon regulations as a stochastic variable and

selected portfolio along the efficient frontier

  • Idaho Power: Developed “risk adders” for various scenario risks and

ranked portfolios according to both expected cost and total risk

  • Northwestern: Developed risk-adjusted cost metric for each

candidate portfolio, by assigning weights to alternate scenarios

  • PacifiCorp: Used to capacity expansion model to determine which

resources where “robust” across carbon scenarios

  • PSE: Identified “threshold probability” of high carbon prices
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Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on utility

planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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Energy Analysis Department

The Carbon Intensity of Utilities’ Preferred The Carbon Intensity of Utilities’ Preferred Portfolios Varies Widely Portfolios Varies Widely

Notes: The figure reflects new, long-term resources in utilities’ preferred portfolios (i.e., excludes contract renewals and short/medium-term market purchases) in the last year of their planning periods. Gross emission rate reflects new incremental resources; net emission rate also accounts for retirements.

Composition & Composite CO2 Emission Rate of Utilities’ Preferred Portfolios

0% 20% 40% 60% 80% 100% Seattle City Light PGE LADWP SDG&E PG&E NorthWestern PSCo SCE Avista PSE Idaho Power PacifiCorp Sierra Pacific Nevada Power Tri-State G&T Percent of Total Portfolio (GWh in Last Yr. of Planning Period) 400 800 1,200 1,600 2,000 lbs CO 2 per MWh Energy Efficiency Renewables Nuclear CHP IGCC (w/ CCS) Natural Gas IGCC (no CCS)

  • Pulv. Coal (no CCS)

Net Emission Rate Gross Emission Rate

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Energy Analysis Department

In Aggregate, Natural Gas Generation is the Largest In Aggregate, Natural Gas Generation is the Largest Component in Utilities’ Preferred Portfolios Component in Utilities’ Preferred Portfolios

Aggregate Resource Additions in Utilities’ Preferred Portfolios (annual GWh)

IGCC (w/ CCS) 1% Energy Efficiency 22%

  • Pulv. Coal (no CCS)

14% CHP 2% Nuclear 1% IGCC (no CCS) 1% Renewables 26% Natural Gas 33%

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Energy Analysis Department

In Aggregate, Utility Preferred Portfolios are In Aggregate, Utility Preferred Portfolios are Consistent with a Modest Carbon Policy Consistent with a Modest Carbon Policy

Comparison of Aggregate New Supply-Side Resources in Utility Preferred Portfolios to EIA Projections of Generation Additions in the West through 2025

0% 20% 40% 60% 80% 100% Utility Resource Plans McCain-Lieberman (S.139) McCain-Lieberman (S.280) Bingaman/NCEP Percent of New Supply Resources 400 800 1,200 1,600 2,000 lbs CO 2 per MWh RE Nuclear Natural Gas (w/ CCS) Coal (w/ CCS) Natural Gas (no CCS) Coal (no CCS) CO2 Emission Rate EIA projected generation additions in the West (2005-2025)

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Energy Analysis Department

Exposure to Carbon Regulatory Risk Exposure to Carbon Regulatory Risk Varies Substantially Across Utilities Varies Substantially Across Utilities

Carbon Intensity of Individual Utility Preferred Portfolios Compared to EIA Projections of Generation Additions in the West through 2025

500 1,000 1,500 2,000 Seattle City Light PGE LADWP PG&E SDG&E PSCo SCE Avista PSE NorthWestern Idaho Power PacifiCorp Sierra Pacific Nevada Power Tri-State G&T lbs CO2 per MWh McCain-Lieberman 2003 (S.139) McCain-Lieberman 2007 (S.280) Bingaman/NCEP 2006 Utility Aggregate 500 1,000 1,500 2,000 Seattle City Light PGE LADWP PG&E SDG&E PSCo SCE Avista PSE NorthWestern Idaho Power PacifiCorp Sierra Pacific Nevada Power Tri-State G&T lbs CO2 per MWh McCain-Lieberman 2003 (S.139) McCain-Lieberman 2007 (S.280) Bingaman/NCEP 2006 Utility Aggregate

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SLIDE 25

Energy Analysis Department

Presentation Outline Presentation Outline

The significance of carbon regulatory risk for utility resource planning Analysis of carbon regulatory risk in Western utilities’ resource plans

  • 1. Assumptions about future carbon emission costs
  • 2. The type and quantity of low-carbon resources evaluated
  • 3. Assumptions about indirect impacts of carbon regulations on utility

planning environment (e.g., natural gas prices, load growth)

  • 4. The manner in which uncertainty in candidate portfolio costs is

considered in the process of selecting the preferred portfolio

The composition and carbon intensity of Western utilities’ preferred resource portfolios Summary and recommendations

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SLIDE 26

Energy Analysis Department

At the Highest Level... At the Highest Level...

Utilities are making important strides in evaluating carbon regulatory costs and risks in their resource plans

  • As evident by the fact that virtually all utilities considered carbon

costs

  • And several utilities made it a primary focus of their analysis

But methods and assumptions are highly varied, and reveal opportunities for improvement Guidance from regulators is essential to building confidence in the results and to ensuring that ratepayers are adequately protected from risks

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SLIDE 27

Energy Analysis Department

Recommendations to Consider Recommendations to Consider

1. Include a reasonable estimate of the “most likely” carbon policy in your state in the base-case scenario and evaluate a broad range of alternate carbon price projections

  • Workshops or technical advisory groups may be appropriate

forums for developing an informed consensus

2. Construct candidate portfolios with the maximum achievable energy efficiency potential 3. Value the avoided carbon costs from energy efficiency and the reduced carbon regulatory risk

  • Show how much energy efficiency would be cost-effective under

high carbon price scenarios vs. base-case scenario

4. Construct candidate portfolios with the full range of renewable generation options AND at levels above minimum RPS requirements

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SLIDE 28

Energy Analysis Department

Recommendations to Consider Recommendations to Consider (cont.) (cont.)

5. Undertake efforts to develop credible assumptions about the future cost and availability of IGCC, CCS (for IGCC and CCGT), and new nuclear power 6. Account for potentially important indirect effects of carbon regulations

  • Especially impacts on wholesale electricity market prices, natural

gas prices, load growth, and coal-plant retirements

7. Develop transparent methods for incorporating information about carbon risk into the portfolio selection process

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Energy Analysis Department

For More Information... For More Information...

Download the Report

http://eetd.lbl.gov/ea/emp/rplan-pubs.html

Contact the Authors

Galen Barbose (glbarbose@lbl.gov) Ryan Wiser (rhwiser@lbl.gov) Charles Goldman (cagoldman@lbl.gov)