energy e3 0711

Idaho’s Current Energy Picture : Idaho’s Current Energy Picture Arne Olson, Brian Horii, & Eric Cutter Energy & Environmental Economics, Inc. (E3) Presented to: Energy, Environment and Technology Interim Committee Boise, Idaho July 11, 2006 353 Sacramento Street, Suite 1700 San Francisco, CA 94111 Telephone: (415) 391-5100 http://www.ethree.com


Agenda : Agenda Basics about the energy industry Statewide energy demand and prices Electricity Energy Facility Siting Natural Gas Petroleum/Transportation Fuels


Roadmap for Developing the Energy Plan : Roadmap for Developing the Energy Plan Understand where we are today Decide where we want to go tomorrow Figure out the best ways to get there Implement the approved measures Negotiate through legislative process Repeat


Goals for Today’s Session : Goals for Today’s Session Get a reasonable understanding of the physical and institutional workings of Idaho’s energy systems Understand the “do-nothing” case Begin understanding where the state has leverage Understand Idaho’s situation compared to other states


Energy Policy Levers: What Can the State Do? : Energy Policy Levers: What Can the State Do? The state as a taxing authority The state as a spending authority The state as a regulator (utility regulation, codes and standards, environment and safety, water rights) The state as an energy consumer The state as an energy producer The state as a participant in regional and federal processes The state as a moral authority


Basics About the Energy Industry : Basics About the Energy Industry


Basics about Energy Industry : Basics about Energy Industry Necessity for public health, safety and welfare Players and playing field Highly capital intensive Idaho has limited indigenous energy resources Consequences of state regulation Sizing of energy infrastructure


Energy is More Than Just Another Commodity : Energy is More Than Just Another Commodity Affordable, reliable energy is a necessity for public health and safety Affordable, reliable energy is a necessity for the functioning of a modern economy Extraction, generation, and delivery of energy involves facilities with a large “footprint” The nature of energy necessitates a strong degree of public oversight “Energy is imbued with the public interest.” Roger Hamilton, former Oregon Commissioner


Who are the Players? : Who are the Players? Investors: Shareholders, bondholders, investment banks, lenders Energy Suppliers: Independent power producers, oil & gas exploration and production companies, electric utilities Bulk Energy Transporters: Pipelines, transmission owners Local Energy Deliverers: Electric and gas utilities, oil distributors, service stations Energy Consumers: Households, businesses, farms, public agencies Federal Regulators: FERC, EPA, FTC, SEC, OSHA State Regulators: PUC, DEQ, IDWR “The Public”: As generally represented by NGOs


What is the Playing Field? : What is the Playing Field?


The Energy Industry is Highly Capital-Intensive : The Energy Industry is Highly Capital-Intensive Large facilities (generators, refineries, transmission lines, pipelines) require large upfront investments Access to capital markets is critical for timely development of energy infrastructure Energy, like all commodities, tends to go through “boom-bust” cycles


Idaho has Limited Indigenous Energy Resources : Idaho has Limited Indigenous Energy Resources No oil, gas or coal resources Hydropower resources have all been developed Some good wind and geothermal resources in various locations Most of the energy Idaho consumes is imported Energy prices are driven by events outside Idaho Most of the dollars that Idahoans spend on energy go out of state and do not benefit the local economy!


Regulation and Competition : Regulation and Competition Some energy facilities are competitive Oil & gas production, petroleum refining, gasoline distribution, electric generation Some energy facilities are regulated as monopoly franchises Electricity and natural gas distribution systems Some energy facilities are regulated as monopolies but are subject to some competition Oil and gas pipelines, electric transmission lines, electric generation


State Regulation of Electric and Gas Utilities : State Regulation of Electric and Gas Utilities “Regulatory compact” took shape in the 1920s and 1930s Utility has the obligation to serve to all customers Utility has the opportunity to earn a fair return on prudent investments Utilities earn profits by investing in facilities for which they receive a regulated rate of return PUC sets rates to recover utility’s cost of service plus return on prudent investments Evidentiary hearings with multiple participants


Economic Incentives of Utilities under State Regulation : Economic Incentives of Utilities under State Regulation Because return is based on investment, utilities have the incentive to make capital investments Because their rate of return is regulated, utilities have the incentive to minimize risk Utilities have little incentive to encourage conservation, because lower sales means less revenue Incentive to reduce costs is muted because cost savings must eventually be shared with customers “Democracy is the worst form of government, except for all those others that have been tried.” Sir Winston Churchill


Sizing of Energy Infrastructure : Sizing of Energy Infrastructure Energy systems have limited capability to store energy This means that suppliers must plan based on how much energy must be delivered in a short period of time Peak demand for energy occurs during extreme events: Summer heat wave (Electricity “Critical Peak”) Winter cold snap (Natural Gas “Design Day”) 4th of July weekend (Gasoline)


Electric Energy and Capacity : Electric Energy and Capacity


Capacity Investments over Time : Capacity Investments over Time


Energy Pricing is Not Driven by Marginal Costs : Energy Pricing is Not Driven by Marginal Costs


Units of Measure : Units of Measure Energy Units Electricity kWh, MWh Natural Gas Therms, Dekatherms, MMBtu, Mcf Petroleum Gallons, barrels Demand Units Electricity kW, MW Natural Gas Dth/day Petroleum bbl/day


Summary : Summary Energy is a necessity for public health, safety and welfare The energy industry is highly capital intensive because of the need to meet peak demands Most energy dollars leave the state System of regulated utilities provides incentives that are different from other industries


Statewide Energy Demand and Prices : Statewide Energy Demand and Prices


Statewide Energy Demand and Prices : Statewide Energy Demand and Prices Statewide energy use by type and over time Energy use per capita and per $ of state GSP Energy prices over time and compared to other states Household energy bills compared to other states


Summary of Statewide Energy Demand and Prices : Summary of Statewide Energy Demand and Prices Idaho energy prices tend to be lower than US average Despite the lower prices, energy is a larger burden for Idaho households than in most other states Gas and oil prices are near early 1980s levels in real (inflation-adjusted) terms High energy prices are probably here to stay


Electricity : Electricity


Electricity : Electricity Who are the players Western Interconnection Utility resource planning Characteristics of the different resource types Current Idaho utility resource plans IPPs and PURPA Transmission


The Electric Grid : The Electric Grid Generation: Can be owned by utility or by independent power producer (IPP) Transmission: Generally owned by utility, federal rules allow access by third parties (FERC Order 888) Distribution: Owned by utility, regulated by the states


Electricity: Who are the Players? : Electricity: Who are the Players? Investor-Owned Utilities: Avista, Idaho Power, PacifiCorp (88% of load, 92% of customers) Municipal Utilities and Rural Electric Cooperatives served by BPA Electricity consumers (both large and small) Independent power producers/qualifying facilities Other interested parties (environmentalists, water users) State PUC, FERC and other government agencies Idaho utilities are still “vertically integrated”, i.e., they still own generation, transmission and distribution.


Major Uses of Electricity in Idaho : Major Uses of Electricity in Idaho Idaho has a relatively large industrial sector with several very large individual users Monsanto, Potlatch, Simplot, Micron, Idaho Engineering Laboratory South Idaho irrigators use a lot of electricity during the summer months Increased saturation of residential air conditioning is driving summer peak loads in southern Idaho


Existing Generating Resources in the Western Interconnection : Existing Generating Resources in the Western Interconnection


Western Transmission Grid : Western Transmission Grid


Utility Resource Planning : Utility Resource Planning Utilities need to acquire resources to meet growing loads Generally use three criteria to evaluate resources Reliability/Needs Determination Cost Risk “Integrated” Resource Planning (IRP) considers conservation as resource on the same terms as generation All the utilities conduct stakeholder processes IRPs filed with IPUC along with stakeholder comments


Reliability/Needs Determination : Reliability/Needs Determination There is no rule or single standard in use across the country to determine resource needs In thermal systems, utilities plan to meet peak loads E.g., forecasted peak load plus 15% reserve margin Hydro systems with lots of peaking capacity can plan on an energy basis E.g., sufficient energy to meet annual needs under “critical water” conditions Neighboring systems may be able to lend a hand Various processes are going on at NWPCC, WECC, NERC and FERC to develop “resource adequacy” standards


Risk and Resource Diversity : Risk and Resource Diversity Gas-fired resources are most variable Natural gas prices are highly volatile 20% of cost is fixed, 80% of cost is variable Coal-fired resources are less variable Coal prices are less volatile than gas, but rail transportation requires volatile diesel fuel 80% of cost is fixed, 20% is variable Conservation and renewable resources have no fuel price volatility, but may have availability/timing issues A diversified resource portfolio will be less risky than a portfolio that relies heavily on a particular resource


Meeting Daily Electric Loads with an All-thermal System : Meeting Daily Electric Loads with an All-thermal System


Meeting Daily Electric Loads with a Mixed Hydro-Thermal System : Meeting Daily Electric Loads with a Mixed Hydro-Thermal System


Value of Intermittent Resources : Value of Intermittent Resources Intermittent resources generate energy only when the resource is available Wind fluctuates from hour to hour and even from minute to minute “Integration” costs additional $5-15/MWh


Meeting Daily Electric Loads with Hydro-Thermal Resources and Wind : Meeting Daily Electric Loads with Hydro-Thermal Resources and Wind


Characteristics of Different Resource Types : Characteristics of Different Resource Types Resource Type Gas Combined Cycle Coal Nuclear Wind Geothermal Energy Efficiency Cost Med-High Depending on Gas Prices Low High High Site-specific Measure- specific Fuel Price Variability High Medium Low Low Low Low Operations Flexible Baseload Baseload Intermittent Baseload Measure- specific Environmental Impact Medium High High Low Medium Low or Net positive Jobs and Tax Base Small Medium Large Medium Medium Large


Conservation, Energy Efficiency and Demand Side Management : Conservation, Energy Efficiency and Demand Side Management Another way to meet customer electricity needs Can be a long-term persistent “resource” Popular in jurisdictions with high retail rates or strong environmental concerns Could have negative rate or shareholder impacts


Value of DSM Programs Depends on Timing of Savings : Value of DSM Programs Depends on Timing of Savings


“Peak-Shaving” Programs Aimed at Reducing Peak Demand : “Peak-Shaving” Programs Aimed at Reducing Peak Demand


Demand-Side Momentum : Demand-Side Momentum High fuel costs Energy crises of the recent past California $2 billion commitment (3 yrs) NYSERDA $874 million Energy Smart program (5 yrs) Avista increased 2005 IRP by 50% over 2003 July 31st roll out of the National Action Plan for Energy Efficiency Endorsed by more than 20 state commissions


DSM Comes in Many Flavors : DSM Comes in Many Flavors Different types of DSM could be promoted, depending upon value objectives. PacifiCorp DSM types 1: Fully dispatchable or scheduled firm 2: Energy efficiency 3: Price responsive 4: Behavioral changes


Energy Efficiency Delivery Mechanisms : Energy Efficiency Delivery Mechanisms Market Transformation Codes and Standards Low interest rate loans On-bill financing Direct install and incentives Delivery Agents (IOU, NYSERDA, IDWR)


DSM – Other Issues : DSM – Other Issues Some jurisdictions provide shareholder incentives to spur implementation. Benefits accrue in the future for investments funded today. Revenue – Sales decoupling can reduce utility disincentive to implement EE. Even EE that is “cost effective” can result in customer rate increases. Fewer sales for spreading costs Lost returns from reduced sales Average customer BILLS go down, but the RATE increases


Idaho Resource Needs over the Next Ten Years : Idaho Resource Needs over the Next Ten Years Idaho load is growing relatively rapidly, particularly peak demand in southern Idaho Total resource gap of ~1200 MW on peak in 10 years Wide range of resources in play, including added transmission and even nuclear in 2022


New Resources in Utility IRPs : New Resources in Utility IRPs


Energy Efficiency in Idaho Utility Resource Plans : Energy Efficiency in Idaho Utility Resource Plans Avista: Conservation identified in IRP: 24 aMW Share of Power Council target: 55 aMW Idaho Power: Conservation identified in IRP: 48 aMW Share of Power Council target: 242 aMW PacifiCorp: Conservation identified in IRP: 25 aMW Share of Power Council target: 60 aMW


Idaho Fuel Mix Now and in 10 years : Idaho Fuel Mix Now and in 10 years


Planned Renewables Investments Over the Next 10 years : Planned Renewables Investments Over the Next 10 years Under utility preferred resource strategies, approximately 9% of Idaho’s load would served by new renewables in 2015 Total investment of approximately 260 aMW This is composed of the following: Avista: 13% of retail load by 2016 Idaho Power: 9% of retail load by 2012 Pacificorp: 3% of retail load by 2015


Independent Power Producers : Independent Power Producers Independent power producers (IPPs) gained a foothold with passage of Public Utility Regulatory Policy Act (PURPA) in 1978 Momentum accelerated after EPACT 92 and FERC Order 888 (1996) Today, IPPs generate around 35% of U.S. power Another possible source of supply for Idaho utilities


Merchant vs. Utility Facilities : Merchant vs. Utility Facilities Utility Facilities Developed under state regulation in conjunction with obligation to serve PUC reviews prudency and sets returns Risks and returns shared among utility shareholders and ratepayers Merchant Facilities No obligations other than those spelled out in contract Physical output is consumed locally, but economic benefits may accrue elsewhere Risks and returns borne by merchant shareholders


PURPA and QFs : PURPA and QFs PURPA passed by Congress in 1978 to: Lessen dependence on foreign gas and oil Alleviate inflation Improve the balance of payments Preserve nation’s nonrenewable resources Utilities must buy power from Qualifying Facilities (QFs) at their “avoided costs” QFs include cogeneration and small renewables Rates, terms, and conditions set by state commissions


PURPA In Idaho : PURPA In Idaho Idaho was one of the first states to adopt PURPA and has been one of the most QF-friendly Rates, terms, and conditions for QF’s have changed several times over the past 25 years The fuel types of QFs have varied over the past 25 years Current PURPA rates around $60/MWh Utilities would prefer to acquire renewables through IRPs rather than PURPA


Cumulative PURPA Contracts by Resource Type : Cumulative PURPA Contracts by Resource Type


Transmission : Transmission FERC “Open Access” policies have enabled competitive generation market but have made transmission planning more challenging Standards of conduct limit contact between generation and transmission staff Transmission is still getting built to serve load pockets, but not for interregional transfers Northwest tried for 10 years to form regional transmission operator, but could not overcome challenge of including BPA


Transmission Planning Efforts in the WECC : Transmission Planning Efforts in the WECC Since 2000, western states and utilities have co-sponsored transmission planning efforts A variety of plans for long-distance lines have been drawn up and are seeking support “Frontier Line” from WY to CA “Northern Lights” from Fort McMurray to Mid-C or AZ “Navajo” from Four Corners to Palo Verde Undersea cable from Northwest to Bay Area No major facilities committed to yet


Conservation Subcommittee Issues : Conservation Subcommittee Issues Are utilities and other entities achieving enough DSM in Idaho? Are penalties or incentives needed to spur more implementation? Are parties implementing the right mix of DSM (in the near term and over the long term)? To what extent should environmental costs and benefits factor into DSM decisions?


What is the Do-Nothing Case? : What is the Do-Nothing Case? The lights stay on! Utilities invest in a mix of thermal resources, renewables and conservation, with most of the new energy coming from thermal resources Unclear whether thermal resources will be built in-state High cost of new resources leads to rate increases over time Idaho utilities acquire less conservation than estimated share of Power Council target PURPA issues played out in front of PUC


What are the Leverage Points? : What are the Leverage Points? PUC decisions: Certificate of Public Convenience and Necessity (CPCN) Prudency review and retail rates Terms and conditions for QFs Treatment of utility revenues lost due to conservation Utility resource acquisition Use of electricity in state facilities Taxation of generation facilities Conservation and low-income assistance through appropriations process


Where Does Idaho Sit Relative to Other States? : Where Does Idaho Sit Relative to Other States? Idaho electricity rates are lower than other states Idaho uses more electricity than other states Idaho does more for QFs than other states Idaho will likely have less renewables than states with portfolio standards, but more than states without


Energy Facility Siting : Energy Facility Siting


Energy Facility Siting : Energy Facility Siting Energy facilities have a large “footprint” Pipelines and transmission lines cross multiple jurisdictions Most states have some form of energy facility siting authority EPACT 2005 gets feds involved in facility siting through national corridors initiative


Energy Facility Siting: Current Process : Energy Facility Siting: Current Process Land-use decisions made by local jurisdictions State agencies conduct separate permitting processes (air emissions, wastewater discharge, occupational health & safety, etc.) Utility-owned facilities: IPUC issues Certificate of Pubic Convenience and Necessity (CPCN) Non-utility-owned facilities: No CPCN


Energy Facility Siting: Many (But Not All) Other States : Energy Facility Siting: Many (But Not All) Other States Separate state government agency Permanent commission Staffed by state employees Local officials sometimes included on commission “One-stop shopping”: Siting agency holds all the hearings, conducts environmental impact statement, issues permits Must follow state agency regulations and local ordinances Limited or no need standard for merchant facilities


Key Points for Siting Subcommittee : Key Points for Siting Subcommittee What is the do-nothing case? Continued local siting and strong likelihood of another train wreck Where does the state have leverage? State has wide latitude to establish siting processes Most, but not all, other states have state-level energy facility siting


Natural Gas : Natural Gas


Natural Gas : Natural Gas Natural Gas and Electricity From supply basin to end use customer Supply – Transport – Distribution – Consumption Supply and Demand Outlook Leverage Points for Idaho


Natural Gas and Electricity : Natural Gas and Electricity Prices less volatile than electricity due to availability of storage Except around hurricanes Historically managed on a daily rather than hourly basis Electric generation to account for over 54% of natural gas demand growth in PNW Close relationship between wholesale prices of gas and electricity


Who are the Players? : Who are the Players? FERC PUC “Upstream” segments: exploration, production “Downstream: LDC systems Marketers Traders Interstate Pipelines Storage Utility (LCD) End Use Customers Producers Suppliers


Idaho Natural Gas Utilities : Idaho Natural Gas Utilities Avista (16% of sales) IGC (63% of sales) Questar(1%) & Munis: (20% of sales)


Gas Demand by Sector : Gas Demand by Sector Residential 29% Residential 27% Commercial 18% Industrial 39% Electric Generation 15% Commercial 27% Industrial 33% Electric Generation 23% Pacific Northwest Idaho


Serving Natural Gas Load : Serving Natural Gas Load Extreme or Design Day Pipeline Capacity


State Regulation of Gas Utilities : State Regulation of Gas Utilities Gas commodity purchased on the open market and passed through (utility makes no margin) Large users buy their own gas and pay utility for transportation service Some states allow choice for smaller customers Resource plans mostly weigh pipe against storage for meeting design day demand “Decoupling” of revenues from flows helps solve conservation incentive problem


FERC Regulation : FERC Regulation FERC Order 636 in 1992 led to “unbundling” of pipelines from supply Secondary market for “released” capacity Encourages supply basin competition Pipeline rates regulated under “just and reasonable” standard “Let the market decide” pipeline expansions (subscription)


Idaho Natural Gas Supply : Idaho Natural Gas Supply Canadian and US markets well integrated Utilities purchase supply on open market Canada 80% 1.9 Bcf/d Rocky Mtn 20% 0.5 Bcf/d


Natural Gas Supply Issues : Natural Gas Supply Issues High, volatile prices expected to continue Increasing competition for western gas Demand continues to grow Big increases in gas-fired generation and oil sands Expansion of pipelines eastbound out of Rockies Possibility of new supplies from Arctic “Frontier Gas” and LNG


Natural Gas Flows : Natural Gas Flows Canadian and Rockies gas wants to flow East for better prices Canadian and US “conventional” gas declining Must be replaced by new sources: coalbed methane, Frontier gas, LNG


Pipeline Expansions : Pipeline Expansions Rockies Express 2.0 Bcf/d Mid-Continent Crossing 1.75 Bcf/d Continental Connector 1.0 Bcf/d Pacific Connector 1.0 Bcf/d Mackenzie Valley 1.9 Bcf/d Alaska Highway 6.0 Bcf/d


LNG Costs : LNG Costs Center for Energy Economics $2.50 – 3.70/MMBtu


State Natural Gas Programs : State Natural Gas Programs


What is the Do-Nothing Case? : What is the Do-Nothing Case? Continue to send lots of dollars to out-of-state natural gas suppliers Tariff rider helps to pay for conservation but utilities still lose revenue


Where are the Leverage Points? : Where are the Leverage Points? PUC policies: Utility procurement (spot vs. forward purchases) Customer choice Decoupling Tariff rider for conservation Promote direct use of natural gas for water and space heating Use of natural gas in state facilities


Petroleum & Transportation Fuels : Petroleum & Transportation Fuels


Petroleum : Petroleum Petroleum product prices are tied closely to the global market for crude oil All segments of the petroleum industry are competitive, but increasingly concentrated Public involvement in infrastructure planning is limited to facility siting State has few leverage points


Petroleum Industry : Petroleum Industry Upstream investments based on conditions in global crude oil market Downstream investments based on conditions in local markets Oil industry is competitive and earns speculative returns “Upstream” segments: exploration, production “Downstream” segments: distribution, service stations


Sources of Idaho Petroleum Products : Sources of Idaho Petroleum Products


Vertical Integration of Petroleum Industry : Vertical Integration of Petroleum Industry “Majors” integrate production, refining and distribution Variety of wholesale – retail relationships


Leverage Points for Transportation Fuels Subcommittee : Leverage Points for Transportation Fuels Subcommittee Biodiesel & ethanol production Biodiesel & ethanol demand Fleet regulations or incentives Home heating oil assistance (mainly NE states) Gasoline regulation Limits on station ownership Regulate retail margins Open access to wholesale supply


Ethanol & Biodiesel Programs : Ethanol & Biodiesel Programs 22 States provide ethanol production and use incentives Tax incentives State fleet purchases 6 states have renewable fuels standards 2-10% Price and production targets


Summary on Petroleum/ Transportation Fuels : Summary on Petroleum/ Transportation Fuels What is the do-nothing case? Continue to send lots of dollars to out of state oil companies Where does the state have leverage? Promoting alternative fuels, state fleets Where does Idaho sit relative to other states? Idaho is more vulnerable to oil price shocks because it (a) has no oil industry and (b) uses more oil per capita than other states


Concluding Thoughts : Concluding Thoughts


Roadmap for Developing the Energy Plan : Roadmap for Developing the Energy Plan Understand where we are today Decide where we want to go tomorrow Figure out the best ways to get there Implement the approved measures Negotiate through legislative process Repeat


Energy Policy Case Study: Oregon vs. Wyoming : Energy Policy Case Study: Oregon vs. Wyoming Oregon Very little conventional energy resources Policy principles: Maximize conservation & efficiency Support renewables: hydro, wind, biomass, biofuels, solar, geothermal, ocean wave Promote alternative transportation fuels Oregon Energy Trust created to administer public benefits fund Wyoming Abundant oil, gas and coal resources Policy principles: Promote energy development: coal, coal beneficiation, coal gasification, clean coal, electricity, deep gas, coal bed natural gas, wind power, ethanol, conventional oil, enhanced oil recovery and uranium Wyoming Infrastructure Authority created to help develop transmission projects


Policies from 1982 Energy Plan : Policies from 1982 Energy Plan High priority on conservation, renewables, and high fuel efficiency generation before others. High priority to hydroelectric projects. Carefully consider impacts on agriculture Favor conversion to natural gas heating Review and update curtailment plans Consider coal and nuclear Promote cogeneration and wood fuel. Encourage development of municipal solid waste power. Identify potential for wind development Promote petroleum and gas conservation, exploration Encourage and support local governments in their efforts to promote energy awareness, efficiency and resource development.


Thank you for your patience! : Thank you for your patience!