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Wellington&Cira Law Seminars Presentation 072610

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  • Need to talk about retail rate caps in Bingaman (4% per annum over state requirements). No rate caps in W-M.States have different rate caps and mechanisms – Refer to Wiser Study
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    • 1. Financial Impacts of Renewable Energy Policies in the Pacific Northwest
      Fred Wellington and Mark Cira
      Navigant Consulting, Inc.
      Renewable Energy in the Pacific Northwest
      Law Seminars International Conference
      August 5, 2010
      Navigant Consulting, Inc.
      One Market Street,
      Spear St. Tower, 12 Floor
      San Francisco, CA 94114
      415.356.7132
      www.navigantconsulting.com
    • 2. Introduction » Navigant’s Clean Energy Service Offerings
      Navigant Consulting has extraordinary depth of expertise in issues that are central to the future of Clean Energy.
      Navigant Consulting Clean Energy Service Offerings
      Clean Energy Policy & Regulation
      Carbon market structure advisory; emissions analysis; policy integration
      Greenhouse Gas Business Strategy
      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
      Energy Efficiency
      Renewable Strategy & Management
      Strategy; RPS management; technology and market assessments: project/technology due diligence; investments/M&A advisory
      Cleaner Electric Generation, Transmission, & Distribution
      Performance optimization; portfolio management; project due diligence; Smart Grid strategies; process improvements
      Cleaner NG Production, Transport, & Marketing
      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.
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 3. Introduction
      Presentation Overview
      This presentation will:
      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.
      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.
      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
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 4. Table of Contents
      1
      RPS Overview
      RPS Gap Analysis
      2
      Strategic Options and Costs
      3
      Conclusions
      4
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 5. There are several structural variations of RPS regulations.
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
      RPS Overview
    • 6. Table of Contents
      1
      RPS Overview
      RPS Gap Analysis
      2
      Strategic Options and Costs
      3
      Conclusions
      4
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 7. Available Wind Resources
      Washington and Oregon have good wind resources and have already developed 43% and 45% of economic wind potential respectively.1
      Installed and Remaining Wind Capacity1
      Economic Wind Capacity by Class
      Source: Western Governors Association and DOE “Western Renewable Energy Zones – Phase 1 Report.” June 2009
      Source: Navigant Consulting, Inc. based on EIA data and Western Governors Association/DOE report “Western Renewable Energy Zones – Phase 1 Report.” June 2009
      1 Includes exports to California
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 8. Remaining Wind Resources and RPS Requirements
      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
      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.
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 9. Table of Contents
      1
      RPS Overview
      RPS Gap Analysis
      2
      Strategic Options and Costs
      3
      Conclusions
      4
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 10. Basic RPS Compliance Options
      Given the wind resource situation, utilities in Oregon and Washington have three basic RPS compliance options.
      Option
      Comments
      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.
      • 11. Higher quality resources could be imported from Montana or Wyoming, although this would include transmission costs.
      • 12. 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.
      • 13. There are limitations on RECs for compliance in Oregon.
      • 14. 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.
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 15. Structure of Analysis
      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.
      Description of Theoretical Utilities in Analysis
      • 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.
      • 16. We constructed three portfolios that envision different compliance scenarios:
      An Accelerated scenario that procures wind quickly, taking advantage of higher quality, Class 4 resources before they are depleted.
      An Incrementalscenario that procures wind incrementally and therefore relies on lower quality resources.
      An Importscenario that relies on imports from Montana (including transmission) due to unavailable in-state resources after 2015.
      1 Includes a simplifying assumption that RPS requirements are met solely with wind resources
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 17. Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
      Structure of Analysis » Wind Build Out Scenario
      The three scenarios vary by the quality of the wind resource, the timing of its procurement and its geographical location.
      Assumed Annual Wind Capacity Additions Under Each Scenario
      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
      MWs
      Import
      Scenario1
      Incremental
      Scenario
      Accelerated Scenario
      1 Includes estimates of the cost of new transmission lines from Montana
    • 18. Analysis Results » Revenue Requirement Increases
      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
      Bars on Left Axis
      Lines on Right Axis
      Higher rates earlier lead to lower long term costs
      Cumulative Percent Change
      Annual Percent Change
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 19. Table of Contents
      1
      RPS Overview
      RPS Gap Analysis
      2
      Strategic Options and Costs
      3
      Conclusions
      4
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 20. Conclusion » Potential Shareholder Risks
      Imprudent decisions regarding renewable energy compliance can present shareholder or ratepayer risks for utilities.
      Potential Shareholder Risk From Poor RPS Compliance Decisions
      • 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.
      • 21. Utilities that are aggressively procuring renewablesearly are less likely to see significant increases in revenue requirements later.
      • 22. 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.
      • 23. 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.
      • 24. This can lead to financial risks insofar as shareholders (in the case of IOUs) are required to bear compliance costs and not ratepayers.
      • 25. For POUs, this can impact credit quality insofar as rating agencies believe there is risk to cost recovery.
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 26. Conclusion » Cost Effective RPS Compliance Decisions
      This necessitates a more strategic view of renewable energy procurement – with a focus on cost effective compliance options.
      Examples of Options to Increase Cost Effectiveness of RPS Compliance
      • Utilities will need increasingly require sophisticated decision-making tools to benchmark and justify the costs of their renewable energy strategies.
      • 27. There is no uniform strategy to increase the cost effectiveness of RPS compliance. Although at a minimum this would likely include:
      • 28. Viewing RPS compliance in a more holistic manner alongside energy efficiency, distributed generation and carbon reduction.
      • 29. Closer assessments of buy versus build decisions, especially as rating agencies more closely scrutinize long-term liabilities of power purchase agreements.
      • 30. More competitive procurements of renewable PPAs to drive down costs.
      • 31. 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.
      • 32. Pursuing new business models associated with distributed (i.e. rooftop) solar photovoltaics.
      Confidential and Proprietary, ©2010 Navigant Consulting, Inc.
      Do not distribute or copy
    • 33. Fred Wellington, CFA
      Managing Consultant
      San Francisco, CA 94105
      phone: 415.356.7132
      fred.wellington@navigantconsulting.com
      Mark Cira
      Senior Consultant
      Chicago, IL 60606
      phone: 312-583-2722
      mark.cira@navigantconsulting.com
      Questions?

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