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04/19/23 1

Economic Value of Economic Value of Stabilizing RegionalStabilizing Regional

Conservation Investments Conservation Investments

Analytical Approach and Preliminary Analytical Approach and Preliminary ResultsResults

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04/19/23 2

Goal of the Analysis

Determine whether there is a net economic Determine whether there is a net economic value to the region’s power system that could value to the region’s power system that could result from stabilizing the annual level of result from stabilizing the annual level of conservation resource acquisitionconservation resource acquisition

Identify and evaluate conservation Identify and evaluate conservation deployment strategies that provide the best deployment strategies that provide the best net economic value to the regional power net economic value to the regional power system considering practical limitations on system considering practical limitations on program ramp rates and market volatilityprogram ramp rates and market volatility

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04/19/23 3

Summary of Problem

Past Plans have called for stable annual Past Plans have called for stable annual regional conservation acquisitionsregional conservation acquisitions

Utility investments in conservation have Utility investments in conservation have varied widely in response to short-run market varied widely in response to short-run market and industry regulatory conditionsand industry regulatory conditions

Question – How does the cyclic investment in Question – How does the cyclic investment in conservation impact its economic value to conservation impact its economic value to the region?the region?

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04/19/23 4

Analytical Approach Selected – Analytical Approach Selected – Step 1Step 1

Use Use AURORAAURORA model to generate future market prices model to generate future market prices under three conditions:under three conditions:

““Average Water”Average Water” – Resource development – Resource development proceeds in response to average water proceeds in response to average water conditionsconditions

““Random Water”Random Water” - Resource develop - Resource develop proceeds in response to average water, but proceeds in response to average water, but market prices vary due to year-to-year hydro market prices vary due to year-to-year hydro conditionsconditions

““Critical Water”Critical Water” - Resource develop proceeds - Resource develop proceeds in response to average water, but market in response to average water, but market prices vary due to assumed critical-water prices vary due to assumed critical-water hydro conditions between 2005 and 2010hydro conditions between 2005 and 2010

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04/19/23 5

Analytical Approach Selected – Analytical Approach Selected – Step 2Step 2

Use Use ConSODConSOD model to simulate two model to simulate two responses to variations in future market responses to variations in future market prices:prices:

““Sustained Orderly Development” (SOD)Sustained Orderly Development” (SOD) - - Conservation acquisitions are deployed in Conservation acquisitions are deployed in uniform annual increments based on long-uniform annual increments based on long-run avoided costsrun avoided costs

““Market Price Response” (MPR)Market Price Response” (MPR) - - Conservation acquisitions are deployed Conservation acquisitions are deployed based on rolling average of short-term based on rolling average of short-term market pricesmarket prices

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04/19/23 6

Analytical Issues – Required Data and Assumptions

Major AssumptionsMajor Assumptions– Relationship between rolling average Relationship between rolling average

Market PricesMarket Prices and and AnnualAnnual Level Level of of conservation acquisitionconservation acquisition

– Relationship between Relationship between Ramp RateRamp Rate and and Total Total Resource Cost Resource Cost of conservation of conservation acquisitionsacquisitions

– Rate at which conservation acquisitions Rate at which conservation acquisitions can be can be Ramped Ramped Up Up and and DownDown

– AmplitudeAmplitude and and FrequencyFrequency andand DurationDuration of of wholesale market price spikeswholesale market price spikes

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04/19/23 7

Is There A Relationship between Is There A Relationship between Market PricesMarket Prices and and AnnualAnnual Level Level of of conservation acquisition?conservation acquisition?

0

20

40

60

80

100

120

140

160

1997 1998 1999 2000 2001

Av

era

ge

Pri

ce

($

/MW

h)

$0

$40

$80

$120

$160

$200

Uti

lity

Inv

es

tme

nts

(M

illio

ns

$)

Average Mid-C Market Price ($/MWh)

Utility Investments (Millions$)

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04/19/23 8

Utility Conservation Investments Are Strongly Correlated to Total Conservation Acquisitions

R2 = 0.88

0

20

40

60

80

100

120

140

160

$0 $100 $200 $300 $400

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04/19/23 9

Annual Conservation Acquisitions are NegativelyNegatively Correlated to “Same-Year’s” Market Prices

R2 = 0.26

$0

$50

$100

$150

$200

$250

30 40 50 60 70 80Conservation Acquisitions (aMW)

Ave

rag

e A

nn

ual

Mar

ket

Pri

ce (

2000

$/aM

W)

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04/19/23 10

Annual Conservation Acquisitions are More Strongly and Positively Correlated to “Last-Year’s” Market Prices

R2 = 0.66

$0$25$50$75

$100$125$150$175$200$225

25 35 45 55 65 75

Current Year's Conservation Acquisitions (aMW)

Pri

or

Ye

ars

Av

era

ge

Ma

rke

t P

ric

es

(2

00

0$

/aM

W0

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04/19/23 11

Changes in Annual Conservation Acquisition Are Strongly correlated to Changes in Prior Year’s Market Prices

R2 = 0.99

-100%

0%

100%

200%

300%

400%

500%

600%

700%

-20 0 20 40 60Change in Acquisitions (aMW)

Pri

or

Yea

rs C

han

ge

in

Mar

ket

Pri

ce (

Mil

lio

ns-

2000

$/aM

W)

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04/19/23 12

Relationship between Relationship between Market PricesMarket Prices and and AnnualAnnual Level Level of conservation of conservation acquisitionacquisition

Rationale:Rationale:

– Conservation acquisitions lag market Conservation acquisitions lag market prices due to the inertia intrinsic inprices due to the inertia intrinsic in» Budget cyclesBudget cycles

» Infrastructure responseInfrastructure response

» Project/Program lead timesProject/Program lead times

Assumption – Ramp ups in conservation Assumption – Ramp ups in conservation acquisitions lag the “rolling average” monthly acquisitions lag the “rolling average” monthly market price changes by 0 – 36 months, with market price changes by 0 – 36 months, with a “expected value” lag of 6 monthsa “expected value” lag of 6 months

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Is There A Relationship between Is There A Relationship between Ramp RateRamp Rate and and Total Resource Total Resource Cost Cost of conservation acquisitions?of conservation acquisitions?

NO DATA on TRC – NO DATA on TRC – Used Utility CostUsed Utility Cost

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04/19/23 14

Cost/aMW and Magnitude of Annual Conservation Acquisitions Are Only Weakly Correlated

R2 = 0.36

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

0 50 100 150

Annual Conservation Acquisitions (aMW)

Co

st/

aM

W (

2000$)

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04/19/23 15

Year-to-Year Changes in Conservation Acquisitions are Not Correlated to Utility Acquisition Costs

R2 = 0.0003

-$1.00-$0.80-$0.60-$0.40-$0.20$0.00$0.20$0.40$0.60$0.80

-60 -40 -20 0 20 40 60Change in Aquisitions (aMW)

Ch

ang

e in

Co

st

(M

illi

on

200

0$/a

MW

)

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04/19/23 16

Relationship between Relationship between Ramp RateRamp Rate and and Utility Cost Utility Cost of conservation of conservation acquisitionsacquisitions

Possible Rationale –Possible Rationale –– Utility conservation acquisition costs ($/aMW) are Utility conservation acquisition costs ($/aMW) are

higher when ramping up than when ramping downhigher when ramping up than when ramping down» Administrative costs are higher/unit savings in the Administrative costs are higher/unit savings in the

beginning of programs than when programs are beginning of programs than when programs are “mature”“mature”

» Retail rate increases “lag” wholesale market price Retail rate increases “lag” wholesale market price increases, so utility financial incentives must be increases, so utility financial incentives must be higher during “ramp up” periods than “ramp down” higher during “ramp up” periods than “ramp down” periodsperiods

Assumption –Assumption –– There is only a very weak relationship between There is only a very weak relationship between

ramp rates (up or down) and utility conservation ramp rates (up or down) and utility conservation acquisition costsacquisition costs

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04/19/23 17

Rate at which conservation Rate at which conservation acquisitions can be acquisitions can be RampedRamped Up Up and and RampedRamped DownDown

History –

–Conservation can be ramped up» 30 – 40 aMW/yr

» OR 50% of prior years acquisitions

–Conservation can be ramped down» 40 – 50 aMW/yr

» OR 60% of prior years acquisitions

Assumption – Create Five “Price Blocks”, Assumption – Create Five “Price Blocks”, constrain ramp rate to respond to “monthly” constrain ramp rate to respond to “monthly” availability” of next next higher cost block.availability” of next next higher cost block.

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AmplitudeAmplitude, , DurationDuration and and FrequencyFrequency of wholesale market of wholesale market price spikesprice spikes

Wholesale market prices will fluctuate as a result of:–Over/Under building–Extreme weather events (hot or cold)–Hydro-system availability–Short-run economic/business cycles

Assumption:“Randomize” the forecast of future Assumption:“Randomize” the forecast of future “price spikes” in response to hydro-system “price spikes” in response to hydro-system availability, ignore “short-run” weather & availability, ignore “short-run” weather & business cyclesbusiness cycles