regulatory flexibility committee strategies for procuring new generation september 18, 2013 indiana...

Regulatory Flexibility Committee

Strategies for Procuring New Generation

September 18, 2013

INDIANA POWER OF WIND COALITION


The Challenge• There is no “free market” for procurement of energy and resources.

• Utilities in regulated states are vertically integrated monopolies with a franchise agreement that entitles them to serve customers within the franchise area.

• Currently, utilities develop integrated resource plans (IRP) which identify supply needs for customers.

• Generally, utilities fulfill energy/capacity shortfall through request for proposals (RFP) and the utility typically chooses themselves.


Other Challenges• Self build options don’t always take into account all transmission and

interconnection costs.

• Risk of construction delay and cost overruns are often not accounted for in self build options.

• Utilities have the ability to recover additional costs from ratepayers.

• Independent power producers (IPP) provide an all-in, binding cost when responding to request for proposals.

• This includes all costs – including transmission and interconnection costs.

• If the project is completed over budget, the risk is borne by the IPP as opposed to the ratepayer.

Example of Utility Share of Supply Resources


UtilityTotal

Resources (MW)

Owned Resources

(MW)

PPA Resources

(MW)

% Owned Resources

AEP 5,279 5,012 267 94.9%Duke 6,830 6,722 108 98.4%IPL 3,353 3,053 300 91.1%

NIPSCO 3,422 3,322 100 97.1%Vectren 1,498 1,288 210 86.0%

SOURCE: 2011 Utilities IRPs

• Approx. 95% of all electricity comes from generation owned by the IOUs


Comparison of Self-Build to Third Party Supply• Utilities receive no rate of return on power purchase agreement (PPA) and

as a result forfeit potential returns for shareholders.

• Lower cost to ratepayer for power purchase agreement, however this may not be the successful proposal.

Utility Self-Build – 100 MW Thermal Plant1

(excludes operating costs)

$427,488,000 Resource Investment

8% Rate of Return

$ 34,199,040

Total Return

Power Purchase Agreement – 100 MW Plant2

$336,384,000 Purchase Agreement Cost

0% Rate of Return

$0 Total Return

Current structure leads to

inefficient outcomes

1 Lazard Levelized Cost of Energy Analysis Version 6.0, June 2012. Assumes Gas Combined Cycle at 40% capacity factor for 20 years at $61/MWh.2 Lazard Levelized Cost of Energy Analysis Version 6.0, June 2012. Assumes Wind at 40% capacity factor for 20 years at $48/MWh.


Example of Competitive Procurement Proposal• Allowing an earned rate of return still provides a lower cost to ratepayer.

Utility Self-Build – 100 MW Thermal Plant1 (excludes operating

costs)

$427,488,000

Resource Investment

8% Rate of Return

$ 34,199,040

Total Return

Power Purchase Agreement – 100 MW Plant2

$336,384,000 Purchase Agreement Cost

0% Rate of Return

$0 Total Return

Current structure leads to

inefficient

outcomes

Ratepayer Savings:$98,392,320

Alternative Procurement – Utilized Wind PPA

$336,384,000 Resource Investment

8% Rate of Return

$ 26,910,720 Total Return


Benefits• Ensure ratepayer is served at lowest, efficient cost. Allow utility sector to balance

the utility shareholder interests with the ratepayer’s desire for low cost energy.

• Reduce ratepayer exposure to cost overrun risk.

• Does not change the regulatory process that currently exists in each state.

• Cooperative working relationships between utilities and independent power producers.

• Alternative for utilities if capital constrained due to generation fleet retirement/retrofit costs, transmission expansion costs, and other system improvement costs. Leverage third parties to provide capital needed to maintain supply adequacy.

• Provide appropriate human resources to support utilities in building new resources. Some utilities no longer have in-house capability for design, project management, and commissioning of new generation resources. The projected utility attrition rate is also a potential concern.

Speakers:

Jason MinalgaManager, Regulatory Affairs

Invenergy

312-582-1500

[email protected]

Consultants:

Tony SamuelPresident

Samuel Solutions

317-403-2339

[email protected]


Questions/Follow Up

regulatory flexibility committee strategies for procuring new generation september 18, 2013 indiana...

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