20220602Comments.pdf

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Kelsey Jae,ISB No. 7899
KELSEY JAE LLC
920 N. Clover Dr.
Boise,ID 83703
Telephone: (208) 39 l -2961
[e-mail]
Attorney for Clean Energt Opportunities for Idaho
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Michael Heckler
Courhrey White
Clean Energy Opportunities for Idaho
3778 N Plantation River Drive, Suite 102
Boise,ID 83703
mike @cleanenergyopportunities.com
[e-mail]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER COMPAIYY'S
2021 INTEGRATED RESOURCE PLAN (IRP)
IPC-E-21-43
COMMENTS
CEO - Comments - IPC-E-2143
Cleon Energy Opporlunilies for {doho'
lune2,2022
Reference Case No. IPC-E-21-43 - ln the matter of ldaho Power Company's 2021
lntegrated Resource Plan
Subject:Comments of Clean Energy Opportunities for ldaho
Recent iterations of tdaho Powe/s lntegrated Resource Plans have incorporated multiple
substantive improvements in process and analysis. CEO also recognizes and appreciates the
open and constructive communication the Company IRP team provided with !RPAC members
and other interested parties in the IRP development process.
As active participants in the development of several of the recent IRP documents, CEO
congratulates the Company on the improvements recently introduced, yet is concerned about
remaining limitations in the software and analytical processes employed to produce the IRP
plans. ln the hope that the recent pattern of process improvement continues in the next IRP
iteration, CEO respectfully suggests that ldaho Power consider the following two areas for
careful review before developing the 2023 IRP:
1. lmprove the ability of the software used (whether Aurora or some other product) to
analyze effects of battery storage on diurnal market price patterns, and
2. lmprove the method for estimating the present value of various portfolios to remove an
existing bias that minimizes out-year costs of inputs that rise in cost over the 2O-year
forecast period (such as those associated with natura! gas prices or carbon emissions
charges).
Regarding the 2021 lRP, CEO appreciates the opportunity to share these two concerns:
1. Software system limitations produced questionable data: forecast Mid-C hourly price
spreads seem unreasonably large. The benefit associated with increased access to
Mid-C market may have been overvalued.
A review of the Mid-C hourly prices used when analyzing the preferred portfolio in the 2021 IRP
suggests that the current version of Aurora might not do an adequate job of accounting for the
potentia! to use batteries to exploit variability in market prices.
ln commodity markets, an opportunity for arbitrage will attract investment among players in
the market. With regard to Mid-C prices, the opportunity to buy low and sell high will drive
resource decisions across the region which will ultimately affect those market prices and reduce
the magnitude of the differences in hourly prices.
Clean Energy Opportunities for ldaho - Comments - IPC-E-21-43 page 2
Cleon f nergy Opporlunilies for {doho'
lf an opportunity for arbitrage looks too good to be true, it's not destined to last. And in this
IRP CEO believes the opportunities to arbitrage in the Mid-C market do look too good to be
true. Specifically, CEO refers to the opportunity for using batteries to exploit those forecasted
market prices by purchasing energy and charging the batteries during hours with low prices and
discharging the batteries and selling that energy at times in the day with higher hourly prices.
The first two figures (below) show the arbitrage opportunity the 2021 IRP preferred portfolio
analysis assumed to be present at the Mid-C market. The daily arbitrage value was calculated
assuming that the arbitrager would purchase energy in each of the four lowest priced hoursl
each day, store that energy for a few hours in a battery and then sell that energy during the
four highest priced hours in that same day. ln both figures the blue line represents the S/MWh
value of the arbitraged "buy low / sell high" opportunities in each day of the year. The orange
line represents the annual average of those 365 daily arbitrage opportunity values.
The first figure shows data based on the Aurora estimated Mid-C hourly prices during 2023
The second figure shows comparable data based on price forecasts for 2033.
With the exception of a few weeks in late Spring, Aurora forecasts large
opportunities for "time-shifting" arbitrage via batteries in Mid-C markets nearly
every day of the year, with an nua! average value = S28. 12/MWh (2023 an n ual data)
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Figure 1 - forecast 2023 Mid-C daily arbitrage opportunities2
Both the 2023 and 2033 data show a distinct seasonal pattern. For a few days in the late spring
Aurora forecasts so much hydro being available that during most al! hours of the day hourly
market prices remain low, thereby offering limited arbitrage opportunities.
l The four-hour period is based on an assumption that the arbitrager would use batteries with
an energy capacity equal to four hours of charge or discharge at its nameplate power capacity.
2 Data source for Figures 1 & 2: CEO Production request#4- Mid-C prices 2OZL-2040
Clean Energy Opportunities for ldaho - Comments - IPC-E-21-43 page 2
Cleon Cnergy Opporlunities for ldoho'
But during the remainder of the year, energy could be sold during the four highest price hours
for about SgO/lUWfr more than the price paid to purchase that same amount of energy during
that day's four low-priced hours.
Based on this simplified illustrative analysis, averaged over all 365 days of the year, the
arbitrager could expect earnings based on a differential of S28.12/MWh between the average
price it paid for energy during the four lowest price hours each day and the price it would
receive when selling during the four highest priced hours of that same day.
Using 2033 Mid-C data shows a similar seasonalpattern with a
h igh er (S42. 89/MWh ) a n n ua I average a b itrage va lu e
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-Daily
abitrage value
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Annual average arbitrage value
Figure 2 - forecast 2033 Mid-C arbitrage opportunities
As shown in Figure 2, the same seasonal pattern appears, but with an even larger difference
between low and high priced hours each day, when reviewing the comparable forecast of Mid-
C 2033 hourly prices.
The daily price spreads during both years seem unrealistically high. There would, of course, be
conversion losses in using batteries to perform such time-shift arbitrage purchases and sales
(some of the energy purchased to charge the batteries would not be released upon discharge),
but the magnitude of the daily trading opportunities seems unreasonably high.
With battery prices forecast to decline over time, someone would likely exploit any such
arbitrage opportunities. As a result, the opportunities to buy low or sell high in the Mid-C
market probably won't be as extensive as Aurora has modeled. A further consequence affects
the forecast benefits accruing to portfolios which have additional access to the Mid-C market.
Portfolios (such as those with the B2H transmission line) with enhanced access to Mid-C
markets may have been materially overvalued in the 2021 IRP analyses.
Clean Energy Opportunities for ldaho - Comments - IPC-E-21-43 page 3
5 CIeon Energy Opporlunilies for {doho'
2. Using an inappropriately high discount rate to calculate present values of forecast
costs for various portfolios inserts bias, which could produce "Regrets"
When comparing the forecast costs associated with various possible resource portfolios, some
method must be used to summarize each portfolio's 2O-year cost streams in a manner that
allows a fair comparison of the various portfolio alternative. The IRP has traditionally used a
"discount to present value" method for producing each portfolio's comparative cost summary.
CEO does not raise concerns
related to using a present
value based comparison,
but does believe that the
Company is using an
inappropriately hagh
discount rate which
inherently introduces bias
into its associated cost
analysis process.
Some of the price forecasts
used in the lRPs rise
dramatically over time.
Estimates of future carbon
emission charges is one such
example as shown in the
figure to the right.Figure 3-202L IRP Carbon Price Forecasts
Some may argue that because the tRP is re-written every two years, effectively the scope of
decisions made based upon each IRP is limited to only those that must be implemented in the
relatively near future. By implication, cost estimates from later portions of the 20-year forecast
are less important because they can be updated in the next IRP iteration.
The use of an overly high discount rate inherently understates the cost exposure in portfolios
which are more exposed to those types of costs (such as future carbon emission charges) that
rise dramatically over the 2O-year forecast period. That inherent bias to understate the cost of
some portfolios could produce decisions that we later "regret".
For each portfolio alternative, a variety of costs are forecast, including fixed costs, fuel costs,
market and other power purchases/sales, emission costs, storage and start-up costs. These
costs are summed up by year to estimate how much revenue would be required if that portfolio
were built. Even the costs for adding new capital resources are estimated on a revenue
requirement basis.
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Clean Energy Opportunities for ldaho - Comments - IPC-E-21-43 page 4
Cleon Energy Opporlunities forldoho'
The fundamental point here is that those revenue requirements would eventually be collected
from customers. CEO strongly believes that the appropriate base for converting future year
cost estimates back to a present value requires using a discount rate that reflects the
custome/s cost of short-term funding and that these cost streams have nothing to do with the
Company's long-term cost of capital.
The discount rate used for any present value calculation can dramatically influence the results
of that comparative analysis. For example, using a relatively short-term rate (such as that
yea/s forecast inflation rate - which some would refer to as adjusting to "real" costs) rather
than a longer-term higher risk rate can produce dramatically different analyticaloutcomes.
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3000
2000
1000
Forecast cost of carbon emksions in HGHC preferred portfolio is almost 93 billion over 20
years, But impact in analyzed portfolio cost is cut in half ($2.98 billion actual vs 5f .57 billion
discounted at Company cost ofcapitaU
-Actual
Emission Costs
-Discounted
to remove inflation
-Discounted
at cost of Cipital
0
Figure 4 - Analyzed portfolio cost reduced by'A of a Sbillion by using higher discount rate
For example, as is shown in Figure 4 above, the actual forecast expenditures for carbon
emissions for the preferred portfolio in the high gas, high carbon scenario, is 52,980 million. By
discounting those expenditures back to a present value using the Company cost of capita! as
the discount rate, those costs were analyzed as being only 51,566 million.
lf, however that 52,980 cost stream had been discounted to make each yea/s expenditures
reflect a constant leve! of customer purchasing power (that is, if the cost stream were
discounted to take out the effects of inflation) the cost stream would have been analyzed as
having a present value of 52,337 million, nearly 3/q of a billion dollars more than it was analyzed
as having cost.
The future cost streams being forecast for all portfolios are estimates of a portion of the
revenue requirements that would have to be collected from customers if that portfolio were
implemented. Those cost streams are NOT forecasts of future IPC capital requirements. The
discount rate employed to be bring those future cost streams back to a present value should
NOT be the Company's long-term cost of capital.
Clean Energy Opportunities for ldaho - Comments - IPC-E-21-43 page 5
Cleon Energy Opporlunilies for {doho'
Within the IRP a comparison was made between the preferred portfolio both with and without
82H. Both portfolios included transmission upgrades: the "with" portfolio added transmission
between the Treasure Valley and the Mid-C market, the "without" added transmission between
the Treasure and Magic valleys. Absent the additional access to the Mid-C market, the
"without" portfolio added much more clean energy resources within the IPC service territory (a
total of about 1.5GWs of incremental resources in the "without" portfolio - 700MWs of wind,
400MWs of more solar and about 400MWs additional batteries).
The "without B2H" portfolio was evaluated as having higher costs over the 2O-year period due
to the additional wind, solar and storage purchases but was more resilient in the face of high
carbon charges as shown in the table below.
Table 1- Base portfolio without B2H more resilient to high carbon charges
CEO is not suggesting that the base portfolio without B2H should have been selected in the
2021tRP.
However, when the bias in favor of B2H arising from what CEO sees as unrealistic arbitrage
opportunities in the hourly Mid-C market price forecasts is combined with an up to $y, billion
understatement of carbon emission cost exposure associated with the B2H portfolio due to the
use of an inappropriately high discount rate, we see opportunities for improvement in future
IRP analyses and hope those improvements will be implemented.
Respectfu lly submitted,
Michael Heckler, Policy Director
Clean Energy Opportunities for ldaho
Planning gas, no
carbon
Planning gas,
planning carbon
High gas, high
carbon
"Without B2H" portfolio
cost compared to "With
B2H" portfolio cost
Without is 5597
million more
expensive
Without is5277
million more
expensive
without is s357
mi!!ion less
expensive
Clean Energy Opportunities for ldaho - Comments - IPC-E-21-43 page 6
Dated this 2nd day of June ,2022.
Respectfully submitted,
wT*
Kelsey Jae, Attorney for CEO
CEO - Comments - IPC-E-2143
CERTIFICATE OF SERVICE
I hereby certiff that on this 2nd day ofJune,2022. I delivered true and correct copies of
the foregoing COMMENTS to the following persons via the method of service noted:
Electronic Mail Delivery
Idaho Public Utilities Commission
Jan Noriyuki
Commission Secretary
secretary@puc. idaho.gov
Idaho PUC Staff
Dayn Hardie
Deputy Attorney General
Idaho Public Utilities Commission
dayn.hardie@nuc. idaho.sov
Micron Technologt, Inc.
Jim Swier
jswis@.microruam
Idaho C onservation Le ague
Benjamin J. Otto
Emma E. Sperry
botto @ idahoconservation.org
esperry@ idahoconservation.org
Austin Rueschhoff
ThorvaldA. Nelson
Austin W. Jensen
Holland & Hart, LLP
darueschho ff@ho I I and hart.com
tnelson@hol landhart.com
[e-mail]
aclee@hol landhart.com
gl garganoanrari @hol landhart.conr
STOP B2H Coalition
Jim Kreider
[e-mail]
Idaho Power Company
Lisa D. Nordstrom
Tim Tatum
Alison Williams
lnordstrom @idahooower.com
awi I I iams@ idahopower.com
ttatum @i dahopower.com
[e-mail]
Industrial Customers of ldaho Power
Peter J. Richardson
RichardsonAdams, PLLC
oeter@rrichardsonadam s.com
Dr. Don Reading
dreadi n [e-mail]
Kiki Leslie A. Tidwell, pro se
ktidwel 12022(@emai l.com
Jack Van Valkenburgh
Van Valkenburgh Law, PLLC
[e-mail]
Ys\e
Kelsey Jae
Attorneyfor CEO
CEO - Comments - IPC-E-2143