20060308Farm Energy.pdf

~I()AHO FARM ENERGY ASSOCIATION
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March 8, 2006
Jean Jewell
Commission Secretary
Idaho Public Utilities Commission
472 W. Washington St.
Boise, ID 83702-5983
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BOARD MEMBERS Re: Comments on P AC-05-
Brian -Jackson Dear Ms. Jewell:
Armand Eckert
John Steiner
The Idaho Fann Energy Association provides the following comments on
the Amended Agreement filed with the Commission on January 27 2006
in the above-referenced matter. The Idaho Farm Energy Association is a
nonprofit corporation formed in January 2006 to promote rural economic
development through on-fann renewable energy projects in the State of
Idaho. On-fann renewable energy projects can shelter consumers from
rising fuel prices, contribute to local economies, provide direct income for
farmers and ranchers, increase diversity of fuel supply, and reduce our
dependence on foreign fuels.
We support approval of the Schwendiman Amended Agreement and view
its modified 90/110 banding mechanism as a significant improvement over
the prior version ofthe band. However, the methodology used to separate
the capacity and energy price components in this Amended Agreement
contains an important error which must be corrected if these new contract
terms are to be applied to other projects. In addition, we believe that the
90/110 performance band remains an unjustified reduction from full
avoided cost prices. We also object to the failure of the methodology to
recognize that deliveries below the 90% band still have capacity value.
Rather than persisting with the 90/110 banding requirement, we believe all
parties would be better served by requiring that wind projects provide
forecasts from pre-approved advanced forecasting services. This is the
best way to minimize the cost of integrating wind energy.
1. N on-Conforming Energy Price Calculation is Erroneous
515 N. 27th St.
Boise , ID 83702
The "non-conforming energy" price is too low because it fails to include
the full value of variable operations and maintenance costs for the
surrogate avoided resource. A portion of variable O&M costs were
included in the capacity component of the published rates, which has the
P 208-859-1882
F 208-495-1555
Ms. Jean Jewell
March 8, 2006
Page 2
effect of reducing the energy component (and thus the non-conforming energy price).
Specifically, all of the variable O&M up to the capacity factor of the peaking resource
has been allocated to capacity. Therefore, the equivalent amount of energy from the SAR
combined cycle would have no variable O&M in its avoided energy costs. This cannot
be correct. Ifthis energy is displaced by wind deliveries, every kWh delivered would
save variable O&M at the SAR. Variable O&M is defined as O&M costs which vary
with the number of kWh generated.
It is important to note that all of the variable O&M of the peaking resource is assigned to
capacity, not just the difference in variable O&M between the peaking resource and the
SAR. In fact, since the variable O&M of the peaking resource is higher than the SAR
this has an even greater impact on the number of kWh with no associated variable O&M.
The attached report of Dr. Don Reading is incorporated by reference to these comments
and provides a more detailed explanation of this error.
In essence, only the fixed costs of a peaking resource should be included in the capacity
component. All variable costs should be allocated to the energy component. Obviously
variable O&M costs, by definition, are not fixed costs. Simply put, variable O&M costs
are more akin to fuel costs than capital costs.
The significance of this error is directly related to the assumed capacity factor of the
peaking resource. In the case of Pacificorp, the assumed capacity factor is 18%. While
this error has a modest impact on the non-conforming energy price under the Amended
Agreement, it would have a much more significant impact if applied to Idaho Power
which assumes a 59% capacity factor, as noted in Dr Reading s letter.
Dr. Reading confirmed that Pacificorp included a portion of variable O&M in capacity in
its avoided cost filings in Oregon and Utah. However in both cases, this was not an
important issue. In those jurisdictions, the division between capacity and energy is only
used to allocate the total avoided costs to different time of delivery periods. Thus, in
those other states, the error was harmless because it did not reduce total average price.
However in the Amended Agreement, this erroneous allocation has a very real impact on
the actual price paid for non-conforming energy. Any variable costs allocated to capacity
prices unfairly reduces the non-conforming energy price. Unlike in Oregon and Utah
this issue has significant relevance to total average price.
The Amended Agreement is signed, final, and should be approved. However, the
Commission should make specific findings that the exclusion of variable O&M costs
from the energy-only value of the published rates is inappropriate and should not be
repeated for future contracts.
Ms. Jean Jewell
March 8 , 2006
Page 3
2. Deliveries Below 90% Deserve Some Capacity Credit
Even if a wind project delivers less than 90% of its projected output, its deliveries still
improve system reliability. That is, it still has capacity value. By way of example, if a
utility-owned resource suffers a major forced outage -- or there is a lack of hydro
resource -- those resources are not removed from ratebase. The utility will still receive
full compensation for building the project even though it has failed to meet its projected
performance. Unlike a utility owned resource, the wind project is only paid for what it
delivers; however, failing to meet the 90% standard does not mean that deliveries below
90% should not receive some capacity credit.
3. The Amended Agreement Is An Improvement, but the 90/110 Performance
Band Continues To Be An Inappropriate Policy
The modified form of the 90/110 band reflected in the Amended Agreement is an
improvement over the market-based non-conforming energy price set in prior standard
PURP A contracts approved by the Commission. Future PURP A projects in each
utilities' service territory should have the option of choosing the terms of the Amended
Agreement (with the variable O&M correction discussed above).
However, we believe the Commission should more strongly encourage and provide
guidance to utilities and wind projects to develop contract terms that are "similarly
rigorous" to the 90/110 band. Order 29880.
The Commission has heard the criticisms of the 90/110 band. The simple fact is that no
wind forecasting technology exists to provide a forecast of monthly production within
10% accuracy a quarter in advance. Nor is such information valuable to operating the
utility system. The 90/110 mechanism simply serves to reduce prices from full avoided
costs. We believe this is forbidden by PURPA, and that better alternatives can be found.
Wind forecasts, like hydro forecasts, are exponentially more accurate in the near term.
the time horizons actually used by utilities for operational planning (such as real time and
day ahead markets), high quality wind forecasts are available. Utilities are far better
served by near term forecasts with higher accuracy than speculative forecasts three
months in advance. Moreover, the 90/110 band drives wind projects to provide
artificially low forecasts to utilities, undercutting the very purpose of its existence.
In Order 29880 (at page 3), the Commission stated that the 90/110 band serves as an
incentive for the QF to make the most reliable estimates possible." In fact, the band
serves as an incentive for the project to submit artificially low forecasts. At higher
penetrations of wind energy on the grid, this could create a situation where utilities are
securing power on the market or allocating resources unnecessarily - a poor outcome for
ratepayers.
Ms. Jean Jewell
March 8 , 2006
Page 4
We believe that new non-price terms can be developed to the advantage of utilities and
wind developers. We suggest the Commission favorably recommend that utilities and
developers carefully explore replacing the 90/110 band with a combination of the new
high resolution short-term forecasting services which have become available and the
mechanical availability guarantee ("MAG"). Using these third party forecasting services
has become increasingly common in the industry. This will provide utilities with the
most accurate forecast of wind production for use in operational planning and resource
dispatch. This was the Commission s primary goal in using the 90/110 band.
If desirable, longer term forecasts can still be provided for a utility's strategic planning
process, but without the pricing terms that have created an incentive for wind projects to
submit artificially low forecasts. Also, including the MAG provision ensures that a
project's operator is focused on doing the best possible job with those things that can be
controlled.
We submit that professional, independent forecasts and the MAG, taken together, are
similarly rigorous" compared to the 90/110 band. In fact, they should provide far more
useful information for operational planners. Short term forecasts from experienced firms
have a high degree of accuracy, and long term forecasts, if needed, will not be skewed
downward due to the wind projects ' natural tendency to hedge against the 90/110 band.
The MAG provision will ensure a high degree of project availability and maximum
energy deliveries.
Thank you for your consideration of these comments.
Sincerely,
Brian Jackson
President, Idaho Fann Energy Association
Ms. Jean Jewell
March 8, 2006
Page 5
Cc:
Lisa Nordstrom
Dean Brockbank
PacifiCorp
825 NE Multnomah, Suite 1800
Portland, OR 97232
Bruce Griswold
PacifiCorp
825 NE Multnomah, Suite 1800
Portland, OR 97232
Dean J. Miller
McDevitt & Miller LLP
O. Box 2564
Boise, ID 83701
PRINCIPAL OFFICES
2252 KILLEARN CENTER BLVD.
TALLAHASSEE, FLORIDA 32309
850-893-8600
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ECONOMIC RESEARCH
AND ANALYSIS
6070 HILL ROAD
BOISE, IDAHO 83703
208-342-1700
FAX [phone]
VISIT OUR WEBSITES
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ELECTRONIC MAIL:
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March 8, 2006
Ben Johnson (ID
Associates,lnc
Brian Jackson
President
Idaho Farm Energy Association
515 N. 2?fh 8t.
Boise, ID 83702
Dear Mr. Jackson:
Your Association has asked me to review the calculations related to the
price for Non-Conforming Energy in the 8chwendiman wind energy
contract and the implications of the modified 90/110 Performance Band
mechanism. The following analysis indicates that the new mechanism is
a major improvement over the existing mechanism. However
PacifiCorp s method of calculation of the Non-Conforming Energy Price
contains a significant theoretical flaw that needs be corrected before the
mechanism is generally applied in future avoided cost calculations.
Modified 90/110 Performance Band
The Modified Band is superior to the current methodology because it
eliminates market price risk from the contract. The forecast of revenues
for the wind projects will be far less volatile because they are no longer
exposed to natural gas prices. For the ratepayers, there will now be an
economic incentive for accurate forecasting at all times. Under the
current mechanism , there is no forecasting incentive when 85% of the
prices at Mid-C exceed the contract price. This situation has occurred in
the past.
The basis of fixed price contracts is to eliminate market price risks for
both parties. The avoided costs represent a common view as to the long
term cost of producing electricity. One problem with the current 90/110
mechanism is that it violated this basic compact. Rather than using the
agreed upon prices, it uses market prices only if they are lower. The
one-sided nature of this mechanism is unfairly biased against wind
projects and artificially reduces supply. This in turn increases costs to
ratepayers in the long run, since they will then buy more energy from
less economic sources. The Modified Band returns to the common view
of forecasted energy prices.
Non-Confonning Energy Price
PacifiCorp has used a common approach to dividing the total avoided
cost, calculated with the SAR method , between capacity and energy. In
jurisdictions which use time differentiated avoided costs, the value of
reliability is separated from the value of energy. If the fixed cost of a
combined cycle is used to price capacity, a competitive market could add
an infinite number of simple cycle combustion turbines (SCCT) and the
owners of those turbines would reap above market returns.
Hence, it is generally recognized that the fixed cost of owning the least
cost peaking resource, such as an SCCT, is the appropriate proxy for
pricing capacity, regardless of what type of power plant is used as the
SAR.
With this approach all other costs of the SAR, including the balance of
the capital costs, are allocated to energy. Essentially, any additional
fixed costs of the SAR compared to the peaking resource is justified on
the basis of operating cost savings.
If the additional capital costs of the combined cycle SAR are not
allocated to the energy price, then only resources operating at or below
the heat rate of the SAR would be economic. However, there are
obviously times when peaking resources, such as Bennett Mountain, will
operate even though their operating costs are higher. This can occur for
a variety of reasons such as load balancing, mitigating transmission
constraints, replacement of outages of other units, etc.. Adding the extra
capital costs of the SAR to energy has the effect of increasing the
energy price to account for periods when more expensive resources are
operating.
PacifiCorp Methodology Error
There is a theoretical flaw in PacifiCorp s avoided cost calculation
methodology. The Company includes variable O&M in the SCCT's fixed
costs. While this is consistent with the way PacifiCorp calculates
avoided capacity prices in Utah and Oregon, it is simply incorrect. In
economic terms, the task here is to determine the change in cost due to
a change in demand (kW). Operating costs (kWh) are not part of this
calculation. The change in variable O&M due to a change in kW is zero.
There is no justification for treating variable O&M costs differently than
variable fuel costs.
In both Oregon and Utah, the avoided capacity price is simply used to
an ocate total avoided costs between time periods. Therefore
PacifiCorp s methodology does not reduce total avoided costs. It only
shifts a minor amount of avoided costs between on-peak and off-peak
periods. In the Schwendiman case, this flawed methodology reduces
the price of Non-Conforming Energy. Therefore, it causes an unfair loss
to the projects that will be subject to this approach.
Applying the Methodology to Idaho Power
The size of the PacifiCorp error is determined by the capacity factor
assumed for the SCCT. PacifiCorp uses an 18% capacity factor based
on their 2004 IRP Update. If this error isn t corrected, it will have a far
larger impact if the method is applied to Idaho Power. Idaho Power
assumes an SCCT capacity factor of 59% in their 2004 IRP. For 2006
the PacifiCorp calculation reduces the Non-Conforming Energy Price by
86 $/MWh. If applied to Idaho Power, the error will equal 2.80 $/MWh.
Attached is a calculation of Non-Conforming Energy Prices for Idaho
Power using its 2004 IRP assumptions and eliminating variable O&M
from capacity prices. To adjust for seasonal prices, I assumed that no
avoided capacity costs be allocated to the three off peak months and
that the Non-Conforming Energy Prices be assigned in the other two
seasons. The result is that most of the difference in seasonal prices is
assigned to capacity prices, which is logical.
It should be noted that there is a small rounding error when applying
Idaho Power's normal seasonality factor to the March-May period. The
actual factor is 73.33%, which has been rounded to 73.5% in the current
SAR model.
Recommendation
The a theoretical flaw in PacifiCorp s avoided cost calculation
methodology needs to be corrected for the reasons stated above.
Variable O&M should not be included in fixed costs. In future contracts
PacifiCorp needs to fix this error and the methodology should not be
extended to Idaho Power, or any other utility without correction.
-c ~
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Don C. Reading, PhD
Consulting Economist, VP
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