The Council’s Regional Portfolio Model Michael Schilmoeller for the Northwest Power and Conservation Council Generation Resource Advisory Committee Thursday,

The Council’s The Council’s Regional Portfolio Regional Portfolio

ModelModel

Michael Schilmoellerfor the

Northwest Power and Conservation CouncilGeneration Resource Advisory Committee

Thursday, September 25, 2008

2

OverviewOverview

Planning Principles Selection of Resource Plans Key techniques Model operation

3

Different Kind of Risk Different Kind of Risk ModelingModeling

Imperfect foresight and use of decision criteria for capacity additions

Adaptive plans that respond to futures Primarily options to construction power

plants or to take other action May include policies for particular resources

“Scenario analysis on steroids” 750 futures, strategic uncertainty Frequency that corresponds to likelihood

Planning Principles

4

Sources of UncertaintySources of Uncertainty Fifth Power Plan

Load requirements Gas price Hydrogeneration Electricity price Forced outage rates Aluminum price Carbon allowance cost

Production tax credits Renewable Energy

Credit (Green tag value)

Sixth Power Plan All of those to the left,

except, perhaps, aluminum price

Power plant construction costs

Technology availability Conservation costs

Planning Principles

5

Most Elements of the Most Elements of the Resource Plan Are Resource Plan Are OptionsOptions

To ConstructTo Construct

1071

Additions in Megawatts

Beginning of year 2008 2010 2012 2014 2016 2018 2020

CCCT 0.00 0.00 0.00 0.00 0.00 610.00 1,220.00SCCT 0.00 0.00 0.00 0.00 0.00 100.00 800.00Coal 0.00 0.00 0.00 0.00 0.00 0.00 0.00Demand Response 500.00 750.00 1,000.00 1,250.00 1,500.00 1,750.00 2,000.00Wind_Capacity 0.00 100.00 1,500.00 2,400.00 4,400.00 5,000.00 5,000.00IGCC 0.00 0.00 425.00 425.00 425.00 425.00 425.00

Conservation cost-effectiveness premium over market 10.00 5.00avg New Conservation 443 746 1416 1774 2020 2198

Planning Principles

6

Why Use a Schedule of Why Use a Schedule of Construction Options for a Construction Options for a

Resource Plan?Resource Plan?

More realistic! Necessary for capturing

construction risk Consistent with earlier Council

Plans

Planning Principles

7

Cost Distribution AssociatedWith a Plan

Hourly demand

Coal

Buy in Market

Buy in Market

Sell in Market

Gas Fired

Price-driven generation

Hydro

Contracts

HydroTotal

Resources

Year 1Summer Winter

Year 2Summer Winter

Background

Coal

Operating CostsOperating Costs

Model Overview

8

Spinner GraphsSpinner Graphs

Illustrates “scenario analysis on steroids,” one plan, across all futures

Link to Excel Spinner Graph Model

Model Overview

9

OverviewOverview

Planning Principles Selection of Resource Plans Key techniques Model operation

10

Risk and Expected Cost Risk and Expected Cost Associated With A PlanAssociated With A Plan

Like

lihood

(Pro

bab

ility

)

Avg Cost

10000 12500 15000 17500 20000 22500 25000 27500 30000 32500

Power Cost (NPV 2004 $M)->

Risk = average ofcosts> 90% threshold

Selection of Resource Plans

11

Like

lihoo

d (P

roba

bilit

y) Avg Cost

10000 12500 15000 17500 20000 22500 25000 27500 30000 32500



Like

lihoo

d (P

roba

bilit

y) Avg Cost

10000 12500 15000 17500 20000 22500 25000 27500 30000 32500



Like

lihoo

d (P

roba

bilit

y) Avg CostAvg Cost

10000 12500 15000 17500 20000 22500 25000 27500 30000 3250010000 12500 15000 17500 20000 22500 25000 27500 30000 32500



Feasibility SpaceFeasibility Space

Incre

asin

g R

isk

Increasing Cost


12

Space of feasible solutions

Feasibility SpaceFeasibility Space

Incre

asin

g R

isk

Increasing Cost

Efficient Frontier


13

25400

25600

25800

26000

26200

26400

26600

26800

27000

16000 16200 16400 16600 16800 17000

Expected Cost -- Millions 2004$

Ris

k (T

ailV

ar90

) Mill

ion

s 20

04$

A -- Least Cost

B

C

D -- Least Risk

Efficient Frontier

01000200030004000500060007000

1 8 15 22 29 36 43 50 57 64 71 78Quarters

aMW

01000200030004000500060007000

DR

Conservation

Avg Loads

A

0

1000

2000

3000

4000

5000

6000

7000

1 8 15 22 29 36 43 50 57 64 71 78

Quarters

aMW

0

1000

2000

3000

4000

5000

6000

7000

DR

Wind

Conservation

Avg Inc Load

B

0

1000

2000

3000

4000

5000

6000

7000

1 8 15 22 29 36 43 50 57 64 71 78

Quarters

aMW

0

1000

2000

3000

4000

5000

6000

7000

Wind

Coal

Conservation

Avg Inc Load

CBase Plan -- Representative Buildout

0

1000

2000

3000

4000

5000

6000

7000

1 8

15

22

29

36

43

50

57

64

71

78

Quarters

aM

W

0

1000

2000

3000

4000

5000

6000

7000

SCCT

CCCT

Wind

Coal

Conservation

Avg Inc Load

D

EfficientFrontier


14

Risk: Importance of Risk: Importance of Multiple Multiple

PerspectivesPerspectives Standard deviation VaR90 90th decile Loss of load probability (LOLP) Resource - load balance Incremental cost variation Average power cost variation (rate

impact) Maximum incremental cost increase Exposure to wholesale market

prices Imports and exports


15

Resource Plan SelectionResource Plan Selection

Trade-off between economic cost and risk

Rate impacts and volatility Exposure to market prices Non-economic costs and risks,

including associated carbon emissions

Meeting reliability standards Difficulties with changing the

resource plan


16

How Do We Interpret and How Do We Interpret and Use a Schedule of Use a Schedule of

Construction Options?Construction Options? As a ceiling for

what should be sited and licensed

To develop signposts for re-evaluation

1071









Siting and Licensing Early Construction

Committed ConstructionIn Service


17

OverviewOverview Planning Principles Selection of Resource Plans Key techniques

Resource construction flexibility Valuation calculation Thermal resource dispatch Decision criteria Supply curves for conservation and price-

responsive hydro Model operation

18

Power Resource RisksPower Resource RisksCosts and ConsiderationsCosts and Considerations

Commercial Availability Risk Construction Risk

Responding fast enough to capture value Sunk siting and permitting costs Construction materials cost Mothball and cancellation costs

Operation Risk Fuel, maintenance, and labor costs

Retirement Risk Carrying the forward-going fixed cost of an

unused plant Undervaluing and retiring a plant that may

have value in the future

Resource construction flexibility

19

The Construction CycleThe Construction Cycle After an initial planning period, there typically large expenditures,

such as for turbines or boilers, that mark decision points.

Cas

h ex

pend

itur

esC

ash

expe

ndit

ures

18 months18 months 9 months9 months 9 months9 months


20

Construction OptionalityConstruction OptionalityC

apac

ity

Cap

acit

y

Planning

Construction

Committed construction

In service

time

Delay


21

New Fixed Cost New Fixed Cost CapabilitiesCapabilities

9 (9,9)

8 (8,8) (8,9)

7 (7,7) (7,8) (7,9)

6 (6,6) (6,7) (6,8) (6,9)

5 (5,5) (5,6) (5,7) (5,8) (5,9)

4 (4,4) (4,5) (4,6) (4,7) (4,8) (4,9)

3 (3,3) (3,4) (3,5) (3,6) (3,7) (3,8) (3,9)

2 (2,2) (2,3) (2,4) (2,5) (2,6) (2,7) (2,8) (2,9)

1 (1,1) (1,2) (1,3) (1,4) (1,5) (1,6) (1,7) (1,8) (1,9)

0 (0,0) (0,1) (0,2) (0,3) (0,4) (0,5) (0,6) (0,7) (0,8) (0,9)

0 1 2 3 4 5 6 7 8 9

Period


22


9 (9,9)

8 (8,8) (8,9)

7 (7,7) (7,8) (7,9)

6(6,6)

(6,7) (6,8) (6,9)

5 (5,5)(5,6)

(5,7) (5,8) (5,9)

4 (4,4) (4,5)(4,6)

(4,7) (4,8) (4,9)

3 (3,3) (3,4) (3,5)(3,6)

(3,7) (3,8) (3,9)

2 (2,2) (2,3) (2,4) (2,5)(2,6)

(2,7) (2,8) (2,9)

1 (1,1) (1,2) (1,3) (1,4) (1,5)(1,6)

(1,7) (1,8) (1,9)

0 (0,0) (0,1) (0,2) (0,3) (0,4) (0,5)(0,6)

(0,7) (0,8) (0,9)

0 1 2 3 4 5 6 7 8 9

Period


23


We will work our way through a pdf file that illustrates the logic

Visio-Logic_v080925.pdf


24




25

ComputationComputation Cost Distribution AssociatedWith a Plan

Hourly demand

Coal

Buy in Market

Buy in Market

Sell in Market

Gas Fired

Price-driven generation

Hydro

Contracts

HydroTotal

Resources

Year 1Summer Winter

Year 2Summer Winter

Background

Coal

Valuation calculation

26

Traditional CostingTraditional Costing

trequiremen totalis

energy alefor wholes ($/MWh) price theis

resource of ($/MWh) price theis

resourceby provided (MWh)quantity is

($)cost totalis

(2) )(

Q

p

ip

iq

c

qQppqc

m

i

i

iim

iii


Hourly variable cost calculation:

27

““Valuation” CostingValuation” Costing


Complications arise when we use extended time periods

price

Loads (solid) & resources (grayed)

28



Average loads and resources are the same, but in the first case, our system has net cost and in the second it has net benefit.

29


(1) )()()( pqqpqEpEpqE


N*(N+1)/2 correlations (upper triangular matrix)

30


trequiremen totalis

energy alefor wholes ($/MWh) price theis

resource of ($/MWh) price theis

resourceby provided (MWh)quantity is

($)cost totalis

(2) )(

Q

p

ip

iq

c

qQppqc

m

i

i

iim

iii


31


)(

*

)(

imi

im

iii

iimm

iim

iii

ppqQp

pqqpQp

qQppqc


Only correlations are now those with the market

32




33

Dispatchable ResourcesDispatchable Resources

Thermal resource dispatch

34

Gross Value of ResourcesGross Value of Resources

case)our in MW (1 turbine theofcapacity theis

($/MWh) rateheat fixed a assuming

hour, in this gas of price theis )(

($/MWh)hour in thisy electricit of price theis )(

case) in this (672 hours ofset theis

where

)))()((,0max(

C

hp

hp

H

hphpCV

g

e

Hhge


35

Gross Value of ResourcesGross Value of Resources

(3) )()(,0max

or

)()(,0max

)()(,0max

hgph

epE

HCNV

HN

Hhh

gph

ep

HCN

Hhh

gph

epCV


36

Gross Value of Resources Gross Value of Resources Using Statistical Parameters Using Statistical Parameters

of Distributionsof Distributions

e

ee

ge

ee

g

e

ge

dd

ppd

(h))(p

p

p

NN

dNpdNpc

12

1

21

2/)/ln(

ln ofdeviation standard is

price gas theis

pricey electricit average theis

variablerandom )1,0( afor CDF theis

where

(4) )()(


Assumes prices are lognormally distributed

37

Estimating Energy Estimating Energy GenerationGeneration


38



39


*

*

1)(CDFcf

)(CDF

Calculus) of Thm (Fund

)(CDF

*

*

gg

gg

g

ppgHg

gH

ppg

e

P

eH

p

V

NCp

pNCp

V

dppNCV


Applied to equation (4), this gives us a closed-form evaluation of the capacity factor and energy.

40




41

Example ofExample of Decision Decision Criterion for Construction: Criterion for Construction:

CCCT and SCCTCCCT and SCCT Projected economic value, from the

construction, fixed, and variable costs and values from simulated forward curves:

the electricity forward price is an average of flat electricity prices over the preceding 18-months

the natural gas forward price is also such an 18-month average

Project the energy adequacy at the end of the construction cycle. If the system would otherwise be inadequate, build this unit if it is the least cost among the options available.

Decision criteria

42

Logic Flow for DecisionsLogic Flow for Decisions

no

Does the resource pay for itself?

yes

Go

Stop

Is the resource least cost of alternatives?

yes

Is forecast requirement on or before the

earliest on-line date?

no

Decision criteria

43

Decision Criteria For Decision Criteria For ConstructionConstruction

time

crite

rion

On-Line!

construction phase

optional cancellation period

evaluation phasetime

crite

rion

On-Line!

Decision criteria

44

Example ofExample of Decision DecisionCriterion for RetirementCriterion for Retirement

Forecast the value of the unit using the forward-going fixed cost only (fixed fuel transportation and salaries)

Mothball (de-staff, sell fixed fuel contracts) after pre-specified number of periods

Permanently decommission (convert the site to other purposes) if the plant remains in mothball status for some period

Decision criteria

45




46

Supply CurvesSupply Curves

Supply curves

Supply Curve

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0 10 20 30 40 50 60 70 80 90

MWa Available Annually

Lev

eliz

ed C

ost

(200

4$/M

Wh

)

47


Supply curves

Cost Assuming No Producers' Surplus

Supply Curve

0.0

20.0

40.0

60.0

80.0

100.0

120.0

0 10 20 30 40 50 60 70 80 90

MWa Available Annually

Lev

eliz

ed C

os

t(2

004$

/MW

h)

48

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Quantity of Energy (MWa)

Mar

ket

Pri

ce

Long-term equilibrium market price

Conservation Supply Conservation Supply CurveCurve

δ

Supply curves

49

Components of Cost Components of Cost ReductionReduction

Additional conservation at $50/MWh

Total System Costs

SCCT deferral

Reduced market prices

Supply curves

50

Price-takers Still See Price-takers Still See BenefitsBenefits

Additional conservation at $50/MWh

Total System Costs

SCCT deferral

Supply curves

51

SCCT DeferralSCCT Deferral

Why does conservation defer single cycle combustion turbines?

Low-capital cost resources are the traditional solution for risk management

SCCT have low capital cost Conservation has high capital cost

Under what conditions does conservation hold an advantage over SCCTs?

Supply curves

52

SCCT DeferralSCCT Deferral$Net Benefit per $Expense

0

2000

4000

6000

8000

10000

12000

14000

16000

18000-1

-0.8

-0.6

-0.4

-0.2 0

0.2

0.4

0.6

0.8 1

1.2

1.4

1.6

1.8 2

2.2

2.4

2.6

2.8

Ratio ($Net Benefit\$Expense)

Fre

qu

ency

SCCT discretionary conservation lost opportunity conservation

Supply curves

53

Price Responsive Price Responsive HydroHydro

Supply curves

Hydro Supply Curve

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

Quantity of Energy (MW-mo)

Ma

rke

t P

ric

e (

200

4$

/MW

h)

54

Price Responsive Hydro:Price Responsive Hydro:Gross ValueGross Value

Supply curves

Hydro Supply Curve

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70


Mar

ket P

rice

(200

4$/M

Wh)

55

Price Responsive Hydro:Price Responsive Hydro:Net Value or CostNet Value or Cost

Supply curves

Hydro Supply Curve

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70


Ma

rke

t P

ric

e (

20

04

$/M

Wh

)

Hydro Supply Curve

0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70


Ma

rke

t P

ric

e (

20

04

$/M

Wh

)

At right, value associated with use of hydro to meet higher market price.

At left, value to return hydro using purchased market power at lower price.

56


Supply curves

Non-reversible Reversible

Cumulative

Incremental

Period curve

Study curve

Supply curve representations also include constraints on utilization rate and on upper and lower prices.

57

ConventionalConventional Hydro Hydro

User-defined lookup function, with a random draw from 50 hydro years each simulation year

Derived from Genesys BPAREGU.OUT file and 2000 Bi-Op and includes independents and the three non-PNCA Idaho hydro units

Estimates of east-side and west-side generation by month, by hydro condition

Estimates of on- and off-peak generation (6x16 definition)

Not! Supply curves

58

OverviewOverview Planning Principles Selection of Resource Plans Key techniques Model operation

Equilibrium search Order of calculations

59

Energy BalanceEnergy Balance

First Law of Thermodynamics: In a closed system, energy may not be created or destroyed.

generation = loads – imports (+exports)

We assure balance by controlling generation through electricity price. The model finds a suitable price by iteration.

Model operation

60

Equilibrium searchEquilibrium search

Model operation

61

ComputationComputation

Model operation

62

EndEnd

63

PredictorsPredictors

Demand Response and Wind: identical logic for fixed and variable costs for the unit, except

the size of the plant is 1MW, the electricity price is an period

average of flat electricity prices

Decision criteria

64

PredictorsPredictors

Coal: identical logic for fixed and variable costs for the unit, except

the size of the plant is 1MW, the electricity price is an period

average of flat electricity prices There was no variation or

uncertainty in coal prices

Decision criteria

65

PredictorsPredictors Conservation

Discretionary Annual, energy-weighted average of year

before last’s flat electricity price (lagged for budgeting)

Optional premium over market Lost Opportunity

Energy-weighted average of last five year’s electricity prices

Ratchets upward to reflect represents such things as market transformation and the implementation of codes and standards

Optional premium over marketDecision criteria

Documents

The Council’s Regional Portfolio Model Michael Schilmoeller for the Northwest Power and Conservation Council Generation Resource Advisory Committee Thursday,