LEAST-COST PLANNING FOR 21ST CENTURY ELECTRICITY SUPPLY
MEETING THE CHALLENGES OF COMPLEXITY AND AMBIGUITY IN DECISION MAKING
Senior Fellow for Economic Analysis,
Institute for Energy and the Environment, Vermont Law School
Energy policy and regulatory decision making in the American electricity sector have always been a challenge because the U. S. is among the most electricity intensive of all nations and it has an extremely wide set of resources with which to meet its electricity needs. Moreover, in the past quarter of a century a fierce debate about the existence and response to climate change, a roller coaster ride in fossil fuel prices and a fizzled “nuclear renaissance” have made things much more difficult by casting doubt on the three primary fuels on which the U.S. relies for almost 90 percent of its electricity. In spite of this uncertainty, because electricity is an essential building block of modern life decision makers are under constant real-time pressures to ensure electricity supply at affordable prices.
This paper argues that the insights and recommendations from the study of financial portfolio and real option analysis, technology risk assessment, reliability and risk mitigation management, and Black Swan Theory all indicate that the 20th century approach to resource acquisition in the electric utility industry is ill-suited to the 21st century economic environment. Indeed, it can be argued that the approaches taken in a wide range of regulatory proceedings such as integrated resource planning, purchase power agreement reviews and general rate cases may have been rendered obsolete by a dramatic change in the terrain of decision making.
Submitted by Leslie Glustrom
In 2009 Xcel’s modeling showed that adding renewable energy to their system would lower system costs when a cost for CO2 emissions was added for fossil fuel resources.
Now, in the (attached) modeling results received from Xcel, the three most competitive wind bids received in January 2011 and discussed in the attached Xcel Bid Report, will lower Xcel’s system costs in Colorado–even without including a cost for CO2 emissions. To the best of my knowledge, this is the first time that this has been shown in Colorado.
The key spreadsheet showing this is LWG 2-1.Al. xls. The question asked can be found in the 10A-377E LWG 2 document. The fact that no cost on CO2 was included is found in footnote 3 on page 15 of the Xcel witness Kurt Haeger’s Rebuttal testimony which is also attached.
Under the assumptions tab in the spreadsheet, note that the cost of coal is assumed to stay essentially flat for the next 30 years, despite the fact that Xcel’s coal costs have been going up about 10% a year for the last several years….A more reasonable assumption about future coal costs would also help improve the modeling results for renewable resources. Similarly, if the actual cost of natural gas is higher than the projections shown, then the wind will save ratepayers more money. The natural gas cost projections are some of the lowest used by Xcel in recent years so it seems unlikely that natural gas costs will drop lower than the projections–but only time will tell.
The wind modeling results (which include the Production Tax Credit for wind), show what we have all been waiting for, which is that renewable energy sources can increasingly be justified on price alone–even without consideration of CO2 and other external costs. This bodes well for efforts to include more renewable energy in the future.
Photo courtesy of martinpro
In its last Resource Plan Xcel predicted that its coal prices would stay relatively flat–increasing about 2% a year for the next several decades. Historical prices back to 1998 can be seen in LWG 1-4, part (b). Until Xcel’s long term coal contracts began expiring in 2005, the average price paid for coal was under $1/MMBTU (million BTUs).
Once the long term coal contracts expired, Xcel’s coal costs have been mounting significantly-averaging over 10%/year. In 2009, Xcel paid over $1.50/MMBTU. In Xcel’s 2009 Annual 10-k report submitted to the Securities and Exchange Commission, Xcel reported paying $1.52/MMBTU for its coal in Colorado. (See page 21 for Xcel’s Colorado coal costs.) In response to the Discovery Question LWG 5-3 (Docket 09A-772E), Xcel provided a 2009 coal cost of $1.61/MMBTU. The reason for the discrepancy is not clear–but either way this is a 50% increase in price in four years–way beyond the 2% per year price increase that was predicted in the last Xcel Resource Plan.
With a coal price in excess of $1.50/MMBTU in 2009, Xcel paid a price for coal in 2009 that it didn’t expect to pay until 2035. Ooops!
A careful assessment of production statistics and the geology of existing coal mines and an analysis of future constraints on coal production indicate that future price increases for coal are likely. While all fossil fuels are subject to complex forces of supply and demand and their price is volatile, the fact that coal is a solid, makes it difficult to work around the very real geologic constraints that exist on economically accessible coal.
More information on coal supplies is available in the extensive Clean Energy Action report issued in February 2009 entitled, “Coal–Cheap and Abundant–Or Is It?”