1. Northwest Power and Conservation Council Slide 1 Direct Use of Natural Gas Economic Fuel Choices from the Regional Power System and Consumer’s Perspective November 1, 2011

2. Northwest Power and Conservation Council Slide 2 Study Objectives Determine which residential space and water heating systems are least-cost (TRC) and least-risk for the region’s power system given; Determine which residential space and water heating systems are least-cost (TRC) and least-risk for the region’s power system given; –The diversity of space conditioning and water heating systems and existing housing characteristics –A large number of combinations of space conditioning and water heating systems to select from –That carbon emissions as well as their economic risk are a consideration Determine whether the retail market will lead consumers to chose the space conditioning and water heating systems that are also least cost and least risk for the region’s power system Determine whether the retail market will lead consumers to chose the space conditioning and water heating systems that are also least cost and least risk for the region’s power system

3. Northwest Power and Conservation Council Slide 3 Significance Council’s existing policy on fuel choice/fuel switching has not be thoroughly reviewed since 1996 Council’s existing policy on fuel choice/fuel switching has not be thoroughly reviewed since 1996 Council’s analysis and policy recommendations are of intense interest to the natural gas industry, as well as electric utilities in the region Council’s analysis and policy recommendations are of intense interest to the natural gas industry, as well as electric utilities in the region Of the 3.6 million existing PNW households Of the 3.6 million existing PNW households –2.6 million will replace their space conditioning and water heating system over the next 20 years –130,000 annual “fuel choice” decisions Potential for conversion of existing appliances: Potential for conversion of existing appliances: –Electricity to gas: Reduce load by 1,500 MWa –Gas to electricity: Increase load by 2,500 – 5,000 MWa

4. Northwest Power and Conservation Council Slide 4 Two Perspectives Regional Power System Regional Power System –Space conditioning and water heating system selection based on wholesale electricity and gas prices –Considers total system “cost” and “risk” (i.e., consideration of individual space and water heating conversion costs and performance alone does not account for the cumulative effects of these systems on the need for new resources) Consumer Perspective Consumer Perspective –Space conditioning and water heating system selection based on retail electricity and gas prices –Does not consider for “system” level impacts slide 4

5. Northwest Power and Conservation Council Slide 5 Observations From Regional Power System Perspective In the Council’s Resource Portfolio model’s “least cost/least risk” plan new gas-fired turbines are deployed to serve load growth beyond that met with conservation and renewable resources In the Council’s Resource Portfolio model’s “least cost/least risk” plan new gas-fired turbines are deployed to serve load growth beyond that met with conservation and renewable resources –Consideration of these costs make some conversions to natural gas economically preferable However, most homes (~75%) should stay with their current space heating and water heating systems However, most homes (~75%) should stay with their current space heating and water heating systems –Improvements in the efficiency of electric space heating and water heating systems is a lower cost (TRC) option than converting most homes without existing gas access to gas space and/or water heating –Extending gas service is an economic hurdle to converting all-electric households to gas space and/or water heating

6. Northwest Power and Conservation Council Slide 6 Summary-TRC Perspective Energy Impacts Over 20 years Over 20 years –560 MWa decline in power use »225 MWa from improvements in electric efficiency »335 MWa from conversion to gas space and/or water heating –7 x 10 12 BTUs per year decrease in regional natural gas use »13.1 x 10 12 BTUs per year increase in direct gas use »20.1 x 10 12 BTUs per year decrease in gas used for power generation Households Households –129,695 existing households

7. Northwest Power and Conservation Council Slide 7 Summary-TRC Perspective Households Over 20 years Over 20 years –2,593,839 Existing households with electric or gas space or water heating (excludes 20% of without “gas access” via main or line extension) –1,896,000 Retain existing electric space and/or water heating systems, but upgrade efficiency –698,000 convert from electric space and/or water heating to natural gas (424,000 water heating, 115,00 space and water heating) –125,000 convert from gas to electric water heating (HPWH)

8. Northwest Power and Conservation Council Slide 8 slide 8 No. Segments No. Housholds/yr20-year Total Share of Total Change in Use (MWa- 20th yr) Change in Use (Trillion BTU- 20th yr) Replace w/Same Fuel & Same Equipment20 48,412 968,23537.3% - - w/Higher Efficiency Space Heating Equipment Only14 1,807 36,1451.4% (10) - w/Higher Efficiency Water Heating Equipment Only10 33,439 668,78525.8% (118) - w/Higher Efficiency Space & Water Heating Equipment14 11,142 222,8358.6% (95) - Sub-Total58 94,800 1,895,99973.1% (223) - Conversions from Electricity to Gas - Space Heating only11 1,520 30,4001.2% (31) 1.14 Water Heating only6 21,197 423,94016.3% (161) 7.29 Space & Water Heating6 5,745 114,9004.4% (166) 6.62 Sub-Total23 28,462 569,24021.9% (358) 15.05 Conversions from Gas to Electricity - Space Heating only0 - -0.0% - - Water Heating only6 6,262 125,2404.8%24 (1.97) Space & Water Heating0 - -0.0% - - Sub-Total6 6,262 125,2404.8% 24 (1.97) Conversions to Gas Space Heating and Electric Water Heating (from Electric Space Heating and Gas Water Heating)8 168 3,3600.1% (3) 0.07 Totals95 129,692 2,593,839100% (559) 13.15 Changes Net of Efficiency Improvements37 34,892 697,84027% (336) 13.15

9. Northwest Power and Conservation Council Slide 9 Summary – TRC Perspective Emissions Regional emissions of CO2 are about the same under a scenario that maintains gas space and water heating market shares or a scenario that results in conversion to electric space and water heating systems Regional emissions of CO2 are about the same under a scenario that maintains gas space and water heating market shares or a scenario that results in conversion to electric space and water heating systems –While existing electric appliances produce more CO2 than gas appliances due to the inefficiency of the overall power system, conversion to heat pumps for space and water heating produce roughly equivalent emissions –Moreover, the limited potential for economic conversions to natural gas make the impact negligible

10. Northwest Power and Conservation Council Slide 10 Consumer Perspective Given current retail electricity and natural gas prices and forecast future retail prices, would consumers likely select the space and water heating systems found to be economically preferable from a regional (TRC) perspective Given current retail electricity and natural gas prices and forecast future retail prices, would consumers likely select the space and water heating systems found to be economically preferable from a regional (TRC) perspective Is there evidence that consumers are selecting the space and water heating systems that are economical preferable from a TRC perspective? Is there evidence that consumers are selecting the space and water heating systems that are economical preferable from a TRC perspective? slide 10

11. Analytical Approach Compare the “first cost” and “life cycle cost” of alternative space conditioning and water heating systems using: Compare the “first cost” and “life cycle cost” of alternative space conditioning and water heating systems using: –Utility specific retail electricity and natural gas prices –6 th Plan forecast of future retail price escalation rates –“Average” system installation and operation and maintenance cost –Representative range of housing sizes and climates »1500 – 2250 sq.ft. »Portland, Seattle, Boise, Spokane, Kalispel slide 11

12. Northwest Power and Conservation Council Slide 12 Analytical Approach The “best” space conditioning and water heating system options for consumers is dependent upon the difference between their retail prices for electricity and natural gas The “best” space conditioning and water heating system options for consumers is dependent upon the difference between their retail prices for electricity and natural gas In order to represent this diversity the life cycle cost model was run using the retail rates for all gas and electric utilities in the region that serve the same general geographic area In order to represent this diversity the life cycle cost model was run using the retail rates for all gas and electric utilities in the region that serve the same general geographic area – “service territory” matching was not done slide 12

13. Northwest Power and Conservation Council Slide 13 Consumer Life Cycle Cost Model Designed to compare: Designed to compare: –First cost (Installed cost of system excludes gas line extension cost) –First year space conditioning and water heating cost –Life cycle space conditioning and water heating cost –“Annual Levelized cost” of space conditioning and water heating User can model specific utilities and climates User can model specific utilities and climates Users with “Crystal Ball” can model distributions of climate zones and utility rates Users with “Crystal Ball” can model distributions of climate zones and utility rates slide 13

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20. Northwest Power and Conservation Council Slide 20 First Cost of Space Conditioning Systems slide 20

21. Northwest Power and Conservation Council Slide 21 First Cost of Water Heating Systems slide 21

22. Northwest Power and Conservation Council Slide 22 Cumulative Distribution of LCC for Gas Furnace w/Condensing Gas DHW slide 22

23. Northwest Power and Conservation Council Slide 23 Cumulative Distribution of LCC for Gas Furnace w/HPWH DHW slide 23

24. Northwest Power and Conservation Council Slide 24 Cumulative Distribution of LCC for Gas Furnace w/AC w/Condensing Gas DHW slide 24

25. Northwest Power and Conservation Council Slide 25 Cumulative LCC for Heat Pump w/ HPWH DHW slide 25

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30. Northwest Power and Conservation Council Slide 30 Space Conditioning System Choices Selections Based on Regional and Consumer Economics

31. Northwest Power and Conservation Council Slide 31 Water Heating System Choices Selections Based on Regional and Consumer Economics LCC-2 Assumes choices that have LCC within 1% of Total LCC are a “tie”.

32. Northwest Power and Conservation Council Slide 32 Summary of Findings Consumer Perspective Alignment With TRC Results Given current retail electricity and natural gas prices and forecast future retail prices, it appears that consumers would generally find the space and water heating systems found to be economically preferable from a regional (TRC) perspective to also be the lowest life cycle systems Given current retail electricity and natural gas prices and forecast future retail prices, it appears that consumers would generally find the space and water heating systems found to be economically preferable from a regional (TRC) perspective to also be the lowest life cycle systems –High efficiency gas and electric water heating systems are economically competitive on an LCC basis slide 32

33. Northwest Power and Conservation Council Slide 33 Summary of Findings Consumer Perspective Market Evidence NEEA surveys indicate that consumers selected the space and water heating systems that are economical preferable from a TRC perspective NEEA surveys indicate that consumers selected the space and water heating systems that are economical preferable from a TRC perspective Continued decline in electric space and water heating market share indicate that where gas is available consumers are converting to gas space and/or water heating systems Continued decline in electric space and water heating market share indicate that where gas is available consumers are converting to gas space and/or water heating systems –Limited recent surveys of conversions slide 33

34. Northwest Power and Conservation Council Slide 34 Backup Slides slide 34

35. Northwest Power and Conservation Council Slide 35 TRC Economics of Water Heating Are Competitive

36. Northwest Power and Conservation Council Slide 36 Water Heating Choices 129,693 households per year 31,202 households/yr 13,379 households/yr 15,010 households/yr 6,430 change to electricity -101.4 BTUs 10^9/yr 64,356 households/yr 21,197 change to gas 364.5 BTUs 10^9/yr 5,745 households/yr 5,745 change to gas 99.7 BTUs 10^9/yr T T T T

37. Northwest Power and Conservation Council Slide 37 Space Heating Choices 129,693 households per year 15,343 households/yr 4,111 households/yr 19,275 households/yr 72,919 households/yr 799 change to gas 31.6 BTUs 10^9/yr 4,793 households/yr 67 households/yr 6,019 households/yr 491 households/yr 6,177 households/yr 6,136 change to gas 247.2 BTUs 10^9/yr 499 households/yr 499 change to gas 15.7 BTUs 10^9/yr T T T T T T T T T

38. Northwest Power and Conservation Council Slide 38 Life Cycle Cost of Each Space Conditioning and Water Heating System Vary Across the Region slide 38

39. Northwest Power and Conservation Council Slide 39 The Life Cycle Cost Heat Pumps and Gas Furnaces with Central AC Are Distributed Differently Across the Region slide 39

40. Northwest Power and Conservation Council Slide 40 Therefore, Only Limited Generalizations About Which System Has the Lowest Life Cycle Cost Are Possible (or Prudent) slide 40