1. Northwest Power and Conservation Council 6 th Plan Conservation Resource Cost- Effectiveness Conservation Resource Advisory Committee March 12, 2009

2. Northwest Power and Conservation Council slide 2 How the Plan’s Cost-Effectiveness Analysis Impacts Regional Conservation Programs Council Plan Council Plan –Establishes regional conservation targets based its interpretation of the Act’s requirements –Contains methodology and assumptions (e.g., future market prices, measure cost & savings) for determining cost- effectiveness –Contains specific “measure level” (e.g. high efficiency electric water heaters) determinations of cost-effectiveness Bonneville’s resource acquisitions are to be consistent with the Council’s Plan Bonneville’s resource acquisitions are to be consistent with the Council’s Plan Utilities covered by I-937 in Washington state must adhere to the Council’s “methodology” Utilities covered by I-937 in Washington state must adhere to the Council’s “methodology”

3. Northwest Power and Conservation Council slide 3 The Plan’s Definition of Resource Cost- Effectiveness Comes From the Regional Act "Cost-effective,” means that a measure or resource must be forecast: "Cost-effective,” means that a measure or resource must be forecast: –to be reliable and available within the time it is needed –to meet or reduce the electric power demand of the consumers at an estimated incremental system cost no greater than that of the least- cost similarly reliable and available alternative measure or resource, or any combination thereof.

4. Northwest Power and Conservation Council slide 4 Under the Act the term "system cost" means: An estimate of all direct costs of a measure or resource over its effective life, including: An estimate of all direct costs of a measure or resource over its effective life, including: –the cost of distribution and transmission to the consumer –waste disposal costs –end-of-cycle costs –fuel costs (including projected increases) –and such quantifiable environmental costs and benefits as are directly attributable to such measure or resource

5. Northwest Power and Conservation Council slide 5 The Act’s Definition of Cost- Effectiveness Seeks to minimize the total cost of meeting the region’s need for the services provided by electricity, i.e., its goal is economic efficiency. Seeks to minimize the total cost of meeting the region’s need for the services provided by electricity, i.e., its goal is economic efficiency. Does not address the distribution of these costs among parties in the region Does not address the distribution of these costs among parties in the region

6. Northwest Power and Conservation Council slide 6 The Council Does Not Use A Single Regional Avoided Cost To Determine Conservation’s Cost-Effectiveness We Use What We Learn from the Portfolio Model We Use What We Learn from the Portfolio Model 1) Pick any forecast of future market prices 2) Add “Risk Premiums” for conservation’s hedge value to that forecast (different ones for lost-opportunity & dispatchable) 3) Use this risk adjusted price to determine the value of the energy savings

7. Northwest Power and Conservation Council slide 7 IRP Methodology 6 th Plan is testing thousands of “plans” against 750 futures 6 th Plan is testing thousands of “plans” against 750 futures Model identifies “plans” with the lowest cost for a given level of risk Model identifies “plans” with the lowest cost for a given level of risk Model tests alternative conservation deployment schedules (amount and timing) as well as “risk mitigation” benefits of buying conservation above forecast avoided cost Model tests alternative conservation deployment schedules (amount and timing) as well as “risk mitigation” benefits of buying conservation above forecast avoided cost Regional Conservation Targets are derived from Plans on lowest-cost lowest-risk frontier Regional Conservation Targets are derived from Plans on lowest-cost lowest-risk frontier

8. Northwest Power and Conservation Council slide 8 Council Process for Estimating Cost-Effective Conservation Resource Potential & Setting Acquisition Targets Measure Cost Cost Measure Savings and Load Shape and Load Shape MeasureLifetime Program Data Contractor Bids Contractor Bids Retail Price Surveys Retail Price Surveys End Use Load Research Engineering Models Engineering Models Billing History Analysis Billing History Analysis Independent Testing Labs Evaluations Census Data Census Data Manufacturers Data Manufacturers Data Engineering Estimates Engineering Estimates Market Model Provides 20-year Forecast of Hourly Wholesale Market Prices & CO2 Emission/kWh Under Average Water Conditions, Medium Gas Price Forecast for Medium Load Growth Scenario Cost-Effectiveness Model Determines measure and program level “cost- effectiveness” using: Measure costs, savings & load shape Measure costs, savings & load shape Aurora Market prices Aurora Market prices T&D savings (losses & deferred $)T&D savings (losses & deferred $) 10% Act Credit10% Act Credit Quantifiable non-energy costs & benefitsQuantifiable non-energy costs & benefits Financial Assumptions (e.g. Discount Rate)Financial Assumptions (e.g. Discount Rate) Risk “Premium” from Porfolio ModelRisk “Premium” from Porfolio Model PortfolioModel Determines NPV of Portfolios with Alternative Levels of Conservation vs Other Resources Under Wide Range for Future Conditions Plan’s Conservation Target

9. Portfolio Analysis Determines How Much Energy Efficiency to Develop in the Face of Uncertainty Frequency Chart Dollars Mean = $689.000.011.022.032.043 0 10.75 21.5 32.25 43 ($3,509)($1,131)$1,247$3,625$6,003 1,000 Trials 1,000 Displayed Portfolio Analysis Model Efficient Frontier NPV System Cost

10. Northwest Power and Conservation Council slide 10 Plans Along the Efficient Frontier Permit Trade-Offs of Costs Against Risk Least Risk Least Cost

11. Northwest Power and Conservation Council slide 11 Alternative Cost-Effectiveness Tests Participant Cost Test (PTC) Participant Cost Test (PTC) –Costs and benefits to the program participant Total Resource Cost (TRC) Total Resource Cost (TRC) –All Quantifiable costs & benefits regardless of who accrues them. Includes participant and others’ costs Utility Cost Test (UTC) Utility Cost Test (UTC) –Quantifiable costs & benefits that accrue only to the utility system. Specifically excludes participant costs Rate Impact Measure (RIM) Rate Impact Measure (RIM) –Net change in electricity utility revenue requirements. »Attempts to measure rate impact on all utility customers especially those that do not directly participate in the conservation program »Treats “lost revenues” (lower participant bills) as a cost

12. Northwest Power and Conservation Council slide 12 Plan Uses Total Resource Cost (& Benefits) Perspective Best meets the requirements of the Regional Act Best meets the requirements of the Regional Act Considers all quantifiable costs & benefits regardless of who accrues them Considers all quantifiable costs & benefits regardless of who accrues them Ensures that conservation expenditures are good for the power system, the customer and society Ensures that conservation expenditures are good for the power system, the customer and society Allows conservation to be compared to other resources considered for development by including all quantifiable costs & benefits Allows conservation to be compared to other resources considered for development by including all quantifiable costs & benefits Was strongly recommended by utilities in first Council Plan Was strongly recommended by utilities in first Council Plan Plan targets would be significantly higher if Plan had considered only “Utility Cost” Plan targets would be significantly higher if Plan had considered only “Utility Cost”

13. Northwest Power and Conservation Council slide 13 Some Utilities Now Recommend Use of Utility Cost Test Perspective Considers only those costs & benefits that accrue to electric utility system Considers only those costs & benefits that accrue to electric utility system –Energy kWh at avoided wholesale cost at time saved –Transmission & distribution kW benefits if coincident with system peak and at value of deferred expansion cost –Utility cost for incentives & program administration Does not count customer costs or benefits Does not count customer costs or benefits Ensure that conservation is good for the utility Ensure that conservation is good for the utility Acts as the upper limit on utility incentives for measures with large non-electricity benefits Acts as the upper limit on utility incentives for measures with large non-electricity benefits Used as a measure of utility cost efficiency Used as a measure of utility cost efficiency –Striving for low utility cost share keeps revenue requirements lower

14. Northwest Power and Conservation Council slide 14 NEET Process Raised Additional Issues Review method of calculating cost-effectiveness Review method of calculating cost-effectiveness –Is the Council’s existing interpretation of the Act’s definition “too conservative”? At what “level of aggregation” should the calculation of costs and benefits be performed? At what “level of aggregation” should the calculation of costs and benefits be performed? –Measure –System –Building –Program –Portfolio

15. Northwest Power and Conservation Council slide 15 Why Council Uses TRC: Avoids Potential Double Counting of the Savings Utility invest $2500 in efficient motor to acquire 5000 kWh/yr savings Utility invest $2500 in efficient motor to acquire 5000 kWh/yr savings –Levelized Cost = 3.4 cents/kWh –B/C = 1.32 Customer matches $2500 utility investment to save the same 5000 kWh/yr Customer matches $2500 utility investment to save the same 5000 kWh/yr –Simple payback = 10 years, motor last 20 years Total of all direct cost is $5000 for 5000 kWh/yr of savings Total of all direct cost is $5000 for 5000 kWh/yr of savings –Levelized cost = 6.8 cents/kWh –B/C ratio = 0.66

16. Northwest Power and Conservation Council slide 16 Why Council Uses TRC Directs Funds Toward Measures That Optimize Total Utility and Customer Investments Utility invest $600 toward cost of $6000 solar PV system that saves 1200 kWh/yr Utility invest $600 toward cost of $6000 solar PV system that saves 1200 kWh/yr –Alternatively utility and consumer could: »Invest $160 in 40 CFLs to save 1200 kWh, reducing cost $440 »Invest $600 to buy 150 CFLs, saving 5000 kWh, quadrupling savings Especially important when budgets are limited Especially important when budgets are limited

17. Northwest Power and Conservation Council slide 17 Why Council Uses TRC Avoids promoting measures that may impose non- energy costs on others Act directs the Council give second priority to the use of renewable resources Act directs the Council give second priority to the use of renewable resources Analysis in 1 st Plan concluded that cost of using wood stoves to offset use of electric heat was below cost of electricity from new generating facilities Analysis in 1 st Plan concluded that cost of using wood stoves to offset use of electric heat was below cost of electricity from new generating facilities 1 st Plan excluded use of wood heat due to “non-energy” cost (air pollution) imposed on the region 1 st Plan excluded use of wood heat due to “non-energy” cost (air pollution) imposed on the region

18. Northwest Power and Conservation Council slide 18 Why Council Uses TRC Expands list of conservation options by allowing consideration of quantifiable “non-energy” benefits Energy Star Clothes Washer in Homes with Gas Water Heater and Dryer Energy Star Clothes Washer in Homes with Gas Water Heater and Dryer –Present Value Capital Cost = $58/MWh –Present Value to Power System = $17/MWh (B/C = 0.3) –Value to Region/Society (includes natural gas, detergent & water savings) = $110/MWh (B/C = 2.0) Power system’s “willingness-to-pay” for these savings should be limited to its present value benefits Power system’s “willingness-to-pay” for these savings should be limited to its present value benefits »Electric Utility could provide incentive up to $17/MWh for washer in a home with gas water and dryer heat

19. Northwest Power and Conservation Council slide 19 Consideration of Non-Energy Benefits Expands the Conservation Supply Curve Conservation Resources in Plan Created by Consideration of Non- Energy Benefits

20. Northwest Power and Conservation Council slide 20 Care Must Be Used in Applying The Plan’s Cost-Effectiveness Results “Prescriptively” Not all measures are in the draft 6 th Plan Not all measures are in the draft 6 th Plan –Plan contains over 1000 applications of specific EE technologies –NOT an exhaustive list of all possible measures & applications (e.g. custom measures) Plan assumes administrative costs = 20% of capital Plan assumes administrative costs = 20% of capital –Administrative cost vary widely by measure & by program design Measure cost-effectiveness in Plan is an estimate Measure cost-effectiveness in Plan is an estimate –Measure costs and savings are a single point estimate, but vary widely in practice –Plan targets are based on full portfolio model analysis, 750 forecasts of “avoided costs” –Measure/Program/Portfolio cost-effectiveness generally determined on a single forecast of “avoided costs” for the next 20 years (with adders for “hedge risk”)

21. Northwest Power and Conservation Council slide 21 Granularity/Bundling – So What’s “A Measure”? "Resource" means-- electric power, including the actual or planned electric power capability of generating facilities, or actual or planned load reduction resulting from direct application of a renewable energy resource by a consumer, or from a conservation measure. "Resource" means-- electric power, including the actual or planned electric power capability of generating facilities, or actual or planned load reduction resulting from direct application of a renewable energy resource by a consumer, or from a conservation measure.

22. Northwest Power and Conservation Council slide 22 Why “Bundle” Measures are interactive, so total savings are not the sum of their “parts” Measures are interactive, so total savings are not the sum of their “parts” –Example: Heat pumps, duct sealing and commissioning “Deeper” savings are lower cost “Deeper” savings are lower cost –Example: Conversions and/upgrades to HSPF 9.0 have a higher TRC B/C ratio than to HSPF 8.5 Adding a “non-cost effective” measure reduces cost per unit of savings by increasing market penetration Adding a “non-cost effective” measure reduces cost per unit of savings by increasing market penetration –Example: Adding “prime window replacements” increases participation in weatherization program, spreading fixed cost over more savings

23. Northwest Power and Conservation Council slide 23 Risks of Bundling Reduces in economic benefits of conservation Reduces in economic benefits of conservation –If the average cost of all conservation equals the avoided cost, there’s no room for a mistakes If “non-cost effective” measure dominates program/portfolio, it places all savings at risk (i.e., not recoverable, not counted toward target) If “non-cost effective” measure dominates program/portfolio, it places all savings at risk (i.e., not recoverable, not counted toward target) Slippery slope – Can bundling of any measures (e.g. PVs w/CFLs) be justified? Slippery slope – Can bundling of any measures (e.g. PVs w/CFLs) be justified? –Is there a need for consistent application across the region?

24. Northwest Power and Conservation Council slide 24 Care Must Be Used in Applying The Plan’s Cost-Effectiveness Results “Prescriptively” Plan’s cost & savings estimates are “averages” Plan’s cost & savings estimates are “averages” –Site-specific applications may be more or less “cost- effective” than in Plan –The Plan “average” may not accurately reflect specific program conditions Programs should be tailored to reflect specific program designs, delivery mechanisms, measure applications, location and other key cost or savings factors Programs should be tailored to reflect specific program designs, delivery mechanisms, measure applications, location and other key cost or savings factors Program estimates need to be more or less granular than Plan estimates Program estimates need to be more or less granular than Plan estimates –Individual measures evaluated in Plan are aggregated into programs/portfolios (e.g., Plan doesn’t have “Energy Star New Homes” as a measure)

25. Northwest Power and Conservation Council slide 25 Avoided Costs Are Forecast to Be Significantly Higher

26. Northwest Power and Conservation Council slide 26 Energy Efficiency is Still the Cheapest Option Assumptions : Efficiency Cost = Average Cost of All Conservation Targeted in 5 th Power Plan Transmission cost & losses to point of LSE wholesale delivery No federal investment or production tax credits Baseload operation (CC - 85%CF, Nuclear 87.5% CF, SCPC 85%, Wind 32% CF) Medium NG and coal price forecast (Proposed 6 th Plan) Bingaman/Specter safety valve CO2 cost

27. Northwest Power and Conservation Council slide 27 Draft 6 th MWa of “Technically Achievable” Conservation Potential

28. Northwest Power and Conservation Council slide 28 Draft 6 th MWa of “Technically Achievable” Conservation Potential 5 th Plan Estimate

29. Northwest Power and Conservation Council slide 29 Backup Slides

30. Northwest Power and Conservation Council slide 30 Customer Perspective Considers only those costs & benefits that accrue to end use consumer Considers only those costs & benefits that accrue to end use consumer –Electric bill savings –Quantifiable non-energy benefits –Customer share of capital & labor cost –Customer share of periodic replacement cost –Customer operation and maintenance cost/savings Ensure that conservation is good for the customer Ensure that conservation is good for the customer Common metrics: B/C ratio, by simple payback, return on investment, years to positive cash flow Common metrics: B/C ratio, by simple payback, return on investment, years to positive cash flow

31. Northwest Power and Conservation Council slide 31 Common Expressions of Cost- Effectiveness Payback Payback –Expressed as time to recoup investment Benefit/Cost ratio Benefit/Cost ratio –Expressed as a ratio Net Present Value Net Present Value –Expressed as dollar value Levelized Cost Levelized Cost –Expressed as cost per kWh or $/MWh

32. Northwest Power and Conservation Council slide 32 Common Metrics for TRC Cost- Effectiveness = Discounted Present Value of Benefits ($) Discounted Present Value of Costs ($) = Discounted Present Value Costs Annualized over Life ($) Annual kWh Saved at Bus Bar (kWh) Benefit/Cost Ratio Net Present Value Levelized Cost (for comparison to other resources) = Discounted PV of Benefits – Discounted PV of Costs ($)

33. Northwest Power and Conservation Council slide 33 Conservation Measure Cost-Effectiveness “Inputs and Outputs” Aurora West Coast Market Price Forecast ECM Costs, Savings, Load Shapes & Coincidence Factors PNW Avoided Cost by Transmission Control Area ProCost BulkPowerSystemValue Carbon Emissions Benefits Local Distribution System T&D Benefits System T&D Benefits BulkTransmissionSystem Benefits Benefits LocalDistributionSystemValue TotalSocietal Value Value Non-EnergyBenefits

34. Northwest Power and Conservation Council slide 34 Council 5 th Plan Forecast of Future Average Monthly Market Prices (Mid C-Trading Hub)

35. Northwest Power and Conservation Council slide 35 Typical “On-Peak” Load Profiles

36. Northwest Power and Conservation Council slide 36 Forecast On-Peak Market Power Prices by Month and Year

37. Northwest Power and Conservation Council slide 37 Typical Off-Peak Load Profiles

38. Northwest Power and Conservation Council slide 38 Forecast Off-Peak Market Power Prices by Month and Year

39. Northwest Power and Conservation Council slide 39 The Council’s Conservation’s Cost-Effectiveness Analysis Compares Savings with Forecast Market Prices at the time the savings occur Four “Load Segments” are used to compute the value of savings: Four “Load Segments” are used to compute the value of savings: –Weekday “Peak” Load Hours –Weekday “Ramp Up/Ramp Down” hours and “Weekend Peak” Load Hours –Weekday and “Weekend Off-Peak” hours –Weekend and Holiday “Very-Low”

41. Northwest Power and Conservation Council slide 41 Each Conservation Measure Has a Different “Cost-Effectiveness” Limit Based on When It’s Savings Occur Weighted Average Value of Space Heating Savings = $41/MWh Weighted Average Value of Space CoolingSavings = $78/MWh

42. Northwest Power and Conservation Council slide 42 Impact Load Shape on Regional Bulk Power System Value Impact on Present Value Benefit (20-year measure life) Impact on Present Value Benefit (20-year measure life) –Low End »Street Lighting - $41/MWh »Residential Space Heating - $41/MWh –High End »Central AC - $78/MWh »Solar Water Heating - $74/MWh

43. Northwest Power and Conservation Council slide 43 Impact of Bulk Transmission System T&D on Power System Value Assumed Bulk Transmission System “Avoided Cost” of $3.00/kW-year Assumed Bulk Transmission System “Avoided Cost” of $3.00/kW-year Impact on Present Value Benefit (20 year measure life) Impact on Present Value Benefit (20 year measure life) –Low end »Irrigated Agriculture - $0.00/MWh »Residential AC - $0.00/MWh –High end »Residential Space Heating - $1.05/MWh »Residential Water Heating - $0.52/MWh

44. Northwest Power and Conservation Council slide 44 Local Transmission and Distribution Benefits There is value in delaying utility investments in local distribution networks (and sub-High Voltage Transmission) that is caused by load growth There is value in delaying utility investments in local distribution networks (and sub-High Voltage Transmission) that is caused by load growth Not all load growth results in the immediate need to increase local distribution system network capacity Not all load growth results in the immediate need to increase local distribution system network capacity Other “Demand Side Management” (e.g. load control) programs may be better suited to deferring network expansion Other “Demand Side Management” (e.g. load control) programs may be better suited to deferring network expansion The value of reducing load growth defer distribution capacity expansions: The value of reducing load growth defer distribution capacity expansions: Capital expansion cost/KW-yr * Probability expansion will be deferred by conservation measure’s impact on distribution system peak

45. Northwest Power and Conservation Council slide 45 Illustrative Local Distribution System T & D Benefits

46. Northwest Power and Conservation Council slide 46 Impact of Local T&D on Power System Value Assumed Local Distribution System “Avoided Cost” of $20/kW-year Assumed Local Distribution System “Avoided Cost” of $20/kW-year Impact on Present Value Benefit (20-year measure life) Impact on Present Value Benefit (20-year measure life) –Low end »Solar PV - $0.14/MWh »Solar Water Heating - $0.30 MWh –High end »Residential Ovens - $26/MWh »Residential Air Source Heat Pumps - $19/MWh

47. Northwest Power and Conservation Council slide 47 Environmental Externalities Value Based on Carbon Dioxide Emissions from West Coast Power System Based on Carbon Dioxide Emissions from West Coast Power System Consensus that $0 is wrong Consensus that $0 is wrong Used $5- $40/ton of CO2 emitted Used $5- $40/ton of CO2 emitted Varied amount and future date of carbon control implementation Varied amount and future date of carbon control implementation Adds about $3/MWh to Present Value Benefit of Savings (also varies by shape of savings) Adds about $3/MWh to Present Value Benefit of Savings (also varies by shape of savings)

48. Northwest Power and Conservation Council slide 48 Expected Value of CO2 Control Cost by Year

49. Northwest Power and Conservation Council slide 49 CO 2 /MWh Trends for Conservation Savings by Load Segment

50. Northwest Power and Conservation Council slide 50 “Cost-Effectiveness” of Conservation Varies by Perspective Energy Star Clothes Washer (MEF 2.2) with Electric Water Heating and Electric Dryer Present Value Capital Cost = $0.44/kWh Present Value Capital Cost = $0.44/kWh –Value to Bulk Power System = $53/MWh (B/C = 1.17) –Value to Local Distribution System (includes bulk power system value) = $66/MWh (B/C = 1.47) –Value to Region/Society (includes detergent & water savings, plus carbon credit) = $123/MWh (B/C = 2.8)

51. Northwest Power and Conservation Council slide 51 Northwest Energy Efficiency Implementation Web Bonneville Power Administration Public Utilities Investor Owned Utilities Northwest Power and Conservation Council State Regulatory Commissions Northwest Energy Efficiency Alliance Energy Trust ofOregon Regional Technical Forum End Use Consumers Markets, Codes & Standards = Policy Recommendations = Technical Recommendations = Program Funding = Conservation Programs = Market Transformation Programs/Projects The “Plan” = Policy = Rate Revenues

52. Northwest Power and Conservation Council slide 52 5 th Plan Identified Nearly 4,600 MWa of “Technically Available” Conservation Potential

53. Northwest Power and Conservation Council slide 53 Adjustments to 5 th Plan’s Conservation Resource Potential Reductions in Available Potential Reductions in Available Potential –Program Accomplishments –Changes in Law »Federal Standards for general service lighting »State Building Codes –Changes in Markets »Improved “Current Practice” due to Energy Star, LEED, Programs, Market Transformation »Other Changes to Federal Standards (10 adopted, 21 under revision, and 12 with effective dates by 2014) –Changes in Forecast »Less new commercial floor area »Lower industrial forecast

54. Northwest Power and Conservation Council slide 54 Adjustments to 5 th Plan’s Conservation Resource Potential Increases in Available Potential Increases in Available Potential –Changes in Scope »Distribution System Efficiency Improvements »Consumer electronics (TV’s, set top boxes) »Irrigation Water Management and Dairy Farm –Changes in Data and Technology »Detailed Industrial Sector Potential »New Measures (e.g. ductless heat pumps, solid state lighting)

55. Northwest Power and Conservation Council slide 55 Avoided Costs Are Forecast to Be Significantly Higher

56. Northwest Power and Conservation Council slide 56 Energy Efficiency is Still the Cheapest Option Assumptions : Efficiency Cost = Average Cost of All Conservation Targeted in 5 th Power Plan Transmission cost & losses to point of LSE wholesale delivery No federal investment or production tax credits Baseload operation (CC - 85%CF, Nuclear 87.5% CF, SCPC 85%, Wind 32% CF) Medium NG and coal price forecast (Proposed 6 th Plan) Bingaman/Specter safety valve CO2 cost

57. Northwest Power and Conservation Council slide 57 Draft 6 th MWa of “Technically Achievable” Conservation Potential

58. Northwest Power and Conservation Council slide 58 Draft 6 th MWa of “Technically Achievable” Conservation Potential 5 th Plan Estimate