Get documents about "Comments on WCI Economic Modeling Western Climate Initiative
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August 13, 2008
Ms. Janice Adair, Special Assistant
Washington Department of Ecology
Chair, Western Climate Initiative
Mr. Steve Owens, Director
Arizona Department of Environmental Quality
Co-Chair Western Climate Initiative
Dear Ms. Adair and Mr. Owens:
I am writing to you on behalf of PacifiCorp to provide you with our comments in
response to the Western Climate Initiative’s (“WCI”) Economic Modeling information
and presentation presented at the July 29th, WCI Stakeholders Meeting in San Diego, and
in regard to the July 15, 2008 update to the modeling Assumptions Book. The WCI
requested comments by August 13, 2008.
PacifiCorp serves more than 1.6 million customers in six western states (California,
Idaho, Oregon, Utah, Washington, and Wyoming). PacifiCorp also has ownership
interests in thermal generation units located in three additional western states (Arizona,
Colorado, and Montana). PacifiCorp owns more than 10,400 megawatts of generation
capacity on a system-wide basis from coal, hydro, wind power, natural gas-fired
combustion turbines, solar and geothermal.
PacifiCorp has attached two documents for the WCI Partners’ consideration. The first is a
set of comments submitted by WEST Associates dated August 13, 2008 (i.e., Appendix
A). PacifiCorp actively participated in the drafting of these comments and supports the
observations and requests made therein. Second, PacifiCorp co-funded an analysis by the
Electric Power Research Institute (“EPRI”) titled "Collaborative EPRI Analysis of CO2
Price Impacts on Western Power Markets" (i.e., Appendix B).
The EPRI analysis is informative to the WCI Partners in two ways. First, it illustrates an
approach to modeling endorsed by PacifiCorp; specifically that a modeling exercise
develop a core/reference case, but is accompanied by various sensitivity runs that rely on
changes to different key underlying modeling assumptions. Such a modeling approach
provides policymakers with a variety of possible futures for them to consider. Second,
this specific analysis is policy design neutral and simply identifies a range of different
carbon prices likely necessary to either stabilize greenhouse gas emissions or achieve
significant emissions reductions from the western electricity sector.
PacifiCorp looks forward to reviewing detailed WCI modeling results by state and
province. In addition to building stakeholder credibility in the Energy 2020 model, such
detailed output will enable stakeholders to understand the distribution of cost impacts
across the western region as WCI’s cap-and-trade program is implemented. We hope
WCI will release the model inputs and various results that show greenhouse gas
PacifiCorp
825 NE Multnomah
Portland, OR 97232
abatement costs, including the impact on electric rates, as well as any economic benefits
or any adverse impacts accruing to each WCI Partner.
Thank you for your consideration of these comments.
Dated: August 13, 2008 Respectfully submitted,
By
Kyle L. Davis
Director of Environmental Policy & Strategy
PacifiCorp
825 NE Multnomah
Portland, OR 97232
(503) 813-6601 Phone
(503) 813-6060 Fax
E-Mail: Kyle.L.Davis@PacifiCorp.com
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Western Climate Initiative Comments
Economic Modeling
October 20, 2012
These comments are submitted on behalf of WEST Associates, a coalition of 16 western
electric utilities with ratepayers in the partner states of the Western Climate Initiative
(WCI). WEST Associates (“WEST”) is concerned about both the design and status of
the economic modeling. WEST is particularly concerned that policy makers will not
have sufficient useful information available to them as decisions are made concerning the
critical design elements of a regional cap and trade program in the western U.S.
Specifically, WEST is submitting these comments in response to the Economic Modeling
information and presentation presented at the July 29th, WCI Stakeholders Meeting in San
Diego, and in regard to the July 15, 2008 update to the modeling Assumptions Book.
The WCI requested comments by August 13, 2008.
Designing the Economic Model for Policy Decisions – What Matters
Most
Ensure that the ENERGY 2020 Model Results are Believable
It is critically important to build stakeholder confidence in the ENERGY 2020 (“E2020”)
modeling data inputs and the model function and design. Doing so will go a long way
toward achieving credibility, both with stakeholders and the public, regarding the model
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results. Accordingly, WEST believes that the WCI should take some important
administrative and communication steps:
Update documentation for the WCI version of the model
Provide input data sets for each of the Reference and Policy Cases, sufficiently in
advance of when the WCI selects its final Cap and Trade (“C&T”) Program
Design Elements
Enable stakeholders to view detailed inputs and outputs from the model to
facilitate stakeholder understanding of the E2020 model functioning and analysis
Provide the opportunity for stakeholders to meet with the WCI and ICF Modeling
Team Members to discuss and clarify issues.
Sensitivity Scenarios are Critical to Understanding Model Performance and Results
WEST urges the WCI to exercise the E2020 model with a range (low to high) of inputs
that will bound the effect of key policy design options, such as those listed below. Such
model scenarios work toward understanding how uncertainties in these critical program
assumptions could affect the economic impacts of the WCI cap and trade program:
1. Sensitivity on a range of low to high natural gas prices.
2. Sensitivity on a range of low to high hydro generation supply years
3. Sensitivity on a range low to high range of auctioned vs. free allowances to cap
and trade sources
4. Sensitivity on a range of low to high costs for fully validated and real offsets
5. Sensitivity on a range of future timing for when CCS Coal will be commercially
available, and a range of when and what levels of nuclear power may be on line.
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Key Over-Arching Modeling Principles for WCI to Consider
There are several over-arching modeling principles and concerns which WEST has noted
in bringing its members’ resources to evaluate the WCI economic modeling effort:
The WCI presentations and discussions on the E2020 modeling provide
substantial focus on the electricity sector. However, it is not clear to WEST as to
what extent the E2020 modeling will also equally focus on economic impacts on
the Transportation and Fuels sectors. It is critical that stakeholders be able to
examine the model inputs to better understand how all sectors intended for the
C&T program by 2015 will be evaluated through year 2020, year 2030, and
beyond.
WEST assumes that the WCI Modeling effort will consistently use market
economic principles for modeling regional electric sector operations and
accounting for required financial investments and costs. However, it is critical
that the WCI provide sufficient documentation of the model design and
functioning of its features in order to provide WEST with such assurances.
The model does not appear to provide endogenous feedback on potential increases
in natural gas costs. A declining CO2 cap will increase the cost of carbon that
will result in a broad backing down of low cost coal generation. This will, as a
result, increase demand for natural gas-fired electric power. WEST believes that
E2020 may fail to reflect the full cost increase potential for natural gas generation
as a result.
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The July 23rd WCI Design Elements now provide for unlimited banking of
unused allowances.1 However, WEST understands that the E2020 internal model
design does not allow, or cannot model allowance banking. If so, no banking of
allowances is a significant weakness in the E2020 modeling of the design of the
C&T program. Not modeling banking will tend to lower the estimated cost of
CO2 allowances in the near term.
WEST understands that the WCI intends to model various offset scenarios,
including changing the levels of offset compliance eligibility. The availability of
lower cost and valid emission offsets from outside the C&T program can have a
direct effect on the costs of compliance for affected sources under the cap. The
sensitivity of compliance cost increases as a result of the program’s annually
declining supply of CO2 allowances. WEST believes that the WCI should
evaluate scenarios at permissible offset levels that are less than or more than 10%
of compliance obligations by C&T sources. It is important for the WCI members
to understand how such a change might affect the cost of implementing the C&T
program.
Additionally, it is important for the WCI to model scenarios reflecting a range of
costs for credible and valid offsets. For example, we note that in the European
Union Emissions Trading Scheme, (EU-ETS) Clean Development Mechanism
1
Draft Plan, Section 8.10
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(CDM) credits are selling for $20 to $40 per ton. Generally CDM credits have
more acceptability than other offset instruments. Certainly, high quality,
verifiable and additional offsets have greater value than lower quality instruments.
WEST supports the use of high quality, verifiable and additional offsets and the
scenario range for offset costs should anticipate maintaining high standards for
offset credibility and validity for WCI compliance.
The E2020 model appears to assume static electric transmission line capability
out to year 2030. This is a significant weakness in evaluating a C&T program
that is intended to induce increased use of renewable generation resources as a
method of backing out high carbon emitting resources such as coal generation.
The model won’t allow for opportunities to adapt by enhancing transmission
capabilities in the western region in order to allow the western electrical grid to
transfer greater quantities of renewable power. WEST believes that as the WCI
C&T program is implemented, electric utilities in the west will improve
transmission capability to facilitate improved transmission of renewable and
alternative generation from sub-region to sub-region across the western states.
E2020 needs to take this technological and economic adaptive behavior into
account in its modeling design and results.
Stakeholders should be able to see detailed modeling results by state and
province. In addition to building stakeholder credibility in the E2020 model, such
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detailed output will enable stakeholders to understand the distribution of cost
impacts across the western region as WCI’s C&T program is implemented.
Specifically, the model inputs and results should show abatement costs, including
the impact on electric rates, as well as any economic benefits by each state or
partner. To date, WEST has not seen any commitment by the WCI Economic
Modeling Subcommittee to share this detail level of E2020 model results.
Model Results Output
WEST urges the WCI to make the E2020 results available as an input to a macro-
economic model. A macro-economic model can measure economic sector
feedbacks and can more accurately demonstrate the socio-economic impacts than
can the E2020 model alone.
The results should clearly point out the benefits from the Role of Complementary
Policies assumed in the E2020 model. According to Appendix I of the
Assumptions Book, and Section 4.9 of the WCI’s Economic Modeling
Presentation on July 29, 2008, complementary policies are expected to be a
significant contributor to reducing WCI region emissions. The costs of
implementing complementary policies and the extent to which the emissions
reduction goals of each complementary policy are expected to be actually
achieved should be clearly communicated to stakeholders. WEST is concerned
that there may be risk for greater GHG reduction requirements for capped
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sources, with concomitant higher abatement costs, in the event that
complementary policies may fail to provide the anticipated emission reductions.
The WCI must establish a firm date by which policy makers and stakeholders will
be able to see the results of the E2020 modeling.
WEST Associates Detailed Comments on the ENERGY 2020 Model
What follows are WEST’s detailed comments and questions regarding the more technical
aspects of the model’s data inputs, assumptions, and operating functions for running the
model.
The Electric Sector’s Supply Side & Model’s Supply Representation
Will the model’s selection of new generation requirements be driven by
maintenance of a certain level of reserve margins? If so, what are the planning
reserve margins assumed in the model? WEST believes that adequate reserve
margins for electric capacity are essential in any electric system planning in order
to ensure reliable supplies of electric energy.
How does the E2020 model represent the known wide variability in annual hydro
generation, and in particular, what happens in low water years? It is not clear if,
and how, this critical variable will be represented in the WCI’s E2020 modeling.
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Therefore, WEST has recommended scenarios of low to high hydro generation
resource years be modeled as discussed above.
The E2020 model’s planned use of a Budget Elasticity for consumption of
electricity based on consumer’s economic budgets appears to be set at 0.2, as
indicated in an earlier WCI presentation. This value seems arbitrarily high and
implies greater price response and lower impacts of CO2 policy actions than
would a lower elasticity value. Assuming an elasticity value that is too high will
result in excessive short-term response (with a higher Budget Elasticity) and will
tend to under estimate the impacts of CO2 abatement policies.
What are the mix and levels of renewable generation technologies that will be
forced in by the RPS requirements? While the WCI region states have set forth
RPS goals that are acknowledged by the WCI in its modeling assumptions, the
mix and levels of renewable technologies required to meet each partner’s RPS
goal needs to be made explicit in setting plausible assumptions for the E2020
model runs.
How is the First Jurisdiction Deliverer (FJD) point of regulation procedurally
represented in the functioning of the model? In other words, how is the FJD
operationalized in the model runs? Specifically, how is the FJD policy
represented for imports from outside the WCI region?
In the E2020, does the transmission system grow over time in response to
increased demands for imports and exports, or does it remain static at 2005 (or
other recent year) capacity limits? This could have a significant impact on the
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modeling of implementation of various levels of new renewable technology
generation.
Demand Related Inputs to the ENERGY 2020 Model
Energy efficiency factors (Appendix J) are based on information sources on
device efficiency, capital cost, and operating costs that are dated from the 1980s –
a lot of technological advancement has been made since then. These should be
checked for currency.
Are reductions in loads due to energy efficiency programs an input or an output of
the model?
The E2020 assumptions provide a lot of detail on end uses and customer classes,
but nothing on behavioral response to power prices (price elasticity). Will this be
augmented to better reflect behavioral responses?
It does not appear in the E2020 assumptions that Plug-In Hybrid Electric Vehicles
(PHEVs) are available as a demand related input. This is potentially very
important since “electrification” has implications for the coverage of the cap and
the demand for the electrical sector under the cap.
Model Scope and Fuel Prices
It is not clear whether WCI will be running the model past year 2020 or 2030.
Limiting the time period over which the model is applied can significantly restrict
the role for new low emission baseline generation, such as nuclear generation or
carbon capture & sequestration (CCS) technologies. This is because of the
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technology commercial maturation time cycle for CCS, as well as the time
required for planning, permitting, and constructing new nuclear. The WCI has
stated that they plan to run the model past year 2020, but not initially in the design
of the program. Unfortunately, failure to model past 2030 will not fully evaluate
future mid-range policy options involving coal CCS and nuclear power that will
be more likely to be commercially implementable by 2030 and beyond.
Accordingly this will skew the policy results from the WCI’s economic modeling.
Although the natural gas prices to be used in the model are higher than those used
in other recent studies, they are still lower than actual prices in the current market.
Since natural gas prices are stated to be exogenous in the E2020 model, there
appears to be no increase in the price of gas as the electricity sector increases its
use in response to climate policy. As stated above, future behavioral choices may
increase demand for electricity greater than current assumptions, in combination
with reduced coal fired generation, will make the electric sector more sensitive to
changes in natural gas pricing.
Will E2020 use a comparison of natural gas price trajectories that include AEO
High Cost Case as well as an extrapolation of the NYMEX market-clearing price
for natural gas to reflect values closer to actual expected prices? See the graphic
illustration below.
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Natural Gas Price Trajectories (2005$)
$14
$12
Price ($/MMBtu - 2005$)
$10
$8
NYMEX July 7, 2008
AEO High Price 2008
$6
$4
$2
$-
2009 2012 2015 2018 2021 2024 2027 2030
Year
Additional Modeling Scope Detail Comments
WEST understands that the WCI may run the E2020 model for each state as a
single utility. If so, why is the transmission detail provided at a zonal level – how
will this information be used within states?
How does E2020 link to an alternating current (AC) transmission model when
electrical energy flows are “pipeline” in nature across the transmission line?
It is not clear how an industrial facility uses “available heat” to make a
cogeneration decision? Increased co-generation is a significant source of
reductions in California’s Draft Scoping Plan (DSP), making this a key issue in
the WCI.
Is nuclear power allowed as a new generation option, of so, what are the
constraints on its rate of introduction (timing and level)?
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What are the assumptions on the cost of storing CO2 from CCS plants?
Are there any constraints on additions of new renewable generation due to
resource limits or electric sector integration issues?
Why is the WCI tracking new additions of coal in Texas, Nebraska and North
Dakota (Appendix F), which are outside the WCI region?
How are endogenous new generation additions distributed among geographical
zones?
What is the regional geographic granularity represented in the electric model –
i.e., what are the zones modeled (is it state, or sub-state)?
Comments on New Generation Technologies (Appendix G)
The costs for new generation are now probably plausible, given that they were
recently updated. Why don’t the California costs reflect a range, as is the case
with the WECC region generation costs?
Solar thermal capacity factors are high enough to suggest onsite thermal storage.
Given this, do the capital costs fully account for thermal storage costs? The
capital costs appear to be too low.
The cost of new wind generation does not reflect potential costs for
interconnection and integration with the existing electrical grid, including backup
capacity requirements (for reliable capacity provision when the wind does not
blow), and ancillary services costs.
The E2020 modeling assumptions do not reveal what, if any, capacity limits are
assumed for new nuclear, CCS coal, and renewables (inclusive of limits, timing,
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and location for amounts of new generation capacity by geographic zone). This is
particularly important to assess given the vast size of regions in the Western states
that appear to be suitable for CCS and renewables deployment.
Why are CA generation technologies costs presented as more certain and higher
while other states have a range of costs?
Why are there equal O&M costs across a broad range of generation technologies
(Appendix G)?
SUMMARY OF WEST ASSOCIATES’ PRIORITY COMMENTS
WEST has provided substantial feedback above to the WCI in the form of both comments
and requests. Summarized and listed below are the most important, key comments and
requests WEST has made herein:
Comments
1) The model is limited in ways that would mostly lead to underestimation of the costs
of meeting WCI goals, due to the following factors apparent in the model:
i) No feedback loop for natural gas prices,
ii) No banking,
iii) No macro feedback,
iv) Static transmission,
2) Due to incomplete model documentation there is reasonable doubt that
implementation of the model being used by WCI follows basic principles of market
economics that govern western power markets, i.e. system operation and trading.
Requests
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1) WCI shouldn’t set policy until it has vetted and discussed results of modeling of
policy cases with stakeholders
2) Stakeholders should get a chance to comment on results
3) Simple risk management dictates WCI should run sensitivity cases, including:
i) Gas price feedback (or just higher prices) for policy cases
ii) Variation in hydro output. (WEST’s view is that a low hydro situation
precipitated exploitation of flawed market design for California during the
2000-2001 energy crises in the state. If E2020 accurately predicted evolution
of the UK market, the same type of analysis should be applied here when the
stakes are many times higher in designing a western regional market; much
greater in scope than California’s Power Market restructuring)
iii) Price and availability of offsets. Offsets with sufficient environmental
integrity may prove to be very expensive (as is the case for CDM credits
traded in the EU-ETS).
4) Provide information to enhance confidence and understanding of analyses by policy
makers and stakeholder
i) Model documentation
ii) Technical interactive meetings with the modeling team
iii) Reveal selections (switches) of the many options for determining how the
E2020 model is set up and run
iv) Model input sets, similar to the Department of Energy’s (DOE) use of the
National Energy Modeling System (NEMS), not only for the electricity sector,
but also for the transportation and fuels sectors, so that stakeholders may fully
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understand the E2020 model functions and analyses.
v) Detailed model output and results, similar to DOE’s use of NEMS.
5) Provide state specific results on abatement, abatement costs, impacts on power prices
and overall economic impacts, to stakeholders for review sufficiently in advance of
the WCI’s selection of final C&T Design Elements.
_____________________
WEST Associates is happy to answer questions or provide further information with
respect to these comments on the WCI’s proposed E2020 economic modeling. Please
contact David Steele at 510-321-1111, or at davidss@simginc.com
Attachment 1: WEST Associates Members
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Attachment 1
WEST Associates Members
Arizona Electric Power Cooperative
Arizona Public Service
Colorado Springs Utilities
Idaho Power Company
Basin Electric Power Coop
The Los Angeles Department of Water and Power
Pacificorp
Platte River Power Authority
Public Service Company of New Mexico
The Salt River Project
Sierra Pacific Power Company
Southern California Edison
Tri-State Generation and Transmission, Inc.
Tucson Electric Power
Xcel Energy
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Attachment B
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Electric Power Research Institute analysis titled
"Collaborative EPRI Analysis of CO2 Price Impacts on Western Power Markets"
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