Focusing the Power Plan

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Focusing the Power Plan Powered By Docstoc
					Systems Analysis Advisory
      Committee (SAAC)

        Friday, November 22, 2002
                    Michael Schilmoeller
                             John Fazio



                                    1
                                     Original Agenda

• Natural gas prices
  –   Sumas, AECO, Rocky mountains
  –   historical and monthly forwards and volatilities
  –   correlations with other variables
  –   subjective forwards
• Hydro generation
  – historical and monthly forwards and volatilities
  – correlations with other variables


                                                                2
  Northwest Power Planning Council         Outcomes and Milestones
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                 3
  Northwest Power Planning Council
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                 4
  Northwest Power Planning Council
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                  5
  Northwest Power Planning Council                       Review
                                     October 24 Agenda

• Metrics
  – Stakeholders
  – Risk measures
  – Timing
• Representations in the portfolio model
  –   thermal generation
  –   hydro generation
  –   conservation and renewables
  –   loads
  –   contracts
  –   reliability
  –   ** Plan Issues **

                                                          6
  Northwest Power Planning Council               Review
                      Revised October 24 Agenda

• Approval of the Oct 4 meeting minutes
• Price Processes
• Representations in the portfolio model
  – thermal generation
• Metrics
  – Stakeholders
  – Risk measures
  – Timing
• Representations in the portfolio model
  – ** Plan Issues ** : price responsive demand


                                                           7
  Northwest Power Planning Council                Review
                                         Plan Issues

•   incentives for generation capacity
•   price responsiveness of demand
•   sustained investment in efficiency
•   information for markets
•   fish operations and power
•   transmission and reliability
•   resource diversity
•   role of BPA
•   global change

                                                       8
    Northwest Power Planning Council          Review
            Representation of dispatchables

• Main Conclusions
  – Option calculation of capacity factor and plant value over the
    month should be identical with hourly dispatch result when
    prices are lognormally distributed. Consequently,
  – Option model should give a reasonable representation of
    dispatchable plant performance and value
  – Volatility in the option model represents both variation within
    the month and uncertainty
  – Where uncertainty dominates, temporal variation become
    unimportant



                                                                   9
  Northwest Power Planning Council                        Review
                                     Review of Results


• Examine gas and power prices from 1999
• How good is the lognormal assumption?
• Comparison of option model with hourly dispatch
  against lognormally distributed prices
• Comparison of option model and hourly dispatch of
  actual dispatch for Beaver in 1999
• Impact of future uncertainty on capacity factor and
  value of Beaver

                                                         10
  Northwest Power Planning Council              Review
                                                            Price Duration Curve
•              If we assume each hour’s dispatch is independent, we can ignore the
               chronological structure. Sorting by price yields the market price duration
               curve (MCD)
                                                                                      Value V is this area
                         40

                         35


                         30
    Market Price $/MWh




                         25

                         20
                                  V  C  max0, pe (h)  p g (h) 

                                               max0, p (h)  p       ( h) 
                         15             hH
                                                            e      g
                         10
                                     CN H    hH
                          5                             NH
                                    or
                                  V  CN H E[max0, pe (h)  p g (h) ]
                          0
                                1
                               25
                               49
                               73
                               97
                              121
                              145
                              169
                              193
                              217
                              241
                              265
                              289
                              313
                              337
                              361
                              385
                              409
                              433
                              457
                              481
                              505
                              529
                              553
                              577
                              601
                              625
                              649




                                    where         Hour
                                     N H is the number of hours in the period (672)                      11
                                     E is the expectation operator
                         Northwest Power Planning Council                                       Review
                          Variability viewed as CDF
• Turning the MCD curve on its side, we get something that looks like a
  cumulative probability density function (CDF)

                                                                            Cumulative Frequency

    Value V is this area                                                                                              100%
                                                        600                                                           90%
                                                                                                                      80%
                                       Count of hours




                                                                                                                             Capacity Factor
                                                        500
                                                                                                                      70%
                                                        400                                                           60%
                                                                                                                      50%
           Pg                                           300
                                                                                                                      40%
  V  NH    f ( p ) dp
           
                 e    e
                                                        200
                                                        100
                                                                                                                      30%
                                                                                                                      20%
   (Fund Thm of Calculus)                               0
                                                                                                                      10%
                                                                                                                      0%
  dV
       N H f ( pe )                                          37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20
  dpe                                                                                $/MWh


  where
  f ( pe ) is the value of the CDF or the capacity factor

                                                                                                                                               12
   Northwest Power Planning Council                                                                               Review
         Hourly Volatilities from Monthly
• We are dealing with expected variation of electricity and
  gas price over the specific time period and with
  uncertainties in these, as well. Using our assumption that
  the hourly uncertainties are constant and independent of the
  temporal variations in the respective commodities,

                 ( h)  z e ( h)   e ( h)  z g ( h)   g ( h)

                        which by our independence assumption implies

                   2  ( z ( h ) 2   z ( h ) 2  2  z , z  z ( h ) z
                                 e           g              e   g       e      g   (h)   )
                       (      2  ,     )
                            2           2
                             e         g           e   g   e        g


                                                                                                       13
   Northwest Power Planning Council                                                           Review
                                           Hourly Dispatch
• Try dispatching against a lognormally distributed set of
  prices, with 1000 observations.

            24.07           27.96            1     =IF(RC[-2]>RC[-3],1,0)
            23.66           30.62            1
            33.26           43.25            1
            40.18          184.25            1
            31.90           28.19            0    • Maximum
            36.91           54.79            1
            20.06          110.83            1      discrepancy over
                                                    prices and
averages    30.67           67.64      0.885542
                                                    volatilities, about
      0.92182047       spread option
                                                    5%


                                                                          14
    Northwest Power Planning Council                             Review
                             Representation of dispatchables

                                                       1999 Daily Prices MC and Sumas

            80.00                                                                                                                           3.00

            70.00
                                                                                                                                            2.50
            60.00
                                                                                                                                            2.00
            50.00                                                                                                                                  On-peak MC
$ Nominal




                                                                                                                                                   Off-Peak MC
            40.00                                                                                                                           1.50
                                                                                                                                                   Average MC
            30.00                                                                                                                                  Natural Gas
                                                                                                                                            1.00
            20.00
                                                                                                                                            0.50
            10.00

             0.00                                                                                                                           0.00
                        19
                             37
                                  55
                                       73
                                            91
                                                 109
                                                        127
                                                              145
                                                                    163
                                                                          181
                                                                                199
                                                                                      217
                                                                                            235
                                                                                                  253
                                                                                                        271
                                                                                                              289
                                                                                                                    307
                                                                                                                          325
                                                                                                                                343
                                                                                                                                      361
                    1




                                                                                                                                                             15
            Northwest Power Planning Council                                                                                                       Review
                              Representation of dispatchables

                      5
ln(nominal price-$)




                      4
                                                                                            Natural Gas
                      3                                                                     On-Peak MC

                      2                                                                     Off-Peak
                                                                                            MC
                                                                                            Average MC

                      1
                      0
                          1
                              35
                                   69
                                        103
                                               137
                                                     171
                                                           205
                                                                 239
                                                                       273
                                                                             307
                                                                                   341
                                                     Days

                                                                                                   16
            Northwest Power Planning Council                                             Review
          Representation of dispatchables


                                    Average (Flat) MC

                       60                                                  20
                       50
                                                                           15
           ln(price)




                       40
                       30                                                  10
                       20
                                                                           5
                       10
                        0                                                  0
                            1

                                3

                                    5

                                        7

                                            9

                                                11

                                                     13

                                                          15

                                                               17

                                                                    19
                                                                                  17
Northwest Power Planning Council                                         Review
          Representation of dispatchables


                                   Sumas Gas

       60                                                        40
       50
                                                                 30
       40
       30                                                        20
       20
                                                                 10
       10
        0                                                        0
                                        11

                                             13

                                                  15

                                                       17

                                                            19
             1

                   3

                         5

                               7

                                    9




                                                                              18
Northwest Power Planning Council                                     Review
              Representation of dispatchables

                         De-Trended Sumas Gas Prices

                    60                                                      4.5
                                                                            4
                    50
                                                                            3.5
                    40                                                      3
        ln(price)




                                                                            2.5
                    30
                                                                            2
                    20                                                      1.5
                                                                            1
                    10
                                                                            0.5
                     0                                                      0
                         1

                             3

                                 5

                                     7

                                         9

                                             11
                                                  13

                                                       15

                                                            17

                                                                 19

                                                                      21
                                                                                    19
Northwest Power Planning Council                                           Review
            Representation of dispatchables

• Beaver
  – 9000 BTU/kWh
  – $4.00/MWh for VOM, variable fuel transportation
  – Did not incorporate forced outage estimate,
    maintenance
  – Assumed 500MW capacity
  – “Hourly” dispatch was on daily on- and off-peak
    only (would understate volatility)



                                                       20
  Northwest Power Planning Council            Review
                       Representation of dispatchables

                                      Comparison of techniques

                     120.0%

                     100.0%
   Dispatch factor




                     80.0%
                                                                              Hourly
                     60.0%                                                    Spread
                                                                              Actual
                     40.0%

                     20.0%

                      0.0%
                              1   2    3   4   5   6   7   8   9   10 11 12
                                                   Month

                                                                                       21
Northwest Power Planning Council                                              Review
            Representation of dispatchables

• To show: The main driver of value is not
  expected variation in price, it is uncertainty
• What is the 1 sigma in daily (hourly?) electricity
  and gas prices over the next several years?




                                                     22
  Northwest Power Planning Council          Review
            Representation of dispatchables

• Oil
                   35
                                                             ?
  price            30


  forecast         25


                   20       History
                            Low
                   15       Medlo
                            Medium
                            Medhi
                   10
                            High
                                                              ?
                            EIA02-R
                    5       EIA02-H
                            EIA902-L
                            8 Others
                    0
                         1990          1995   2000   2005   2010   2015   2020


                                                                                   23
  Northwest Power Planning Council                                        Review
            Representation of dispatchables

• NG                               4.5                        ?
  price                             4

  forecast                         3.5
                                                                                             History
                                    3                                                        Low
                     2000$/MMBtu




                                                                                             Medlo
                                   2.5                                                       Medium
                                                                                             Medhi
                                    2                                                        High
                                                                                             EIA-Ref
                                   1.5
                                                                  ?                          EIA-Low
                                                                                             EIA-High
                                    1                                                        DRI-WEFA
                                                                                             GRI
                                   0.5                                                       CEC
                                                                                             ICF
                                    0
                                         1995   2000   2005   2010    2015   2020   2025


                                                                                                   24
  Northwest Power Planning Council                                                  Review
                                           Mid-Columbia price forecast
                                             Average annual w/comparisons
                                           ?
                    $55
                    $50
                    $45
Price (2000$/MWh)




                    $40
                    $35
                    $30
                    $25
                                                                Current Trends Hi Shape (092702)
                    $20                        ?
                    $15                                         5th Plan corrected transfer (062402).

                    $10                                         Adequacy & Reliability Study (Feb 2000)
                     $5
                     $0
                       2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020


                                                                                                                        25
                    Northwest Power Planning Council                                                         Review
                                   Uncertainty Dominates

      Addition of
     uncorrelated
                                                                  Error in approx z by max(x,y)
      volatilities
                                                      45.0%                                                               12
  z2=x2+y2                                            40.0%
                                                                                                                          10
                                                      35.0%




                                     (z-max(x,y))/z
                                     Relative error
                                                      30.0%                                                               8
                                                      25.0%




                                                                                                                               Z
                                                                                                                          6
                                                      20.0%
        z              Uncertainty
                                                      15.0%                                                               4
                          x                           10.0%
                                                                                                                          2
                                                      5.0%
                                                      0.0%                                                                0
                                                              0   1   2   3   4       5       6    7       8   9    10

              y=1                                                                         X

                                                                              error           Value of z

    Expected variation

                                                                                                                         26
Northwest Power Planning Council                                                                           Review
                                     Uncertainty Dominates

• Beaver Value, assuming change in volatility
  due to uncertainty
  same expected fuel and electricity price, correlation

               volatility       CF       Value    volatility      CF       Value
     Jan           18.3%     13.3%       84569       105.6%    63.3%     2062640
     Feb           17.0%     23.2%      146865       108.7%    66.8%     2135302
     Mar           18.8%     14.7%       81952       103.4%    62.7%     1819113
     Apr           36.8%     49.8%     1065049       105.7%    70.1%     2951938
     May           37.3%     55.0%     1390094       117.0%    73.3%     3778254
     Jun           69.4%     36.0%     1113231       110.2%    62.4%     2082887
     Jul           37.1%     43.1%      929229       113.2%    69.6%     3127952
     Aug           39.3%     49.9%     1408176       109.2%    70.7%     3754281
     Sep           21.9%     85.6%     2167144       111.7%    77.1%     5141926
     Oct           19.2%    100.0%     5536028       119.3%    83.2%     8873424
     Nov           43.9%     80.0%     2834708       125.5%    78.9%     5467271
     Dec           21.9%     49.3%      758491       112.4%    71.2%     3757433
     average                 56.9%                             72.2%
     total                           17,515,537                        44,952,421


                                                                                        27
  Northwest Power Planning Council                                             Review
                                                 Uncertainty Dominates

                                  Comparison of dispatch factors

                    120.0%

                    100.0%
  Dispatch factor




                    80.0%

                    60.0%

                    40.0%

                    20.0%

                     0.0%
                             1    2     3    4     5     6    7     8    9    10   11       12
                                                         Month

                                 Spread with future uncertainty   Spread with 1999 prices
                                                                                                     28
Northwest Power Planning Council                                                            Review
                                                  Uncertainty Dominates

                                            Value of Beaver

                   10,000,000
                    9,000,000
                    8,000,000
Dollars, nominal




                    7,000,000
                    6,000,000
                    5,000,000
                    4,000,000
                    3,000,000
                    2,000,000
                    1,000,000
                            0
                                Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
                                                           Month

                        Beaver value with uncertainty   Beaver value with 1999 prices
                                                                                                 29
    Northwest Power Planning Council                                                    Review
                                                                                                                                   Makes sense

                           • CF may or may not increase with volatility

                                          European Call Option                                                                        European Call Option

                      12                                                                                          12


                      10                                                                                          10
Value of Option ($)




                                                                                            Value of Option ($)
                      8                                                                                           8


                      6                                                                                           6


                      4                                                                                           4


                      2                                                                                           2


                      0                                                                                           0
                           20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40                              20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
                                                 Price of underlying                                                                         Price of underlying


                                                                                                                                                                          30
                                 Northwest Power Planning Council                                                                                            Review
                                                                                                                                   Makes sense

                           • Value increases with volatility

                                          European Call Option                                                                        European Call Option

                      12                                                                                          12


                      10                                                                                          10
Value of Option ($)




                                                                                            Value of Option ($)
                      8                                                                                           8


                      6                                                                                           6


                      4                                                                                           4


                      2                                                                                           2


                      0                                                                                           0
                           20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40                              20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
                                                 Price of underlying                                                                         Price of underlying


                                                                                                                                                                          31
                                 Northwest Power Planning Council                                                                                            Review
                                                                                          Makes sense

• Value increases with volatility
                                                                                      n                          n
                                                                                                                              1
                  Cumulative Frequency
                    Single, fixed hour
                                                                                      ( x  x) P( x
                                                                                     i 1
                                                                                           i         i     X )   ( xi  x) 
                                                                                                                      i 1    n
                                                                                      E ( xi  x  )  E ( xi )  x
                                                               1
                            A                                                        But
                                                                                                    1




                                                                     Prob of price
                                                               0.8                     n




                                                                     exceeding p
                                                               0.6                   
                                                                                     i 1
                                                                                          ( xi  x)   A  B
                                                                                                    n
                                                               0.4                   so
                                                                                     E ( xi )  x  A  B
                                                               0.2
                     B                                                               In particular,
                                                                0
40.00 38.00 36.00 34.00 32.00 30.00 28.00 26.00 24.00 22.00 20.00                    A  E (max(0, xi  x))
                             $/MWh




                                                                                                                      32
      Northwest Power Planning Council                                                                     Review
                                     Conclusions

• The monthly spread option model gives a
  reasonable representation of expected
  capacity factors (and hence value) of
  resource options
• Given that the uncertainty in hourly prices
  exceeds the expected variation, the detailed
  information about hourly prices from any one
  scenario tells us little about the expected
  capacity factor and value of resource options
                                                    33
  Northwest Power Planning Council         Review
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                 34
  Northwest Power Planning Council
                       Price responsive demand
• Intended to represent short-term (1 day to 1 month)
  load reduction, on- and off-peak, if the price is right
• Does not address longer term DSI load curtailment
  (which is addressed later)
• Described by a supply curve
• Energy available represented as special continuous
  function of price
   – Zero variable cost, but some fixed cost
• Supply curve developed by Ken Corum



                                                               35
   Northwest Power Planning Council              Representations
                    Price responsive demand
            • Baseload 32000MW, Base price $25/MWh,
              Short-run elasticity is -0.05

                Energy Price       Increm.
                (Wholesale)        Reduct.
                $/MWh              MW
                100                1433
                300                1426
                600                937
                800                389
                1600               927
                4000               1192


                                                               36
Northwest Power Planning Council                 Representations
                         Price responsive demand
• Side observation:                     Stack Model
  Much of the value of
  PRD is driven by                             Curtailment block 2

  peak prices. The                             Curtailment block 1
  price of electricity in                               Peaker 3

  the portfolio model is                                 Peaker 2               Load Curve
                                                         Peaker 1
  subjective, but so are          Price responsive demand         A B C D   E   F
  curtailment block                                      CCCT 2
  prices in our other                                    CCCT 1
  models. At right, the
  value of PRD is                                          Coal 2
  determined by those                                      Coal 1
  prices, the marginal
  costs in hour
  segments A and B.                                         Hydro
                                                                                Hours

                                                                                                      37
     Northwest Power Planning Council                                                   Representations
             Conservation & Renewables

• Represent as non-dispatchable energy
• Supply curve for conservation developed by
  Tom Eckman
• Renewables cost and operating
  characteristics assembled by Jeff King




                                                    38
  Northwest Power Planning Council    Representations
                                      C&R Weaknesses
• Lack of short term operating flexibility
  – If market prices fall below the dispatch cost of a traditional
    resource, the unavoidable cost of a dispatchable resource is
    limited to fixed cost (typically 10% to 30% of total cost);
    Conservation and renewables’ costs are largely capital and
    unavoidable
  – Makes C&R less attractive when resource portfolio capacity
    exceeds loads

• Some financial risks
  – Conservation and renewables have higher up-front cost. If resource
    disappears (failure, technological obsolescence,…), the owner stands
    to lose more.

                                                                         39
   Northwest Power Planning Council                        Representations
                                      C&R Strengths
• “Real option” (modularity) value
   – C&R can be added incrementally and with a
     shorter lead time than conventional resources.
• Fuel Price risk mitigation
• Emission cost risk mitigation
• Conservation may have lower availability risk
• Conservation may have lower credit risk than
  fixed price forward contracts.

                                                           40
   Northwest Power Planning Council          Representations
                                     NPPC Analysis

• Credit and availability advantages can be
  valued by adding these uncertainties to
  alternatives, such as contracts
• Modularity benefits require a new approach
• Example of Sustained Orderly Development
  (SOD)



                                                          41
  Northwest Power Planning Council          Representations
                                                                              Benefits ($)




                                                                   0
                                                                        200000
                                                                                   400000
                                                                                            600000
                                                                                                      800000
                                                                                                               1000000
                                                          Sep-03
                                                          Sep-04
                                                          Sep-05
                                                          Sep-06
                                                          Sep-07
                                                          Sep-08
                                                          Sep-09




Northwest Power Planning Council
                                                          Sep-10
                                                          Sep-11




                                        benefit
                                                          Sep-12
                                                          Sep-13
                                                          Sep-14


                                                   date

                                        price
                                                          Sep-15
                                                                                                                         Timed case




                                                          Sep-16
                                                          Sep-17
                                                          Sep-18
                                                          Sep-19
                                        capacity

                                                          Sep-20
                                                          Sep-21
                                                          Sep-22
                                                          Sep-23
                                                          Sep-24
                                                          Sep-25
                                                                   0
                                                                        100
                                                                                 200
                                                                                        300
                                                                                                400
                                                                                                       500
                                                                                                               600




    Representations




                                                                       Capacity Installed
                                   42




                                                                         (MWa cum)
                                                                                                                                      SOD Analysis
                                                                               SOD Analysis
                                            Dispatchable Conservation Supply Curve

                               1,400

                               1,200
    Resource Potential (aMW)




                               1,000

                                800

                                600

                                400

                                200

                                 -
                                       $-    $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.
                                              0     0     0     0     0     0     0     0     0     00
                                                          Levelized Cost (2000$/aMW)

                                                                                                                   43
Northwest Power Planning Council                                                                     Representations
                                           SOD Analysis
• There is only a weak relationship between
  ramp rates (up or down) and utility
  conservation acquisition costs.
• Utility conservation acquisition costs ($/aMW)
  may lower when ramping up than when
  ramping down, due to:
  – Outstanding contracts
  – “Lags” in personnel changes
  – Desire to maintain stable infrastructure
• Assumption –
  – Assume same cost/aMW during ramp down than ramp up.
                                                                  44
  Northwest Power Planning Council                  Representations
                                     SOD Analysis

• Conservation has been ramped up and down
  within a range of +/- 10 aMW
• Assumption – Constrain ramp rate to
  “monthly availability” of each conservation
  cost block (e.g. maximum annual change =
  12x monthly availability).




                                                         45
  Northwest Power Planning Council         Representations
                                       SOD Analysis
• Wholesale market prices will fluctuate as a result
  of:
   – Over/Under building
   – Extreme weather events (hot or cold)
   – Hydro-system availability
   – Short-run economic/business cycles
Assumption:“Randomize” the forecast of future
  “price spikes” in response to hydro-system
  availability, ignore “short-run” weather & business
  cycles
                                                           46
    Northwest Power Planning Council         Representations
                                                                         NPPC Analysis

                                                    construction phase
wholesale electricity market




                                          optional cancellation period




                                                                            expected price trend
                                                                                 price threshold

                               evalulation phase




                                                           time

                                                                                                     47
              Northwest Power Planning Council                                         Representations
                                     NPPC Analysis

• Implement in Portfolio Model
  – Evaluation period (rolling average prices over the
    last 18 months?)
  – Cancellation period
  – Construction period
  – Ramp rate constraint




                                                            48
  Northwest Power Planning Council            Representations
                                     NPPC Analysis

• Real Options
  – Opportunity to defer, expand, abandon according to changing
    circumstances
  – Staging benefits
  – Switching fuel supplies




                                                                       49
  Northwest Power Planning Council                       Representations
                                          NPPC Analysis
• Broad Application of real options to the Electric Power Industry
    – Renewables
        • Mark Bolinger, Ryan Wiser and William Golove, “QUANTIFYING
          THE VALUE THAT WIND POWER PROVIDES AS A HEDGE
          AGAINST VOLATILE NATURAL GAS PRICES,” Proceedings of
          WINDPOWER 2002, June 2-5, 2002, Portland, Oregon
        • http://eetd.lbl.gov/EA/EMP/
    – Coal
        • Y. SMEERS, CORE and L.BOLLE , O. SQUILBIN, “COAL OPTIONS,
          Evaluation of coal-based power generation in an uncertain context,”
          Final report, September 2001, OSTC - Global Change and
          Sustainable Development 1996-2000, Belgium Federal Office for
          Scientific,Technical and Cultural Affairs
        • http://www.belspo.be/belspo/ostc/geninfo/publ/pub_ostc/CG2131/rC
          G23_uk.pdf

                                                                             50
    Northwest Power Planning Council                           Representations
                                                    NPPC Analysis
• Broad Application of real options to the Electric Power Industry
    – R&D expenditures
         • Graham A. Davis, Brandon Owens, “Optimizing the Level of Renewable Electric R&D
           Expenditures Using Real Options Analysis,” National Renewable Energy Laboratory,Golden,
           CO 80401 December 18, 2001


    – Distribution Systems
         • Costing Methodology for Electric Distribution System Planning November 9, 2000
           Prepared for: The Energy Foundation Prepared by: Energy & Environmental
           Economics, Inc. Karl E. Knapp, Jennifer Martin, Snuller Price, And Pacific Energy
           Associates Frederick M. Gordon
         • http://www.energyfoundation.org/documents/CostMethod.pdf




                                                                                               51
   Northwest Power Planning Council                                            Representations
                                     Working Hypothesis

• Some participants will find risk attributes
  of C&R more attractive than others
• Good portfolio for C&R
  – Heavy exposure to carbon-based fuel prices (even more benefit if fuel
    prices are correlated to electricity prices)
  – Contracts with credit problems
  – Contracts with duration less than lifetime of C&R measure
  – Short supply of other resources relative to demand
  – High but unpredictable load growth potential



                                                                         52
  Northwest Power Planning Council                         Representations
                                     Working Hypothesis

• Some participants will find risk attributes
  of C&R more attractive than others
• Poor portfolios for C&R
  – Low exposure to carbon-based fuel prices, e.g., high-quality forward
    contracts with terms comparable to lifetime of C&R measures
  – Long supply of resources relative to demand
     • Made worse if portfolio has hydro generation and market prices
       are negatively correlated with hydro generation
  – Stagnant or decreasing loads expected



                                                                         53
  Northwest Power Planning Council                         Representations
                                     NPPC Analysis

• If C&R are beneficial from the standpoint of cost
  and risk, what is the best strategy to deploy?
• What is the value of SOD, and to which
  measures is SOD beneficially applicable?
• What are the technology-specific risk attributes
  for solar, wind, geothermal, biomass, low-head
  run-of-river hydro?


                                                          54
  Northwest Power Planning Council          Representations
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                 55
  Northwest Power Planning Council
                                     Hydrogeneration

• Excel Add-in has 50-year record

  Demonstrate:
  – Parameters to pull out different data
  – Use as random draw & correlation with other
    assumptions
  – Use of function to pull out specific year

• Reflects 10-hour sustained peaking capability
  from the trapazoidal approximation studies
                                                            56
  Northwest Power Planning Council            Hydrogeneration
                                                              Hydrogeneration

                                         NW Sustained Peak - September

                              25000
        Sustained Peak (MW)




                              22000

                              19000

                              16000

                              13000
                                                2-hr             4-hr          10-hr
                              10000
                                  8600   8800    9000     9200   9400   9600   9800 10000
                                                       Energy (MW-period)



                                                                                                     57
Northwest Power Planning Council                                                       Hydrogeneration
                                                                  Hydrogeneration
•   Function vfuncHydroGen(ByVal sYear As Single, ByVal lLoc As Long, ByVal lType As Long, Optional ByVal lPeriods As Long =
    1) As Variant

•   'Takes:
•   'sYear - single [0.00-50.00] representing the years 1929-1978, sorted ascending by annual energy.
•   '       By passing 50*Rand() as sYear to this function, this permits random draws
•   '       of hydro condition. Ascending order permits user to correlate annual energy with
•   '       other variable. To access a particular year, use the sfuncYear() function, below.
•   '
•   'lLoc - 0, East only
•   '       1, West only
•   '       2, East+West Generation
•   '
•   'lType - 0, MWa
•   '       1, 10-hour Sustained Peak, MWa
•   '       2, off-peak, MWa
•   '       3, on-peak, MWa
•   '       4, off-peak, MWh, assumes 288 hours (4 weeks) each month, 144 for each half-month period
•   '       5, off-peak, MWh, assumes 384 hours (4 weeks) each month, 192 for each half-month period
•   '
•   'lPeriods - Optional
•   '       0, 14 periods of hydro year Sept - August, with two periods of August and two for April
•   '       1, (default), 12 months of hydro year Sept - August
•   '==============================================================================================
•   'Returns:
•   '       A variant containing an array of period Hydrogeneration (MWa) for east-side or
•   '       west-side generation, or both. Entry 0 is September generation, and if
•   '       lPeriods = 0, entry 11 is August generation, else entry 13 is Aug 15-31                                            58
•   '
     Northwest Power Planning Council                                                                    Hydrogeneration
                                     Hydrogeneration
• To call as random hydro condition
  generator:

 =vfuncHydroGen(Rand(), 2, 0)

• This would produce an array of 12
  months of data, MWa, for total system
  generation
                                                            59
  Northwest Power Planning Council            Hydrogeneration
                                                                    Hydrogeneration



•   Function sfuncYear(ByVal lYear As Long, ByVal lType As Long) As Single

•   'Takes a calendar year, e.g., 1937, and returns a real single with a value in the
•   'middle of the correct "bin" for that year, for use as input to vfuncHydroGen.
•   'For example, 1937 is the second lowest year for Eastside Hydro, in terms of
•   'annual energy and is therefore the second entry in vfuncHydroGen(*,0). Then
•   'sfuncYear(1937,0) = 1.5 (The first bin is [0,1), the second is [1,2), etc.
•   'lType - 0, East Generation only
•   '      1, West Generation only
•   '      2, East+West Generation




                                                                                   60
    Northwest Power Planning Council                                 Hydrogenerat
                                     Hydrogeneration

• Emphasize
  – 4-week convention for lType options
    4 and 5 of vfuncHydroGen
• Demonstrate
  – ..\..\..\Hydro General\HydroGen
    AddIn\HydroAddIn.xls




                                                            61
  Northwest Power Planning Council            Hydrogeneration
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                 62
  Northwest Power Planning Council
                                      Loads

• Non-DSI Loads
  – Calibrate with data from NWPP
  – Short-term uncertainty driven by random
    temperatures (HELM)
  – Long term uncertainty from Terry Morlan’s
    work
• DSI Loads
  – Terry Morlan’s aluminum industry model
                                                63
 Northwest Power Planning Council       Loads
                                      Loads

• Non-DSI Loads
  – Develop monthly on- and off-peak energy
    values from an hourly model
  – Calibrated to most recent NPPC forecasts
  – Access to function to permit coordination
    with hydro condition



                                                64
 Northwest Power Planning Council       Loads
                                                                     HELM’s Load
                                    Weather Response Functions

            1000000
            900000
            800000
            700000
            600000                                                                         WRF 1
  MWh/Day




                                                                                           WRF 2
            500000
                                                                                           WRF 3
            400000                                                                         WRF 4
            300000
            200000
            100000
                 0
                      0   10   20    30     40    50   60    70      80   90   100   110

                                          Dry-Bulb Temperature (F)



                                                                                                     65
Northwest Power Planning Council                                                             Loads
                                                      HELM’s Load

                                         LSL 1

          35000

          30000

                                                            -10 to 38
          25000
                                                            38 to 45
          20000                                             45 to 52
     MW




                                                            52 to 57
          15000                                             57 to 61
                                                            61 to 64
          10000
                                                            64 to 110

          5000

             0
                  10
                  11
                  12
                  13

                  15
                  16

                  18
                  19

                  21
                  22
                  23
                  14



                  17



                  20




                  24
                   1
                   2


                   5



                   8
                   9
                   3
                   4

                   6
                   7




                                   Hours of the day


                                                                        66
Northwest Power Planning Council                             Loads
                                                            HELM’s Load
                                          LSL 2

     35000

     30000

     25000                                                                 -10 to 38
                                                                           38 to 45
     20000                                                                 45 to 52
MW




                                                                           52 to 57
     15000                                                                 57 to 61
                                                                           61 to 64
     10000                                                                 64 to 110

     5000

        0
                                           13

                                                  15




                                                            19
                                                       17




                                                                 21

                                                                      23
             1

                 3




                         7

                              9
                     5




                                     11




                                    Hours of Day

                                                                                        67
 Northwest Power Planning Council                                               Loads
                                                              HELM’s Load
                                            LSL 3

       35000

       30000

       25000                                                                 -10 to 38
                                                                             38 to 45
       20000
  MW




                                                                             45 to 52
                                                                             52 to 57
       15000
                                                                             57 to 61
                                                                             61 to 64
       10000
                                                                             64 to 110

       5000

          0
                                             13

                                                    15

                                                         17

                                                              19

                                                                   21

                                                                        23
                                       11
                       5




                                   9
               1

                   3




                           7




                                       Hour in Day


                                                                                         68
Northwest Power Planning Council                                                 Loads
                                                           HELM’s Load
                                        LSL 4

      30000


      25000
                                                                          -10 to 38
      20000                                                               38 to 45
                                                                          45 to 52
 MW




      15000                                                               52 to 57
                                                                          57 to 61
      10000                                                               61 to 64
                                                                          64 to 110

       5000


          0
              1

                  3




                               9
                      5

                          7




                                                                     23
                                   11

                                         13

                                                 15




                                                           19

                                                                21
                                                      17




                                   Hour in Day

                                                                                      69
Northwest Power Planning Council                                              Loads
                                     Non-DSI Loads

• Short-term uncertainty:

  Use 50-year record of daily temperatures to create
  estimates of on- and off-peak loads by month.
  Draw randomly.

• Long-term uncertainty:

  Make the long-term uncertainty consistent with
  Terry Morlan’s estimates
                                                      70
  Northwest Power Planning Council            Loads
                                                                                Non-DSI Loads
                                                             Total Sales
                                                            Non-DSI
                      45000


                      40000                                                                                                 97.5%
                      35000
  Average Megawatts




                      30000


                      25000


                      20000                                                                                                 97.5%
                      15000


                      10000
                         81

                               84

                                     87

                                           90

                                                 93

                                                       96

                                                             99

                                                                   02

                                                                           05

                                                                                 08

                                                                                       11

                                                                                             14

                                                                                                   17

                                                                                                         20

                                                                                                               23
                        19

                              19

                                    19

                                          19

                                                19

                                                      19

                                                            19

                                                                  20

                                                                        20

                                                                                20

                                                                                      20

                                                                                            20

                                                                                                  20

                                                                                                        20

                                                                                                              20
                                                                                                                             71
Northwest Power Planning Council                                                                                    Loads
                                     DSI Loads

• Terry Morlan’s model
• Inspired by Robin Adams, Resource
  Strategies, CRU Group




                                                 72
  Northwest Power Planning Council       Loads
                                                      DSI Loads
                          LME Cash Aluminum Prices:
                               Daily 1989-2002
            $3,500
            $3,250                                    Cash
                                                      15-Month
            $3,000                                    Real Cash
            $2,750                                    Linear (Real Cash)
US$/Tonne




            $2,500
            $2,250
            $2,000
            $1,750                                                $0.80
                                                                  $0.70
            $1,500
            $1,250
            $1,000
                 89
                 90
                 91
                 92
                 93
                 94
                 95
                 96
                 97
                 98
                 99
                 00
                 01
                 02
              19
              19
              19
              19
              19
              19
              19
              19
              19
              19
              19
              20
              20
              20                                                                   73
   Northwest Power Planning Council                                        Loads
                                                                DSI Loads
                                      Aluminum Price                       1550
• Compute break-even price            Premium Rate
                                      BPA Rate
                                                                            0.03
                                                                              23
  for each of nine PNW                BPA Allocation                        100

  aluminum plants                     Mwh/Tonne                           13.199
                                                                    Plant A
• Assume plant will leave the                                   (modern prebake)
                                      Potential Demand                       457
  system if the spread                Cost Components
  between aluminum prices              Alumina                              403
                                       Carbon                                90
  and electricity cost                 Labor/Other                          400
                                       Sustaining Capital                    80
  component gets too small
• Examine the impact of 100           Electricity Cost Max                 623.5

  MW allocation of BPA                Electricity Price Max                47.24

  power at various prices
                                      Electricity Price
                                                          $30

                                      Demand @ Price                        457
                                                                                           74
   Northwest Power Planning Council                                                Loads
                                                                                                DSI Loads
                                                   Viable Smelter Loads

                      3500

                      3000                                                                                 $/Mw

                      2500                                                                                   20
     Aluminum Price




                                                                                                             25
                      2000                                                                                   28
                                                                                                             30
                      1500                                                                                   32
                                                                                                             35
                      1000
                                                                                                             40

                       500

                         0
                             00

                                   50

                                         00

                                               50

                                                     00

                                                           50

                                                                  00

                                                                        50

                                                                              00

                                                                                    50

                                                                                          00

                                                                                                50

                                                                                                      00
                        11

                                  11

                                        12

                                              12

                                                    13

                                                          13

                                                                14

                                                                       14

                                                                             15

                                                                                   15

                                                                                         16

                                                                                               16

                                                                                                     17
                                                               Electricity Use
                                                                                                                     75
Northwest Power Planning Council                                                                             Loads
                                                                                                 DSI Loads
                                                    Viable Smelter Loads
                                                    (No BPA Allocation)

                       3500

                       3000                                                                                 $/Mw
                                                                                                               20
                       2500
     Electricity Use




                                                                                                               25
                       2000                                                                                    28
                                                                                                               30
                       1500                                                                                    32
                                                                                                               35
                       1000
                                                                                                               40
                        500

                          0
                              50

                                    50

                                          50

                                                50

                                                      50

                                                            50

                                                                   50

                                                                         50

                                                                               50

                                                                                     50

                                                                                           50

                                                                                                 50

                                                                                                       50
                         10

                                   11

                                         12

                                               13

                                                     14

                                                           15

                                                                 16

                                                                        17

                                                                              18

                                                                                    19

                                                                                          20

                                                                                                21

                                                                                                      22
                                                                Aluminum Price
                                                                                                                      76
Northwest Power Planning Council                                                                              Loads
wholesale electricity market                                                        DSI Loads

                                                                                          minimum restart period


                                           minimum shut-down period   evalulation phase




                                                                                          aluminum-elec
                                                                                           price spread

                                                                                 expected price trend
                               evalulation phase




                                                          time

                                                                                                                   77
              Northwest Power Planning Council                                                             Loads
                                     DSI Loads

• Model DSI load as a function of electricity
  prices and aluminum prices.
• Represents monthly response. Would stay
  down for several months and take several
  months to bring back on-line.
• Has value as a exchange option or spread
  option.

                                                 78
  Northwest Power Planning Council       Loads
                                      Revised Agenda
• Approval of the Oct 24 meeting minutes
• Review and questions from the last meeting
   – Representation of dispatchable resources in the portfolio
     model
   – Metrics
• Representations in the portfolio model
   – Price responsive demand
   – Renewables and conservation
• Hydro
• Loads
• Natural gas prices
                                                                 79
  Northwest Power Planning Council
                                     Natural Gas Prices

• Data from Gas Daily
• Statistics?
  –   Historical Dailies
  –   Price processes
  –   Distributions within the month, year
  –   Future uncertainties (Terry)
  –   Reasons for variation over time
  –   Correlation with electricity, load, temperature,
      aluminum prices, hydro

                                                                 80
  Northwest Power Planning Council               Natural Gas Prices
                                         Natural Gas Prices
•   1. Mean Reversion - Vasicek Model
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt + Sigma*sqrt(dt)*N(0,1)
•   2. Mean reversion - CIR Model
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt + Sigma*Sqrt(P(t))*sqrt(dt)*N(0,1)
•   3. Geometric Brownian Motion - GBM
•   P(t+dt) - P(t) = Drift*P(t)*dt + Sigma*P(t)*sqrt(dt)*N(0,1)
•   4. Mean reversion - unrestricted
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt + Sigma*P(t)^Gamma*sqrt(dt)*N(0,1)
•   5. Jump-diffusion (Use the same time step for estimation and simulation - h doesn't
    scale!!)
•   P(t+dt) = P(t)exp( Drift*dt + Sigma*sqrt(dt)*N(0,1)+Y*N(Drift_j,Sigma_j))
•   Y=1 with probability h and Y=0 with probability (1-h)
•   6. Brennan and Schwartz Model
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt + Sigma*P(t)*sqrt(dt)*N(0,1)
•   7. Mean reversion with jump-diffusion, Vasicek type diffusion
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt + Sigma*sqrt(dt)*N(0,1)+Y*N(Drift_j,Sigma_j)
•   Y=1 with probability h and Y=0 with probability (1-h)


                                                                                           81
    Northwest Power Planning Council                                      Natural Gas Prices
                                       Natural Gas Prices
•   8. Mean reversion with jump-diffusion, CIR type diffusion
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt +
    P(t)^0.5*(Sigma*sqrt(dt)*N(0,1)+Y*N(Drift_j,Sigma_j))
•   Y=1 with probability h and Y=0 with probability (1-h)
•   9. Mean reversion with jump-diffusion, Brennan-Shcwartz type diffusion
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt +
    P(t)*(Sigma*sqrt(dt)*N(0,1)+Y*N(Drift_j,Sigma_j))
•   Y=1 with probability h and Y=0 with probability (1-h)
•   10. Mean reversion with jump-diffusion, "Unrestricted" type diffusion
•   P(t+dt) - P(t) = Beta*(Alpha - P(t))*dt +
    P(t)^gamma*(Sigma*sqrt(dt)*N(0,1)+Y*N(Drift_j,Sigma_j))
•   Y=1 with probability h and Y=0 with probability (1-h)




                                                                               82
    Northwest Power Planning Council                           Natural Gas Prices
                                     Next Meeting

• Natural Gas Prices
• Electricity
• Statistics
  –   Historical Dailies
  –   Price processes
  –   Distributions within the month, year
  –   Reasons for variation over time
  –   Correlation among electricity, load, temperature,
      aluminum prices, hydro, natural gas prices

                                                          83
  Northwest Power Planning Council
                                          Almost there...
• Then the B-S formula for the value the plant is

           V  pN (d1 )  XN (d 2 )

           where
           N is the CDF for a N (0,1) random variable
            is standard deviation of ln(p/~)
                                           p
           d1  ln( p / X )  T 2 / 2
           d 2  d1   T

  with the variance of e (h)  ze (h)   e (h) playing the role
  of                            2
                                     T                              84
  Northwest Power Planning Council             Representations - thermal
                                                    The payoff
• The B.S. formula for the capacity factor the plant is

                        V
                    f      N (d1 )
                        p
                      where
                   d1  ln( p / X )  T 2 / 2
                       ln( pe / p g )  ( ze    e ) / 2
                                              2       2




                                                                              85
  Northwest Power Planning Council                      Representations - thermal
                                  European spread option
• The Margrabe pricing formula for the value of a spread
  option, assuming no yields
                     V  p2 N (d1 )  p1 N (d 2 )

                     where
                           ln( p2 / p1 )   2T / 2
                     d1 
                                     T
                     d 2  d1   T
                      2   12   2 2  2 1, 2 1 2


                                                                                86
   Northwest Power Planning Council                       Representations - thermal

				
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