BC Hydro Provincial Integrated Electricity Planning Committee Meeting 5 (July 12-14, 2005)

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1 BC Hydro Provincial Integrated Electricity Planning Committee Meeting 5 (July 12-14, 2005) Information Sheet #12 Financial Impacts Background The financial objective for the IEP is to minimize cost. Most of the discussion around costs at PIEPC meetings has so far concentrated on the unit energy cost (UEC) for different resource options expressed in $/MWh. The UEC is a simple metric, and it does not capture all of the factors that affect cost that are accounted for in the portfolio analysis. For example, the following is included in the portfolio costs: Trade benefits Seasonal differences in electricity value Transmission losses Transmission bulk upgrades Impacts of adding combined resource types Determination of volume of resource options required to meet load energy/ capacity requirements The portfolio attribute that is used to measure the financial impacts of a portfolio is the Net Present Value (NPV). NPV accounts for the time value of money as it calculates today s value based on a future series of cash flows. At previous PIEPC meetings there was also discussion about using a rate impact attribute to compare portfolios. The rate impact has not yet been calculated for the portfolios, but the IEP project team expects to present the rate impact at the next PIEPC meeting. The goal of this information sheet is to present an in-depth analysis of the financial results of the different portfolios and describe the different sensitivities/scenarios that were performed. The portfolios were not rescheduled with new resources for the sensitivities. Instead, the portfolios were tested to see how they performed under different scenarios. Sensitivities/scenarios include: BC Hydro 2005 IEP PIEPC Meeting 5 Page 1 of 9

2 1) increasing the capital cost of Site C by 20% 2) three different GHG cost reduction scenarios 3) three different gas and electricity forecasts 4) two discount rates Please refer to Information Sheet #3 for a detailed description of portfolios, Information Sheet #6 for a description of the GHG cost reduction scenarios, and Information Sheet #6 from PIEPC meeting 3 for a description of the gas and electricity forecasts. Context In order to provide some context for examining the portfolios, a $100M NPV difference between two portfolios would mean an extra $8.7M per year for the 20 year planning period at a 6% discount rate, and $10.2M per year at a 8% discount rate. For BC Hydro s 2004 Revenue Requirement Application, a rough rule of thumb was that each $25M-30M would result in a 1 per cent increase in rates. Financial Results Across Portfolios Figure 1 provides the portfolio NPV results for a 6% pre-tax real discount rate, the EIA 100 gas and electricity rate, and the GHG mid reduction cost (GHG cost2). This combination of scenarios represents the most probable or expected case. Resources in the portfolios were scheduled to first meet the objective of the portfolio, and after that were scheduled based on least cost. In some cases, the initial resources added to portfolios may not have been scheduled based on least cost due to lead-time constraints that is to say the least cost unit could not be constructed in time to meet load requirements. The Low Air Impacts portfolio has the lowest NPV, followed by the 100% Green and Low Land Impacts, and then Coal and Diverse Technology. Site C Capital Cost Sensitivity Some PIEPC members have expressed concern about Site C s capital cost estimate noting that short term construction costs have increased significantly over the last few years, and that small hydro IPP costs have typically risen 20%. To test the portfolio NPV results sensitivity to the capital cost of Site C, the Site C capital cost was increased by 20%. The results are as follows: BC Hydro 2005 IEP PIEPC Meeting 5 Page 2 of 9

3 Site C capital cost increase +20% Low Air Impact portfolio (includes Site C in F2015) 6% Real Pre-tax 8% Real Pre-tax Discount Rate Discount Rate +103 M +107 M This sensitivity will only affect the NPV values for the portfolio with Site C scheduled, Low Air Impacts. However, even with this sensitivity, the Low Air Impacts portfolio still has the lowest NPV under the expected scenario. GHG Cost Reduction Scenarios The NPV results for the three different GHG cost reduction scenarios and the NPV with no GHG adders are shown in Figure 2 (@ 6% discount rate and EIA 100). Note that the portfolios with high GHG intensity become more expensive with each increase in GHG price scenario. The 3 different GHG cost reduction scenarios effectively change the UEC for a coal plant and CCGT as shown below in Table 4 Table 4: Effective Adders to UEC for GHG Cost Reduction Scenarios ($/MWh) GHG Cost 1 GHG Cost 2 GHG Cost 3 560MW pulverized Coal $14/MWh $17/MWh $28/MWh 500 MWCCGT $2/MWh $2/MWh $4/MWh 1) Adders are provided as an example based on an in-service date of F2008 Gas and Electricity Forecast Scenarios Figure 3 shows the NPV results for three different gas and electricity forecasts: Hi 25, EIA 100, and Confer 100. The results in Figure 3 are shown at a 6% discount rate and GHG cost 2. Note: The portfolios with higher variable cost and that are exposed to market prices show a larger spread of NPV results between the three different gas and electricity forecasts. These include Low Land Impact and Diverse Technology. Note also that the order of gas and electricity results for an individual portfolio depends on whether the costs are all fixed, or if the portfolio has more exposure to buying from the market. For the fixed price portfolios (Coal, Low Air Impact, 100% Green), the higher market prices are better. This is because the annual generation produced and costs are fixed, so the portfolios perform better if the excess energy can be sold into the market at a higher price. For the portfolios with at least one CCGT (Low Land Impact, Diverse Technology) the high gas and electricity forecast produce the highest NPV. Discount Rate Sensitivity Figure 4 shows the NVP results for a 6% and 8% real, pre-tax discount rate (EIA100, GHG cost 2). For the discount rate sensitivity, the UECs for the projects and resource bundles are recalculated at the 8% discount rate, and the cash flow is also discounted at the 8%. The higher discount rate sensitivity will result in higher UECs for all of the resource options. However, resource options with a larger component of variable cost (i.e., CCGTs) will not be affected as much. Inherently, higher discount rates reduce the impact of future cashflows hence; the BC Hydro 2005 IEP PIEPC Meeting 5 Page 3 of 9

4 portfolios with relatively less capital cost investments but higher operating costs show an advantage at the higher discount rate. Summary Figure 5 shows all of the scenarios and sensitivities on one figure. Outstanding Questions / Data Gaps Cost information for the 2005 Call for Tender and the Resource Smart bundle of projects were not included in the portfolio analysis. Since these resources were common between all portfolios their omission will not affect the comparative results for NPV. BC Hydro 2005 IEP PIEPC Meeting 5 Page 4 of 9

5 11,500 Figure 1 NPV results for a 6% pre-tax real discount rate and the EIA 100 (EIA only,with GHG Cost 2) 11,000 10,500 NPV ($Millions) 10,000 9,500 9,000 8,500 BC Hydro 2005 IEP PIEPC Meeting 5 Page 5 of 9

6 Figure 2 GHG cost reduction scenarios (@ 6% discount rate and EIA 100) NPV ($ Millions) GHG Cost1 GHG Cost2 GHG Cost3 Zero GHG BC Hydro 2005 IEP PIEPC Meeting 5 Page 6 of 9

7 11,500 Figure 3 : NPV results for different gas and electricity forecasts (6% with GHG Cost 2) Gas & Electricity Price Forecast 11,000 High25 EIA100 Confer100 10,500 NPV ($Millions) 10,000 9,500 9,000 8,500 BC Hydro 2005 IEP PIEPC Meeting 5 Page 7 of 9

8 11500 Figure 4 :NVP results for a 6% and 8% real, pre-tax discount rate (EIA100, GHG cost 2) NPV ($ Millions) % 8% 8500 BC Hydro 2005 IEP PIEPC Meeting 5 Page 8 of 9

9 GHG Cost 3 Figure 5 NPV results with sensitivities to: GHG Cost Reduction, Discount Rate and Site C capital Reference scenario corresponds to EIA 100, 6% discount rate, GHG Cost 2 scenario The first error bar shows the sensitivity of GHG Cost Reduction. The second error bar shows the sensitivity of discount rates. The third error bar shows the sensitivity of increasing Site C capital cost by 20%. High25 EIA100 Confer Site C NPV ($ Millions) GHG Cost no GHG Cost % 8500 BC Hydro 2005 IEP PIEPC Meeting 5 Page 9 of 9

2005 Integrated Electricity Plan. Provincial IEP Committee Meeting #2 Economic Analysis February 22/23, 2005

2005 Integrated Electricity Plan Provincial IEP Committee Meeting #2 Economic Analysis February 22/23, 2005 Presentation Overview Economic Analysis Economic vs Financial Analysis Unit Costs vs Portfolio