Long Run Marginal Cost (LRMC) Ryan Steele Power Supply Planning Specialist

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1 Long Run Marginal Cost (LRMC) Ryan Steele Power Supply Planning Specialist

2 Overview Provide a historic overview of FBC s LRMC Highlight BC Hydro s stated LRMC Discuss FBC s proposed LRMC approach Relationship to the Portfolio Analysis included the LTERP The Average Incremental Cost (AIC) approach Multiple LRMCs will be stated based on different portfolio scenarios used to meet future load requirements Highlight considerations associated with applying the LRMC The LRMC should be viewed as a price signal, not a threshold

3 Notable References to the LRMC Demand Side Management (DSM) Most predominate use of the LRMC Regulations require utilities to evaluate DSM using their Long-Run Marginal Cost of acquiring electricity generated from clean or renewable resources in BC Used as the approximate cost of power acquired over a longer term horizon Evaluate the Cost of New Long Term Resources Certificate of Public Convenience and Necessity (CPCN) Applications 3

4 Historic FBC LRMC Statistics Wholesale Energy Markets: $84.94/ MWh With the drop in market prices, decreased from $84.94/MWh to $56.61CAD/MWh ( PBR) Reflects FBC s cost of energy when required in the short to medium term Clean Power: $111.96/ MWh A levelized cost developed using a base price of $101.39/MWh (2011$) from BC Hydro Standing Offer Program (SOP) and escalated at 50 percent of CPI annually between 2011 and Demand Side Management (DSM) Applications

5 BC Hydro LRMC [2015 RDA] Definition LRMC can be defined as the price of the most cost-effective way of satisfying incremental customer demand beyond existing and committed resources Levelized Unit Electricity Cost (LUEC) Approach The cost of Energy only was estimated at $85/MWh (2013$) Updated from the range of $85 to $100/MWh [2013 IRP] Based on DSM and IPP EPA renewals The cost of Capacity was estimated in the range of $50-55/kWyear (2013$) Based on Revelstoke Unit 6 5

6 LRMC: BC Hydro vs FBC Do due a number of differences it is difficult to draw direct comparisons between BC Hydro and FBC s LRMC values Timing of Resource Volume Differences Governing Requirements Location Differences Methodology Differences 6

7 LRMC Calculation Method: LUEC Resource-specific calculation of the constant electricity price required to cover all the relevant costs associated with a resource, given a set of assumptions Note: Resources used to define BC Hydro LRMC are resource options specific to BC Hydro Does NOT provide a portfolio estimate of the LRMC does not consider the combination with existing resources or the combination with other incremental resources 7

8 FBC Proposed LRMC Definition The cost to build, or contract on a long term basis, reliable power where existing resources are insufficient to meet forecasted load requirements Stated at the point of interconnection to FBC s system Adders for applicable Transmission, Distribution, and/or line losses may be used to translate the LRMC to the equivalent LRMC value at the customers site The LRMC will be stated on a Real Basis (2015$) 8

9 Reliable Power LRMC represents the cost to meet load when existing resources are insufficient Includes both an Energy and a Capacity component Future resource gaps occur within specific months (and at specific times) The Capacity and Energy components come from a combination of resources in the portfolio Existing resources have attributes that influence the requirements of the next incremental resource in addition to external factors 9

10 Portfolio Analysis Using a Mixed Integer Linear Programming model to optimize each portfolio scenario, addressing the following questions: What resources to acquire? When to acquire resources? Once a resource is acquired, how much energy should it generate? Several portfolio scenarios being considered The LRMC value is derived from (is a by-product of) a portfolio scenario With multiple scenarios, correspondingly, FBC will state multiple LRMC values The characteristics of a given LRMC will align with the characteristics of the source portfolio 10

11 Portfolio Scenarios & Characteristics Characteristics Evaluated Access to wholesale energy markets BC Hydro Power Purchase Agreement (PPA) Requirement for 93% of energy to be sourced from clean resources Percentage of projected load growth addressed or deferred by DSM activity Base Portfolio PPA continues until expiry in 2033 Continued Access to Market Energy Requirement for 93% clean resources Most Likely DSM Scenario Portfolio Scenarios All portfolios are relative to the Base Portfolio Conservative DSM Aggressive DSM Clean/Renewable Energy Only Remove 93% Clean Energy Cap Self-Sufficiency Flexible PPA * Scenarios are preliminary and may be subject to change or additional scenarios may be considered 11

12 Average Incremental Cost (AIC) The AIC takes the present value of the incremental costs over the planning horizon and divides those costs by the additional demand expected to be served. Reflects the general level and trend of future costs that will be incurred as forecasted demand increases AIC Calculations Steps 1. Establish a long-run demand forecast 2. Gather information regarding the characteristics and costs of resource options 3. Determine the optimal combination of resources given a set of constraints that can satisfy the forecasted demand. 4. Calculate the LRMC by dividing the present value of the optimal portfolio by the present value of the additional demand served 12

13 Average Incremental Cost (AIC) 13

14 Proposed FBC Calculation Method: AIC The LRMC is a by-product of the Portfolio Analysis 1. As a baseline, assume the load is constant at the current level (L0 = 2015) for the full planning horizon (next 20 years) 2. Based on the portfolio scenario being investigated, find the optimal portfolio (P0) to meet the baseline load The characteristics of the portfolio scenario are implemented as constraints in the portfolio optimization routine 3. Determine a Load Forecast (L1) for the planning horizon 4. Using the Load Forecast, and the same set of portfolio constraints (characteristics), find the optimal portfolio (P1) 5. Calculate the LRMC = Forecast ed Load Current Load 14

15 Other LRMC Considerations The LRMC should be viewed as a price signal, not a threshold The performance profiles (and risks) of different technologies needs to be taken into account A combination of resources will be required to address gaps at certain times The identified incremental resource(s) may have attributes that complement existing resources within the context of the portfolio The LRMC assumes that all electricity generated is of equal value This assumption does NOT hold true in practice FBC s resource requirements vary at different times of the year The value of energy on the wholesale market varies at different times FBC s time horizon to requiring a new resource is further into the future Inappropriate applications of the LRMC can lead to negative impacts 15

16 Summary The LRMC has previously been discussed in a number of contexts, but primarily DSM Applications FBC has previously stated two LRMC values Wholesale Energy Markets; Clean and Renewable Energy FBC s is planning to use the Average Incremental Cost (AIC) approach By-product of the Portfolio Analysis included the LTERP Multiple LRMCs will be stated based on the different portfolio scenarios There are other considerations associated with LRMC values The LRMC should be viewed as a price signal, not a threshold Details of the Portfolio Scenarios and corresponding LRMC values to be discussed in a future workshop

Long Run Marginal Cost (LRMC)

Long Run Marginal Cost (LRMC) Ryan Steele Power Supply Planning Specialist Agenda & Objectives Preliminary Discussion PART I Provide a historic overview of FBC s LRMC Highlights from BC Hydro s stated