4.1. ERMUSR 09-15-2010 - Laserfiche WebLink

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Executive Summary of Phase I Results for Elk River Phase I was designed to plan for long-term uncertainty in the electric power sector, specifically variations in the price of natural gas and the state of carbon regulation. Portfolios were designed both to minimize wholesale cost and to minimize the risk associated with uncertain economic and policy variables. After each participant's overall needs were determined, each was given a unique outline as to how each portfolio should minimize cost, and then a basic idea of how to diversify to reduce their risks. Your main study findines were as follows: Build long-term plans around these ideas: (i) There will be carbon regulation in the long-run. It will most affect coal resources. (2) Carbon emissions will have a highly uncertain price attached to them. (3) Coal and diesel fuel costs should increase at roughly the rate of inflation. (4) Natural gas prices should increase slightly faster than inflation, but will also be very uncertain. (5) A future with wholesale costs over $100 in today's dollars is very possible with high gas and/or carbon prices. Reducing that risk is a priority. This means that your best portfolio should look something like this: (1) Base load: Keep your existing landfill gas resource for your use after 2022. (2) Bose load: Get about35 MW hydro. (3) Intermediate load: Get 30-40 MW of combined cycle capacity. (4) Peaking load: Get new CT (20 MW). (5) Peaking load: Keep existing diesels (10.6 MW), and consider adding new diesel capacity (20 MW). These can be arranged in various contract structures. Portfolio choice is very sensitive to assumptions for base and intermediate load. A $1 difference in gas prices or a $5 difference in carbon prices will completely change which type of base load resource is best for you and how much you should buy of it. Consider as an example our expected future: Gas costs $7/million btu, there is carbon regulation, and carbon costs $30/ton. What's our best choice of base load and intermediate load resources if the future's different? (1) If we're correct: See the above "best" portfolio. Hydro is a great option if you expect gas to cost $7 or more and carbon to cost $30 or more. (2) If gas is $1 cheaper: Choose 65 MW of combined cycle instead. Why? If you expect gas prices to be roughly $S or less, gas' fuel cost is low enough that your best option is to obtain all base load and intermediate needs from combined cycle resources.