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Make Sure You Know The Full Price Before You Make A Down Payment EPA Make Sure You Know The Full Price Before You Make A Down Payment EPA Regulations, Older Coal Plants, and Rational Planning Presented by Jim Lazar RAP Senior Advisor June 25, 2012 The Regulatory Assistance Project 50 State Street, Suite 3 Montpelier, VT 05602 Phone: 802 -223 -8199 web: www. raponline. org

About Jim Lazar is a RAP Senior Advisor, based in Olympia, WA • • About Jim Lazar is a RAP Senior Advisor, based in Olympia, WA • • Economist with 34 years experience in utility resource planning, rate development, and financial analysis Expert witness in more than 100 rate proceedings on resource planning, revenue requirement, cost allocation, rate design, and energy efficiency. • • • Long-time consultant to Washington Public Counsel (1983 -2008) Participated in development of energy efficiency programs in Washington, Oregon, Idaho, Montana, California, Arizona, and British Columbia Assisted RAP in many US states, plus Brazil, China, Hungary, India, Indonesia, Israel, Mauritius, Mozambique, Namibia, Philippines Author or co-author of RAP publications on Electricity Regulation, Energy Efficiency, Pricing, and Emissions Costs. Get a copy of “Incorporating Environmental Costs in Electric Rates” 2

Old Power Plants Are At Risk • • • 1, 000 power plants over Old Power Plants Are At Risk • • • 1, 000 power plants over 40 years old. ~100, 000 Megawatts. Many will need multiple retrofits to continue operations. Even with retrofit for all criteria pollutants, still have high operating costs, limited lifetime, and exposure to CO 2 regulation. 3

Retrofits are Expensive ~$300 million for a 300 MW power plant. About the same Retrofits are Expensive ~$300 million for a 300 MW power plant. About the same as new CCCT Capacity Graphic: Brattle 4

Cumulative Retrofit Costs Could Easily Exceed Any Reasonable Value 5 Cumulative Retrofit Costs Could Easily Exceed Any Reasonable Value 5

Regulated and Unregulated Owners Approach the Problem Differently Regulated Utilities Non-Utility Generators • Have Regulated and Unregulated Owners Approach the Problem Differently Regulated Utilities Non-Utility Generators • Have responsibility for reliability, so concerned about resource adequacy. • Concerned about recovery of existing sunk costs. • Concerned about regulatory disallowances. • Concerned about quarter-toquarter financial results. • Averch-Johnson effect may induce capital spending. • Direct role in EE and DR. • No reliability obligation. • No ability to recover sunk costs if unit retired. • No issue with regulatory disallowances. • Concerned about short-term and long-term financial results. • No attraction to capital spending. • No role in energy efficiency or DR 6

There May Be Low-Cost Options For Capacity and Energy Capacity: NEISO has invited Demand There May Be Low-Cost Options For Capacity and Energy Capacity: NEISO has invited Demand Response and Energy Efficiency into the auctions for several years. NEISO: $41. 20/k. W-Year Energy: Efficiency options abound at costs of $. 03 - $. 06/k. Wh 7

Some Regions With Greatest Risk Also Have Greatest EE Opportunities States With Greatest Exposure Some Regions With Greatest Risk Also Have Greatest EE Opportunities States With Greatest Exposure to Capacity Retirement (NERC) States With Best and Worst EE Program Achievment (ACEEE) CA Risk is oncethrough cooling Graphic: NERC Graphic: ACEEE 8

Cost Allocation and Rate Design • Retrofit costs are incurred to allow continued use Cost Allocation and Rate Design • Retrofit costs are incurred to allow continued use of coal. They are effectively fuel costs, rates should reflect this. If capacity is needed, there are usually cheaper options. • • $/k. W-Year For “Capacity” Resources Demand Response Energy Efficiency 9

Bottom Line • • Technology has improved. Emissions matter. Old machines wear out. Demand Bottom Line • • Technology has improved. Emissions matter. Old machines wear out. Demand Response and Energy Efficiency are viable alternatives. Is it smart to spend $100, 000 to fix up a 1967 Ford Country Squire? Or maybe we should buy a new Ford Escape Hybrid. For $30, 000 10

About RAP The Regulatory Assistance Project (RAP) is a global, non-profit team of experts About RAP The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power and natural gas sectors. RAP has deep expertise in regulatory and market policies that: § Promote economic efficiency § Protect the environment § Ensure system reliability § Allocate system benefits fairly among all consumers Learn more about RAP at www. raponline. org Jim Lazar, RAP Senior Advisor jlazar@raponline. org