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HomeMy WebLinkAboutPCE Efficiency Project Evaluations for Larger Utilities 1990State of Alaska Steve Cowper, Governor Alaska Energy Authority A Public Corporation MEMORANDUM May 24, 1990 To: David Denig-Chakroff Director of Rural Programs From: Richard Emerman por Senior Economist Subject: PCE Efficiency Project Evaluations for Larger Utilities RECAP OF PROJECT EVALUATION ISSUE The logic of AEA project evaluations has basically been to compare the cost of providing power in a base case that excludes the project with the cost of an alternate case that includes the project. For example, none of our proposed hydro projects have been assessed by comparing only fuel cost savings with the project's estimated capital cost, because construction of the project results in the avoidance of other costs as well -- specifically the capital and 0&M costs of capacity that would have to be built at some point if the hydro project were not. Estimating the magnitude of these other avoided costs requires establishing a base case scenario. The problem we discussed with respect to PCE efficiency projects for larger PCE utilities is that, with the possible exception of project timing, the base case and the alternate case are often identical. To use a common example, if AEA does not install the recommended generator, in many instances the utility will. It would generally make sense to install a more efficient generator at the time the old unit is worn out; whether it makes economic sense to replace the existing unit before the end of its useful life is a question that would require additional data on the remaining life and 0&M costs of each existing unit. Unless we decide to wade into this timing question (which no one has recommended) , the question then becomes not whether a new generator should now be installed but rather who should pay for it. AEA action will not produce a different outcome with respect to the physical configuration of the = PO.BoxAM Juneau, Alaska 99811 (907) 465-3575 © PO. Box 190869 701 EastTudor Road Anchorage, Alaska 99519-0869 (907) 561-7877 utility system, but will produce a different outcome with respect to the allocation and timing of costs. PROPOSED APPROACH FOR PROJECTS IN LARGER PCE UTILITIES The main purpose of the PCE efficiency program is to reduce the long- term obligation of the State to make PCE payments. To this point, we have compared the expected PCE payments that would be made in a defined base case with expected payments assuming AEA constructs a proposed efficiency project. Because the base case and the alternate case are often identical for projects in larger PCE utilities, we propose to compare PCE payments under several project financing alternatives with PCE payments at today's level. This is not to determine whether the project (e.g. generator replacement) has economic merit, but rather to assess what the impact of different project financing alternatives may have on State expenditures now and in the future. Alternative 1: 100% Initial State Financing This will determine how much PCE savings would be expected over the next 10 years compared with today's PCE payment level if the State were to pay the full cost of the project. The entire savings will be in the fuel cost component. In the attached example for Shungnak (which is part of AVEC), the project cost is $110,000 and the annual PCE savings relative to today's payment level is estimated at $6,956. The simple 10-year payback is therefore $69,560 as shown below: ALTERNATIVE 1 OUTCOME Initial 10-year PCE Net Impact on State Cost State Savings State Treasury $110,000 $69,560 ($40,440) Alternative 2: Initial State Financing Equals 10-year PCE Savings This will determine how much PCE savings would be expected over the next 10 years compared with today's PCE payment level if the State were to pay up front for project construction only the amount justified by the calculation in Alternative 1, i.e. 10 times the annual PCE savings due to fuel cost reduction. In the Shungnak example, this means that the State would pay $69,560 towards the cost of construction, and the utility would pay the balance of $40,440. The calculation for this alternative assumes that the utility would borrow its contribution to the project cost at 12% interest, and that the depreciation and interest expense associated with this balance would then be added to PCE eligible non-fuel costs. The outcome for this case is as follows: ALTERNATIVE 2 OUTCOME Initial 10-year PCE Net Impact on State Cost State Savings State Treasury $69,560 $31,964 ($37,596) In this case, the PCE savings are the net result of a PCE rate decrease due to fuel cost reduction and a PCE rate increase due to partial recovery of the utility investment of $40,440. Alternative 3: Zero Initial State Financing This will determine the impact on PCE payments over the next 10 years compared with today's PCE payment level assuming that the entire project cost were financed by the utility with a loan at 12% interest, and the State contributed nothing up front to project construction. The outcome for the Shungnak example is as follows: ALTERNATIVE 3 OUTCOME Initial 10-year PCE Net Impact on State Cost State Savings State Treasury 0 ($32,706) ($32,706) In this case, the State would pay an additional $32,706 over the next 10 years (relative to today's payment level) for increased PCE payments. Again, this is the net result of a PCE rate reduction for fuel cost savings and a PCE rate increase due to partial recovery of the utility investment (in this case, an investment of $110,000). FUNDING DECISTONS As this example shows, there is not a great deal of difference in the net impact on the State treasury from these three alternatives. Assuming the object of the program is to reduce future PCE payments as much as possible, Alternative 1 would generally be selected since it results in the greatest PCE savings over 10 years. Attachments cc: Brent Petrie Gary ae i Marcey Rawitscher Ol AVECGRT .XLS,5/24/90, AVEC PCE RATE ANALYSIS WITH GRANT Village: Shungnak Elec. Sold Vill FY89 752,347 Kwh* Elec. Sold AVEC FY89: 34,800,981 Kwh* Capital Cost: $110,000 Fuel Effy FY89: / 9.8 Ruh/gat* Fuel Effy FY89: 10.6 Kwh/gal* New Effy: 1 10.8 Kwh/gal New Effy: 0 10.6 Kwh/gal Fuel Saved (Gal): 7,108) Fuel Price: 1.6677 ¥/gal** Fuel Price: 1.01828 $/gal** Fuel Saved ($) $11,855 Grant Amount: 10 Year PCE Savings: (Based on 100% grant) Simple Payback, years: Grant Amount: 10 Year PCE Savings: (Based on Partial grant) CURRENT SCENARIO PARTIAL GRANT W/NON-FUEL INCREASE 100% GRANT,NO NON-FUEL INCREASE Fuel Cost: $3,343,127 Fuel Cost: $3,331,272 Fuel Cost: $3,331,272 kWh Sold: 34,800,981 kWh Sold: 34,800,981 kWh Sold: 34,800,981 Non- fuel Cost: $6,851,984 Non- fuel Cost: $6,856,792 Non-fuel Cost: $6,851,984 kwh Sold: 26,115,237 kWh Sold: 26,115,237 kWh Sold: 26,115,237 PCE Rate: $0.25977 PCE Rate: $0.25962 PCE Rate: $0.25944 Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296 PCE Total Costs: $5,583,772 PCE Total Costs: $5,580,575 PCE Total Costs: $5,576,816 PCE Annual Savings: PCE Annual Savings: NOTES: (with partial grant) (with 100% grant) CURRENT SCENARIO Fuel Cost, Non-fuel Cost, and kWh Sold are from the latest AEA FY89 PCE DATA Eligible Kwh Sold is from the AEA FY89 PCE DATA PARTIAL GRANT W/NON-FUEL INCREASE Fuel Cost is based on NEW fuel efficiency & kwh sold from AEA FY89 PCE data,& $/gallon from AVEC Non-fuel Cost is from APUC PCE filing + DEPRECIATION AND INTEREST ON THE DIFFERENCE BETWEEN THE CAPITAL COST AND GRANT kwh Sold is from the AEA FY89 PCE data Eligible kWh Sold is from the AEA FY89 PCE DATA 100% GRANT,NO NON-FUEL INCREASE Fuel Cost is based on NEW fuel efficiency, AEA FY89 PCE kWh sold, & $/gallon from AVEC Non-fuel Cost is from the latest APUC PCE rate filing (DOES NOT INCLUDE ADDITIONAL DEPRECIATION & INTEREST) kWh Sold is from the AEA FY89 PCE data Eligible kwh Sold is from the AEA FY89 PCE DATA GRANT SCENARIO NON-FUEL COSTS Non-Fuel Cost: $6,851,984 INCREMENTAL Cost: $40,440 Depreciation Term: 10 yrs Depreciation and Interest Expense $6,407 per year Interest Rate: 12.00% Real Interest Rate: 7.18% 1.072 Inflation Rate: 4.50% Non-fuel Cost plus depreciation and interest expense: $6,856,792 per year Page 1 AVECLOAN.XLS,5/24/90, PCE RATE ANALYSIS WITH 100% LOAN TO AVEC AT 12% Shungnak 752,347 Kwh* Elec. Sold AVEC FY89: 34,800,981 Kwh* Village: Elec. Sold Vill FY89 Capital Cost: $110,000 Fuel Effy FY89: 9.8 Kwh/gal* Fuel Effy FY89: 10.6 Kwh/gal* New Effy: 1 10.8 Kwh/gal New Effy: 0 10.6 Kwh/gal Fuel Price: 1.6677 $/gal** Fuel Price: 1.01828 $/gal** Fuel Saved (Gal): Fuel Saved ($): Grant Amount: 10 Year PCE Savings: CURRENT SCENARIO 100% LOAN TO AVEC AT 12% Fuel Cost: $3,343,127 Fuel Cost: $3,331,272 kWh Sold: 34,800,981 kWh Sold: 34,800,981 Non- fuel Cost: $6,851,984 Non-fuel Cost: $6,865 ,063 kwh Sold: 26,115,237 kWh Sold: 26,115,237 PCE Rate: $0.25977 PCE Rate: $0.25992 Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296 PCE Total Costs: $5,583,772 PCE Total Costs: $5,587,042 PCE Annual Savings: ($3,271) NOTES: (with 100% Loan) CURRENT SCENARIO Fuel Cost, Non-fuel Cost, and Kwh Sold are from the AEA FY89 PCE DATA Eligible Kwh Sold is from the AEA FY89 PCE DATA 100% LOAN Fuel Cost is based on NEW fuel efficiency, AEA FY89 PCE kWh sold, & $/gallon from AVEC Non-fuel Cost is from the latest APUC PCE rate filing PLUS ADDITIONAL DEPRECIATION & INTEREST kwh Sold is from the AEA FY89 PCE data Eligible kWh Sold is from the AEA FY89 PCE DATA LOAN NON-FUEL COSTS Non-Fuel Cost: $6,851,984 CAPITAL Cost: $110,000 Depreciation Term: 10 yrs Depreciation and Interest Expense $17,428 per year Interest Rate: 12.00% Real Interest Rate: 7.18% 1.072 Inflation Rate: 4.50% Non-fuel Cost plus depreciation and interest expense: $6,865,063 per year Page 1