HomeMy WebLinkAboutEligibility of AVEC Utilities for PCE Efficiency Improvement Program Funds 1990MEMORANDUM STATE OF ALASKA
ALASKA ENERGY AUTHORITY
To: Dave Denig-Chakroff Date: 5/7/90
Director of Rural Programs
Thru: Dick Emerman ) 4
Senior Economist Zz
From: Steve Stassel
Engineering Analyst
Subject: Eligibility of AVEC Utilities for PCE Efficiency Improvement Program Funds
Attached is the PCE analysis for Shungnak, an AVEC utility. AVEC has proposed an upgrade that
would, according to their analysis, improve efficiency by 1.0 kWh/gallon at a construction cost of
$110,000. Unless State funds are provided, AVEC is expected to finance the project with a loan
either from REA, a private bank, or (funds permitting) the Power Project Loan Fund. The key
assumption for this analysis is that the project will be completed regardless of the availability of
PCE Efficiency Improvement funds.
Our conclusions are as follows:
1) An economic analysis is not applicable since it is assumed the project will be
completed at the same cost, and with the same improvements in fuel efficiency and
reduced O&M costs, regardless of the availability of PCE Efficiency funds. The
same amount of resources will be expended with the same effect in either scenario.
2) The financial (or PCE rate) analysis indicates that the project will prevent an annual
increase to the PCE program of $7,663/year, if the $110,000 project cost is not
claimed as an eligible non-fuel cost in the PCE rate tariff (i.e., the project is funded
through a grant.) Using the 10-year simple payback criteria, this could justify a PCE
Efficiency grant amounting to $76,630, or 70% of the project cost.
3) Based on a nominal interest rate of 7%, an inflation rate of 4.5%, a real interest rate
of 2.39%, and a 10 year amortization schedule, an argument could be made that ALL
AVEC utility projects could be eligible for funding through the PCE Efficiency
Improvement Program for roughly 70% of the estimated project cost. (This is based
entirely on AVEC’s avoided increase in non-fuel costs as a result of receiving grant
funds as opposed to financing debt service, and not on improvements in efficiency.)
A similar case can be made for utilities such as THREA, Alaska Power & Telephone Co., Nome,
and Kotzebue, etc., if we assume they too will borrow or invest their own money in efficiency and
O&M improvements that will provide identical costs and savings as would be realized if the Energy
Authority performed the work. This raises the following basic questions:
Should PCE Efficiency funds be reserved only for improvements that, in our opinion, would not
otherwise occur; or should they also be used to share the cost of improvements that would be made
anyway? Arguments supporting the first position are:
1) PCE Efficiency grant funds are limited. The program purpose is not served if the
grants produce no greater efficiency in rural systems than would otherwise occur.
2) Assuming survival of the PCE program, the State will share the cost of utility-
financed efficiency projects in any event. In the case of Shungnak, the alternatives
presently facing the State are:
a) Share the project cost with an initial grant of $76,630 from limited PCE
Efficiency funds plus 70% of the balance shared through future PCE
payments; or
b) Share the project cost over an assumed 10-year period with annual
PCE payment of $7,663.
Looking at it this way, the State shares a substantial portion of the cost of the
Shungnak project in either case. However, by using annual PCE funds to share
efficiency project costs where possible and reserving PCE Efficiency grants for those
projects that would not otherwise be financed, more cost-sharing of efficiency
projects can be accomplished.
The argument supporting the second position is basically that it appears unfair to deny PCE
Efficiency funds to the utilities that are active enough to develop their own efficiency projects and
sources of financing. As a result, program benefits are reserved exclusively for the less capable
utilities.
ce: Brent Petrie
Gary Smith
SHUNGNAK.XLS,5/7/90,
PCE ECONOMIC ANALYSIS
Village: Shungnak Construction Cost: $110,000
Elec. Sold Vill FY89 752347 Kwh* Elec. Sold AVEC FY89: 34800981 Kwh*
Net Benefit: $o
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 PV Current Scenario: ($8,878)
Fuel Price: 1.6677 $/gal** Fuel Price: 1.01828 $/gal** PV PCE Scenario: ($8,878)
Fuel Price Increase: 0.00% Fuel Price Increase: 0.00%
Discount Rate: 3.00% Discount Rate: 3.00% Max Construction Cost $110,000
CURRENT SCENARIO NEW PROJECT SCENARIO ro ($) ($ saved) |(gal_saved)| ($ saved) ($) ($_ saved) | gal_saved | ($ saved)
Investment Year: 1990} ($110,000) $0 | ($110,000) $0
Savings: $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
“ $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 = $11,855
Savings: $11,855 $11,855
roeat—[esrro,aay} —— so] —7r-nasl se sae [CoT10, coos} ——s0-] Ti oesp sie sae pr 19507 —[estt0-o00x} so] [-storstee [tio 0003 so] "stor 122]
NOTES:
CURRENT SCENARIO
Identical to New Project Scenario
NEW PROJECT SCENARIO
Capital Cost includes AVEC's estimated project cost of $110,000
Generating fuel efficiency is improved 1.0 Kwh/gal
Fuel (gallons saved) is based on the generation efficiency improvement and Kwh sold in FY89
Fuel ($ Saved) is based on FY90 $/gallon and gallons of fuel saved
O&M costs savings are equal and net out at $0
Maximum Construction Cost is equal to the Construction Cost minus the Present Value Current Scenario
plus the Present Value PCE Scenario
* FY89 PCE data
** From AVEC
Page 1
SHUNGNAK.XLS,5/7/90,
PCE RATE ANALYSIS
APUC/PCE CURRENT |NEW PROJECT SCENARIO Capital Cost: $110,000
DATA _FY89 | SCENARIO
| PCE ($) | PCE ($) |CAPITAL($) | PCE ($) | Simple Payback, years 14.35
Investment Year: ($110,000) Benefit Cost Ratio: 0.70
Savings:
“ Maximum Cost for 10yr Payback:| $76,629
"
"
"
"
"
"
"
Savings: L
-55844786| ($110,000)
APUC/PCE DATA, FY89 CURRENT SCENARIO, FY89 NEW PROJECT SCENARIO, FY89
Fuel Cost: $3,475,877 Fuel Cost: $3,331,272 Fuel Cost: $3,331,272
Kwh Sold: 35,708,463 Kwh Sold: 34,800,981 Kwh Sold: 34,800,981
Non- fuel Cost: $6,851,984 Non-fuel Cost: $6,861,784 Non- fuel Cost: $6,851,984
Kwh Sold: 26,115,237 Kwh Sold: 26,115,237 Kwh Sold: 26,115,237
PCE Rate: 0.2610 PCE Rate: 0.2598 PCE Rate: 0.2594
Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296
PCE Total Costs: 5,609,834 PCE Total Costs: 5,584,479 PCE Total Costs: 5,576,816
PCE Annual Savings: PCE Annual Savings: $7,663
NOTES: New Proj vs. APUC/PCE New Proj vs. Current
APUC/PCE DATA, FY89
Fuel Cost, Non-fuel Cost, and Kwh Sold are from the latest APUC PCE rate filing
Eligible Kwh Sold is from the AEA FY89 PCE DATA
CURRENT SCENARIO
Fuel Cost is based on NEW fuel efficiency & kwh sold from AEA FY89 PCE data,& $/gallon from latest APUC PCE rate filing
Non-fuel Cost is from APUC PCE filing Non-fuel cost PLUS depreciation and interest expense for the new equipment
Kwh Sold is from the AEA FY89 PCE data
Eligible Kwh Sold is from the AEA FY89 PCE DATA
NEW PROJECT SCENARIO
Fuel cost is identical to Current Scenario
Non-fuel Cost is from the latest APUC PCE rate filing
Kwh Sold is from the AEA FY89 PCE data
Eligible Kwh Sold is from the AEA FY89 PCE DATA
CURRENT SCENARIO NON-FUEL COSTS
Non-Fuel Cost: $6,851,984
Capital Cost: 110,000
Depreciation Term: 10 yrs Depreciation and Interest Expense $13,400 per year
Interest Rate: 7.00%
Real Interest Rate: 2.39% 1.024
Inflation Rate: 4.50%
Non- fuel Cost plus depreciation and interest expense: $6,861,784 per year
Page 2
SHUNGNAK.XLS,5/7/90,
NOMINAL REAL
YEAR IPMT DEP ‘SUM INF INDEX SUM
1 $7,700 $11,000 $18,700 1 $18,700
2 $7,143 $11,000 $18,143 1.045 $17,361
3 $6,546 $11,000 $17,546 1.092 $16,068
4 $5,908 $11,000 $16,908 1.141 $14,817
5 $5,226 $11,000 $16,226 1.193 $13,606
6 $4,495 $11,000 $15,495 1.246 $12,434
7 $3,713 $11,000 $14,713 1.302 $11,298
8 $2,877 $11,000 $13,877 1.361 $10,197
9 $1,982 $11,000 $12,982 1.422 $9,129
10 $1,025 $11,000 $12,025 1.486 $8,091
$46,615 $110,000 $156,615 Present V 117,931
Payment $13,400
Sum Total $131,702
Page 3
MEMORANDUM STATE OF ALASKA
ALASKA ENERGY AUTHORITY
To: Dave Denig-Chakroff Date: 5/7/90
Director of Rural Programs
Thru: Dick Emerman )
Senior Economist uC
From: Steve Stassel
Engineering Analyst
Subject: Eligibility of AVEC Utilities for PCE Efficiency Improvement Program Funds
Attached is the PCE analysis for Shungnak, an AVEC utility. AVEC has proposed an upgrade that
would, according to their analysis, improve efficiency by 1.0 kWh/gallon at a construction cost of
$110,000. Unless State funds are provided, AVEC is expected to finance the project with a loan
either from REA, a private bank, or (funds permitting) the Power Project Loan Fund. The key
assumption for this analysis is that the project will be completed regardless of the availability of
PCE Efficiency Improvement funds.
Our conclusions are as follows:
1) An economic analysis is not applicable since it is assumed the project will be
completed at the same cost, and with the same improvements in fuel efficiency and
reduced O&M costs, regardless of the availability of PCE Efficiency funds. The
same amount of resources will be expended with the same effect in either scenario.
2) The financial (or PCE rate) analysis indicates that the project will prevent an annual
increase to the PCE program of $7,663/year, if the $110,000 project cost is not
claimed as an eligible non-fuel cost in the PCE rate tariff (i.e., the project is funded
through a grant.) Using the 10-year simple payback criteria, this could justify a PCE
Efficiency grant amounting to $76,630, or 70% of the project cost.
3) Based on a nominal interest rate of 7%, an inflation rate of 4.5%, a real interest rate
of 2.39%, and a 10 year amortization schedule, an argument could be made that ALL
AVEC utility projects could be eligible for funding through the PCE Efficiency
Improvement Program for roughly 70% of the estimated project cost. (This is based
entirely on AVEC’s avoided increase in non-fuel costs as a result of receiving grant
funds as opposed to financing debt service, and not on improvements in efficiency.)
A similar case can be made for utilities such as THREA, Alaska Power & Telephone Co., Nome,
and Kotzebue, etc., if we assume they too will borrow or invest their own money in efficiency and
O&M improvements that will provide identical costs and savings as would be realized if the Energy
Authority performed the work. This raises the following basic questions:
Should PCE Efficiency funds be reserved only for improvements that, in our opinion, would not
otherwise occur; or should they also be used to share the cost of improvements that would be made
anyway? Arguments supporting the first position are:
1) PCE Efficiency grant funds are limited. The program purpose is not served if the
grants produce no greater efficiency in rural systems than would otherwise occur.
2) Assuming survival of the PCE program, the State will share the cost of utility-
financed efficiency projects in any event. In the case of Shungnak, the alternatives
presently facing the State are:
a) Share the project cost with an initial grant of $76,630 from limited PCE
Efficiency funds plus 70% of the balance shared through future PCE
payments; or
b) Share the project cost over an assumed 10-year period with annual
PCE payment of $7,663.
Looking at it this way, the State shares a substantial portion of the cost of the
Shungnak project in either case. However, by using annual PCE funds to share
efficiency project costs where possible and reserving PCE Efficiency grants for those
projects that would not otherwise be financed, more cost-sharing of efficiency
projects can be accomplished.
The argument supporting the second position is basically that it appears unfair to deny PCE
Efficiency funds to the utilities that are active enough to develop their own efficiency projects and
sources of financing. As a result, program benefits are reserved exclusively for the less capable
utilities.
ce: Brent Petrie
Gary Smith
SHUNGNAK .XLS, 5/7/90,
PCE ECONOMIC ANALYSIS
Village: Shungnak Construction Cost: $110,000
Elec. Sold Vill FY89 752347 Kwh* Elec. Sold AVEC FY89: 34800981 Kwh*
Net Benefit: $0
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 PV Current Scenario: ($8,878)
Fuel Price: 1.6677 $/gal** Fuel Price: 1.01828 $/gal** PV PCE Scenario: ($8,878)
Fuel Price Increase: 0.00% Fuel Price Increase: 0.00%
Discount Rate: 3.00% Discount Rate: 3.00% Max Construction Cost $110,000
CURRENT SCENARIO NEW PROJECT SCENARIO Fay [cs savy [eget saven| co esvecy | Yes) [ce saves | gl anved| ce eee ($ saved) |(gal_saved)| ($ saved) ($_ saved) | gal_saved | ($ saved)
Investment Year: 1990} ($110,000) $0 | ($110,000) $0
Savings: $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
" $11,855 $0 $11,855
7 $11,855 $0 $11,855
Savings: $0 $11,855 $0 $11,855 (3110, 000) ($110,000)
NOTES:
CURRENT SCENARIO
Identical to New Project Scenario
NEW PROJECT SCENARIO
Capital Cost includes AVEC's estimated project cost of $110,000
Generating fuel efficiency is improved 1.0 Kwh/gal
Fuel (gallons saved) is based on the generation efficiency improvement and Kwh sold in FY89
Fuel ($ Saved) is based on FY90 $/gallon and gallons of fuel saved
O&M costs savings are equal and net out at $0
Maximum Construction Cost is equal to the Construction Cost minus the Present Value Current Scenario
plus the Present Value PCE Scenario
* FY89 PCE data
** From AVEC
Page 1
SHUNGNAK.XLS,5/7/90,
PCE RATE ANALYSIS
|APUC/PCE CURRENT |NEW PROJECT SCENARIO Capital Cost: $110,000
‘A_FY89 | SCENARIO
[pce <$) | pce ($) [CAPITAL(S) | PCE (3) Simple Payback, years 14.35
Investment Year: 1990 ($110,000) Benefit Cost Ratio: 0.70
Savings:
" Maximum Cost for 10yr Payback:| $76,629
"
"
"
"
"
"
"
Savings:
-56098339| -55844786} ($110,000)| -55768157,
APUC/PCE DATA, FY89 CURRENT SCENARIO, FY89 NEW PROJECT SCENARIO, FY89
Fuel Cost: $3,475,877 Fuel Cost: $3,331,272 Fuel Cost: $3,331,272
Kwh Sold: 35,708,463 Kwh Sold: 34,800,981 Kwh Sold: 34,800,981
Non- fuel Cost: $6,851,984 Non-fuel Cost: $6,861,784 Non- fuel Cost: $6,851,984
Kwh Sold: 26,115,237 Kwh Sold: 26,115,237 Kwh Sold: 26,115,237
PCE Rate: 0.2610 PCE Rate: 0.2598 PCE Rate: 0.2594
Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296 Elig. Kwh Sold: 21,495,296
PCE Total Costs: 5,609,834 PCE Total Costs: 5,584,479 PCE Total Costs: 5,576,816
PCE Annual Savings: PCE Annual Savings: $7,663
NOTES: New Proj vs. APUC/PCE New Proj vs. Current
APUC/PCE DATA, FY89
Fuel Cost, Non-fuel Cost, and Kwh Sold are from the latest APUC PCE rate filing
Eligible Kwh Sold is from the AEA FY89 PCE DATA
CURRENT SCENARIO
Fuel Cost is based on NEW fuel efficiency & kwh sold from AEA FY89 PCE data,& $/gallon from latest APUC PCE rate filing
Non-fuel Cost is from APUC PCE filing Non-fuel cost PLUS depreciation and interest expense for the new equipment
Kwh Sold is from the AEA FY89 PCE data
Eligible Kwh Sold is from the AEA FY89 PCE DATA
NEW PROJECT SCENARIO
Fuel cost is identical to Current Scenario
Non-fuel Cost is from the latest APUC PCE rate filing
Kwh Sold is from the AEA FY89 PCE data
Eligible Kwh Sold is from the AEA FY89 PCE DATA
CURRENT SCENARIO NON-FUEL COSTS
Non-Fuel Cost: $6,851,984
Capital Cost: 110,000
Depreciation Term: 10 yrs Depreciation and Interest Expense $13,400 per year
Interest Rate: 7.00%
Real Interest Rate: 2.39% 1.024
Inflation Rate: 4.50%
Non-fuel Cost plus depreciation and interest expense: $6,861,784 per year
Page 2
SHUNGNAK .XLS,5/7/90,
NOMINAL REAL
YEAR IPMT DEP ‘SUM INF INDEX SUM
1. $7,700 $11,000 $18,700 1 $18,700
2 $7,143 $11,000 $18,143 1.045 $17,361
3 $6,546 $11,000 $17,546 1.092 $16,068
4 $5,908 $11,000 $16,908 1.141 $14,817
5 $5,226 $11,000 $16,226 1.193 $13,606
6 $4,495 $11,000 $15,495 1.246 $12,434
7 $3,713 $11,000 $14,713 1.302 $11,298
8 $2,877 $11,000 $13,877 1.361 $10,197
9 $1,982 $11,000 $12,982 1.422 $9,129
10 $1,025 $11,000 $12,025 1.486 $8,091
$46,615 $110,000 $156,615 Present 117,931
Payment $13,400
Sum Total $131,702
Page 3