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State of Alaska Long Term Energy Plan, Executive Summary Brief 1982
EXECUTIVE SUMMARY RECEIVED “V4 2 4982 ALASKA POWER AUTHORITY State of Alaska Long Term Energy Plan Jay S. Hammond Governor Charles Webber Commissioner Department of Commerce and Economic Development Lloyd M. Pernela __ Director Division of Energy and Power Development JAY S. HAMMOND STATE OF ALASKA Juxkau Dear Alaskan: Managing Alaska's energy resources to effectively meet current and future energy needs is a challenge facing all Alaskans. Recent reductions in State revenues resulting from lower world oil prices illustrate the importance to Alaskans of energy resources, both as a source of income and a means for meeting the State's future energy needs. To respond effectively to these challenges, the State needs an ongoing forum for analyzing instate energy problems and for developing both short and long-range solutions. The annual report on the State's Long-Term Energy Plan provides an opportunity to continue the dialogue on resolving some of the State's most pressing problems. This year's effort is the second annual report. The plan provides an excellent overview of the energy issues confronting the State. More importantly, however, it focuses on Alaska's energy problems and points to avenues that the State can pursue to develop just and equitable long-term solutions. To this end, the 1982 report describes Alaska's current and potential energy concerns, provides an evaluation of energy alternatives on a regional basis, and reviews State energy organizations, programs and policies. Based upon analysis of Alaska's energy situation, this year's report offers a number of key recommendations: CONSERVATION PROGRAMS MUST BE ENCOURAGED Conservation provides the most attractive means for reducing the impact of high energy cost on Alaskan consumers. Relatively low cost, high payoff conservation programs are available to the State in this area. MAJOR HYDROPOWER PROJECTS MUST BE KEPT ON THEIR CRITICAL PATH Major hydropower projects, such as Susitna, could be economically attractive alternatives for electricity generation over the next fifty years if, as assumed, fossil fuel prices continue to rise. While economically viable hydro projects offer substantial benefits beyond the first decade of the next century, they are more expensive in the near and mid-term future. These large costs, along with recent reductions in State revenues, highlight the importance of carefully phasing the development of specific projects to assure an economical match between regional electricity needs and plant capacity. ° THE ECONOMIC VIABILITY OF ENERGY ALTERNATIVES FOR RURAL AREAS MUST BE ESTABLISHED The high costs of energy in rural areas continues to place a heavy burden on the rural population. A variety of alternative energy technologies -- wind, small hydro, geothermal -- may offer some interesting approaches for reducing rural dependence on fossii fuels. In determining the optimal mix of energy supply options, the economic viability of all technologies must be established. The State has instituted and is continuing programs in each of these areas. However, continued efforts along these lines are necessary. Further refinement of the Alaskan Long-Term Energy Plan will result in an effective means of annually evaluating and setting State energy program priorities. As the State considers whether these recommendations should become policy, your involvement in this process is critical, and your participation is greatly appreciated. FOREWORD Each year the Department of Commerce and Economic Development, Division of Energy and Power Development, with the assistance of the Alaska Power Authority, is required to prepare a report on the Long Term Energy Plan for Alaska. This year’s report documents the evolution of the State’s energy program and the associated long-term planning process. It builds upon the initial 1981 Long Term Energy Plan to provide an indication of the relative importance of the energy problems and potential solutions facing Alaska in the near, mid, and long term. The Long Term Energy Plan focuses existing energy information to support current decision-making needs. The types of energy problems facing the different regions are highlighted, along with the most attractive technical solutions to the problems. Based upon an understanding of the least cost technical alternatives, recommendations are made regarding existing and future State energy programs and policies. This report must be viewed as part of the evolution of the long term energy planning pro- cess. As such, it establishes a regional framework and focus for addressing energy prob- lems. While current regional information is incomplete, the report attempts to provide as much regional detail as possible in its discussion of energy problems and solutions. Addi- tionally, specific recommendations are provided regarding how regional information and energy planning can be improved. The Long Term Energy Plan should not be viewed as just a tool for policy development, but also as the initial step in policy implementation. Its role is to help provide a bridge bet- ween the overall energy policies and goals established by the Governor and the Legislature and the detailed energy projects and activities undertaken by State agencies. The annual report review process undertaken by the Governor’s office and agencies with energy-related responsibilities, and the transmission of the report to the Legislature by the Governor, pro- vide a regular means of focusing debate on the State’s energy policies and goals. Refinement of energy goals and objectives, and the development of measures of perfor- mance for energy projects, is a critical step in the long-term energy planning process. Without clearly stated objectives and measures of performance it is impossible to provide an adequate evaluation of existing or proposed state projects or programs. An effective evaluation process, such as the one initiated in this year’s plan, will allow the State to upgrade its energy activities and modify them to respond effectively to the constantly changing energy situation. Annually, this report documents changes in the energy situation and provides an updated view of future energy issues. The report evaluates energy projects in terms of their contribu- tions to overall energy goals, and presents recommendations to modify existing programs or initiate new ones. By providing a comprehensive statewide overview of Alaska’s energy situation, the plan provides the necessary visibility to ensure that existing programs are ef- fective in meeting State objectives and that the most cost-effective energy alternatives are chosen for the State. EXECUTIVE SUMMARY With all of its indigenous energy resources, its large revenues from energy production and with many of its citizens depending on high-priced fuels, the State of Alaska has an obligation to involve itself in energy planning. The Alaska Legislature recognized this responsibility in 1980 by requiring the development of an annual State long-term energy plan.* The 1980 act required that the plan and its annual revi- sions include: e An “end-use” study examining and reporting on the nature and amount of energy used and the purposes of such energy use ¢ An energy development component for meeting projected thermal, electrical and transportation energy needs in the state at the lowest reasonable cost ¢ An energy conservation component in- cluding regional conservation goals and measures to achieve those goals ¢ A component for emergency energy conservation measures applicable dur- ing times of emergency ¢ A report on areas or subjects of energy research, development and demon- stration projects involving alternative energy systems, local energy sources, and energy conservation. *State Statute HCS CCSB 438 (Finance amH, section 44.56.224 By addressing the required elements presented above, the plan provides an overview of the statewide energy situation, and helps the State Legislature develop just and equitable solutions to Alaska’s energy problems. The overall purpose of this year’s report is to focus existing energy information to support current decision- making needs and provide a sense of priori- ty across State projects and programs. To this end, this year’s report describes the current and future energy situation, the least cost energy alternatives for different regions, and the consequences of pursuing these different alternatives. The 1982 report on the Long-Term Energy Plan builds on the initial 1981 Long Term Energy Plan, as well as other recent and ongoing studies, including: the Susitna Feasibility Study by Acres American; the Railbelt Electrical Power Alternatives Study; and the Historical and Projected Oil and Gas Use Study by Battelle Northwest Laboratories. Only the Historical and Pro- jected Oil and Gas Use Study had been completed in time to support the develop- ment of this year’s plan. However, informa- tion from interim reports, working papers and draft reports from the other studies was incorporated wherever possible. This information may differ slightly from that contained in the final reports for those studies. The primary policy objective addressed by the 1982 plan is “to use Alaskan resources to meet, at the lowest reasonable cost, Alaska’s current and future in-state residential, commercial, industrial and transportation energy needs.” While it is recognized that there are other State social, environmental and economic objec- tives that must be considered in energy planning, the “least cost” objective was chosen to provide an analytical framework for the plan. The quantitative estimates of energy costs and benefits provided in the plan can be viewed as a basis for broader policy decisions involving energy and non- energy decisions. While currently available energy data are limited, particularly at the regional and subregional levels, a regional perspective is critical to State energy planning efforts. To provide the necessary regional energy perspective the state was first divided into three major regional areas and _ nine regions, as shown in Exhibit 1 and de- scribed in Appendix A. The three major regions are used for discussion purposes in most instances, since existing data cannot support detailed analysis at a nine-region level. The three aggregate regions and their components are: ¢ Extended Railbelt Area —South Central (Region V) —Prince William Sound (Region VI) —Fairbanks/Alaska Highway (Region VII) ¢ The “Bush” Area —Arctic Slope (Region I) —Subarctic Coast (Region II) —Aleutian Islands/Alaska Peninsula (Region III) — Southwest Coast (Region IV) —Interior (Region VIII) ¢ Southeast Area — Southeast (Region IX). These regions were developed by aggre- gating Alaska’s census regions to produce EXHIBIT 1 ENERGY PLANNING REGIONS SUBARCTIC COAST BETHEL DILLINGHAM J ALEUTIAN IS. ALASKA PEN. BARROW Fainsanxs WIL. FAIRBANKS/ Awae ALASKA HWY geographical areas having similar energy use patterns, energy problems and energy resources. The importance of a regional disag- gregation to analyze Alaska’s energy situa- tion is illustrated in the following example. On a statewide average, electricity prices are similar to those in the lower 48: Alaska’s weighted average price is approxi- mately 6 cents per KWH, compared with 5.5 cents in the lower 48 states. In addition, 1980 weighted average fuel oil prices were roughly 25 to 30 percent greater than the average for the lower 48 states. However, as shown in Exhibit 2, both electricity and fuel oil prices vary substantially across the state. Electricity prices averaged 36¢/KWH for some regions in 1980, with some in- dividual communities facing substantially higher prices. To illustrate these differences and evaluate their implications for energy plan- ning, this plan provides as much detail as possible at a regional level, given existing energy data. It is recognized that these data are often incomplete, and different sources are likely to be inconsistent. Because of the current data problems, this year’s report should be viewed as a prelimi- nary quantitative description of regional energy problems. While the description is preliminary, the basic findings presented in this year’s plan will not change signifi- cantly as more precise quantitative regional analyses are completed for next year’s plan. In addition, the plan does pro- vide an operational regional framework that can be utilized as a basis for energy planning from the state level all the way down to the local and community level. In conducting the analyses to support this year’s report, three basic questions are used to provide a means for structuring the existing information and to provide a better understanding of the policy and program options available to the State. These ques- tions are: ¢ What type of energy problems does Alaska face: where, when, why, and how severe —Energy price problems? —Resource exhaustion or energy pro- duction problems? —Energy vulnerability or reliability problems? e What technology options are most attractive for solving each problem? ¢ What is the most effective set of State projects and programs for solving energy problems? By focusing directly on existing and potential future energy problems it is possi- ble to establish a close link between the energy needs of Alaskans and the potential technological solutions and State pro- grams that address these needs. This pro- cess will provide a basis for determining whether or not individual projects are directed towards the most pressing prob- lems. The remaining portions of the Execu- tive Summary describe the most pressing existing and potential future energy problems and the most attractive techno- logical alternatives and provide recom- mendations for future State activities. 1. HIGH PRICES REPRESENT ALASKA’S MAJOR NEAR- AND MID-TERM ENERGY PROBLEM Energy prices vary substantially throughout the state as illustrated in Ex- hibit 2. The more populated areas— South EXHIBIT 2° COMPARISON OF RESIDENTIAL OIL AND ELECTRIC PRICES IN ALASKA: 1980 45.0 36.0 F ELECTRICITY PRICE ¢/KWH 270 18.0 F US. AVERAGE @ ALEUTIAN ISLANDS @ VALDEZ/CORDOVA @ FAIRBANKS SOUTH CENTRAL ARCTIC SLOPE © @ INTERIOR ARCTIC/SUB. © Arctic COASTAL @ SOUTHWEST COAST —— 5.4¢/KWH SOUTHEAST 1 4 1 T | | | | | | | | | | | 90 | | US. AVERAGE 97.7¢/GALLON 1.00 1:25 1.50 1.75 2.00 FUEL OIL PRICE $/GALLON Central and Southeast—currently pay rela- tively low electricity prices. Much of the natural gas used to generate electricity in the South Central region is purchased under low price long-term contracts negotiated in the early 1960s. The South- east region benefits from hydropower facilities that were built prior to recent increases in construction costs. Similarly, fuel oil prices in the South Central and Southeast regions are only 25 to 30 percent higher than the U.S. aver- age. These cost differentials are not out of line with many consumer goods, which also cost more in Alaska than in the lower 48 states. This is not the case for Alaska’s rural consumers—with almost total reliance upon petroleum products— who are hit the hardest by high energy prices. Based on re- *Division of Energy and Power Development Community Energy Survey; Alaska Public Utility Commission Annual Report; Energy Information Administration 1980 Annual Report to Congress. gional averages, they pay up to eight times more for electricity than urban Alaskans and up to double for fuel oil. These high costs are a result of two key factors: *High Petroleum Distribution Costs—In the bush, small volumes of diesel fuel must be shipped long distances between communities. The product changes hands many times, driving up its cost. Large inventories must be financed and kept on hand, especially during the winter when the waterways are icebound. *Low Conversion Efficiencies—In many communities, generating equip- ment has a conversion efficiency of only 12 to 18 percent. Larger bush communities, such as Kotzebue have diesel generating efficiencies ap- proaching 32 percent, and correspon- dingly lower electricity costs. Consumers in the bush use substantially less energy to meet electrical and thermal energy needs than do consumers in the Ex- tended Railbelt and Southeast regions. This is due to several reasons: ¢ Higher electricity and fuel oil prices mandate conservation ¢ Dwellings are smaller and indoor temperatures are often lower ¢ Fewer electrical appliances are used. Even though substantially less electrical and thermal energy is used in the bush regions, on the average, bush households spend approximately the same annual amount to meet their electricity needs, and spend substantially more to meet their thermal needs than do residents of the Ex- tended Railbelt. Electricity and thermal energy consumption patterns—including average 1980 household consumption, prices and expenditures—for the three re- gions are shown in Exhibits 3 and 4. The relatively large annual household expenditures for thermal energy consump- tion in the Southeast results from large total household consumption. This is caused by a per capita thermal consump- tion slightly lower than that in the Ex- tended Railbelt, which is offset by a larger number of persons per household. In addi- tion, only the cost of heating with fuel oil was considered for the Southeast, while both oil and natural gas were considered in determining the thermal energy prices in the bush and Extended Railbelt regions. The fuel oil prices used for the bush regions include those in major population centers, EXHIBIT 4* HOUSEHOLD RESIDENTIAL THERMAL ENERGY EXPENSE . EXHIBIT 3 HOUSEHOLD RESIDENTIAL ELECTRICITY EXPENSE 14 12 10.9 10 ELECTRICITY og CONSUMPTION MWH HOUSEHOLD 4 0 20 ELECTRICITY PRICE uo c/KWH) 10 me 0 0 zh 800 ( 630 ELECTRICITY 609 EXPENSE $/HOUSEHOLD: 400 200 0 EXTENDED SOUTH BUSH RAILBELT EAST REGIONS THERMAL 450 ENERGY CONSUMPTION (MILLION BTUs/ 100 HOUSEHOLD) 50 0 THERMAL ENERGY PRICE 6 $/MILLION {Ee 1600 1530) THERMAL 12007 ENERGY EXPENSE 800 [- $/HOUSEHOLD! 1080 — 400 SOUTH EAST BUSH REGIONS EXTENDED RAILBELT *DEPD Community Energy Survey; Appendix I-A, State Energy Balance which are substantially lower than those in outlying areas. All Alaskans, urban and rural, will be affected by oil and natural gas price trends in the coming years. It appears that crude oil prices will remain level or even decline during the next few years. Current world economic conditions, coupled with a sub- stantial increase in energy use efficiency, have greatly reduced world oil demand. Worldwide economic recovery, which would stimulate oil demand, is not likely to take place for at least a year. An excess de- mand for oil, which would push prices up- ward, may not be felt in the world oil markets until after 1985. These conditions along with new discoveries suggest that ex- cess oil supplies will continue until the late 1980s. During the late 1980s and throughout the 1990s, world energy prices can be expected to increase, but at a more moderate rate than that experienced during the 1970's. Alaskan oil prices can be expected to track this more moderate real annual equivalent growth rate of about 2.5 percent through the year 2000. Alaskans also pay more for transporta- tion fuels than residents of the lower 48 states. Even though approximately 50 per- cent of transportation fuel is used for inter- national and domestic jet aviation, high prices for highway gasoline and diesel have a substantial impact on individual energy expenditures. For example, if a household used 1,000 gallons of fuel annually (equivalent to driving 15,000 to 20,000 miles per year depending upon mileage assumptions), their expenditures would range between $1,200 and $1,700. This is roughly equal to the amount spent on ther- mal energy, and not quite twice the amount spent on electricity. Alaskan natural gas prices are expected to stay relatively level through the early 1980s, for a special reason. Currently the Anchorage area relies primarily on Cook Inlet natural gas to meet its thermal and electrical needs. Twenty-year contracts for this gas were initiated in the 1960s. The gas purchased today under these contracts is very low-priced—18¢ to 25¢ per million cubic feet (MCF)—compared with other energy sources. When these contracts ex- pire in the mid-1980s, prices should rise to $2.00 to $2.70 per MCF. 2. ELECTRICITY AND THERMAL ENERGY CONSERVATION PRO- VIDES THE GREATEST OPPOR- TUNITY FOR NEAR- AND MID- TERM ENERGY COST SAVINGS Over the next five years, substantial reductions in energy use with corres- ponding reductions in energy expenditures, can be achieved through relatively simple energy conservation actions. These im- provements are technically applicable to meeting thermal and electrical needs in all regions of the state. However, the cost- effectiveness of the measures differs substantially among regions, since climate and energy costs also vary significantly by region. Electricity consumption currently repre- sents a small part of total state energy use. However, it represents one of the fastest growing uses, approximately 10 percent annually over the last decade. The com- mercial /industrial sector was the dominant user of electricity in the Extended Railbelt and Southeast regions (see Exhibit 5). That sector accounted for over half of the state’s total electricity consumption. Although electricity costs for Alaskans on the average are moderate, bush region EXHIBIT 5° ELECTRICITY USE BY SECTOR NATIONAL DEFENS! 2000 E ELECTRICITY | DEMAND MILLION KWH: | RAILBEL SOUTHEAST ** BUSH residents have very high power costs. There are three ways that these high costs ¢ Conservation— costs can be reduced by using electricity more efficiently. Greater efficiencies can be realized through building energy management practices and use of the more efficient appliances, lighting systems and management systems now available in the market. e Fuel Substitution—Wind power, hydropower, and fossil fuels have the potential to generate electricity at a lower cost. ¢ Increased Generation Effi- ciency—costs can be reduced by im- proving maintenance and operating *Total electric consumption for the three regions, 3,932 million KWH, is net of transmission losses and electricity used in energy production. **Southeast commercial/industrial sector includes na- tional defense purchases. procedures and more efficiently matching generator size to electricity demand. Improving the efficiency of electrical use offers the greatest near-term opportunity of reducing electrical costs of consumers. Electrical consumption can be reduced and future electricity demand moderated through relatively simple conservation practices and use of new energy efficient appliances, lighting systems and energy management systems. Nationwide the trend is towards more ef- ficient appliances in the marketplace. New energy efficient appliances and lighting systems are being designed and manu- factured as a result of increased consumer pressures brought about by high energy prices. In addition, the Department of Energy has an ongoing appliance efficiency labeling program that provides consumers with the information required to make more informed product choices. The State can speed the adoption of energy efficient appliances through its educational and in- formation efforts. There are substantial incentives to ex- plore fuel substitution possibilities for elec- tricity generation, since many technologies look to be attractive even under modest fuel escalation assumptions. As Exhibit 6 illustrates, small wind machines with in- stalled costs of $5,000 per KW, running at a capacity factor (C.F.) of 25 percent, would be competitive with diesel generators to- day. Despite the initial attractiveness of fuel substitution options, the feasibility of substituting alternative fuels and technolo- gies for diesel oil is severely limited by resource availability and the small scale of village electricity demand. The actual cost- effectiveness of these alternatives must, therefore, be determined on a community- by-community basis. EXHIBIT 6° INDIFFERENCE PRICES CAPITAL COST OF ALTERNATIVE TECHNOLOGIES TO COMPETE WITH DIESEL GENERATION IN THE BUSH REGIONS DIESEL COST OF ELECTRICITY - ¢/KWH 41.6 54.6 15.5 28.6 25,000 20,000 DIESEL FUEL PRICE 10,000 Now 1980 CAPITAL COST $/KW (1982 DOLLARS) $/MMBTU 10 15 20 $/GALLON 1.39 2.08 2 Ny N DOO nnnns SMO 5 30 35 40 HYDRO —»| FUEL CELL WIND Exhibit 7 shows the wide variation in electrical generator efficiency in the bush regions. The positive relationship between capacity utilization and operating efficien- cy illustrated in the exhibit suggests that improvements in capacity utilization can lead to higher diesel operating efficiency. If utilities currently operating at below 20 per- cent can approach the 30 percent level of some utilities plotted in the exhibit, fuel savings of up to 50 percent would be possi- ble. Other factors such as equipment age and condition also affect operating efficien- cy. The State would need to encourage bet- ter operations and maintenance _pro- cedures in conjunction with programs to improve system capacity utilization. One method of improving system capac- ity utilization is to more closely match generator size with demand by down-sizing the diesel generators as replacements are needed. This option (to down-size gener- ators), where feasible, is likely to be more attractive on a purely economic basis than increasing total system demand through construction of a relatively expensive inter- tie system—costs range from $40,000 to $90,000 per mile depending upon system type and location. This results from the fact that the maximum efficiency of a small— less than 5-10 MW—intertie system, before *Capacity factor assumptions: Hydro 50%; Fuel Cell 65%; and Wind 25%. EXHIBIT 7° CAPACITY UTILIZATION IN BUSH REGIONS —— — UTILITIES WITH GENERATION CAPACITIES GREATER THAN 500 KW (X) @ ¢ © © © UTILITIES WITH GENERATION CAPACITIES LESS THAN 500 KW (©) ALL UTILITIES 32.0 = 240 GENERATION EFFICIENCY (ACTUAL KWH/GAL COMPARED TO 16.0 [F- THEORETICAL KWH/GAL) IN PERCENT 8.0 1 1 i 4 8.0 16.0 24.0 32.0 CAPACITY UTILIZATION (IN PERCENT) transmission losses, is not significantly bet- ter than a set of well-run independent diesels. However, fuel savings and im- provements in service could result if the villages are close enough together so that the intertie can be used as a distribution line to hookup new customers. Additional benefits will result if the potential improvements in reliability, sharing of spinning reserve and labor, and generator scheduling can be realized. If an intertie system could create a con- centration of demand large enough to war- rant a power plant fired by inexpensive non- oil energy sources such as a hydropower project it may prove economical. In that case, fuel and labor expenses may be decreased enough to justify the expense of an intertie system. The major problem with this option is finding the necessary scale of demand. A 10 MW plant could serve a community network with a supporting *A plot of generator efficiency versus capacity utilization is illustrated in the exhibit. Generation efficiency represents the actual KWH generated per gallon of diesel fuel by a utility as a percent of the theoretical maximum. Capacity utilization represents the actual number of KWH generated as a percent of the total that could be generated given a specific utility's capacity. Each point on the graph represents the generation efficiency and capacity utilization for a specific utility. population of over 33,000 people at current electricity utilization rates. The required population is well in excess of current con- centrations in rural Alaska. While intertie systems may not always be attractive from an economic standpoint, they may offer significant non-economic, social and in- stitutional benefits. The state’s thermal energy needs are met principally by oil and natural gas. Both the quantity of energy used and the mix of these fuels differ substantially by region (see Exhibit 8). The Southeast and bush regions rely primarily on oil for meeting thermal energy needs, while oil, natural gas and electricity are all used in the Ex- tended Railbelt region. Three elements affect the overall cost of meeting thermal energy needs in residen- tial and commercial buildings: ¢ The fuel—cost, availability, and energy content EXHIBIT 8° RESIDENTIAL THERMAL DEMAND BY ENERGY SOURCE 20,000 Bo 15,000 TOTAL USE (BILLION BTU's) 10,000 5,000 SOUTHEAST RAILBELT BUSH REGIONS L *Appendix 1-A, State Energy Balances 10 ¢ The building shell integrity—ther- mal gain and loss characteristics ¢ The fuel conversion unit (e.g., furnace)—cost and efficiency. Where fuel is expensive, as it is in the bush regions, there is substantial incentive to substitute fuels or improve conversion effi- ciency and building shell integrity. For those consumers who use low-cost natural gas or low-cost electricity—which is pri- marily limited to the South Central and Southeast regions—the incentive to sub- stitute fuel sources or increase efficiency is low. As energy prices rise in the late 1980s and early 1990s, however, more efficient technologies such as waste heat recovery and heat pumps—which have proven suc- cessful during a one-year demonstration in Juneau and Ketchikan—will be increas- ingly used. Thermal losses in Alaskan buildings could be reduced from 10 to 30 percent (even more in rural areas). In many cases an expenditure of $300 will result in a 10 percent reduction in building energy use, resulting in savings of roughly $180 annu- ally. A reduction of 30 percent, and savings of $500 annually, could be achieved with an expenditure of $1000-$2500 per building. The relative effectiveness of a variety of conservation and alternative energy mea- sures is shown in Exhibit 9. However, it should be noted that the economic attrac- tiveness of conservation measures varies considerably by site and primary fuel type. A weatherization package is economical in a bush community where oil heaters pro- duce heat for about $19 per million BTU (at $1.60 per gallon). The same package is less attractive in Barrow, where space heating with natural gas costs less than $1 per million BTU. Information from current EXHIBIT 9° COMPARISON OF EQUIVALENT ENERGY COST FOR SELECTED CONSERVATION AND ENERGY END USE OPTIONS Generator waste Small rural $100,000 Heat recover village with $8.90 e) 1400 Supplies 100% of heat $9.60 for local 20,000 sq. ft ool (or 10,000 gal il/yr. savings State audit programs will be used to con- firm and refine these estimates for use in next year’s plan. Substantial advances have been made in furnace and heating technologies during the last decade. For Alaskans, improved oil furnaces, natural gas furnaces, and wood stoves can result in immediate cost savings. For example, a 30 percent im- provement in furnace efficiency, offered by advanced natural gas and fuel oil furnaces, can save $500-$1000 per residence. * Notes: 1. Levelized Annual Energy Costs = [(Installed Cost x CRF)+ Annual Primary Energy Savings] + Annual Fuel Costs; Capital Recovery Factor (CRF based on 12% discount rate). 2. Maintenance and other operating expenses assumed to be small compared to cost savings. 3. Data based on interviews with State energy program management and results of energy audit programs. 3. WHILE ALASKA’S ENERGY SUP- PLIES ARE PLENTIFUL IN THE NEAR TERM, PROJECTED GROWTH IN ELECTRICITY CON- SUMPTION DICTATES IMME- DIATE CONSIDERATION OF SUPPLEMENTAL ELECTRICAL SUPPLIES The recent reduction in current and ex- pected State revenues will have a signifi- cant impact on Alaska’s future energy needs. It was not possible to incorporate the latest estimates of State revenues in the projections discussed below. As_ such, these projections should be viewed as be- ing higher than those which reflect the recently forecasted reductions in State revenues and the corresponding reductions in State expenditures. 11 Based upon state revenue estimates from late 1981 and projected price trends and regional energy use patterns, Alaska’s overall energy demand is expected to grow moderately during the coming years. The projected growth rates vary by region:* ¢ Extended Railbelt—electricity de- mand is projected to grow at 3.5 per- cent annually; thermal energy demand will increase about 2 percent per year. Transportation fuel demand will in- crease at slightly less than 0.5 percent per year and feedstock demand is proj- ected to remain constant, since no new projects are assumed to be built. ¢ Southeast—slow thermal energy demand growth of less than 1 percent per year is projected; strong growth in electricity demand of 3.5 percent per year and transportation fuel demand growth of 1.5 percent per year. ¢ Bush—thermal energy demands will grow by less than 1 percent per year, while demand for electricity should in- crease by 7 percent per year and trans- portation fuel demand should increase by about 1 percent per year. Electricity consumption is expected to grow more rapidly in the bush and South- east regions than in the Extended Railbelt. This results because less electricity is cur- rently used per capita in the bush regions, and even small increases in population growth and appliance usage will result in significant percentage increases. The switching from oil heat to electric heating and heat pumps will increase electricity de- mand in the Southeast. *Much of this discussion is based upon the results of the Historical and Projected Oil and Gas Consumption Study and the preliminary results of the Railbelt Alternatives Study, both by Battelle Northwest Laboratories. 12 Electricity consumption in the Extended Railbelt is projected to increase modestly in the absence of major new economic developments. Yet even under this condi- tion, major capacity additions will be re- quired in the early 1990s, even if effective load management can be undertaken to in- crease capacity utilization rates. Alaska’s known energy reserves are suffi- cient to easily meet projected needs well into the 21st century. However, it is not yet clear how these resources will be used to satisfy future needs. During recent years, growth in natural gas use has far out- stripped growth in petroleum use. During the last decade, petroleum use has grown at 5 to 6 percent annually, while natural gas use has grown substantially—averag- ing 9 to 10 percent annually. These figures reflect the rapid population and energy use growth in the South Central region, where natural gas is the leading fuel. Despite substantial future price in- creases, such as those discussed above, natural gas is likely to remain the fuel of choice, in the South Central region, to meet thermal needs and provide for peak load electricity generation. The price of natural gas would have to rise significantly before alternative electric and thermal op- tions become economically attractive. The gas threshold price for power alternatives, such as hydropower, would be approxi- mately $5 per million cubic feet (MCF). Natural gas prices would have to rise to at least $10 per MCF before fuel oil or coal- generated electricity replaces natural gas for space heating. Wood at nominal prices may be competitive with natural gas for home heating; however, commercially sold wood currently costs over $100 per cord, well above the price needed to be competitive with natural gas today. Hydropower, coal-fired power plants and possibly natural gas-fired power plants will be the most attractive options for baseload power generation in this region. These op- tions are attractive because of the long- term availability of coal and hydro resources and the relatively low cost of natural gas. Given the economic attractiveness and convenience of natural gas for meeting thermal and electrical needs, there is only one factor that may inhibit its future use: the adequacy of Cook Inlet reserves. The Alaska Department of Natural Resources conducts an annual forecast of the likely future trends in oil and natural gas demand and supplies. Results of that study indicate that sufficient Cook Inlet reserves exist to supply the South Central well into the 1990’s provided that: ¢ New coal or hydropower generation plants are used to meet future electric- ity demands ¢ No additional Cook Inlet reserves are used commercially except for am- monia/urea production at historic levels, Tokyo LNG at existing produc- tion levels, and Pacific LNG Phase I at planned levels. If these conditions are met, current reserves could very well exceed demand through the mid 1990's. A shortfall of ap- proximately 13 percent—about 500 billion cubic feet (BCF) or approximately 21/2 years’ consumption—of current reserves will occur, however, if natural gas is used for expanded electric power generation. While Cook Inlet reserve to production ratios are declining rapidly, there may be substantial additional reserves in the region. Estimates of undiscovered recov- erable reserves in the South Central region range from 7 to 50 trillion cubic feet (TCF). These factors lead to the conclusion that the major purpose in reducing natural gas use will be to mitigate the impact of price increases, rather than the need to extend supply through the year 2000. Such price pressure may not be severe when com- pared to natural gas prices in the lower 48 states, or to the costs of thermal energy alternatives in the South Central region and the rest of Alaska. However, efforts must be undertaken now to assure that alternatives to natural gas exist for elec- tricity generation and to encourage resi- dential natural gas users to anticipate future price shocks by undertaking conser- vation actions. Oil production on lands where the State has a royalty interest is expected to decline more than 50 percent by 1997. Total Statewide oil production averaged 1.6 million barrels per day (BPD) in 1980. North Slope production accounted for 1.5 million BPD, while the remainder was pro- duced in the Upper Cook Inlet. Overall, oil production on those North Slope lands in which the State holds at least a partial royalty interest is expected to peak at about 1.7 million BPD in 1990. At the peak, pro- duction from the Lisbourne, Flaxman Island and Point Thompson reservoirs will offset declines in the Sadlerochit Reser- voir. After this peak, production is ex- pected to decline to about 725 thousand BPD in 1997. At the same time, Cook Inlet production will decline to 14 thousand BPD by 1997. The major impact of the decline in oil production will be felt in State revenues, rather than on the availability of petroleum products in the state. Sufficient West Coast refinery capacity and the likelihood of in- creased oil production on non-State lands will likely assure sufficient supplies. 13 In addition to oil and gas, Alaskans can use solid fuels such as coal, wood and peat, as well as renewable energy sources such as hydropower and wind. Vast amounts of these resources exist in Alaska; however, together they supply only 6 percent of Alaska’s current energy needs. This per- centage will increase as the costs of exist- ing energy supplies increase. However, the transition to alternative energy sources is hampered by a number of factors: © Lack of knowledge regarding regional resource quantity, quality and ex- pected extraction and delivery costs. ¢ Distances between known energy sources and centers of use may be sub- stantial, resulting in high transporta- tion and transmission costs. ¢ Limited, small-scale demand makes economical large-scale resource development infeasible. The importance of these factors varies dramatically by region. ¢ In the bush regions, where less costly energy alternatives are needed, little is known about the quantity, quality and costs associated with alter- native energy sources on a community basis. In addition, there is a mismatch between the scale of energy demand and the scale required for local com- mercial development of many of the alternatives. ¢ In contrast, the Railbelt region has abundant supplies of coal, hydro- power, and peat, as well as demand sufficient to support large-scale extrac- tion, delivery and conversion. However, the economic attractiveness of these alternatives has not been fully determined. 14 e In the Southeast region, where current energy costs vary dramatic- ally, the costs of extracting, delivering, converting and transmitting alter- native energy sources are high. Making these resources economically viable and practical energy alternatives for meeting Alaska’s energy needs requires use of the most attractive conversion technolo- gies. This subject is addressed in the following section. 4. ANALYSIS OF ALASKA’S CUR- RENT AND FUTURE ENERGY SITUATION POINTS TO A NUMBER OF STATE-SPONSORED ACTIVITIES THAT COULD HELP ALASKANS MEET FUTURE ENERGY NEEDS AT THE LOWEST POSSIBLE COST Given current data limitations and the limited operating experience of many research, development and demonstration projects, it is impossible to chart an all- encompassing long-term course at this time. There is sufficient information available, however, to support a number of low-risk, high-payoff activities. In addition to these activities, the State can seek addi- tional information to estimate the benefits and costs of other programs more ac- curately. Five specific recommendations are highlighted to help the State determine how Alaska’s vast energy resources can be most effectively used to meet future needs. (1) Determine the Attractiveness of Hydropower Projects and Fossil Fuel Power Plants for Satisfying Future Electrical Generating Requirements In the Extended Railbelt and in some Southeast communities, electricity de- mand is projected to increase enough to require the addition of substantial new electrical generation capacity. The major generation alternatives are: ¢ Hydropower projects * Coal-fired steam power plants in the Railbelt ¢ Residual oil-fired steam power plants ¢ Natural gas-fired turbines. Hydropower projects and fossil fuel power plants represent two fundamentally different types of long-term generation alternatives: ¢ Hydropower Projects—have high construction costs, relatively low operating and maintenance require- ments, and no fuel costs. ¢ Fossil Fuel Power Plants—have lower construction costs but substan- tial fuel costs and relatively high operating and maintenance costs. Three major factors drive the variability of hydroelectricity generating costs," as shown in Exhibit 10: ¢ The size and location of the proj- ect. The last column of Exhibit 10 shows the variability in the cost of *In this discussion “hydroelectricity generation costs” represent the cost of generating and transmitting the elec- tricity, including financing costs. They do not represent the final price to the consumer. While the State can lower the end price that the consumer will pay for electricity through subsidies, it does not lower the cost of the project itself, or the State’s opportunity cost of funds, which determine the effective annual cost of generating the power. Subsidies, such as the provision of State funds below their opportunity cost—e.g., earnings in the Permanent Fund—merely shift the end cost from the electricity consumer to the State. EXHIBIT 10° ** COST OF ELECTRICITY GENERATION FOR MAJOR HYDROPOWER PROJECTS I Rated Capacity Full Capacity Cost of Electricity* Project Project Cost ae T SO Mw $/Kw Initial Yc] MM KWH CF ¢/KWH** Lake Tyee 100 30 3333 2000 120 49% 8.4 Swan Lake 90 22 4090 1990 80 45% 11.3 Terror Lake 150 20 7500 1993 145 83% 10.4 Black Bear Lake 35 5 7000 1988 24 558 14.6 Solomon Gulch 68 12 5667 1985 55 51% 12.4 Green Lake 60 16.5 3636 1984 60 45% 10.0 Bradley Lake 365 90 4056 1988 356 45% 10.3 Susitna -Watana only 3716 1020 3640 1996 3459 38% 10.8 -Watana and Devil Canyon 5176 1620 3193 2002 6790 48% 7.6 Chester Lake 14 2.5 5600 1986 10 50% 14.0 It “Includes transmission costs. **COE = (project cost) (.10 fixed charge rate) + (.002 project cost for O&M) KWH/yr generated ***Division of Policy Development and Planning, “Statutory Options to Improve the Energy Program for Alaska”*, Policy Paper No. 81-25 (updated by interviews with APA personnel). 15 hydroelectricity for major hydroelec- tric projects in the State. Both the in- stalled cost per rated megawatt and the cost of electricity generation (¢/KWH)—essentially a “busbar cost” —differ substantially across proj- ects. This variability illustrates the site specific nature of hydropower project construction costs and the differences in average annual electricity output per KW of capacity. Some projects (e.g., Terror Lake) have high capacity costs, but these are offset by a high average annual output and capacity factor (C.F.), which results in relative- ly low costs of generation. Other pro- jects (e.g., Chester Lake) have lower capacity costs, but do not have a very high average annual output, which results in relatively high costs of generation. ¢ Policies regarding financing of projects. Costs of electricity genera- tion shown in Exhibit 10 are based upon the assumption that the State’s long-term opportunity cost of funds is 10 percent which establishes the an- nual payment necessary for capital recovery of the initial investment. The State has the ability to make funds available in any fashion that it chooses. Currently, the existing law (S.B. 25) requires that only operating and maintenance costs of a State- financed hydroprojects be recovered from consumers using a Statewide average electricity rate." Under these conditions the price of electricity to the *This financing approach—where the State holds a 100 percent equity position in the projects—requires that the State Legislature appropriate approximately $5.0 billion for hydroprojects by 1986. If this appropriation is not made, the Law requires that the State receive a 10 percent return on its investment, which corresponds more closely to the State’s opportunity cost of funds and a long-term real return of between 2 and 3 percent depending upon actual in- flation. 16 utility would only be a fraction of the costs indicated in the exhibit.** These operating and maintenance costs would be below 2¢/KWH for most all hydropower projects. A third financing policy has been proposed by the Governor and is currently under con- sideration in the Legislature.*** This proposal provides for a full return of State funds in inflation adjusted dol- lars; however, there is no return on State funds, which represents a lost opportunity for the State to increase available revenues (in today’s mar- kets, even “riskless” securities— e.g., Treasury Bills—provide a return greater than inflation). Because no return is earned on State funds, the annual cost of generation is substan- tially lower than those shown in Ex- hibit 10. The following table illustrates how the lower annual costs translate into significantly different estimates of generation costs. Of the three different financing policies discussed, the one based upon the State’s opportunity cost of funds (i.e., assuming that the project is either financed on the open market or that the State requires a return on its money comparable to that earned in the Permanent Fund) results in sig- nificantly higher generation costs. Either of the ‘subsidy’ pol- icies—where the State requires only a return of the invested funds in one case and no return in the other case— **The price charged by the State for hydropower- generated electricity would account for only one portion of the final price paid by the consumer to a local utility. The local utility must recover the cost of items such as ad- ministration, debt service and distribution and incorporate these into the final price paid by consumers. ***The Governor’s proposed capital recovery approach is a repayment of the initial investment over 33-13 years, plus an inflation adjusted annual repayment of capital based upon the average inflation rate during the preceding 20 years, plus repayment of O&M expenses. COSTS OF ELECTRICITY GENERATION(¢ / KWH) From Exhibit Governor's Project 10 Proposal Lake Tyee 8.4 3.2 Swan Lake 11.3 4.4 Terror Lake 10.4 3.7 Black Bear Lake 14.6 5.8 Solomon Gulch 12.4 4.4 Green Lake 9.2 4.3 Bradley Lake 10.3 3.6 Susitua —Watana only 10.8 3.4 —Watana and Devil Canyon 7.6 2.4 Chester Lake 14.0 6.7 results in costs of generation that are at least 50 percent lower than the non- subsidy case. While these financing options result in lower electricity costs to be covered by electricity consumers, the lower costs are achieved at the ex- pense of all Alaskans, since the funds are committed to hydropower projects rather than other public projects or in- vestments in the Permanent Fund. Essentially, the subsidy would repre- sent a transfer payment from those Alaskans not able to consume low cost electricity to those Alaskans consum- ing substantial amounts of low cost electricity. ¢ Assumptions about growth in de- mand. Since hydropower projects are dominated by fixed construction costs, another key determinant of the annual costs of generation in any one year is the actual amount of electricity gener- ated in that year. The values for an- nual KWH generated used in Exhibit 10 represent estimated average annual output for the different projects. In some cases, that estimate is signifi- cantly larger than the estimated total electricity demand in the immediate service area for the project. In those cases the costs of generation in the early years of operation will be larger than those shown in the exhibit. For example, a total demand of approxi- mately 60 million KWH—rather than the assumed 120 million KWH—for Lake Tyee would result in a doubling of generation costs to 16.8¢/KWH. Simi- lar increases would apply to any case where the total electricity demand was not large enough to absorb a major portion of the project’s average annual sendout. Hence, the timing of a hydroproject is extremely important to assure that the demand in the service area is large enough to allow for the most effective use of the project. Hydropower projects insulate future elec- tricity consumers from the possibility of escalating fossil fuel prices, but they reduce planning flexibility and are likely to result in relatively high generation costs in the mid-term. This situation is illustrated in Exhibit 11. Where, for comparison pur- poses, hydroelectricity costs have been calculated for those projects in the Ext- ended Railbelt region. They range between 7.5¢/KWH and 12.5¢/KWH—between now and the year 2030. The range is shown as a shaded band in Exhibit 11. Currently, all of the fossil-fired generation alternatives compare favorably with projected hydro electricity costs.* The relative attrac- tiveness of the fossil-fuel alternatives “Hydroelectric costs, as well as the costs of generation from fossil fuel plants, reflect an assumed opportunity cost of 10 percent for the invested funds. Financing alternatives, such as S.B. 25 do not lower the cost of the hydroproject, but rather transfer the burden of these costs from the elec- tricity consumer to the State. All Alaskans bear the costs, since funds used to purchase a hydroproject cannot be in- vested to earn a return for the State or cannot be used to build other State projects. 17 EXHIBIT 11 RELATIVE ECONOMIC ATTRACTIVENESS OF ELECTRICITY GENERATION TECHNOLOGIES IN FUTURE YEARS (¢/KWH IN CONSTANT 1982 DOLLARS) KEY. 20 1. GAS-FIRED COMBUSTION TURBINE 2. GAS-FIRED COMBINED CYCLE 3. COAL-FIRED STEAM-ELECTRIC ($28/Ton) 4. COAL-FIRED STEAM-ELECTRIC ($40/Ton) FUEL PRICE ESCALATION RATE PROJECTED RANGE OF HYDROPOWER COSTS 10 COST OF ELECTRICITY* ¢/KWH NOW 1990 2000 diminishes by the year 2010 if substantial real rates of price escalation are assumed. However, as shown, coal-fired, steam- electric plants are likely to remain an at- tractive alternative to hydropower plants even with substantial price increases. Viewed from the present, conventional power plants represent a less risky invest- ment for the State, because less current money is spent and near-term electricity costs can be reduced to a level below both the diesel and hydro alternatives. How- ever, if one believes that conventional fuel costs will escalate rapidly, for a substantial period of time, the conventional options may be riskier because they would expose Alaskans to the risk of escalating fuel prices. The current energy situation in Alaska is highly uncertain. Current and ex- pected world oil prices are changing ra- pidly, as are the related estimates of State revenues. Fluctuations in expected State revenues increase the uncertainty surroun- ding projections of future economic growth and the related growth in future electricity 18 2010 2020 2030 needs. Given this uncertainty it is ex- tremely important for the State to keep all major energy options open. Of particular importance is the need to keep major proj- ects such as the Susitna hydroelectric proj- ects on their critical path. (2) The State Must Move Quickly to Determine the Economic Viability of Alternative Energy Resources to Lower Energy Costs in the Bush Regions Energy costs in the bush are high and likely to escalate even higher during the late 1980s. Many resource options appear to offer lower costs than diesel fuel. The State is already moving to develop these alternatives. However, the State should focus more precisely on: ¢ Determining the costs of extracting and delivering alternative fuels to bush communities, in order to establish “Cost estimates include capital costs, operating costs, and transmission costs. economic distances and quantities for resource development ¢ Determining the quantity and quality of the energy resources within economic distances of the rural communities. The purpose of these efforts should be to determine the viability of energy resources for individual communities or groups of communities, rather than to simply docu- ment the statewide energy resource base. In so doing, expenditures on low pay-off projects can be minimized and major ef- forts can be made to accelerate the use of the most attractive alternatives on a community-by-community basis. Use of the most cost-effective alternatives will also minimize State subsidy expenditures. (3) The State Should Increase Energy Conservation and Energy Effi- ciency Activities To Meet Near- Term Energy Needs As stated previously, in the near term conservation offers the greatest opportun- ity for reducing energy costs. Substantial savings can be realized through currently available and cost-effective improvements in energy conversion efficiency and rela- tively simple conservation measures that have little effect on life style. These im- provements are technically applicable for all regions of the state. However, their cost-effectiveness differs substantially depending upon climate and the cost of competing fuels. Specific programs and types of activities include: e Energy audit and conservation Programs can reduce residential thermal losses by approximately 30 percent. Average household savings would range between $400 and $800 annually. It is estimated that total an- nual energy savings of between $10 and $20 million per year could be achieved with an investment of less than $100 million in State funds (assuming the State purchases and in- stalls the conservation measures). ¢ Increased generating efficiency of small diesel power plants can reduce fuel use by as much as 35 per- cent. Estimated savings for a typical rural household range from $200 to $400 annually, assuming all reductions in fuel costs are passed on to consumers. ¢ Substitution of advanced fuel oil heaters can reduce fuel use by 25 to 50 percent and reduce total fuel costs in the average home by roughly $900 per year. These heaters can be up to 90 percent efficient, compared with cur- rently popular “drip” oil furnaces which have efficiencies below 50 per- cent. If other conservation measures are incorporated in the home, a new furnace would save $600, but the total heating bill would be reduced from ap- proximately $2300 to below $1000 as a result of both energy conservation and improved furnace efficiency. State sponsored demonstration projects must focus on establishing the expected economic performance of those alternative technologies with the greatest promise for meeting mid-term energy needs. At present many efforts are underway to demonstrate the feasibility of alternative technologies in the unique Alaskan environment. These ef- forts must be viewed as a test of the poten- tial economic attractiveness of the tech- nologies, in addition to demonstrating 19 their technical feasibility. These tech- nologies and projects must demonstrate the potential for meeting specific economic performance criteria (e.g., 10-year payback or lower electricity costs than diesel generators) before they receive fur- ther State funding. (4) Existing State Energy Policies and Programs Must Be Assessed To Assure That They Effectively Address the Most Critical State Energy Problems Alaska has greatly expanded its energy policies and programs over the past few years. Major emphasis has been placed on establishing programs and providing funds for specific energy projects to directly minimize the impacts of rising prices. The intent of most of these actions is clear: to develop renewable energy resources, pri- marily hydropower, to assist in the elec- trification of rural Alaska and to equalize the burden of higher energy prices for all Alaskans. In many cases the impacts of these pro- grams have not been felt, since most have been in existence for less than two years. The lack of experience makes it difficult to assess the relative effectiveness of the dif- ferent policies in encouraging the use of Alaskan resources to meet, at the lowest reasonable cost, Alaska’s thermal, electric and transportation energy needs. However, it is possible to establish a framework for this assessment to provide insights into how effective alternative policies are likely to be. As explained earlier, the types of energy problems facing Alaskans can be reduced to basically three types: ¢ High costs and/or prices, which are: —Current electricity costs in the bush and in rural Southeast communities —Current fuel oil prices in the bush, Southeast, and Railbelt areas out- side of the South Central region —Mid- to long-term natural gas prices in the South Central region ¢ Resource exhaustion and/or capacity constraints, which are: —Cook Inlet natural gas in the long term —Long-term electrical generation capacity in the Extended Railbelt —Long-term electrical generation capacity in the urban areas of the Southeast ¢ Supply vulnerability and reliabil- ity, which are: —Current fuel supplies to bush communities —Reliability of current electrical generation and distribution in the bush. Existing and proposed State policies can be quickly assessed to see which type of problem they address, and their relative ef- fectiveness in solving specific energy prob- lems can ultimately be evaluated. For example, the Power Cost Assistance Program subsidizes 95 percent of the price of electricity above 12¢/KWH but not ex- ceeding 45¢/KWH. This program was initiated to minimize the hardship of pur- chasing expensive diesel generated elec- tricity until cheaper alternatives can be developed. In so doing, however, the symp- tom is being treated rather than the cause—which in itself is not an improper policy goal—but the likely outcomes of this program may not encourage the required increased generation efficiency or the subsitution of lower cost generation alternatives. As illustrated in Exhibit 12 and explained more fully in Chapter IV, a consumer’s electrical bill could in fact rise as a result of this subsidy program. If a customer was at point A, paying 45¢/KWH and consuming 840 KWH annually, the total bill would be approximately $380. With the subsidy, however, the customer may move to point C where his effective price would be roughly 14¢/KWH and annual consump- tion would increase to approximately 6000 KWH. If this were true the State would pay a subsidy of 31¢/KWH for all 6,000 KWH consumed, or nearly $1,900 annually. Customers with an annual electricity con- sumption of 2,000 to 4,000 KWH and cur- rently paying 30¢ to 20¢/KWH—point B—could increase their consumption 2 to 3 times and not increase their utility bills. The State subsidy, however, would amount to about $800 to $7,000 per customer, depending on the presubsidy rate of the utility. The relationship illustrated in Exhibit 12 should not be interpreted as a precise, quantitative prediction of future consumer response, it is indicative of what can be ex- pected to result from this type of subsidy program. Because of the substantially lower effective price faced by the con- sumer, demand is likely to increase significantly over time and the State may end up with an average expense as large as $1000 per residential customer annually. Clearly, this is an expensive way for the State to mitigate the impacts of higher diesel fuel prices and encourage increased electricity use in the bush, since inefficien- EXHIBIT 12° COMPARISON OF RESIDENTIAL ELECTRICITY PRICES AND USE 16,000 14,000, SOUTH ¢: 12,000 CENTRALE: ° 10,000 \ . AVERAGE < ANNUAL 8000 ° CONSUMPTION SOUTHEA (KWH/CUSTOMER) 6000 4000 2000 10 20 30 AVERAGE PRICE (¢/KWH) ARCTIC FOR A “TYPICAL” COMMUNITY PRICE QUANTITY ANNUAL COST (¢/KWH) (KWH/CUST.) ($/CUST.) 5.0 10,280, 515 10.0 7,300 730 12.0 6,500 780 15.0 5,560 830 20.0 4,320 860 30.0 2,580 770 45.0 840 380 AFTER SUBSIDY APPLIED A TOC, EXTREME CASE @ CUSTOMER BILL INCREASES FROM $380 TO $780 @ CUSTOMER CONSUMPTION INCREASES FROM 840 TO 6500 KWH @ SUBSIDY PAID BY STATE EQUALS $2015 ($0.31/KWHx6500 KWH) B TOC, TYPICAL CASE A @ CUSTOMER BILL UNCHANGED @ CONSUMPTION INCREASES FROM 2600 TO 6500 KWH @ SUBSIDY PAID BY STATE EQUALS $1040 ($0.16/KWH x 6500 KWH) *Alaska Power Administration: Estimates based upon data from over 70 communities. 21 cies develop when consumers do not base their decisions on actual costs of produc- tion.* Because of the State’s third party payment, consumers would not see their total electricity expenditures, and utilities would see little decline in sales if they rais- ed prices up to 45¢/KWH. In that sense the test of the marketplace is removed from the transaction between utilities and their customers. Less pressure exists for utilities to achieve maximum efficiency and for consumers to be efficient in their electricity consumption. Similarly, inefficiencies may result, and the State would not achieve the lowest costs possible, when one electrical genera- tion source—hydropower—is given favor- able financial treatment over another alternative—coal. As was discussed above, a coal-fired steam power plant may be the lowest cost near-term alternative source of electricity. However, if hydropower proj- ects received subsidized financing—i.e., less than the market rate of return— hydroelectricity may actually be “priced” more cheaply than electricity generated from coal. This lower “price” results not from lower “costs” of generation, but rather from the subsidy being given to elec- tricity consumers by the State. As discussed above, if the problem being addressed is the lack of future electrical generation capacity in the Extended Rail- belt and Southeast regions, all options should be evaluated on a consistent basis. If substantially different financing assump- tions are used for each alternative, their “It must be noted that increased electricity sales may result in improved diesel utilization which would have a beneficial impact on unit costs. However, this impact is expected to be very small relative to the total State subsidy. In addi- tion, consumers are likely to be better off and have a higher “standard of living” as a result of the increased electricity consumption that can be achieved under the subsidy pro- gram. 22 true relative costs may not be fully under- stood and the State may undertake proj- ects that do not provide the lowest energy costs. (5) Next Year's Long Term Energy Plan Report Must Provide the Strategic Context for Energy Plan- ning in the State Many of the items addressed above em- phasize the need for a statewide strategic energy plan. This years’ report addressed many of the requirements of a strategic plan, but it did so in an uneven manner due to data limitations and time constraints. Exhibit 13 illustrates the key elements of a strategic energy planning process for the State of Alaska. The elements include: ¢ Energy Situation — which highlights the types of energy problems facing the state in the near- , mid- and long- term ¢ Strategic Alternatives—which represent the basic program and policy alternatives available to the State e Energy Objectives—which repre- sent the consensus of Alaskans regarding the most desirable energy future for the State ¢ Measures of Performance—which is a standard system of evaluating the performance of strategic alternatives against energy objectives ° Strategic Portfolio—which represents the “best” set of energy resource and technology development activities, as well as the most attrac- tive subsidy and regulatory policies. EXHIBIT 13 STRATEGIC ENERGY PLANNING PROCESS raul ie DEVELOP INDIGENOUS ENERGY RESOURCES ENERGY SITUATION © SUPPLY DEVELOP, OBJECTIVES MPROVE FD] enercy TECHNOLO. © VULNER g ABILITY GIES * PRODUC TION SIALLWNYGLTV DIDILVYLS > MODIFY MARKET INSTITUTIONS* ee While each of these elements has been ad- dressed to the fullest extent possible in this year’s report, substantial refinements are needed to produce a definitive 1983 report. The requirements for refining each of these elements during the next year are dis- cussed more fully below. e Analysis of Alaska’s Energy Situation Is Critically Dependent Upon the Development of a “Bottoms-up” Picture of Regional Energy Needs. Because of the variability in energy problems across the state it is necessary to define the energy problems and available stra- tegic alternatives on a regional or community basis. Reliable regional data are necessary for this analysis. To date, much of the State’s energy use data have been collected indepen- dently within many private and government agencies and compiled at the statewide level. Regional eri bas, AND REGULATORY POLICY TO MODIFY PRIVATE MARKET OUTCOMES MEASURES OF PERFORMANCE estimates are often derived from the aggregate state data. Regional data fabricated from statewide aggregates are of limited usefulness when policy and program decision making re- quires a finer degree of understanding regarding the energy options available within each region. For example, to set reasonable program objectives for sub- sidizing rural electricity rates or for assisting in the purchase of bulk fuel storage capacity for rural communities re- quires accurate monthly energy use and price information for each rural commun- ity. Currently this information is sketchy at best. These community-specific and regional data needs could be met through upgrading and expanding DEPD’s Rural Community Energy Survey. This survey could be modified slightly and _ sup- plemented by a regular field survey con- 23 ducted by State energy personnel. The modified DEPD survey would form the nucleus of a comprehensive State regional energy data base. The development of for- malized partnerships between the State and local or regional planners would be of great benefit to the energy planning pro- cess. Through State financial and tech- nical assistance, local governments and regional entities can receive the resources to provide the “bottom up” assistance in developing a comprehensive community and regional data base. This assistance will also aid in the development of local and regional energy strategies tailored to meet local needs. ¢ Strategic Alternatives Must be Accurately Characterized. This year’s report provides estimates of the cost and energy savings for many of the resources and technologies under consideration. Actual data based on Alaskan experience are incomplete and need to be improved. In addition, specific evaluations of the impacts of subsidy programs such as the Power Cost Assistance Program, discussed earlier in this chapter, should be undertaken to better understand ac- tual program impacts. ¢ Greater Emphasis Must Be Placed on Clearly Specifying Energy Objectives and Develop- ing Measures of Performance. Collectively, existing State energy pro- grams implicitly define Alaska’s energy objectives. However, without a more explicit definition of the State’s economic and energy development ob- jectives, a basis for resolving policy and program conflicts will not exist. Some misallocation of State resources is likely to result in this situation. 24 eA Formal Evaluation Process Should Be Undertaken To Estab- lish the Relative Worth of Pro- grams and Projects. Currently, the State lacks a systematic approach for the review and prioritization of all energy programs and projects. To en- sure that the State funds are spent most effectively, it should develop and implement a consistent and economi- cally rational methodology for evaluating and comparing energy pro- grams and projects. —The evaluation of energy programs, such as energy conservation grants, should take into account the follow- ing: ¢ Program costs or expenditures in- cluding administration costs ¢ Program benefits or impacts both qualitative and quantitative —Technical evaluations of projects such as wind machine demonstra- tions should include the following: ¢ Total costs of the project and the State’s share of funding ¢ Construction, operating, and maintenance costs ¢ Data on the projects’ performance and reliability. Given this type of information, it will be possible to calculate expected energy costs and expected total energy impacts for dif- ferent programs and projects. Relative benefits and costs can be compared and individual programs and projects can be matched explicitly with State energy objectives. The strategic planning process outlined above will provide the State with an objec- tive system for assessing likely program benefits and evaluating program results. This planning process should involve an in- dependent review of major programs and projects and should measure progress against clear, quantifiable objectives. The 1982 Report on the State of Alaska Long-Term Energy Plan is composed of three separate documents. The Executive Summary presents the key findings and recommendations of the 1982 Report on the State of Alaska Long-Term Energy Plan. The main body of the 1982 report ad- dresses each of the areas required in the legislation. A separate volume of appen- dices contains supporting data and background information for the report. The main body of the report is organized in the following manner. ¢ Chapter I - Current and Projected Energy Use—which examines the amount and purpose of energy use in the state and the prices of different energy sources ¢ Chapter II - Energy Supplies and Resources—which documents ex- The State’s energy policy and program activities appear comprehensive—covering all aspects of energy planning and develop- ment. However, given the recent rapid increase in energy policy and program activities, an evaluation of existing energy programs and projects is necessary to en- sure that they are each effectively meeting overall State energy goals. isting and projected energy supplies and their potential applicability for meeting projected energy needs and lowering energy costs ¢ Chapter III - Regional Techno- logy Options—which presents an analysis of the potential energy sav- ings for those technology options, in- cluding conservation measures, that have the lowest costs for meeting near mid- and long-term State energy needs ¢ Chapter IV - State Energy Pro- grams and Policies—which reports on current State energy activities and provides recommendations for pro- gram modifications and additions, in- cluding those dealing with the possibility of energy emergencies. Conversion Factors ENERGY FORM ¢ Electricity Capacity Generation Oil — Crude oil Diesel fuel — Distillate fuel oil Motor gasoline — Aviation gasoline —Jet fuel Kerosene LPG (liquified petroleum gas) —Lubricants —Resid. (residual fuel oil) * Coal —Alaskan coal — Domestic anthracite Domestic bituminous * Natural gas ¢ Peat Alaskan Peat _ * Wood ~Sitka Spruce STANDARD UNITS KW (Kilowatt) — MW (Megawatt) — KWH (Kilowatt hour) 3,412 MWH (Megawatt hour) 3,412,000 bbl (barrel) 5,800,000 gal (gallon) 138,095 bbl 5,825,000 gal 138,690 bbl 5,825,000 gal 138,690 bbl 5,253,000 gal 125,070 bbl 5,048,000 Pal 120,190 bbl 5,355,000 gal 127,500 bbl 5,670,000 gal 149,690 bbl 4,011,000 gal 95,500 bbl 6,065,000 gal 144,400 bbl 6,287,000 gal 149,690 Short ton (2000 Ibs) 16,440,000 Ib 8,220 Short ton 23,250,000 Ib 11,760 Short ton 22,430,000 lb 1172115 SCF (Standard cubic foot) 1,020 MCF (Thousand cubic feet) 1,020,000 Ib 6,000 —9,000 cord 17,100,000 Source: The Energy Factbook, Congressional Research Service, Library of Congress. BTU EQUIVALENT e Executive Summary R3 -82-530- DEPD