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Benefit Cost Study

Benefit Cost Study of the Governor’s 2015 Wind Challenge: 1,000 MW by 2015 Bob Glass KCC Utilities Division, Economic Policy & Planning. Benefit Cost Study. Traditional Approach to Investment Evaluating Benefit/Cost Model from the point of view of the ratepayer Cost of Service Methodology

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Benefit Cost Study

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  1. Benefit Cost Study of the Governor’s 2015 Wind Challenge:1,000 MW by 2015Bob GlassKCC Utilities Division, Economic Policy & Planning KEC Electricity Committee, March 12, 2008

  2. Benefit Cost Study Traditional Approach to Investment Evaluating Benefit/Cost Model from the point of view of the ratepayer Cost of Service Methodology Net Present Value (NPV) Criteria NPV > 0  Good for Ratepayers NPV < 0  Bad for Ratepayers NPV = 0  Neutral KEC Electricity Committee, March 12, 2008

  3. Major Concern: Uncertainty Uncertain of the values of variables and parameters We could not make the uncertainty go away So we tried to quantify the uncertainty KEC Electricity Committee, March 12, 2008

  4. What Does Wind Energy Compare to? • Wind is neither controllable or dispatchable. • Because of this, wind energy is not a substitute for capacity-based energy: wind energy does not substitute for firm energy. • Wind energy provides fuel, not capacity, savings. • We assumed wind substituted for the utility’s fuel mix. • We did, however, include a 7% capacity credit for wind energy (per SPP rating). KEC Electricity Committee, March 12, 2008

  5. KEC Electricity Committee, March 12, 2008

  6. KEC Electricity Committee, March 12, 2008

  7. Benefit Cost Study Results shed light on the question of whether an investment in 1,000 MW of wind energy by 2015 is likely to be a good deal for Kansans. And the answer is that it depends... KEC Electricity Committee, March 12, 2008

  8. Is Wind Energy a Good Deal?(internal cost perspective) For average Kansas ratepayers, the answer is likely to be “no.” Under most forecast scenarios, wind-based electricity costs more than electricity from conventional sources, and is likely to result in higher rates and, thus, higher electric bills. KEC Electricity Committee, March 12, 2008

  9. Is Wind Energy a Good Deal?(internal cost perspective) The average ratepayer is likely to pay $0.98 to $1.90 more per MWh, resulting in annual bills that are $11.76 to $22.80 higher (based on 11 MWh/yr average usage). Over the 29-year term of the investment, the typical residential customer is likely to pay an extra $341 to $661 as a result of the Challenge. KEC Electricity Committee, March 12, 2008

  10. Is Wind Energy a Good Deal?(total cost perspective) For average Kansans concerned about health & environmental costs of burning fossil fuels, the answer is “maybe.” Though wind energy is more costly, if Kansans are willing and able to pay the wind premium, then meeting the Challenge could be beneficial overall. KEC Electricity Committee, March 12, 2008

  11. Is Wind Energy a Good Deal?(total cost perspective) Depends on the value of external cost savings thatresultfrom wind energy displacing conventional electric generation. Unfortunately, very little good data exists to quantify pollution-related external costs in Kansas. KEC Electricity Committee, March 12, 2008

  12. Is Wind Energy a Good Deal?(total cost perspective) If external cost savings are large enough—if they more than offset the higher utility bills—then the Challenge would be a good deal for Kansas. Just how high do the external cost savings need to be for wind to break even? • $27/MWh to $52/MWh KEC Electricity Committee, March 12, 2008

  13. Key Result 1 In terms of internal cost, wind-based electricity is more expensive than conventional generation. How much more? If acquired through a typical PPA, wind costs about $28/MWh more; if acquired through utility investment, wind costs about $51/MWh more. KEC Electricity Committee, March 12, 2008

  14. Key Result 2 In terms of total generation cost, wind-based electricity may cost less, provided the external cost savings reach the threshold level • $28/MWh for wind acquired through PPA • $51/MWh for wind acquired through utility investment KEC Electricity Committee, March 12, 2008

  15. Key Result 3 It’s likely to be less expensive for ratepayers if the utility buys (acquires wind-based electricity through a PPA) than if it builds (invests in its own capacity). As installation costs increase, the buy option is even more competitive. KEC Electricity Committee, March 12, 2008

  16. Key Result 4 Meeting the Challenge is likely to increase the average retail rate of electricity in Kansas by $0.98/MWh, if met entirely with PPAs (the buy option), and by $1.90/MWh, if met entirely by utility investment. KEC Electricity Committee, March 12, 2008

  17. Net Benefit is Uncertain Whether the Challenge yields a positive net benefit to Kansans largely depends on the external cost savings attributable to wind-based electricity. Based on January 2008 data, external cost savings need to be at least $40/M Wh for the Challenge to be cost effective (includes PTC). KEC Electricity Committee, March 12, 2008

  18. Net Benefit is Uncertain Uncertainty of costs: • wind installation and O&M costs • performance of turbines, etc Uncertainty of benefits • potential carbon regulation • overall value of reduced power plant emissions KEC Electricity Committee, March 12, 2008

  19. A PDF version of the “Benefit Cost Study of the Governor’s 2015 Wind Challenge” is available on the KEC web site: http://www.kec.kansas.gov/reports/ 2008_wind_report.pdf KEC Electricity Committee, March 12, 2008

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