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INDIANA POWER OF WIND COALITION Regulatory Flexibility Committee Strategies for Procuring New Generation September 18, 2013 INDIANA POWER OF WIND COALITION The Challenge • There is no “free market” for procurement of energy and resources. • Utilities in regulated states are vertically integrated monopolies with a franchise agreement that entitles them to serve customers within the franchise area. • Currently, utilities develop integrated resource plans (IRP) which identify supply needs for customers. • Generally, utilities fulfill energy/capacity shortfall through request for proposals (RFP) and the utility typically chooses themselves. INDIANA POWER OF WIND COALITION Other Challenges • Self build options don’t always take into account all transmission and interconnection costs. • Risk of construction delay and cost overruns are often not accounted for in self build options. • Utilities have the ability to recover additional costs from ratepayers. • Independent power producers (IPP) provide an all-in, binding cost when responding to request for proposals. • This includes all costs – including transmission and interconnection costs. • If the project is completed over budget, the risk is borne by the IPP as opposed to the ratepayer. INDIANA POWER OF WIND COALITION Example of Utility Share of Supply Resources • Approx. 95% of all electricity comes from generation owned by the IOUs Utility Total Resources (MW) AEP Duke IPL NIPSCO Vectren 5,279 6,830 3,353 3,422 1,498 Owned PPA % Owned Resources Resources Resources (MW) (MW) 5,012 6,722 3,053 3,322 1,288 267 108 300 100 210 94.9% 98.4% 91.1% 97.1% 86.0% SOURCE: 2011 Utilities IRPs INDIANA POWER OF WIND COALITION Comparison of Self-Build to Third Party Supply • Utilities receive no rate of return on power purchase agreement (PPA) and as a result forfeit potential returns for shareholders. • Lower cost to ratepayer for power purchase agreement, however this may not be the successful proposal. Utility Self-Build – 100 MW Thermal Plant1 (excludes operating costs) $427,488,000 Resource Investment 8% Rate of Return $ 34,199,040 Total Return Power Purchase Agreement – 100 MW Plant2 Current structure leads to inefficient outcomes $336,384,000 Purchase Agreement Cost 0% Rate of Return $0 Total Return 1 Lazard Levelized Cost of Energy Analysis Version 6.0, June 2012. Assumes Gas Combined Cycle at 40% capacity factor for 20 years at $61/MWh. 2 Lazard Levelized Cost of Energy Analysis Version 6.0, June 2012. Assumes Wind at 40% capacity factor for 20 years at $48/MWh. INDIANA POWER OF WIND COALITION Example of Competitive Procurement Proposal • Allowing an earned rate of return still provides a lower cost to ratepayer. Alternative Procurement – Utilized Wind PPA $336,384,000 Resource Investment 8% Rate of Return $ 26,910,720 Total Return Utility Self-Build – 100 MW Thermal Plant1 (excludes operating costs) $427,488,000 Resource Investment 8% Rate of Return $ 34,199,040 Total Return Ratepayer Savings: $98,392,320 Power Purchase Agreement – 100 MW Plant2 Current structure leads to inefficient outcomes $336,384,000 Purchase Agreement Cost 0% Rate of Return $0 Total Return INDIANA POWER OF WIND COALITION Benefits • Ensure ratepayer is served at lowest, efficient cost. Allow utility sector to balance the utility shareholder interests with the ratepayer’s desire for low cost energy. • Reduce ratepayer exposure to cost overrun risk. • Does not change the regulatory process that currently exists in each state. • Cooperative working relationships between utilities and independent power producers. • Alternative for utilities if capital constrained due to generation fleet retirement/retrofit costs, transmission expansion costs, and other system improvement costs. Leverage third parties to provide capital needed to maintain supply adequacy. • Provide appropriate human resources to support utilities in building new resources. Some utilities no longer have in-house capability for design, project management, and commissioning of new generation resources. The projected utility attrition rate is also a potential concern. INDIANA POWER OF WIND COALITION Questions/Follow Up Speakers: Jason Minalga Consultants: Tony Samuel Manager, Regulatory Affairs Invenergy 312-582-1500 [email protected] President Samuel Solutions 317-403-2339 [email protected]