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Precise Impact Unclear Mark Ohrenschall Con.Web, December 20, 2002

BPA Reduces Conservation/Renewables Spending by $21 Million through 2006

Energy efficiency and renewable energy spending cuts by Bonneville Power Administration will reverberate around the Northwest in years to come.

But the precise extent of their impact is yet unclear. BPA officials believe the agency can still achieve significant energy savings and renewable energy advances despite $21 million in reduced spending over the next four years.

Those trims account for about 6 percent of the $350 million in cost savings identified by BPA administrator Steve Wright in a Nov. 22 letter outlining Bonneville's responses to a projected $1.2 billion gap between expenses and revenues from fiscal year 2002 through FY 2006. No further rate increases are planned, for the moment.

BPA officials pledge to meet the agency's energy-saving target of 220 average megawatts from 2002 through 2006, with less money. Bonneville's 2002 results of 50.7 aMW of total installed savings--much of it gained at lower-than-historical-average costs to the agency--suggest BPA is tracking toward that goal.

Yet the spending cuts will actually lower BPA's Conservation Augmentation capital budget by more than one-third--the $13 million in projected conservation dollar savings comes from reduced interest and amortization costs from not borrowing $84 million. One regional energy analyst said BPA faces a challenge to meet its savings target with that greatly reduced level of capital spending.

BPA also will cut renewables spending $4 million through 2006, or $1 million annually. Of broader consequence, Bonneville envisions a diminished role in buying renewable energy. The agency plans to "focus more on facilitating purchases of renewable generation by others than on a BPA-only acquisition program," Wright wrote.

BPA also has stopped active consideration of four wind proposals remaining from its landmark 1,000 MW or more wind solicitation issued in February 2001.

Reaction to BPA's conservation/renewables actions ranges from fatalism to concern to glimmers of opportunities.

Financial Travails

Bonneville's financial travails lie behind the agency's conservation/renewables and other cuts.

Wright in his letter called the past two years "particularly challenging" for BPA. And the projected $1.2 billion deficit over the five-year rate period could widen with meager hydropower production or continuing low wholesale market prices.

BPA's single biggest financial problem, Wright told the Northwest Energy Coalition's Nov. 15 fall conference in Portland, is declining net revenues from surplus power sales. The agency planned 2002-2006 expenses around higher such revenues, based on the late 1990s pattern of high wholesale prices and abundant precipitation. But then came hydropower-reducing drought and plummeting market prices after the energy crisis.

Bonneville has lost $800 million the past two years, despite a 46-percent wholesale rate increase, Wright said. "We can't keep losing this kind of money, 3, 4, 500 million dollars a year. It's unsustainable."

Through late summer and fall Bonneville solicited regional opinions through its Financial Choices process. BPA heard from many people about the significance of energy efficiency, renewable energy and fish and wildlife spending, Wright said. Agency officials also listened to tales of teacher layoffs, farm closures and increasing power shut-offs related to higher electricity costs. "It's having an impact on real people out there," he said. Northwest electric rates are no longer a major competitive advantage for regional industries, which Wright called "a huge shock for me."

BPA's response eschews further rate increases for now, although Wright pledged in his letter to monitor water and market conditions and "revisit" this option in early 2003.

The $350 million in spending reductions, deferrals and other actions target $107 million in Power Business Line internal operations, $72 million at the Columbia Generation Station, $56 million in freed-up Energy Northwest bond reserves, and the $21 million conservation/renewables cuts (including $4 million from Energy Web spending). Another $500 million may be forthcoming, Wright wrote.

'Socially Responsible' Pledge

The Nov. 22 letter acknowledged "impacts and tradeoffs" from the cost-cutting moves, but Wright pledged BPA to "respond in a socially responsible way.

"We will continue to work toward a sustainable energy efficiency future, and we intend to meet the Northwest Power Planning Council's target for conservation acquisition [220 aMW from BPA for 2002-2006]. Based on recent experience, we believe we can hit that target at costs significantly below the cost of historic conservation acquisitions if we stay on track with our conservation augmentation programs," he wrote.

"We will continue to exert leadership and promote development of cost-effective renewable energy resources but will focus more on facilitating purchases of renewable generation by others than on a BPA-only acquisition program," he wrote.

Some Reactions

BPA has little choice but to slash its budgets, said senior economist Kevin O'Meara of the Public Power Council. "This is not a happy time," he said. "Bonneville's finances are really in a bad state and the problem is the rate increases are doing enormous amounts of damage to the regional economy."

The PPC board, O'Meara said, generally believes that "Bonneville has to make these painful cuts so both Bonneville stays alive and the region's economy stays alive. Basically a lot of different sectors have to contribute. The sad thing is that any cuts in programmatic conservation expenditures are probably going to be swamped in effect by the price-induced conservation Bonneville's done" by increasing wholesale rates. "I'd prefer in the long run more programmatic conservation and less price-induced conservation."

At the Northwest Energy Coalition, "We're somewhat pleased that Steve didn't cut conservation and renewables too much. A few million dollars, given the crisis, that's not too bad," said senior policy associate Steve Weiss. "The cuts aren't wonderful … We would rather not have them," he added, but at least BPA's energy-saving target remains intact. Weiss expressed concern about the $500 million in potential further budget cuts, calling that "the other shoe."

Bonneville's conservation budget cuts were "bigger than I wanted and less than I expected," wrote executive director Stan Price of the Northwest Energy Efficiency Council in the December NEEC News. Rate increases are difficult, but efficient use of electricity is "the best method" to lessen their harm, according to Price. "Reducing consumption … is the only way for the Northwest to cling to some small part of its historical energy market advantage. Those who argue that energy efficiency is a regional expense that puts upward pressure on rates and declines utility revenues are not good students of recent history. If the current weather continues and power markets remain soft, we will all likely have the opportunity to take the make-up test."

BPA Conservation

Bonneville's $13 million in energy efficiency budget cuts fall on Conservation Augmentation, an umbrella for numerous energy-saving initiatives. BPA's conservation/renewables wholesale rate discount is not directly affected.

The dollar savings will accrue from not tapping $84 million of capital borrowing authority, which will reduce interest and amortization costs by $13 million, explained BPA's John Pyrch. Bonneville initially budgeted $290 million in ConAug capital borrowing to achieve 100 aMW of ConAug savings over the five-year rate period. That figure shrank to $240 million last year, he told Con.WEB, and with the new budget cuts it will drop to $156 million.

BPA thus expects to save 100 aMW through ConAug at an average cost of about $1.5 million per average megawatt--a level the agency achieved in racking up 23.6 aMW of 2002 ConAug energy efficiencies. That compares favorably with BPA's historical conservation acquisition costs of about $2 to $2.50 per average megawatt, Pyrch said.

"We think we've added a lot of value, gotten a lot of megawatts done, and found ways to do it a lower cost," BPA Power Business Line senior vice president Paul Norman told the NWEC fall conference. "Despite the financial stresses we're going to stay off the [historical conservation] roller coaster, continue to focus on low cost and pursue new ideas."

Norman and Wright praised BPA's energy efficiency staff, led by vice president Mike Weedall, in gaining lower-cost savings.

Weedall said he attaches more importance to the 220 aMW target than the allocated budgets. "We feel fully confident with the resources we're being given that we can do it," he told Con.WEB.

BPA will meet its goal if it duplicates or exceeds 2002 conservation numbers throughout the rate period. The agency tallied 50.7 aMW of installed savings for the just-ended fiscal year, Pyrch reported. Among ConAug ventures a major contract with Seattle City Light brought in 9 aMW, while compact fluorescent lamp coupons added about 4.5 aMW and federal agency initiatives tallied 3.2 aMW. Bonneville also chalked up 14.8 aMW from C/RD, 12 aMW from its share of regional market transformation and 0.25 aMW from low-income weatherization, according to Pyrch.

"It'll be a challenge for us in the future to see if we can get it at this [cost] level," he said. "You go up the supply curve in conservation and the cost goes up."

Weedall also acknowledged a challenge. So did senior policy analyst Charlie Grist of the Northwest Power Planning Council, who said the conservation cuts represent a "fairly paltry savings in rates and a fairly big decrease in their capital budgets for stuff that they finance."

The region's rough historical average for conservation savings slightly exceeds $2 million/aMW, he noted. "Can we get it for a whole lot less? I don't know. We got a bunch last year with CFLs. How many more CFL binges can you pull off? We had one in the mid-90s with showerheads. Will that happen in the future? I hope so." He suggested BPA could provide more incentives for more cost-effective C/RD savings. "That's probably the biggest area for improvement."

"We'll continue to look for new programs, new initiatives to get other ways to contribute," said Pyrch. Weedall listed a new residential loan program as one upcoming offering from Bonneville.

Meanwhile, BPA is lifting its ban on new long-term ConAug agreements with utilities, according to Norman. Weedall said the agency thought it unfair to customers to sign any such contracts during the discussions on BPA's financial future.

BPA Renewables

BPA has long been a regional force in non-hydro renewable energy. As a major example it buys energy from about 198 MW capacity of wind power, making Bonneville a nationally prominent wind purchaser. "We're proud of that," said Wright, but quickly added, "We do think our role is going to change."

Bonneville has served as the Northwest's primary resource gatherer, he told the NWEC conference. But, "all of the signals are folks don't want us to be" in the future.

For renewables acquisitions, Wright continued, BPA now plans to function more as an aggregator and less as a soloist. Bonneville could act as a minority purchaser for wind projects, to help make them happen in collaboration with other partners. "It's difficult to sustain the amount of financial risk we have in this type of environment we're operating in," he said.

The renewables budget cuts through 2006 amount to $4 million total over the next four years. Among the effects will be a scaled-back wind forecasting venture, along with fewer dollars for resource acquisitions, said BPA renewables program manager George Darr. "There's still money in there for us to acquire resources, but not as much," he told Con.WEB.

Darr also said Bonneville has stopped actively working on four remaining submittals from its 2001 wind-energy solicitation. The agency has proceeded with environmental reviews on the proposed 150-MW-capacity Maiden Wind Farm in south-central Washington, "so if we do need the power we can acquire it quickly."

BPA will continue its "fundamental program" of financially supporting renewables up to a $15 million annual net cost, Norman told the NWEC conference. He called renewables "a very entrepreneurial function within Bonneville, incented to maximize green revenue. I think it's worked very well." A recent Financial Choices document from BPA reported that Bonneville forecasts net renewables costs (generation values and green attribute values minus total costs) of $3.1 million in FY 2002, rising to $10.1 million in 2006, based on then-current spending levels.

"We'll try to add value, not just by buying power, but also facilitating services and commitments," Norman said.

Indeed, Bonneville can support wind power beyond buying electrons, said NWEC's Weiss. "One of the ideas Bonneville has is that instead of spending its limited amount of money for renewables directly on renewables, why don't we spend it on giving other developers cheap or free ancillary services. The dams really can deal with intermittency very easily, at almost no cost … Maybe they could leverage other developers and actually create more renewables than they could by buying [power]."

That scenario could work, said marketing vice president Dave Roberts of SeaWest WindPower, which has two Northwest wind proposals, 100 MW to 200 MW apiece, in the now-idled BPA wind solicitation. "Bonneville is in a fairly unique position to be able to aggregate demand and then manage the intermittency of the wind resource with their hydro capabilities and then provide back to that demand a firmed green product," he said.

Roberts acknowledged BPA's financial predicament and its uncertain resource acquisition future. He said SeaWest continues to collect wind data and work on other tasks (short of a full environmental review) for the two proposed projects, one in Klickitat County, WA and the other in Wasco County, OR. Those sites were planned with the Bonneville system in mind, Roberts said, although they could be arranged for other power buyers.

Times have changed since the Bonneville wind solicitation less than two years ago, said senior resource analyst Jeff King of the Northwest Power Planning Council. "The above-market costs of renewables have increased fairly substantially over levels people thought it would be" in early 2001. "I would be really surprised if Bonneville moved ahead [on the wind proposals] in the near future." If Bonneville were to seek new renewables, he said he would anticipate a new request for proposals.

"I suspect that the astute [wind] developer is probably looking for other opportunities," he said, mentioning the Energy Trust of Oregon, PacifiCorp's wind-friendly draft integrated resource plan (see related story), Puget Sound Energy's avowed interest in owning new power generation facilities, and NorthWestern Energy's power supply needs in Montana.

In addition, BPA whacked $4 million from its Energy Web program through 2006. "Some Energy Web research and development efforts will continue, but at substantially reduced levels, as we look for ways to leverage our funding with other regional partners," Wright wrote.

Related Sites:
BPA's Financial Choices process (including Steve Wright's Nov. 22 letter)