Summary of Issues for the Fifth Northwest Power Plan
The Council is beginning development of its fifth power plan. As
required by the Northwest Power Act, the Fifth Northwest Power Plan will
incorporate 20-year forecasts of demand for electricity, assess resource
strategies to meet those demands at the lowest cost to the region and make
recommendations for implementing those strategies. The development of a
new power plan also provides the Council with the opportunity and the
responsibility to address important issues that can affect the achievement
of the Act's dual goals of an adequate, efficient, economic and reliable
power supply and protection, mitigation and enhancement of the fish and
wildlife resources of the Columbia River Basin. Through the process of
developing the plan, the Council hopes to engage the region on these
issues and influence their resolution in ways that are beneficial to the
region. The purpose of this paper is to discuss the issues we intend to
address in the plan and to seek public comment on them.
The Act requires a 20-year time frame, calling explicitly for 20-year
forecasts of demands and of the resources required to meet those demands.
While this time frame was largely a result of the long lead-time, highly
capital-intensive resources and fully regulated electricity markets of the
1970s, there remain important longer-term issues affecting the objectives
of the Northwest Regional Power Act. Given the relatively short-term focus
of the current electricity market, the Council is one of the few
organizations able to take a long-term perspective.
That said, the reality of much shorter lead-time, lower capital-cost
resources and more competitive electricity markets leads to a shorter-term
focus. This shorter-term focus cannot be ignored. Moreover, we believe
there are a number of important issues that will have to be addressed over
the next five to seven years. Consequently, we plan to focus much of our
attention on the initial five to seven years of the 20-year, 2002 -2021
planning horizon.
The experience of the past year and a half, with its extremely high and
volatile prices, the threat of blackouts, and the need to resort to
emergency hydropower operations suggests that electricity markets in the
West are not functioning as efficiently and effectively as most market
participants would desire. While there are many factors that contributed
to this situation, electricity market structure is a significant one. That
structure might be termed a "mixed" market. By a mixed market,
we mean that the wholesale and retail parts of the market are not directly
connected for most consumers within the region, or for that matter, in the
rest of the West. The wholesale power market is a loosely regulated
"competitive" market in which prices are determined through
market transactions, and the development of new resources is largely
undertaken by private developers responding to market signals. Those
signals are typically a combination of spot market prices and the prices
that can be negotiated for longer-term bilateral contracts. In the retail
market, most customers are buying from regulated utilities, either
regulated by state commissions or local governing bodies. Retail rates are
generally established in rate proceedings that lag the wholesale market.
Rate structures generally do not provide "real time" signals of
the current value of power. While there are some retail customers who are
directly exposed to market signals, they are, for the most part, larger
customers, and this situation is by no means universal even for them.
For many reasons, we think this general structure will persist for at
least the next five to seven years. We think it is unlikely that states in
the region will move farther down the road to retail competition beyond
those steps already taken, and there is some possibility that some steps
toward retail competition will be reversed. On the other hand, we think it
is unlikely that there will be any significant reversal of national policy
encouraging wholesale competition. As a practical matter, the important
issue is not restructuring power markets in any overall sense. It is, we
think, seeking improvements within this mixed market structure that will
allow it to function more efficiently and effectively. We recognize that
many utilities and others in the region feel they are fully occupied in
dealing with the aftereffects of high power prices and other consequences
of the recent electricity crisis. However, if we fail to address these
issues over the next few years, the chances of a repeat of the power
supply and price problems experienced over the last year are greatly
increased.
Addressing the problems of the current market structure would benefit
the Council's fish and wildlife responsibilities as well. As we saw this
year, severe shortages in the electricity market can also affect the
region's ability to achieve its fish and wildlife mitigation goals.
Some of the issues raised by the current market structure and other
issues that we think should be addressed in the Fifth Northwest
Conservation and Electric Power Plan include:
- Incentives for Development of Generation -- The current market
structure appears to have failed to provide adequate and timely
incentives for adding new capacity to ensure power supply adequacy and
to moderate price volatility. The Council proposes to assess existing
incentives and disincentives for development of new generation and
examine options available to encourage development that will moderate
potential supply-demand imbalances and price volatility. Options will
be analyzed to determine their effect on prices, system cost, adequacy
and reliability. If appropriate, the plan may recommend measures to
address systematic problems or improve signals for market development.
- Increasing the Price Responsiveness of Demand -- Most analyses of
the 2000-2001 electricity situation agree that the lack of a demand
response to wholesale prices worsened supply problems and price
volatility. The Council proposes to evaluate alternatives for
increasing the price responsiveness of demand. The analysis would
address the effects of various mechanisms on system cost, reliability
and prices. If appropriate, the plan may make recommendations for
implementing measures to improve the price responsiveness of demand.
- Sustaining Economically Efficient Investment in Efficiency -- Over
the past several years, investment in energy efficiency has followed a
"roller coaster" pattern - investment at below
cost-effective levels when market prices were low followed by
"crash" programs when prices exploded. The Council proposes
to assess the strengths and weaknesses of different approaches to
achieving economically efficient levels of investment in energy
efficiency in a more volatile electricity market and, if appropriate,
suggest ways in which these programs might be improved.
- Information Requirements for Assessing Power Supply Adequacy and
Market Performance -- The 2000-2001 electricity situation highlighted
the need for timely information for assessing both power supply
adequacy and reliability, and market performance. Some information
that used to be readily available is now closely held. The Council
proposes to evaluate the data needed to perform its planning and
market assessment functions, and to investigate and make
recommendations on how best to obtain such data if it is not currently
available.
- Fish Operations and Power -- During the 2000-2001 electricity
crisis, tradeoffs were made between hydro operations for fish and
operations for power. These tradeoffs were important in maintaining an
adequate power supply but came at some cost to the survival of
juvenile salmon and steelhead. If many of the issues described above
can be successfully resolved, the power system should be better able
to provide the operations desired for fish even in low water years or
times of financial crisis while the region also enjoys a more reliable
power system. The Council' s 2002 mainstem amendments to the Fish and
Wildlife Program are intended to lead to river operations that provide
for both fish recovery and enhancement and an adequate, efficient,
economical and reliable power system. However, conflicts are likely to
always exist. There remain incentives to deviate from prescribed fish
operations when supplies are tight and prices soar. The Council
proposes to investigate operational strategies and potential
incentives to minimize impacts on fish recovery from deviations from
prescribed fish operations and the options available to mitigate these
impacts.
- Transmission and an Adequate, Efficient, Economic and Reliable Power
System - Transmission policy and planning have become even more
critical to the goal of an adequate, efficient, economic and reliable
power system since the restructuring of the electricity industry to
achieve functional separation of transmission and generation. The
issue is how the mix of independent power developers, transmission
owners, load serving entities, and consumers make coherent decisions
about what to build and where to build it in a vast interconnected
system. How these decisions are made can have a significant effect on
power system costs, reliability, and the environment. While many of
the issues are being addressed in the RTO West process, it will be
some time before the Regional Transmission Operation (RTO) is in place
if ever. In the meantime, Bonneville and others will be making
decisions about transmission policy and planning. Consequently, the
Council proposes to address alternatives with respect transmission
pricing, planning, and policy as they affect the Council's mission of
an adequate, efficient, economical and reliable power system.
- Value of and Barriers to Resource Diversity -- The new generation
that is under construction or in the development process in the region
is heavily weighted toward natural gas-fueled combustion turbine
technologies. Some observers have raised the concern that the
Northwest and, even more so, the West Coast, is becoming overly
dependent on natural gas and that the region should strive to increase
the diversity of resources being added to the system. The Council
proposes to assess the benefits of resource diversity and the
potential barriers to increasing it. These include the issues
associated with integrating intermittent resources into the system and
pricing, transmission and distribution system issues raised by
alternative resources and distributed resources. The plan will
evaluate the prospects for achieving benefits from diversity,
intermittent resources and distributed generation. We will attempt to
identify barriers to the achievement of benefits and assess approaches
to resolving the issues.
- Future Role and Obligations of the Bonneville Power Administration
-- The Bonneville Power Administration is legally obligated to serve
the loads placed on it by public agencies at cost, even if it must
acquire additional resources to do so. Many believe that in a
competitive wholesale power market, this obligation exposes the
Northwest to some risk of losing continued preferential access to the
output of the Federal Columbia River Power System (FCRPS). In
addition, it distorts the market for new resources both from the
standpoint of Bonneville's large presence in the market and the price
signals sent to its customers. However, if Bonneville were unable to
acquire additional resources, some means of allocating its existing
resources among competing interests would have to be found. There are
currently discussions ongoing among different customer groups that are
focused on the question of allocation of existing Bonneville power in
the post-2006 rate period and to some degree Bonneville's role in
resource acquisition. If these discussions bear fruit, the Council
would analyze the proposal or proposals to develop the pros and cons
with respect to resource development, power system adequacy,
reliability, cost, market dynamics and the ability of the region to
retain the benefits of the federal system. The purpose of this
analysis would be to help the public and regional leaders reach
decisions about the appropriateness of the proposals. In the absence
of such proposals, the plan will evaluate alternative roles and
practices for Bonneville and develop as fully as possible the pros and
cons associated with the alternatives.
- Global Climate Change Risks to the Power System -- A preponderance
of scientific opinion asserts that the earth is warming and that this
warming is largely the result of increased production of carbon
dioxide and other greenhouse gasses due to human activities. Because
of the widespread use of fossil fuels to produce electricity, the
electric power industry is a principal contributor to the growing
atmospheric concentration of carbon dioxide and will be affected by
any initiatives to reduce carbon emissions. Furthermore, the
production of electricity from hydropower, so important in the
Northwest, may be affected by climate change if historical
precipitation patterns change. The Council proposes to review the
status of the global climate change issue, including the current
understanding of possible effects on the Northwest hydropower system,
the effects of possible greenhouse gas emissions control policies on
the relative cost-effectiveness of resources available to the
Northwest, and the value of strategies to address climate change
impacts.
While these issues have been presented as discrete, many are clearly
highly interrelated. The plan will analyze these interrelationships.
Further discussion of these issues is provided in the issue paper Issues
for the Fifth Northwest Power Plan, document 2002-1.
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