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Eggs in Many Baskets: Arizona Public Service Diversifies Generation Sources

Arizona Public Service (APS) changed how it selects new generation supply with a March 2012 filing; it will no longer use "least cost" as the dominant factor. Instead, it will diversify and distribute its generation eggs in many baskets. Not only that, APS will reduce carbon emissions and total water use, and has protected itself from potential future price spikes and volatility in the natural gas market.

At the end of March, APS released its first approved integrated resource plan (IRP) in 17 years. The latest APS IRP creates a resource plan for meeting APS customer load for the next 15 years (through 2027). Of note, APS proposes to increase energy efficiency, renewable energy (RE), distributed renewable energy, and natural gas power generation, while decreasing coal generation, all to varying degrees.

As of April 2011, 27 states required utilities to conduct IRP processes (updated every 2-3 years usually) where utilities consider electric sector planning horizons of typically 15-20 years. Another 11 states in deregulated electric generation markets require 5-10 year procurement plans updated annually, but these plans are not "integrated" by nature.

How is Arizona's process distinct? The state identifies diversity as a clear goal. For APS to achieve a diversity goal, no single source will provide more than 26% of the generation portfolio by 2027. As shown in Figure 1, APS currently generates power using 38% coal and 29% nuclear.

What is driving this change? APS submitted a draft IRP in 2009 and explored new ways that it could consider generation supply options, which prompted action by its regulators. Regulators liked the direction APS was headed and created a new IRP process. According to NREL analyst Collin Donnelly, "the Arizona Corporation Commission (ACC) has modified the state's IRP rules to include externalities within the resource planning and investment process." In a press release, ACC Commissioner Paul Newman stated, "These IRP rules include…externalities — the uncounted costs of power production such as air pollution, water pollution, water use by power plants, and potential liability for coal ash contamination — which have monetary value." Commissioner Newman further stated, "Including all the costs of power generation makes good sense, protects our health, and recognizes the value of clean air and water" [3].

Moreover, the ACC requires Arizona utilities to explain in the same analysis how they plan to meet the state renewables mandate. Therefore, the APS IRP explains, a "long-term strategy aimed at meeting future customer energy needs, achieving regulatory targets, and managing environmental impacts, all at a reasonable cost." While several other states are moving away from a single determinant like least cost, Arizona is one of the leaders in updating its IRP process.

The following details are explained in the APS IRP and are shown in Figure 2. APS analyzed four main portfolios of future generation supply. Key metrics were tracked for each portfolio, including fuel diversity, revenue requirement, capital expenditures, natural gas use, total water use, and total emissions. All portfolios included 15% energy efficiency, and the total nuclear power generation remains constant (although the percentage decreases as demand is projected to increase). What changes to varying degrees, are the size of increases in power from natural gas, RE and distributed RE, as well as a declining reliance on coal generation. Sensitivities on key costs were considered for all four portfolios.

Interestingly, RE costs were not varied at all, and the capital cost of RE generation was held constant. As utilities plan, they typically hold the capital expenses (CAPEX) constant, to make it easier to see the differences in CAPEX between the portfolios. However, renewable CAPEX is still evolving as costs decrease or technologies improve (e.g., better production might come at an additional cost), especially for solar and wind. Additionally, the cost of RE integration was not varied. The potential evolution in both RE technology costs and RE integration costs might be interesting factors to explore more thoroughly.

Overall, APS is facing a large capital investment, no matter which portfolio is chosen. According to the IRP, the base case will cost $9 billion total, and it will cost a total of $13 billion for 23% renewables (up from 15% in the base case — the level of the state renewable portfolio standard, or for the scenario where all coal generation is retired within the timeframe. The additional cost leads to some significant benefits. In the Enhance Renewables case, the additional cost leads to lower natural gas use and lower CO2 emissions. In the Coal Retirement Case, the lowest CO2 emissions result, and there are significant water use reductions. See Figure 3 for details.

Going forward, regulators will work with APS to finalize its generation plan, and APS will be required to revise the plan every two years. By diversifying its resources, APS will reduce carbon emissions and total water use, and it will be partially shielded from potential future price spikes and volatility in the natural gas market, thus serving its generation portfolio sunny-side up.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

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