PacifiCorp 2007 Integrated Resource Plan (May 30, 2007)

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PacifiCorp – 2007 IRPChapter 6 – Modeling and Risk Analysis ApproachA stochastic model in PaR guides the random sampling process. The stochastic model accountsfor both short-term and long-term variable volatility as well as correlation effects among thevariables. (Appendix E describes PacifiCorp’s stochastic modeling methodology.) The output ofthe stochastic model consists of stochastic parameters—multipliers that represent the stochastic“shocks” applied to the expected value forecasts for each variable.The PaR model is configured to conduct 100 Monte Carlo simulations for the 20-year study period,so that each of the 100 simulations has its own set of stochastic parameters and shockedforecast values. The end result of the Monte Carlo simulation is 100 production cost runs (iterations)reflecting a wide range of alternative futures. PacifiCorp derives expected values for theMonte Carlo simulation by averaging run results across all 100 iterations.The company also looks at subsets of the 100 iterations that signify particularly adverse costconditions, and derives associated cost measures as indicators of high-end portfolio risk, or “riskexposure.” The company uses scatter plots of portfolio cost versus risk exposure to help assesshow each portfolio performs with respect to balancing cost and risk, as well as showing the costrisktradeoff for specific resource strategies.Scenario Risk AnalysisIn addition to modeling portfolio stochastic risks (the base stochastic simulation step in Figure6.1), stochastic simulations were also conducted with various CO 2 emission cost adders to capturethe risks associated with potential CO 2 emission compliance regulations. Since the probabilityof realizing a specific CO 2 emissions cost cannot be determined with a reasonable degree ofaccuracy, potential CO 2 emission costs were treated as a scenario risk in this IRP. PacifiCorpdefines a scenario risk as an externally-driven fundamental and persistent change to the expectedvalue of some parameter that is expected to significantly impact portfolio costs. This risk categoryis intended to embrace abrupt changes to risk factors that are not amenable to stochasticanalysis.The practice of combining stochastic simulation with CO 2 cost adder scenario analysis representsadvancement with respect to the modeling approach used for PacifiCorp’s 2004 IRP. Previously,the company simulated CO 2 scenario risks using several separate deterministic production costruns.Another scenario risk investigated in this IRP is potential widespread enactment of California’sgreenhouse gas emissions performance standard. (See Chapter 3, “California Greenhouse GasEmissions Policies”, for background information.) PacifiCorp used the CEM and PaR models todevelop a portfolio that (1) excludes all new resources—generation and purchase contracts—thatfail the emission performance threshold and (2) meets system-wide Renewable Portfolio Standardgeneration requirements stemming from assumed RPS enactment in all of PacifiCorp’swest-side jurisdictions. Stochastic simulation of this portfolio yielded cost, risk, and CO 2 emissionmeasures for comparison against other risk analysis portfolios. The results of this analysisare reported as the conclusion to Chapter 7.130
PacifiCorp – 2007 IRPChapter 6 – Modeling and Risk Analysis ApproachPORTFOLIO PERFORMANCE MEASURESStochastic simulation results for the risk analysis portfolios were summarized and compared todetermine which portfolios perform best according to a set of performance measures. Thesemeasures, grouped by category, include the following:Cost• Stochastic mean cost (Present Value of Revenue Requirements, or PVRR)• Customer rate impact• Environmental (emissions) externality cost• Capital costRisk• Risk exposure• Production cost variabilityEmissions• Carbon dioxide emissionsReliability• Average annual Energy Not Served (ENS)• Loss of Load Probability (LOLP)The following sections describe in detail each of the performance measures listed above.Stochastic Mean CostThe stochastic mean cost for each risk analysis portfolio is the average of the portfolio’s net variableoperating costs for 100 iterations of the PaR model in stochastic mode, combined with thecapital cost additions of new resources determined by the CEM for that portfolio.The net variable cost from the PaR simulations, expressed as a net present value, includes systemcosts for fuel, variable plant O&M, unit start-up, market contracts, spot market purchases andsales. The variable costs included are not only for new resources but existing system operationsas well. The capital additions for new resources (both generation and transmission) are calculatedon an escalated “real-levelized” basis to appropriately handle investment end effects. Other componentsincluded in the stochastic mean PVRR include the value of renewable energy credits(green tags), renewable production tax credits, emission allowance costs and credits, and the costassigned to Energy Not Served. 47 . Emission allowance costs or credits are determined outside ofthe CEM and PaR models and added to the PVRR as one of the final calculation steps.47 The cost of Energy Not Served is set to $400/MWh, which is the FERC wholesale electricity price cap now ineffect for the California Independent System Operator. Note that PacifiCorp added this cost to its stochastic PVRRcalculations subsequent to the distribution of early risk analysis portfolio results to public stakeholders in October2006.131
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PacifiCorp 2007 Integrated Resource Plan (May 30, 2007)

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