introduction to the regional portfolio model
DESCRIPTION
Introduction to the Regional Portfolio Model. Michael Schilmoeller NW Power and Conservation Council Thursday, June 10, 2010. The Northwest Power and Conservation Council. Generation Resources. Forecasts Have Not Improved. 3.50. 3.00. 2.50. 2.00. 1.50. Current $/MMBTU. 1.00. 0.50. - PowerPoint PPT PresentationTRANSCRIPT
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Introduction to theRegional Portfolio Model
Michael SchilmoellerNW Power and Conservation Council
Thursday, June 10, 2010
2
The Northwest Power and Conservation Council
3
Generation Resources
4
Forecasts HaveNot Improved
EIA World Oil Price Forecasts
0
10
20
30
40
50
6019
85
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Cur
rent
Yea
r $/B
arre
lAEO 1982
AEO 1983
AEO 1984
AEO 1985
AEO 1986
AEO 1987
AEO 1989*
AEO 1990
AEO 1991
AEO 1992
AEO 1993
AEO 1994
AEO 1995
AEO 1996
AEO 1997
AEO 1998
AEO 1999
AEO 2000
AEO 2001
AEO 2002
AEO 2003
AEO 2004
AEO 2005
AEO 2006
Actual
source: C:\Backups\EUCI 100505 Presentation\Back up and working papers\Hist EIA oil price fc.xls; andAnnual Energy Outlook, Mid-Price or Reference Case Projections, Various Editions (forecasts), Energy Information Administration, Annual Energy Review 2005, DOE/EIA-0384(2005) (Washington, DC, July 2006) , Table 5.21 (historical data)
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Market ForecastsHave Not Improved
source:Q:\MS\Admin\Contracts\Marty Howard\Uncertainty and Prediction\20080511 Gas Price Forecast Error Characteristics 6 mjs.doc
0
0.5
1
1.5
2
2.5
3
3.5
0 200 400 600 800 1000 1200
$/m
mbt
u Er
ror
Days Forward
Gas: Average sqrt(Squared Error) vs. Number of Days Forward3.503.002.502.001.501.000.50
0.00
Cur
rent
$/M
MB
TU
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How the NWPCCApproach Differs
• No perfect foresight, use of decision criteria for capacity additions
• Likelihood analysis of large sources of risk (“scenario analysis”)
• Adaptive plans that respond to futures
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Special Terms
• Futures: aspects of the future we cannot control, combinations of uncertainties
• Plans: actions or policies that we can control
• Scenario: a particular plan under a particular future
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Sources of Uncertainty• Fifth Power Plan
– Load requirements– Gas price– Hydrogeneration– Electricity price– Forced outage rates– Aluminum price– Carbon allowance cost– Production tax credits– Renewable Energy Credit
(Green tag value)
• Sixth Power Plan– aluminum price and
aluminum smelter loads were removed
– Power plant construction costs
– Technology availability– Conservation costs and
performance
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Excel Spinner Graph Model
• Represents one plan responding under each of 750 futures
• Illustrates “scenario analysis on steroids”
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Uncertainty and theConstruction Cycle
Cap
acity
Planning
Early Construction
Committed construction
In service
time
Delay
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Num
ber o
f Obs
erva
tions
Cost for Future 2
Cost for Future 1
Distribution ofCost for a Plan
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2006 $M)->
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Risk and Expected Cost Associated With A PlanLik
elih
ood
(Pro
babi
lity) Avg Cost
Risk = average ofcosts> 90% threshold
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2006 $M)->
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Likeli
hood
(Pro
babil
ity) Avg Cost
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2004 $M)->
Risk = average ofcosts> 90% threshold
Likeli
hood
(Pro
babil
ity) Avg Cost
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2004 $M)->
Risk = average ofcosts> 90% threshold
Likeli
hood
(Pro
babil
ity) Avg CostAvg Cost
10000 12500 15000 17500 20000 22500 25000 27500 30000 3250010000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2004 $M)->
Risk = average ofcosts> 90% threshold
Feasibility Space
Increasing TailVaR90
Increasing Average Cost
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Space of feasible solutions
Finding Robust Plans
Reliance on the likeliest outcom
e
Risk Aversion
Efficient Frontier
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Modeling Process
The portfolio model
Likeli
hood
(Pro
babil
ity) Avg Cost
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2004 $M)->
Risk = average ofcosts> 90% threshold
Likeli
hood
(Pro
babil
ity) Avg Cost
10000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2004 $M)->
Risk = average ofcosts> 90% threshold
Likeli
hood
(Pro
babil
ity) Avg CostAvg Cost
10000 12500 15000 17500 20000 22500 25000 27500 30000 3250010000 12500 15000 17500 20000 22500 25000 27500 30000 32500
Power Cost (NPV 2004 $M)->
Risk = average ofcosts> 90% threshold
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Picking a PlanConsiderations
• The strategies along and removed from the efficient frontier
• Other sources of risk, not necessarily captured by the efficient frontier
• The timing of commitments• Controllable costs
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ClaimAnnual
RiskAnnual
PremiumAnnual
Rate1 in 10 over 20 years $ 3 B 2006 1 in 190 $ 15 M 2006 0.50%
injury in auto 13,262.00$ 1 in 128 207.22$ 1.56%major wind damage 6,518.00$ 1 in 258 50.53$ 0.78%
major water damage 5,033.00$ 1 in 387 26.01$ 0.52%
1 in 100 over 20 years $ 10 B 2006 1 in 2000 $ 15 M 2006 0.15%fire in home 21,979.00$ 1 in 1057 41.59$ 0.19%
source: C:\Backups\EUCI 100323 Presentation\Efficient Frontier\EUCI 100323 01.xlsand http://insuranceriskcalculator.com
Option Costs and Risk Benefits
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What the Risk ModelingTeaches Us
• Power plant construction lead time is critical to economic risk
• It is better to be a little surplus in resources than a little deficit, but…
• The biggest blunder is overbuilding. This is consistent with history, too.
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What the Risk ModelingTeaches Us
• Utilities that are reliant on fossil fuels may become economically “short” if carbon control legislation is passed
• If so, they may face a triple whammy:– greater reliance on the market, – higher electricity prices in the market, and – lower value for generation
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What the Risk ModelingTeaches Us
• If we ignore risk, the least-cost plan is relying on the market for new capacity
• Least-risk plan resources need not be “used” to be useful
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• Not all resources can or should cover their costs in the wholesale energy market
• Acquiring conservation that costs $50/MWh over wholesale energy price reduces cost and risk – “the business case”
155000
155500
156000
156500
157000
157500
158000
104000 104500 105000 105500 106000
Cost (NPV $2006 M)
Ris
k (N
PV $
2006
M)
L8112L8112 frontier
A
B
CD
Source: Analysis of Optimization Run_L811 090502.xls
155000
155500
156000
156500
157000
157500
158000
104000 104500 105000 105500 106000
Cost (NPV $2006 M)
Ris
k (N
PV $
2006
M)
L8112L8112 frontier
A
B
CD
155000
155500
156000
156500
157000
157500
158000
104000 104500 105000 105500 106000
Cost (NPV $2006 M)
Ris
k (N
PV $
2006
M)
L8112L8112 frontier
A
B
CD
Source: Analysis of Optimization Run_L811 090502.xls
What the Risk ModelingTeaches Us
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End
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NWPCC ForecastsHave Not Improved
NWPCC World Oil Price Forecasts
0
20
40
60
80
100
120
140
1970 1980 1990 2000 2010 2020 2030
Year
2002
$/B
arre
l83 LL
83 LM
83 HM
83 HH
86 LL
86 LM
86 HM
86 HH
91 LL
91 LM
91 M
91 HM
91 HH
96 LL
96 LM
96 M
96 HM
96 HH
03 LL
03 LM
03 M
03 HM
03 HH
83 MJS
86 MJS
source: C:\Backups\EUCI 100505 Presentation\Back up and working papers\WOP Forecast History_MJS.xls