Selected Geothermal Resource Topics Selected Geothermal Resource Topics from a Utility Perspectivefrom a Utility Perspective

Geothermal Power Generation Workshop

May 11, 2003

Ken Dragoon

PacifiCorp

ken.dragoon@PacifiCorp.com

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PacifiCorp’s Power SystemPacifiCorp’s Power System

Western Control Area Eastern Control Area

PacifiCorp’s power system is divided into two separate control areas.

Transmission interconnection between the two control areas allows for generation sharing.

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PacifiCorp’s Resource MixPacifiCorp’s Resource Mix

PacifiCorp Resource Mix7973 MW Capacity*

Coal77%

Hydro14%

Gas8%

*Does not include contractual purchases.

Geothermal .3%Wind .4%

Other .7%

1.5 million retail customers in six states, covering 135,000 square miles.

Owned and contractual resources with about 8,800 MW of capacity.

Annual load growth of about 2.1% 4,000 MW of new generation by 2013.

PacifiCorp integrates nearly 300 MW of wind capability on its system.

One 23 MW geothermal project in Utah.

Considering others in renewable resource RFP.

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Renewables in PacifiCorp’s Integrated Resource PlanRenewables in PacifiCorp’s Integrated Resource Plan

» PacifiCorp used wind as a generic renewable resource because of its relative abundance.

» Plan identified 1,400 MW of renewable resources as part of the lowest cost resource portfolio.• Geothermal contributes nearly three

times the energy per nameplate MW.» Some outstanding issues in concluding

negotiations under the renewables RFP:• Counterparty Credit.• Hedge value?• Operational experience versus modeling

assumptions for wind resources.

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Power Purchase Agreement IssuesPower Purchase Agreement Issues

» Financing can depend on long term power purchase agreements.• Biggest Issues in power purchase

negotiations:Cost of generated power.

– Must show prudency to regulators.» RPS can help.

Cost and availability of transmission to reach load centers.

Credit requirements of the parties.

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Why Credit Requirements?Why Credit Requirements?

» Utility View:

• Prime directive– serve low cost, reliable electric service to ratepayers.

• In the Midwest and California price run-ups, some sellers of power could not, or did not perform under their contracts.

Purchasers had to replace the lost power at extremely high market rates.

Utility power purchase agreements now have substantial credit requirements to satisfy potential liabilities for under-performance.

• Seller’s View: Now seeing cases where some utility

companies’ credit is not acceptable to lenders.

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Credit in Project-Financed ProjectsCredit in Project-Financed Projects

» Developers may not be backed by highly capitalized corporations, and have no, or low, credit ratings themselves.• Special purpose entities usually created

to build, own, and operate projects.

• Parent companies often do not want to use their credit to support projects.

» Sub-investment grade entities required to post letter of credit or similar security to ensure performance.• May tend to increase costs for smaller

entities.

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Renewable Resources as Market Volatility HedgeRenewable Resources as Market Volatility Hedge

» Utilities have increased reliance on market purchases and natural gas-fired resources to meet loads over the last ten years.• Electric and natural gas market prices

tend to be among the most volatile.» Renewable proponents suggest that the

high fixed, and virtually zero variable costs convey a hedge value that must be considered.• 2002 Lawrence-Berkeley study

suggested premium based on hedge value.

http://eetd.lbl.gov/ea/ems/reports/50484.pdf

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Hedging is a Matter of PerspectiveHedging is a Matter of Perspective

» Hedging implies that net revenue volatility is reduced by entering into a particular transaction.

» Whether a fixed cost resource increases or decreases net revenue volatility depends on the current portfolio.• Fixed cost resources act as a hedge in

portfolios that are effectively net buyers in the market.

• Fixed cost power acts as speculation (opposite of hedge) in portfolios that are effectively net sellers into the market.

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» Investors are, “… urging electric companies to disclose their exposure to climate risk and how they plan to mitigate that risk”. [The Risk Desk Vol V, Number 4, also see www.ceres.org/pub/publication.php?pid=59]

» PacifiCorp accounts for the value of this hedge by including a carbon adder fossil fuel dispatch costs.• Effect is to be willing to pay more for

renewable resources.Ultimate cost timing of the carbon cost

adder is uncertain.

Geothermal Hedges Climate RiskGeothermal Hedges Climate Risk

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ConclusionsConclusions

» Credit and economics remain significant issues for geothermal development.

• There is a role for regulators or other government agencies to mitigate the problem through capital support or renewable portfolio standards.

» Role of renewables in hedging costs is similar to other high fixed cost resources such as nuclear, and even coal to some extent.

• Hedging climate risk is potentially a much more important issue that is beginning to emerge.

» PacifiCorp is optimistic about the prospects for adding geothermal to its portfolio.