Long Run Marginal Cost
(LRMC)
Ryan Steele
Power Supply Planning Specialist
Overview
• Provide a historic overview of FBC’s LRMC
• Highlight BC Hydro’s stated LRMC
• Discuss FBC’s proposed LRMC approach
• Relationship to the Portfolio Analysis included the LTERP
• The Average Incremental Cost (AIC) approach
• Multiple LRMCs will be stated based on different portfolio
scenarios used to meet future load requirements
• Highlight considerations associated with applying the
LRMC
• The LRMC should be viewed as a price signal, not a threshold
Notable References to the LRMC
• Demand Side Management (DSM)
• Most predominate use of the LRMC
• Regulations require utilities to evaluate DSM using their Long-Run
Marginal Cost of acquiring electricity generated from clean or
renewable resources in BC
• Used as the approximate cost of power acquired over a
longer term horizon
• Evaluate the Cost of New Long Term Resources
• Certificate of Public Convenience and Necessity (CPCN) Applications
3
Historic FBC LRMC Statistics
• Wholesale Energy Markets: $84.94/ MWh
• With the drop in market prices, decreased from $84.94/MWh to
$56.61CAD/MWh (2014 -2018 PBR)
• Reflects FBC’s cost of energy when required in the short to
medium term
• Clean Power: $111.96/ MWh
• A levelized cost developed using a base price of $101.39/MWh
(2011$) from BC Hydro Standing Offer Program (SOP) and
escalated at 50 percent of CPI annually between 2011 and 2040.
• Demand Side Management (DSM) Applications
BC Hydro LRMC [2015 RDA]
Definition
• “LRMC can be defined as the price of the most cost-effective way of
satisfying incremental customer demand beyond existing and
committed resources”
• Levelized Unit Electricity Cost (LUEC) Approach
• The cost of Energy only was estimated at $85/MWh (2013$)
• Updated from the range of $85 to $100/MWh [2013 IRP]
• Based on DSM and IPP EPA renewals
• The cost of Capacity was estimated in the range of $50-55/kWyear (2013$)
• Based on Revelstoke Unit 6
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LRMC: BC Hydro vs FBC
• Do due a number of differences it is difficult to draw direct
comparisons between BC Hydro and FBC’s LRMC values
• Timing of Resource
• Volume Differences
• Governing Requirements
• Location Differences
• Methodology Differences
6
LRMC Calculation Method: LUEC
• Resource-specific calculation of the constant
electricity price required to cover all the relevant costs
associated with a resource, given a set of assumptions
• Note: Resources used to define BC Hydro LRMC are
resource options specific to BC Hydro
• Does NOT provide a portfolio estimate of the LRMC
• does not consider the combination with existing resources
or the combination with other incremental resources
7
FBC Proposed LRMC Definition
The cost to build, or contract on a long term basis, reliable
power where existing resources are insufficient to meet
forecasted load requirements
• Stated at the point of interconnection to FBC’s system
• Adders for applicable Transmission, Distribution, and/or line losses may
be used to translate the LRMC to the equivalent LRMC value at the
customers’ site
• The LRMC will be stated on a Real Basis (2015$)
8
Reliable Power
• LRMC represents the cost to meet load when existing
resources are insufficient
• Includes both an Energy and a Capacity component
• Future resource gaps occur within specific months (and at specific times)
• The Capacity and Energy components come from a
combination of resources in the portfolio
• Existing resources have attributes that influence the requirements of the
next incremental resource in addition to external factors
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Portfolio Analysis
• Using a Mixed Integer Linear Programming model to optimize each
portfolio scenario, addressing the following questions:
• What resources to acquire?
• When to acquire resources?
• Once a resource is acquired, how much energy should it generate?
• Several portfolio scenarios being considered
• The LRMC value is derived from (is a by-product of) a
portfolio scenario
• With multiple scenarios, correspondingly, FBC will state multiple LRMC
values
• The characteristics of a given LRMC will align with the characteristics of
the source portfolio
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Portfolio Scenarios & Characteristics
• Characteristics Evaluated
• Access to wholesale energy markets
• BC Hydro Power Purchase Agreement
(PPA)
• Requirement for 93% of energy to be
sourced from clean resources
• Percentage of projected load growth
addressed or deferred by DSM activity
• Base Portfolio
• PPA continues until expiry in 2033
• Portfolio Scenarios
• All portfolios are relative to the Base
Portfolio
• Conservative DSM
• Aggressive DSM
• Clean/Renewable Energy Only
• Remove 93% Clean Energy Cap
• Self-Sufficiency
• Flexible PPA
• Continued Access to Market Energy
• Requirement for 93% clean resources
• “Most Likely” DSM Scenario
* Scenarios are preliminary and may be subject
to change or additional scenarios may be
considered
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Average Incremental Cost (AIC)
• The AIC takes the present value of the incremental costs over the planning
horizon and divides those costs by the additional demand expected to be
served.
• Reflects the general level and trend of future costs that will be incurred as
forecasted demand increases
• AIC Calculations Steps
1. Establish a long-run demand forecast
2. Gather information regarding the characteristics and costs of resource
options
3. Determine the optimal combination of resources given a set of
constraints that can satisfy the forecasted demand.
4. Calculate the LRMC by dividing the present value of the optimal
portfolio by the present value of the additional demand served
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Average Incremental Cost (AIC)
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Proposed FBC Calculation Method: AIC
The LRMC is a by-product of the Portfolio Analysis
1. As a baseline, assume the load is constant at the current level (L0 =
2015) for the full planning horizon (next 20 years)
2. Based on the portfolio scenario being investigated, find the optimal
portfolio (P0) to meet the baseline load
• The characteristics of the portfolio scenario are implemented as constraints in
the portfolio optimization routine
3. Determine a Load Forecast (L1) for the planning horizon
4. Using the Load Forecast, and the same set of portfolio constraints
(characteristics), find the optimal portfolio (P1)
5. Calculate the LRMC
‫ۻ܀ۺ‬۱ =
ܸܲሺܲ‫݋݈݅݋݂ݐݎ݋‬Forecast ed Load ሻ − ܸܲሺܲ‫݋݈݅݋݂ݐݎ݋‬Current
ܸܲሺ‫݀ܽ݋ܮ ݀݁ݐݏܽܿ݁ݎ݋ܨ‬ሻ − ܸܲሺ‫݀ܽ݋ܮ ݐ݊݁ݎݎݑܥ‬ሻ
Load ሻ
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Other LRMC Considerations
• The LRMC should be viewed as a price signal, not a threshold
• The performance profiles (and risks) of different technologies needs
to be taken into account
• A combination of resources will be required to address gaps at certain times
• The identified incremental resource(s) may have attributes that complement existing
resources within the context of the portfolio
• The LRMC assumes that all electricity generated is of equal value
• This assumption does NOT hold true in practice
• FBC’s resource requirements vary at different times of the year
• The value of energy on the wholesale market varies at different times
• FBC’s time horizon to requiring a new resource is further into the
future
• Inappropriate applications of the LRMC can lead to negative impacts
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Summary
• The LRMC has previously been discussed in a number of contexts,
but primarily DSM Applications
• FBC has previously stated two LRMC values
• Wholesale Energy Markets; Clean and Renewable Energy
• FBC’s is planning to use the Average Incremental Cost (AIC)
approach
• By-product of the Portfolio Analysis included the LTERP
• Multiple LRMCs will be stated based on the different portfolio scenarios
• There are other considerations associated with LRMC values
•
The LRMC should be viewed as a price signal, not a threshold
• Details of the Portfolio Scenarios and corresponding LRMC
values to be discussed in a future workshop