1

An Efficiency Power Plant in Three Years –

An Interim Goal for the Northwest

Council document 2001-26

Overview

The Lesson of the Past Few Years

Over the last years of the 1990s, the Northwest and, for that matter, the entire West invested very 

little in new resources, whether generation or efficiency. During the years 1997 through 2000, 

Northwest utilities invested in efficiency at a pace that was roughly half as much as the Council 

determined to be cost-effective in its 1998 Power Plan. This is despite the fact that the Council’s 

cost-effectiveness assessment was based on forecast power costs that were much less than current 

forecasts and very much less than the actual wholesale power costs experienced over the June 2000 

to June 2001 period. The factors influencing that decline included the uncertainty about electricity 

industry restructuring and the mistaken expectation that the low market prices of the late 1990s 

would persist. 

What seems likely is that electricity prices will be much more volatile than they have been in the 

past. The extreme volatility of the past year is an example. In such an environment, investments in 

efficiency that appear only marginally cost-effective during periods of lower prices will be 

extremely cost-effective during periods of higher prices. In fact, if the conservation1 called for in the 

Council’s 1998 Plan had been in place in the June 2000 to June 2001 period, more than 80 percent of 

its full cost would have been paid for at the average firm wholesale prices at the Mid-Columbia 

trading hub. If this conservation were in place today, it would produce additional savings for an 

average of 13 more years.

In response to the tight supplies and high prices of the past year, utilities have refocused on 

conservation, in particular on conservation measures that could be implemented quickly. For 

example, record numbers of compact fluorescent lights have been sold over the past year with 

incentives from regional utilities. However, the question now is what is going to happen over the 

next few years. At least two scenarios are possible. Prices have moderated and some are predicting 

an excess of new generation that, combined with more normal hydro conditions, would drive power 

prices down. This could presage another round of volatile prices by suppressing development until 

demand again overtakes supply. Alternatively, much of the generation currently in the development 

process or in the earliest stages of construction may not be completed as scheduled, leaving the 

region facing potential reliability issues when we again experience worse-than-normal hydro 

conditions. 

Either scenario suggests that we ought to re-think our approach to conservation. Many analysts 

believe that volatility will be the norm in electricity markets. Rather than accelerating and 

decelerating conservation acquisition in response to the swings in market prices, we believe it makes 

 

1

 This paper uses “efficiency” and “conservation” interchangeably. The definition of conservation is consistent with that 

used in the Northwest Power Act – reductions in the use of electricity resulting from improvements in the efficiency with 

which electricity is used. 
2

more sense to sustain a level of investment that is justifiable in light of expected average prices and 

that can prove very valuable during periods of upward volatility. Such investment can insulate a 

portion of a utility’s loads from that volatility and protect consumers. Moreover, sustainable 

investment in efficiency is more economically efficient. The infrastructure needed to implement 

much of the lowest cost efficiency resource – manufacturers, engineers, contractors, utility staff –

cannot efficiently ramp their activity up and down with the variations of the power market. 

Prospects for Sustainable Funding

What is the prospect that the region will provide sustainable funding for implementing the costeffective amounts of conservation over the next several years? The signs are mixed. Two states in 

the region have instituted systems benefits charges. In Oregon, for example, the Legislature has 

created a mechanism to fund conservation and renewables efforts in investor-owned utility (IOU) 

service areas as part of its electricity restructuring legislation. This mechanism will begin operation 

in March of next year. A non-governmental, non-profit group, The Energy Trust of Oregon, will 

administer funds equal to 3 percent of revenues from the sale of electricity by the investor-owned 

utilities and is mandated to use those funds to develop conservation and renewable resources. Most 

of it is targeted for conservation, including low-income conservation. Low-income energy bill 

assistance is funded separately. Large customers will self-direct similar conservation and 

renewables efforts. That system should provide sufficient funding for customers of Oregon’s 

investor-owned utilities. Public utilities can opt out of the system. Among the publicly owned 

utilities, some have and will continue to pursue efficiency improvements aggressively, some have 

not. What they will do in the future is unclear. 

Montana also has a systems benefit charge established as part of its restructuring legislation. It is 

funded at the rate of 2.4 percent of utility revenues. The funds are administered by the individual 

utilities and can be used for conservation, low-income weatherization, low-income bill assistance 

and renewables. Public utilities that purchase power from Bonneville can use the portion of their 

Bonneville charges attributable to debt service on past conservation investments as an offset to the 

system benefits charge. This reduces the amount available for new conservation investment. 

In Washington and Idaho, there is no overall system benefit charge, and utilities, both public and 

private, are pursuing efficiency improvements at different rates. Some utilities have been very 

aggressive, some have not. 

We do know that many utilities will be implementing rate increases, which should increase many 

consumers’ interest in and need for conservation. The Bonneville Power Administration is offering 

a discount on its wholesale rates to its utility customers that operate qualifying conservation and 

renewables programs. On the other hand, many utilities will be trying to recover high costs of power 

purchases made over the past year. Many may be inclined to cut conservation staff and expenditures 

on the grounds that the “energy crisis” has passed and costs must be cut. Some already have. 

The New Power Plan

Over the next year or so, the Council will be developing a new power plan. As required by the 

Northwest Power Act, an important element of that plan will focus on evaluating the benefits and 

costs of investment in new and existing efficiency technologies and programs and the potential 

contribution of these technologies and programs to the region’s energy supply. Equally important, 
3

the plan will also address the policies necessary to achieve sustainable levels of investment in costeffective efficiency throughout the region. This is consistent with both the Northwest Power Act and 

the energy policy recently adopted by the Western Governors. 2

In developing the conservation elements of the power plan, the Council will work with the 

Bonneville Power Administration, individual utilities, industries, builders and developers , 

conservation advocates, state and local governments, tribes and other interested members of the 

public. The Council will form a Conservation Advisory Committee in the very near future to carry 

this work forward. While we believe we can accomplish this task over the next year or so, the 

complete process from conception to implementation will take some time. In the interim, it is 

important that the region not lose the momentum established for conservation over the last year. 

Maintaining Momentum in the Interim

As a way of encouraging continued attention to cost-effective conservation at sustainable levels, the 

Council is proposing to adopt a tangible near-term conservation goal for the region and to challenge 

the region’s citizens, utilities, and others responsible for conservation implementation to commit to 

achieving their share of that goal. In general, the proportion of regional load that each load-serving 

entity represents would determine the share. A tangible near term goal would be to commit to 

building roughly the equivalent of the output of a power plant – a large combined cycle combustion 

turbine – through conservation over three years. This would translate into approximately 100 

average megawatts per year. As will be shown in the following sections, the Council believes such a 

goal is achievable and cost-effective. 

The Council is seeking public comment on the following questions:

• Should the Council establish an interim conservation target?

• Are the target levels proposed appropriate?

• What kind of response to that target should the Council expect from those entities with 

conservation responsibility? 

• What mechanisms and forums could be used to enhance the response?

• Is the method proposed for allocating the target to different entities reasonable and workable?

 

2

 See www.westgov.org/wga/policy/01/01_01.pdf
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What Are We Capable of Doing and What Have We Done?

The Northwest has an admirable record of conservation development. Figure 1 shows conservation 

acquisitions by utilities in the region through the decade of the 1990s.3 

Figure 1

Annual NW Utility Conservation Savings

0

20

40

60

80

100

120

140

160

19901991199219931994199519961997199819992000

Average Megawatts

Actual

Council's Plan

As Figure 1 shows, the region is capable of developing conservation resources at a signifiant rate. 

Conservation acquisition peaked in 1993 at almost 140 average megawatts. The rate of acquisition, 

however, fell off dramatically in the latter years of the decade. The factors influencing that decline 

included the uncertainty about electricity industry restructuring that was pervasive during that 

period, and the apparent expectation that the relatively low wholesale power prices would persist. 

In its Fourth Northwest Power Plan the Council identified approximately 1535 average megawatts of 

conservation opportunities that could be cost-effective to develop over a 20-year period. The 

Council’s analysis estimated that by developing these resources, rather than relying on new gas-fired 

generation, the region could save $2.3 billion dollars in avoided electricity costs and reduce carbon 

dioxide emission by approximately 80 million tons. The plan’s estimate of cost-effective 

conservation potential was based on a maximum total regional levelized cost of 3.0 cents/kilowatthour ($30 /MW-Hr). 4

 Figure 1 shows the annual level of acquisition that the Council determined to 

be cost-effective for the years 1997 through 2000. Those estimates were based on expected future 

market prices that now look naïve. They began in the low to mid-2 cents/kilowatt-hour and rose 

gradually into the mid- to upper-2s/low 3s over the next 20 years. But even given those low avoided 

costs, actual acquisitions were approximately half the cost-effective acquisitions identified in the 

Council’s Plan.

 

3

 Year 2000 actuals are preliminary and based on partial reporting of achievements.

4

 Total regional cost includes all costs paid for conservation including administration costs. Unlike power purchases, 

consumers who benefit from conservation savings are usually willing to bear some portion of its costs.
5

How Much Conservation is Available at What Cost?

Figure 2 shows the annual level of conservation acquisition by levelized cost block over the several 

years that staff believes it is feasible to develop. This is based on analysis from the last power plan 

that looked at accelerating conservation implementation in response to higher prices.

Figure 2 – Annual Incremental Conservation Potential

Annual Conservation Savings by Levelized Cost 

Range

0

20

40

60

80

100

120

2001 2002 2003 2004 2005

Average Megawatts

4 to 5 Cents/kWh

3 to 4 Cents/kWh

2 to 3 Cents/kWh

1 to 2 Cents/kWh

0 to 1 Cents/kWh

This shows that over the next three to four years, there is approximately 100 average megawatts per 

year at maximum levelized costs up to 3 to 4 cents/kilowatt-hour. The great majority of the savings 

have a levelized cost of 3 cents/kilowatt-hour or less. The average levelized cost of the conservation 

up to a maximum of 5 cents/kilowatt-hour is around 2 cents/kilowatt-hour. 

As shown on Figure 3, over the next three to four years, the total annual costs of developing the 

conservation up to the 4 cents/kilowatt-hour level are approximately $250 million/year, including 

utility administrative costs. Limiting conservation development to 3 cents/kilowatt-hour would have 

an annual cost of approximately $220 million/ year. These costs would not be solely the 

responsibility of the utility system. We expect these costs to be split in some proportion between the 

participating end-users and the systems’ ratepayers. End-users benefit directly from power cost 

reductions as well as, in many instances, non-energy benefits such as increased productivity, greater 

comfort, reduced maintenance costs, reduced environmental emissions, etc. Moreover, these 

expenditures would not be entirely incremental to current conservation budgets. At least 50 percent 

of this amount is already incorporated in utility commitments to the Northwest Energy Efficiency 

Alliance, Bonneville’s Conservation and Renewables Discount and Conservation Augmentation 

budget, and the Oregon Energy Trust. This does not include the plans of investor owned utilities 

outside the state of Oregon or the plans of major public utilities such as Seattle, Tacoma, Eugene, 

Snohomish Public Utility District and Clark Public Utilities nor does it include the participating end 

user’s contribution.
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Figure 3 – Annual Cost of Conservation

Annual Capital Investment

0

50000

100000

150000

200000

250000

300000

350000

2001 2002 2003 2004 2005

Thousands of Y2000$

4 to 5 Cents/kWh

3 to 4 Cents/kWh

2 to 3 Cents/kWh

1 to 2 Cents/kWh

0 to 1 Cents/kWh

As shown in Figure 4, almost 60 percent of the conservation potential lies in the commercial and 

industrial sectors. This implies that the conservation investment should contribute directly to 

making the economy of the Northwest more efficient and more risk resistant. 

Figure 4 – Conservation Potential by End Use

Where the Potential Resides

Non-Aluminum 

Industrial

30%

Irrigated 

Agriculture

1%

Existing 

Residential 

Space Heating

2%

New 

Residential 

Space Heating

11%

Residential 

Lighting

2%

Water Heating

21%

Refrigerators & 

Freezers

5%

Existing 

Commercial

11%

Commercial 

Renovation/Re

model

4% New 

Commmercial

13%
7

How Much is Cost-effective

Cost-effectiveness is a relative term. If the point of comparison is the fully allocated cost of power 

from a new combined cycle combustion turbine, Council staff’s current estimate is a levelized cost

of approximately 36 to 37 $/megawatt-hour (2000 $) or 3.6 to 3.7 cents/kilowatt-hour.5 

Alternatively, one might compare the cost of conservation with the long-term cost of power on the 

market. Figure 5 shows a comparison of the market price forecast used in developing the 

conservation levels in the Council’s last plan compared with a more recent price forecast and the 

actual wholesale prices of the past year.

Figure 5 – Wholesale Price Forecasts

Monthly Average Wholesale Prices

0

100

200

300

400

500

600

Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05

$/Megawatt-Hour

Plan Forecast

Reliability Study

Forecast

Mid-C Actual

The line marked “Plan Forecast” was the estimate of ma rket prices used in the Council’s last power 

plan. It was produced in 1995 before the wholesale market was very well developed and before the 

Council had incorporated a more sophisticated model of the West Coast power market into its 

analyses. The line marked “Reliability Study Forecast” was developed in early 2000 using 

AURORA, a commercial model of the West Coast electricity markets. AURORA is a “market 

fundamentals” model. This means that market prices are set by the operating cost of the most 

expensive power plant that has to operate to meet load. The analysis assumed average loads and 

hydro conditions. The results demonstrate the typical increase in prices across the summer months 

driven by air-conditioning loads in California and the Southwest. The analysis uses a forecast of 

natural gas prices that many would think is optimistic, i.e., leading to lower electricity prices than we 

are likely to actually see. It also assumes orderly development of new resources where developers 

have perfect knowledge of future prices and new resources are added to the system only when they 

can make an adequate return on investment. As a consequence, the results of this model do not 

reflect the effects of periods of oversupply and undersupply on prices. While this forecast reflects 

significantly higher prices than the plan forecast, it does not capture the market behavior (Mid-C 

Actual) experienced over the past year. 

 

5

 Fully allocated costs include both fixed and operating costs. 
8

Using the reliability study forecast, we would expect average annual market prices beginning in the 

mid- 3 cents/kilowatt-hour range and trending upward, reaching 5 cents/kilowatt-hour by 2005 and 

continuing upward thereafter. Market prices higher than the cost of power from a new combined 

cycle power plant reflect the operation of older, less efficient plants during periods of high demand. 

On the basis of this forecast, conservation acquisitions up to a levelized cost of 4 cents/kilowatt-hour 

would clearly be justifiable in the near term. Acquisitions in the 4 to 5 cents/kilowatt-hour range can 

also be justified where the measures involved yield higher-valued summer period savings or where 

the conservation would otherwise be a “lost opportunity.” Lost opportunity measures are typically 

measures involved in new construction or long-lived capital equipment where retrofit to higher 

efficiency is not practical. However, limiting the target to the conservation costing up to 4 

cents/kilowatt-hour has little impact on the target level.

As noted earlier, acquisition up to these levels implies annual conservation costs in the neighborhood 

of $240 to $250 million/year. While this level of expenditure is substantial, it is below past levels of 

expenditure, it is a relatively small increment to current spending and it is cost-effective on the basis 

of what many would say is an optimistic (i.e., low) view of future electricity prices. 

It should be noted that the risk profile of an investment in conservation is significantly different than 

the risk profile of a gas-fired combustion turbine or reliance on the spot market. The conservation is 

essentially all capital cost. Once you have made the investment, you can't avoid the costs. The cost 

of power from the gas turbine is largely operating cost - primarily fuel. When the power market is 

operating competitively, prices will be closely tied to fuel prices, which can themselves be volatile. 

At other times, such as this past year, spot market prices for electricity will be more volatile that the 

underlying fuel price. 

The point is that both conservation and gas turbines present risks, but they are different risks. 

Including 300 megawatts of fixed cost conservation along with 4000 megawatts of new gas turbines 

is a prudent diversification of the region's portfolio of power system investments. If, over the next 

15 years, the region experiences a year of price volatility in which the average wholesale price is 

only half what it was over the past year, the savings from the conservation investment would cover 

approximately 40 percent of the total cost noted above in that one year. 

The Target

On the basis of the foregoing, staff recommends a short-term target of at least 100 average 

megawatts per year over three years. This translates into a bit more than the energy output of a 

typical single-unit natural gas-fired combined cycle combustion turbine power plant (270 average 

megawatts) and the period, three years, is approximately the time it takes to plan, site, permit and 

construct such a generating unit. Staff recommends communicating that goal as “building a 

efficiency power plant.” The reasons are:

• The goal communicates that conservation is an energy resource like generation;

• Expressing the goal as a generation equivalent makes it tangible in a way that the public can 

understand. 

• The goal communicates commitment to a diverse resource portfolio for the region. The 

region currently has almost 4000 megawatts of new, gas-fired generation either recently 

completed or under construction. The goal expresses the commitment to get less than 10 

percent of that figure through efficiency. 
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Who’s Responsible for How Much?

Staff proposes that the Council adopt this interim target and ask each entity responsible for 

conservation delivery to commit to building their share of the efficiency CT over the next three 

years. These entities include utilities, the Oregon Energy Trust, and, where major retail consumers 

have direct access to the power market, the consumers. Shares would be determined by each entity’s 

share of regional load. Based on 1999 loads, the responsibility for energy savings by utility would 

be approximately as shown on Figure 6. The Regional Technical Forum, working with Council 

staff, has developed a web site that will greatly facilitate both the selection of measures or programs 

that utilities would offer and the reporting of accomplishments. 

However, the intent is not to have a rigorously enforced target for each entity or to dictate what 

conservation programs are undertaken or how they are delivered. The intent is rather to put a 

spotlight on the importance of continued attention to improving the efficiency with which we use 

electricity and establish an expectation that all will do their part. The Council recognizes that some 

utilities in the region are already planning for more than “their share” of this goal and applauds them 

for their initiative. The Council also believes that there are some who have planned on doing less. 

The Council hopes that this will encourage them to reach farther. 

There are some issues that will have to be resolved. There is an issue as to whether utilities that 

purchase part of their load from Bonneville pay for all the conservation in their territory or only that 

part served by their own resources. Those customers typically have the ability to maintain their load 

on Bonneville while being able to sell on the market their own resources made available as a result 

of the conservation savings. To the extent that is the case, the data in figure 6 assigns responsibility 

on the basis of load, it makes no assumptions regarding what the source of the funding may be. The 

data in figure 6 also assigns major direct access customers to the utility. Where the customer has 

direct access, the utility cannot be held responsible for the conservation investment. We would 

expect direct-access customers to be responsible for their own share. 
10

Figure 6

Shares of Regional Retail Sales -- 1999

(not including DSIs)

PUD No 1 of 

Snohomish 

County

4%

PUD No 2 of 

Grant County

2%

Bonneville 

Federal 

Agencies

1%

Avista Corp

5% Idaho Power Co

9%

Montana Power 

Co

1%

PacifiCorp

13%

Portland 

General Electric 

Co

13%

Puget Sound 

Energy Inc

13%

PUD No 1 of 

Chelan County

1%

PUD No 1 of 

Clark County

3%

Eugene City of

2%

PUD No 1 of 

Cowlitz County

3%

Tacoma City of

4%

Seattle City of

6%

Other Public 

Utilities

20%

*

 Source: U.S. Department of Energy, Energy Information Agency

Opportunities for Public Comment

Please submit comments on this issue paper and, specifically to the questions on Page 3, by the close 

of business Friday, November 16, 2001. Public comments also will be accepted at the Council’s 

November 8, 2001 meeting in Idaho Falls, Idaho and its December 12 Work Session in Portland, 

Oregon. Please address all comments to Mark Walker, Director, Public Affairs, Northwest Power 

Planning Council, 851 SW Sixth Avenue, Suite 1100, Portland, Oregon, 97204. Comments will also 

be accepted via e-mail at comments@nwppc.org. Please indicate that you are commenting on 

Council document 2001-26.

*West of 

Continental Divide