MEMORANDUM

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WRITTEN TO: GREG NUDD (EPA), STEPHEN EDGERTON (ECR) DATE: AUGUST 28, 2012

WRITTEN BY: GARY MIRICH

REGARDING: HAWAII LOW SULFUR FUEL MODEL – AVOIDED COST IMPACT FOR HELCO

It came to our attention that the original LSF modeling we had completed for EPA did not address an 

avoided cost issue relative to HELCO. Specifically, we came to understand that the cost paid by MELCO 

for IPP renewables was based on an avoided cost calculation, and that any change in avoided cost in our 

modeling (i.e. increased fuel costs driven by a change in fuel from LSFO to LSIFO) would need to address 

the impact on avoided costs paid for the QF purchases. 

This memo discusses the changes incorporated into the MS Excel workbook titled “C-5-g Fuel Cost 

Screening - r0 - 08_15_12 ESLC Edits” made to address the impact of avoided costs on the total utility 

fuel cost and electric rate impact outputs from the model. 

Modeling Modification

Based on research on the HI rules and discussion with the HI staff we learned that the HI avoided cost 

calculations are derived from a production cost model revised annually, but run monthly to create both 

on and off peak avoided cost rates for those hours. The avoided cost actually paid to generators is, 

therefore, a function of their on and off peak production (MWh) and the calculated on and off peak 

prices. Although some key components of the historical avoided costs are published online, those 

readily available do not include the year 2009 – the year in our fuel impact model. Even so, had that 

data been available we are not confident that we could recreate the calculations without considerably 

more data and access to all assumptions in the production cost model employed at the time. 

To address the avoided cost issue in light of the constraints on information and data, we modified the 

LSF model as described. Avoided costs are derived from an approved stipulation in a case concluded 

before the HI PUC in 2002. The stipulation approved the general methodology for calculation of avoided 

cost and calls the method a “QF in /QF out” approach – where avoided cost is driven by cost differential 

that occurs when MWh production of existing fossil resources are replaced by MWh from a QF resource. 

In this case the qualifying resources are the renewables that HELCO purchases. 

1. The original LSF fuel impact model estimated 2009 costs for QF renewable plant purchased

based on averages of the prior three years costs – data that was available online. This data also 

included the MWh of production purchased from each facility, thus an estimated 2009 MWh of 

QF production was calculated using the average of 2006-2008 data. The estimated 2009 QF 

MWh production for each plant totaled 340,604 MWh. The revision in the model to address 

avoided costs therefore seeks to determine what cost was avoided from fossil plant production 

(QF out) because 340,604 MWh of energy was supplied by QFs (QF in).

2. Seeking to balance with the QF MWh production described above, thermal plant output was 

increased by changing the capacity factor of individual units. Any fossil plant production that 
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was increased in order to reach the targeted MWh (340,604) was not allowed to run more than 

85% capacity factor in a year.

3. Plant capacity factors were increased on the highest heat rate unit first, then the next highest, 

and so on, until the total MWh produced by the adjustment equaled the QF MWh production 

described above. 

4. The MWh adjustments were made for both the base case and the alternative case, then the 

difference in fuel cost between the two cases was calculated – this represented the incremental 

avoided cost as a result of the higher fuel cost in the alternative case.

5. This incremental avoided cost was added to the cost of each QF plant price for the year to give 

the adjusted total impact. That impact flows through to the Dashboard page in the model.