# MEMORANDUM P AGE 1 OF 2
**W RITTEN TO**  **: G**  **REG N**  **UDD (EPA)**  **, S** **TEPHEN E**  **DGERTON (ECR)**  **D ATE**  **: A**  **UGUST 28** **, 2012**  **W RITTEN**  **B Y**  **: G**  **ARY M**  **IRICH R**  **EGARDING :**  **H AWAII**  **L OW**  **S ULFUR**  **F UEL**  **M ODEL**  **– A** **VOIDED C** **OST I**  **MPACT FOR HELCO**  It came to our attention that the original LSF modeling we had completed for EPA did no t 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 f uel 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
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-g Fuel Cost Screening
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- 08_15_1 2 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 t he 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 . T he avoided cost actually paid to generators is, therefore, a function of t heir 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, ha d that data been available we are not confident that we could recreate the c alculations 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 con straints 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 g eneral methodology for calculation of avoided co st 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 renew ables that HELCO purchases. 1. T he original LSF fuel impact model estimated 2009 c osts 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 foss il plant production (QF out) because 340,604 MWh of energy was supplied by QFs (QF in). 2. S eeking to balance with the QF MWh production described above , thermal plant output was increased by changing t he capacity factor of individual units. A ny fossil plant production that

# MEMORANDUM P AGE 2 OF 2 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.