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Tier 2 Facts

What is Tier 2?

For many years, OTEC has relied on the Bonneville Power Administration (BPA), to use the Federal Based Hydro System (FBS) to meet all of our power needs. Over the past few years, power demand has exceeded the FBS's ability to meet the needs of the northwest utilities. This has caused BPA to go into the market place to provide the needed generation. This inability to meet the demand was one of the big reasons for the huge price spikes the region endured in 2001.

Why Tier 2?

As BPA readies power sales contracts to offer utilities such as OTEC, for long-term service starting on October 1, 2011, BPA is trying to best determine how to accomplish its need to provide power, while preserving the value of the FBS. To this end, leaving the FBS as pure as possible (not augmenting other more expensive power sources) will help keep rates as low as possible. 

BPA wants each utility to make its own resource decisions to serve the new load above the amount the FBS can provide. Keep in mind that BPA is willing to acquire the resources needed to meet our load, but the resources that BPA chooses may not be the ones each utility would have chosen on their own.

Why would BPA make different choices than OTEC or other utilities?

Each resource carries its own profile of cost, risks and environmental characteristics. The Resource Program will explore the tradeoffs involved with each resource and their interactions. Unlike BPA, each utility can make choices that are tied more to resource cost than to political pressures. For example, the Pacific Northwest Electrical Power Planning and Conservation act of 1980 gives BPA direction for its power resource acquisitions — buy what's cost-effective in the following order: (1) energy conservation (with a 10 percent cost advantage), (2) renewable resources, (3) cogeneration, and only then (4) traditional thermal resources such as oil, natural gas, coal or nuclear energy. This requirement does not allow BPA to obtain the most economical power resource available.

What political pressures does BPA face in this process?

Every five years, the Northwest Power and Conservation Council produces an Electric Power and Conservation Plan for the entire Northwest. The Council completed its new plan in 2009 and released it in February 2010. 

By law, BPA's resource acquisitions are guided by the Power Plan. BPA sets its performance targets to achieve, for example, its share of the Council's energy efficiency goal for the region. In addition, the Council must review any BPA proposal to acquire a major power resource that is intended to produce more than 50 average megawatts for five years or longer. 

BPA must also consider political pressures in each state. For example, Oregon, Washington and California have each passed laws mandating different Renewable Portfolio Standards that utilities must follow. These laws dictate to utilities when and how much of their energy portfolio MUST come from renewable sources. In addition, these laws may make it virtually impossible to consider new coal fired or nuclear plants. 

There is continual pressure from environmentally oriented groups to remove dams on the Columbia and Snake Rivers. If this does occur, there will be less hydropower for BPA to deliver. Short of complete removal, court decisions and the endangered species act can have a drastic effect on the amount of hydropower that BPA is able to produce.

What about Renewables for Tier 2?

OTEC is fully in support of purchasing renewables that are cost competitive with the market place. But renewables are not the answer on their own. For example, wind power provides energy but requires backup for windless days. Combustion turbines are generally seen as the next-best resource for backing wind, after hydropower. Large nuclear and coal plants provide blocks of steady output, but cannot be ramped up or down quickly and leave a huge hole in the power supply if they go off line unexpectedly. State renewable portfolio standards will play a major role in determining the types of resources OTEC can use.

What will Tier 2 cost?

No one knows for sure at this time, but we believe it will be at least double what we are paying for FBS hydro from BPA today. Power from BPA's FBS is sold at cost-based rates at a cost of a little over 3 cents per kWh for power. Tier 2 power will be at current market prices. Most of the projects proposed today are 5.5 cents per kWh or higher. Without market-price contracts for Tier 2, no one would develop projects to meet our power needs.

How much Tier 2 power will OTEC have to purchase?

That will be determined by two basic determinates. They are load growth and the output of the FBS. Today basically all of OTEC's load can be provided within the output of the FBS. But future load growth in 2011 and beyond will need to be served from Tier 2 sources. Secondly, if dams are removed from the river, or output from the dams is reduced (due to fish mitigation, etc.) then the replacement power will need to be purchased as a Tier 2 resource.