saysit needs more rapid response gas-fired generation to cope with increasinglyjagged demand peaks and valleys.

The ArizonaCorporation Commission reviewed APS's approach in a special meeting on July 18as the utility continues work on its 2017 integrated resource plan, whichforecasts needs over 15 years.

ThePinnacle West Capital Corp.subsidiary on March 1 filed a preliminary plan illustrating the challenges it increasingly facesto meet evolving load patterns brought on by abundant solar generation. Decliningminimum loads and sharply changing patterns in maximum loads requirefast-responding resources, the utility said.

Thisis particularly evident in non-summer months when overall demand is low andrenewable energy resources result in dual peaks — one in the morning and alarger peak in evening hours — with a large demand slump at midday. The utilitysaid it must have flexible gas resources that can be shut off or ramped down tocompensate for plentiful solar power during the midday.

APSis projecting it will need to increase its gas-fired resources that produce 26%of total energy consumed to meet 36% of energy demand by 2031 as solar andother renewables increase from 11% to 18% and energy efficiency increases from12% to 14%.

Muchof the additional gas resources will be needed due to the high cost ofenvironmental regulations impacting the utility's coal fleet, APS Director ofResource Planning Jim Wilde said in an interview. "The lowprice of natural gas is a big determining factor in that," Wilde said.

SouthwestEnergy Efficiency Project Arizona representative Jeff Schlegel said theincrease in natural gas-fired generation will heighten the risk for consumerssince gas prices historically have been volatile. "The future price isuncertain for APS, but the risk is completely borne by customers,"Schlegel said.

CommissionChairman Doug Little said gas prices are also a large concern for him, but henoted the need to mitigate risk with balanced generation portfolios as APSretires its coal plants. "What we need to do in this processis look at many factors, not just the fuel price, because of other impacts onArizonans as well," Little said.

CommissionerRobert Burns noted Mexico's interest in construction of a pipeline that coulddivert gas from Arizona. "We don't have gas storage facilitieshere in Arizona," Burns said. "The natural gas issue is a verycritical one. We've got to be careful not to put too many eggs in one basket."

Schlegelsaid his group, known as SWEEP, believes customer resources should be a largerpart of APS's portfolio. SWEEP is a public interest group that promotes greaterenergy efficiency.

Wildesaid APS hedges its fuel over three-year periods to cushion against priceincreases, and those hedges cover the comparatively brief periods of gas pricespikes. APS is making existing gas-fired capacity more fuelefficient and is partnering with customers on microgrids, he noted.

Thecompany is increasingly focusing on using demand side management to addresspeak demand rather than simply providing overall energy savings, Wilde said.Energy can be bought cheaply at midday and in some cases APS gets paid to takesurplus energy from California, so energy savings measures are moreappropriately applied during high price periods, he said.

Theutility said in its preliminary integrated resource plan report that it willsoon begin to participate in the CaliforniaISO's energy imbalance market to optimize generation dispatchacross multiple utilities. Technological advancements provide for enhancedreal-time management for energy dispatch, APS said.

Further,APS aims to deploy other flexible options, including battery storage, smallreciprocating engines and updated customer price signals, to tamp down peakdemand, the report said. More energy efficiency and demand response resourceswill be acquired.

Theutility sees future needs to acquire in excess of 3,500 MW by 2022 to replaceexpiring energy and capacity contracts and meet increasing demand. By 2027 theneed is forecast to grow to 5,400 MW of new resources.

Aftermore workshops on its preliminary plan, APS will start working on writing itsfinal integrated resource plan in the early fall to meet an April 2017deadline, Wilde said.