CFC s Financial Webinar Series CERA: The Strategic Challenge. How to Submit Your Question

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1 CFC s CERA: The Strategic Challenge How to Submit Your Question Step 1: Type in your question here. Step 2: Click on the Send button.

2 CFC s CERA: The Strategic Challenge To start the program: Michael Burn, Account Director Cambridge Energy Research Associates Today s speaker: Sharon Reishus, Senior Director Cambridge Energy Research Associates

3 As a result of this session you will be able to: Describe the impact of FERC order List the components of upcoming price and rate pressures. Today s speaker: Sharon Reishus, Senior Director Cambridge Energy Research Associates North American Power 8

4 Modest Economic Growth Results in a Persistently High Unemployment Rate Real GDP Growth (Left scale, annual percent change) Unemployment Rate (Right scale, percent) Source: IHS Global Insight. 9 Bottom Line With US economic growth near stall speed, the risk of a return to recession is high (40 percent). Consumers and businesses are cautiously increasing their spending. Pent-up demand for housing will eventually be the key to stronger economic growth. Fiscal tightening is coming, but the big issues (entitlements and taxes) will not be settled until after the 2012 elections. Source: IHS Global Insight. 10 US GDP Growth Rates Note: GDP = gross domestic product. 11

5 Power Generation in North America 8,000 7,500 Global Redesign Meta Vortex 7,000 TWh 6,500 6,000 5,500 5, Cumulative Power Generation Capacity Additions in North America* 900, , , ,000 MW 500, , , , ,000 Non-wind Renewables Wind Gas- CT/ST Gas (CC) w/ CCS Gas- CC Coal- Advanced Coal- Conventional Nuclear - Global Redesign Metamorphosis Vortex *includes capacity added to replace older power plants that are retired in addition to new capacity built to meet rising demand 13 Scenarios: Power Generation Asset Changes 14

6 Natural Gas Market on a Roadway of Surprises Note: Bcf = billion cubic feet Henry Hub Price Outlook $6 tu B $5 M M r e p $ S $4 U $3 Nominal Real $ Source: IHS CERA, Intelligence Press. 16 Key Results form Selected Wind Energy Integration Cost Studies Sources: Brooks et al. (2003) [Xcel-UWIG]; Electrotek Concepts, Inc. (2003) [We Energies]; EnerNex Corp. and Wind Logics, Inc. (2004) [Xcel-MNDOC]; PacifiCorp (2005) [Pacificorp-2004]; Shiu et al. (2006) [Calif. (multi-year)]; EnerNex Corp. (2006) [Xcel-PSCo]; EnerNex Corp. and Windlogics Inc. (2006) [MN-MISO]; Puget Sound Energy (2007) [Puget Sound Energy]; Acker (2007) [Arizona Pub. Service]; EnerNex Corp. (2007) [Avista Utilities]; EnerNex Corp. and Idaho Power Co. (2007) [Idaho Power]; PacifiCorp (2007) [PacifiCorp-2007]; EnerNex Corp. (2008) [Xcel-PSCo]; BPA (2009) [Bonneville]; EnerNex Corp (2010) [EWITS]; EnerNex et al. (2010) [Nebraska]

7 Energy and Environmental Regulatory Trajectories Regulatory Evolution in the Three Scenarios Metamorphosis Stronger CES Growth in state RPS Carbon Emission Standard leads to: Phase out of conventional coal and CCS on all new gas combined cycle and new coal Global Redesign Energy and Environmental Policies Modest CES Moderate GHG cap and trade PTCs renewed State RPS roll-backs Vortex PTCs expire Delay in conventional pollutant regulations Small GHG tax Note: PTC = production tax credit; RPS = Renewable Portfolio Standard; CCS = carbon capture and sequestration; CES = clean energy standard; CC = combined cycle. 18 IHS CERA North American Renewable Power Outlook, November 2011 US Renewable Power Outlook by Technology: 53,100 MW additions Scenarios: CO 2 Emissions 20

8 FERC Order FERC Order 1000: Key Requirements for Transmission Providers Regional planning. Transmission providers must participate in a regional transmission planning process and produce a transmission plan. Public policy consideration. Transmission planning must incorporate consideration of requirements of state and federal laws and regulations. Interregional planning coordination. Must develop procedures to share (with neighbors) information regarding regional needs and solutions, and jointly evaluate interregional facilities that might more efficiently and costeffectively satisfy needs. Regional and interregional TCA. Transmission planning must incorporate a beneficiary pays cost allocation methodology for new transmission, including policy-driven projects. FERC will use the record of the efforts to determine a cost allocation method if a region can not develop consensus. Federal right of first refusal (ROFR) elimination. Utilities within RTO/ISO will no longer have the automatic ROFR to build regional transmission lines in their service territories (with exceptions). 22 It May Take a Decade Before the Order Influences New Transmission Development Clarifications to the Order are likely. Over 50 Requests for Rehearing and Clarification submitted There is a broad scope of requests for clarification of key definitions There is precedent for FERC clarifying Orders September informational conferences may address some questions FERC approved tariff revisions for most are unlikely before 2013 to 2014 for regional planning and TCA 2014 to 2015 for interregional planning and TCA And then there is implementation of the new processes and methodologies, as well as siting, permitting, and construction. There could be court appeals but compliance filings are likely to be submitted before appeals are heard. 23

9 Some of the Potentially Relevant Public Policies EPA Conventional Pollutant and Other Regulations CA CO 2 Cap and Trade (2013 anticipated) AK WA OR NV CA ID AZ UT MT WY CO NM ND SD NE KS OK MN IA MO AR WI IL MI IN TN OH KY WV SC PA VA NC VT NY NH ME DE MA RI CT NJ MD Regional Greenhouse Gas Initiative (RGGI) TX LA MS AL GA FL Mandated RPS Energy Efficiency Qualifies for Mandated RPS Sources: IHS CERA, Database of State Incentives for Renewable Energy (DSIRE). Nonbinding Renewable or Clean Energy Goals Separate Energy Efficiency Resource Standard (EERS) 24 State RPS Policies Can Evolve 28 states have one or more legislative proposals that would alter their RPS 12 proposals could increase demand for wind 22 proposals could erode demand for wind 4 proposals would impose stricter instate requirements State RPS Proposed Changes Establish New RPS Increased Wind Demand Increase Total RPS Target Decrease Nonwind Carve-outs Increase Nonwind Carve-outs Expand RPS Eligible Technologies Lower Total RPS Target Eliminate RPS Decreased Wind Demand Source: IHS CERA, IHS Emerging Energy Research. Notes: Proposals are as of May A carve out is an RPS policy provision requiring specified amounts of the total RPS target to be satisfied by a particular technology. Solar carve outs are the most common. An increase in a nonwind carve-out may or may not have an impact on the demand for wind depending upon the policy design. 25 Potential Federal Renewable or Clean Electricity Mandate All leading federal proposals of the past three years would, in most regions, add an additional layer of renewable or clean electricity demand on top of state policy targets.* The additional demand would fall disproportionately on the Southeast, owing to its relatively few existing state policies. The Order has the potential to influence the timing and outcome of a federal renewable or clean electricity mandate. *Proposals in 2009 were S.1462, American Clean Energy Leadership Act (Bingaman) and H.R. 2454, American Clean Energy and Security Act of 2009 (Waxman-Markey). Proposals in 2010 were S. 3464, Practical Energy and Climate Plan (Lugar) and S. 20, Clean Electricity Standard Act of 2010 (Graham) 26

10 Major Areas of Potential Transmission Investment Opportunities, Dominant Driver: Components of Upcoming Price and Rate Pressures 28 Key Implications Power sector faces potentially US$1 trillion in additional costs this decade a major investment opportunity for investor-owned utilities. Majority of costs are associated with new or replacement generation, transmission, or distribution. On a kilowatt-hour basis, rates would on average increase by 1 cent per kwh (real dollars) or 3 cents per kwh (nominal dollars) by This investment picture depends on a continued low natural gas price and increasing electric demand growth. Managing regulatory risk and public pushback on proposed rate increases will be a key strategic challenge for the industry. 29

11 Key Implications, continued Rate increases will be lumpy in time and significantly vary by region and utility, resulting in continued retail price disparity among regions. Many of the costs accelerate in the second half of this decade, particularly investments to meet renewable portfolio standards (RPS) and smart grid deployments. IHS CERA s estimate is conservative: costs could be higher, particularly depending on policy decisions later in the decade. 30 The Specific Costs and Their Connections Replacement of Aging Infrastructure Environmental Regulations New Generation and Distribution/ Transmission to Meet Load Growth Energy Efficiency Programs Smart Grid (metering and T&D investments) Demand Response Programs Renewable Portfolio Standards Uncharted Costs* *Uncharted costs may vary dramatically over time or are not currently tracked systematically across the industry but may nonetheless be material costs to the power sector. This category includes such costs as underfunded pension funds, grid security, storm restoration cost trends, and/or compliance with new NERC reliability rules. 31 US Power Industry Investment Outlook 32

12 US Power Industry Generation Investment Outlook Through US Retail Power Price Outlook 34 Average Retail Price of Electricity, 2010 Data source: US Energy Information Administration

13 Household Electricity Use versus Income, Implications for the Power Sector Expect increased regulatory scrutiny of investor owned utilities: In a lackluster economy, regulators will examine ALL costs more closely to see where to trim and who pays Could see greater emphasis on least-cost planning Understanding which costs regulators may approve will become critical e.g., reliability investments and air pollution may be viewed as vital, but need for two-way versus one-way automated meter reading may not be Choice of new generation technology or requiring increased use of competitive bidding to build future generation possible Timing is of the Essence: Timing of capital expenditures (to extent possible) becomes vital to minimize sudden large rate increases In-state jobs creation or loss associated with investments such as RPS, energy efficiency or smart meter programs may influence support 37 For more information about this presentation or IHS CERA in general, please contact... Michael Burn Michael.Burn@ihscera.com

14 Now let s turn it over to our audience! How to Submit Your Question Step 1: Type in your question here. Step 2: Click on the Send button. Please take a minute to complete the survey. If you are requesting CPE credits, this is a requirement.

15 Events & Training Tab Look for the replay of this program early next week Mark Your Calendar For Our Next Event: December 14, 1 p.m. Eastern Time The Topic Planning: A key to the future. The Speakers Dan Kessler, CFC Werner Buehler, Oregon Trail EC