October 21, Contact: Copyright 2010 by ScottMadden. All rights reserved.

Transcription

1 Coal Plant Shutdown A Case Study EEI Strategic t Issues Roundtable October 21, 2010 Contact: spearman@scottmadden.com

2 Discussion Outline What s Driving Coal Shutdowns? Implications? How Is the Business Case Made? What Does It Take to Plan and Manage? What Are the Lessons Learned? 1

3 What s Driving This? An Expensive, Murky EPA Alphabet Soup Many Moving Parts: New Rules Under Development Clean Air Uncertain CAIR replacement rule timeline $1,000 Interstate Phase II SO 2 and NOx by 2015 Rule (CAIR) SO 2 /NO 2 Mercury Particulate Matter One-hour primary National Ambient Air Quality Standards (NAAQS) of 75 parts per billion (PPB) in June 2010, reduced from 140 PPB Mercury and hazardous air pollutants (HAPs) clampdown Maximum available control technology (MACT) required Information collection on air toxics Fine PM ( 2.5 microns diameter) NAAQS $750 $500 $250 Illustrative Incremental Environmental Costs for a 500 MW Coal Plant ($/kw) At $785/kW, an additional $12 per MWh is required to recover investment over 20 years* (compare PJM 2009 average: $55.30/MWh) $300 $200 $185 CO 2? NSR? Hg? Particulates? 100 $785 Ozone Ash Water (Clean Water Act) CO 2 Eight-hour ozone NAAQS Coal combustion by-product (dry ash) (CCB) containment, disposal, and lining requirements 316(b) Phase II (power plant cooling water intake rule delayed fine screens/cooling towers) Possible closed-loop cooling system requirements Kerry-Lieberman proposed, but its future uncertain EPA endangerment finding triggering rulemaking $0 Flue Gas Desulfurizaton Selected Catalytic Reduction Cooling Tower Retofit Regulatory Requirement CCB Impoundment Total CAIR SO 2/NO 2 Mercury Particulates Ozone Ash Water CO 2 Other Note: *Capital cost only; excludes incremental O&M. Assumes monthly amortization; 55%-45% debt-equity ratio; 12% required ROE, 7% cost of debt (9.25% WACC); 80% capacity factor; estimated $50 million per facility for impoundment enclosures Sources: EEI Environment Executive Advisory Committee; U.S. EPA; PJM 2

4 Fossil Environmental Compliance Timeline Expected Environmental Regulatory Changes and Compliance Deadlines for Fossil-Fired Generation Proposal phase Rule finalization, standards, & compliance Compliance phase Clean Air Interstate Rule SO2 /NO 2 Phase I Annual SO 2 Cap CAIR replacement rule SO 2, NO 2 primary SO 2 primary Secondary SO 2, NAAQS NAAQS NO 2 NAAQS Mercury HAPs MACT proposed rule HAPs MACT final rule HAPs MACT compliance Particulate Matter Next PM-2.5 NAAQS revision PM-2.5 SIPs due New PM-2.5 NAAQS designations Ozone Final nonattainment designation Next ozone NAAQS revision Ash Proposed CCB rule Final CCB rule Final CCB rule compliance Water 316(b) proposed rule Proposed effluent guidelines 316(b) final rule Effluent guidelines final rule 316(b) compliance Effluent guidelines compliance CO 2 CO 2 regulation? A Short Window to Decide and Pursue Alternatives to Coal Scrubber, SCR engineer, construction (3 5 years) Cooling tower construction (2 5 years) Gas, biomass conversion (3 4 years) Combined cycle development and construction (3 6 years) Source: EEI Environment Executive Advisory Committee 3

5 Results to Date Retirements Loom; New Coal Plants Are Delayed Timing Coal Retirements EPA s new proposed p Transport Rule successor to the Bush Administration s proposed CAIR will require generators to ratchet down SO 2 and NOx emissions by Generators will have to make significant retrofit vs retire decisions, but most expect that many smaller units with higher heat rates will be retired 2015 Not indicated 2020 Some estimate that up to 15% of U.S. coal generation is at risk * PJM only Other regulations mercury, water, coal ** Estimate based upon RFC, MRO, SERC, and WECC regions combustion products also loom over existing and new coal-fired generation New Build Sources: NETL; SNL Financial; EEI; investment analysts; PJM; Clean Energy Group; ScottMadden analysis Historically, actual coal capacity coming on line has been significantly less than proposed Further, many jurisdictions have stymied construction of new coal capacity Uncertainty about climate legislation timing, g severity of restriction, impacted sources, pace of reduction together with the EPA s endangerment finding and related rulemaking, is causing some utilities to scrap, and regulators to reject, proposed new coal-fired capacity or deny needed permits All of these headwinds will likely continue or intensify 4

6 What Are the Implications? Power prices? Gas build and gas duty cycle? Preferred generation technologies, investment, and timing? Baseload adequacy? System reliability? Transmission? 5

7 Making the Business Case Asset Optimization Process Current Long- Range Plan: Capital O&M Environmental Assumptions: Mercury HAPS CATR Carbon Market Assumptions: Fuel Prices Power Prices Emissions Prices Prior-Year Optimization: Results Initiatives Benchmarking Results Other Potential Adjustment Factors Changes in Material Condition New Performance Gaps Develop/ evaluate key initiatives Identify key projects that will require significant capital and O&M Develop business cases for inclusion in LRP Develop scenarios/ other initiatives Update Operating Characteristics Develop cost/ benefit assumptions on initiatives Unit valuations/ initiatives evaluations Asset Optimization Presentations (GM/Tech Mgrs/Bus Analysis) Initiatives List (GM/CFAMs/Bus Analysis) Develop a long-term view of the value of each of Exelon Power s assets Results are the basis for long-term investment decisions Provide basis for development of Capital/O&M spending on units Identify and quantify risks to long-term value Develop initiatives to improve value Report for each unit on an annual al basis with updates, as necessary, based on key issues/events that impact value 6

8 Making the Business Case The Decision Decision was based on economic analysis and included extensive scenario analysis Incremental NPV of $165M to $200M vs. continued operations Significant cash flow benefits in the first five years via capital expenditure reduction Improvement in net income (primarily depreciation avoidance) Market scenarios based on varying key assumptions Gas/energy prices, capacity prices, regulatory framework, and environmental Operating scenarios included gas conversion, mothballing, and O&M and capital stress scenarios with multiple end of life dates (5, 10, and 20 years) Multiple factors influenced the economic analysis and final decision Age of assets ( 50+ years old) High capital investment in infrastructure in short term Low demand growth Low gas prices Inability to clear in PJM capacity auctions Anticipated increasing cost due to environmental regulations 316a/b and Mercury/HAPS 7

9 Making the Business Case Projected Impact Approximately 280 positions impacted as a result of unit retirements Results in longer-term operating O&M savings of approximately $75 million per year Impact on Operating Earnings and Capital Expenditures ($ in millions) Revenue Net Fuel $0 $(50) $(80) Operating O&M Savings Depreciation Savings Incremental Pre-Tax Operating Income $24 $18 $40 Capital Expenditure Reduction $40 $85 $80 Retirements increase ongoing operating earnings and improve future free cash flow 8

10 Planning and Managing Current Timeline Business Approval BOD Approval PJM Notification filed for May 11 closure PJM notifies Exelon of need for units beyond planned closure date Exelon signs consent order with PA DEP and agrees operating protocols with PJM End of RPM Capacity Obligations Exelon files RMR request with FERC Retire Cromby 1 and Eddystone 1 Commence Decommissioning Retire Cromby 2 Retire Eddystone 2 Finalize Decommissiong Nov 09 Dec 09 Jan 10 Apr 10 May 10 May 11 Jun 11 Dec 11 Jun 12 Dec 12 Authorize project organization and approach Engage team leads 90-day plan Savings validation Engage team members Detailed plan: interim operations to decommissioning Governed by Project Plan 9

11 Planning and Managing Team Structure Steering Committee Operations Human Resources Regulatory Legal Communications & Govt. Affairs Power Executive Team Support Organization Provide oversight Approve project plans Resolve escalated issues Executive Sponsor Core Team Team Lead Legal/Regulatory Communications & Govt. Affairs Human Resources Support Services Operations Power Team Finance Govern project Provide guidance, direction, and oversight Approve resources Update Executive Committee quarterly Plan and manage integrated project Produce results Integrate/escalate issues Track and monitor status Update Steering Committee bi-weekly (initially weekly) Legal/Regulatory Prepare 8-K/legal filings Manage PJM retirement process Participate in township discussions Comm. & Govt Affairs Identify stakeholders Manage stakeholder communications Investor relations communications Human Resources Develop employee programs for transition Severance package Union negotiations Retention Pension/retiree benefit Finance and Support Services Manage infrastructure transition Decommissioning plan Finance tracking Insurance Real estate Operations Operations plan Supply transition Power Team transition Security Power Team Fuel strategy Trading team IT Develop and execute IT plan Supply Supply transition Resource recovery 10

12 Planning and Managing Level 1 Project Plan Communications/Government Affairs Ref. # Activity Accountable Due Date Status 1 Communications and Government Affairs 1.1 Communications and Government Affairs Rollout Plan collateral McClure 11/25/09 On Track materials finalized and approved 1.2 Exelon Power Leadership Rollout Prep Meeting McClure 12/1/09 On Track At 4 p.m. 1.3 Employee Meetings face-to-face at each Power stations - Kennett Power Leadership, 12/2/09 On Track At 9am Square, Eddystone, Cromby, Conowingo Dam, Fairless Hills, Communications, West Medway and Handley/Mt. Creek HR 1.4 Distribution of press release McClure 12/2/09 On Track At 9:30am 1.5 Distribution of internal notification to Power employees McClure 12/2/09 On Track At 9:30am 1.6 Distribution of internal notification to all Exelon employees Karesh 12/2/09 On Track At 9:30am 1.7 Key stakeholder notification Judge 12/2/09 On Track 1.8 What's Next Employee Meetings HR/ 12/3/09 On Track Communications 1.9 Special Edition of Inside Generation distributed Wirth 12/4/09 On Track 1.10 Inside Exelon Article Karesh 1.11 Inside Nuclear Article Nuclear 12/4/09 Communications 1.12 Distribute Union Negotiations o MOA Announcement e Communications/ 1/15/10 On Track HR 1.13 Distribute Self-Identification and Voluntary Severance McClure/Chorvat 1/19/10 Announcements 1.14 Distribute Re-staffing Announcements McClure/Chorvat 3/8/ Investment Community Call Anderson 12/2/09 On Track At 10:30am Comments (Incl. Issues, Decisions Required) Note status as of day prior to report Status indicators On Track Complete At risk Overdue 11

13 Planning and Managing Announcement Week Hourly Schedule Action/Event/Venue Audience Delivery Monday November 30 1HR Change management process complete Power VPs, GMs, Chorvat and Directors 2Rating Agency Calls Rating Agencies Beneby, Robinson, Cornew Accountable Scheduled Time (all times EST) Organization/ Preparation Freedman Chaka Patterson, JaCee Burnes x x x x x x x Tuesday December 1 1Exelon Board Meeting BOD Crane Various 2Preparation meeting for IR call Crane, Beneby, Cornew, Robinson, and others Anderson Anderson 3 EP SeniorManagement Mtg PowerVPs VPs, GMs, Beneby Beneby/ McClure and Directors 4Dry Run Communication Practice Power VPs, GMs, McClure, Chorvat McClure, Chorvat and Directors 5PECO Communications Notification Multon Geus McClure McClure 6Pre Notification to Critical Stakeholders PJM and Tier 1 Elected officials Judge, Chiomento, Laird 7Remote location notification/dry run TX Tipton, Dunning Randle, Weeks NE Hughes Judge, Chiomento, Laird McClure, Chorvat x x x x x x x x x x x x x x 12

14 Lessons Learned Good early and iterative planning, including multiple challenge sessions Core team members held accountable for developing and executing their portions of the plan Drilling down in key areas with cross-functional impact during team meetings to ensure understanding and coordination Regular meeting cadence with defined deliverables and visibility to senior management; tight meeting schedule with limited time for presentation rework Good early communications to set the stage; organization and stakeholders were not blind-sided Devote the time needed for meetings and review Lavish time on communications Think creatively on the people side of things 13

15 Appendix: Environmental Trends and Policy Affecting Coal-Fired Power Generation

16 Disparate State Outcomes for Proposed New Coal Plants Wash. Energy Facility Site Evaluation Council Denied permit for IGCC plant Could not emit more CO 2 than an NG plant, failed to submit a GHG reduction plan, and unable to commit to sequestration Kansas DHE Denied permit for pulverized coal plant Found GHGs to present substantial endangerment, classified CO 2 as a pollutant Sources: Industry news; ScottMadden analysis South Dakota PSC Approved coal plant despite alleged environmental injury from CO 2 emissions Need for capacity, lack of alternatives (including renewables) in time, marginal contribution to CO 2 Arkansas PSC PSC approved ultra-scpc coal plant despite uncertainty about carbon costs Fuel diversification and comparatively low and stable coal prices AR appeals, Supreme Court rejected permit, saying all alternatives not disclosed Indiana PSC Approved IGCC coal plant despite uncertainty about carbon costs and escalating construction costs and potential rate increases Efficiency and capture readiness; declined to revisit alleged new facts Florida PSC Denied need petition for two ultra-scpc coal plants Found ratepayer savings scenarios not compelling, uncertain costs fuel, capital, market, and regulatory factors Not explicitly based on GHG 15

17 Many New Coal Plants Have Been Planned, But Actual Construction Has Been Elusive Historically, actual capacity has been shown to be significantly less than proposed capacity e.g., the 2002 NETL Report listed 11,455 MWs of proposed capacity for the year 2005 when actually only 329 MWs were constructed Sources: U.S. Dept. of Energy, National Energy Technology Laboratory (as of Jan. 2010) 16

18 Tightening Environmental Regulations Jeopardizes the Future of Some Coal Plants Ameren About 2,500 MWs between 2022 and 2038 FirstEnergy Lake Shore R.E. Burger Reliant Resources New Castle Niles Titus Allegheny Energy R. Paul Smith Exelon Cromby 1 2 Eddystone 1 2 NRG Indian River Constellation C.P. Crane Wagner 2 3 Mirant Potomac River Nearly 15% of current Progress Energy 1,500 MWs (1/3 of coal fleet) Some Recently Announced or Anticipated Coal Plant Retirements Sources: Industry news; ScottMadden analysis 17

19 Environmental Constraints Are Tightening for Air, Water, and Combustion Products Ozone SO2/NO2 CAIR Water Revised Ozone NAAQS Beginning CAIR Phase I Seasonal NOx Cap CAIR Vacated CAIR Remanded Reconsidered Ozone NAAQS NO2 Primary NAAQS SO2 Primary NAAQS Proposed CAIR Replacement Rule Expected CO2 Regulation Final CAIR Replacement Rule Expected Effluent Guidelines proposed rule expected SO2/NO2 Secondary NAAQS 316(b) final rule expected Effluent Guidelines Final rule expected Next Ozone NAAQS Revision 316(b) Compliance 3-4 yrs after final rule Effluent Guidelines Compliance 3-5 yrs after final rule '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 PM-2.5 SIPs due Begin ( 97) CAIR Phase I CAMR & Annual Delisting NOx Cap Rule vacated Begin CAIR Phase I Annual SO2 Cap Proposed Rule for CCBs Management PM2.5 Next PM- Final 2.5 Rule for NAAQS CCBs Revision Mgmt HAPs MACT proposed p rule 316(b) proposed rule expected HAPS MACT final rule expected Final EPA Nonattainment Designations Ash PM-2.5 SIPs due ( 06) New PM-2.5 NAAQS Designations Begin Compliance Requirements under Final CCB Rule (ground water monitoring, double monitors, closure, dry ash conversion) Beginning g CAIR Phase II Annual SO2 & NOx Caps HAPS MACT Compliance with Compliance 3 yrs CAIR after final rule Replacement Rule Hg/HAPS CO2 Beginning CAIR Phase II Seasonal NOx Cap -- adapted from Wegman (EPA 2003) Sources: Edison Electric Institute 18

20 The Proposed EPA Transport Rule Could Have a Significant Impact on Coal-Fired Generation On July 6, EPA issued a proposed Transport Rule, intended to replace the Bush Administration CAIR which was struck down by the U.S. Court of Appeals in D.C. Under the Transport Rule, additional reductions in SO 2 and NOx are required in two phases States Covered Under the Recently Proposed EPA Transport Rule Less stringent than CAIR in first phase (2012); more stringent than CAIR in second phase 2.5 million ton cap by 2014 (vs. 2.6 million ton cap by 2015 under CAIR) Reductions of 71% in SO 2, 52% of NOx over 2005 levels (vs. 57% of SO 2 and 61% of NOx over 2003 levels) The Transport Rule also looks at upwind sources Some initial analyst comments: May give the Administration more near-term leverage over utilities fuel choices It will be necessary (i) to cease generation at all unscrubbed coal-fired power plants that produce 15% of U.S. coal-fired generation, and (ii) to install SO 2 scrubbers that today generate a further 6% More than three-quarters [of generating units without scrubbers affected by the rule] are of less than 200 MW of capacity Some 41% are smaller than 50 MWs, the point at which installing SO 2 scrubbers becomes comparable to the cost of building a new [gas] combined cycle Estimated Capital Cost (% of Rate Base) for Selected Utilities Where Makes Sense (source: Sanford C. Bernstein) AEP $2.17B (8%) Empire Dist. Electric $154M (12%) Great Plains Energy $465M (8%) CMS Energy $351M (4%) Sources: U.S. Environmental Protection Agency; SNL Financial; industry news 19

21 Environmental Trends and Policies Environmental constraints on coal-fired power plants have been tightening and will continue to tighten New regulations on SO2, NOx, and mercury emissions, i water usage, and coal combustion products will require utilities to make decisions on significant additional capital investment vs. retirement or repowering (to gas or biomass) of existing coal units The EPA s new Transport Rule will likely require most, if not all, sources to have flue gas desulfurization equipment by 2014 Uncertainty about climate legislation timing, severity of restriction, impacted sources, pace of reduction together with the EPA s endangerment finding and related rulemaking, is causing some utilities to scrap and regulators to reject proposed new coal-fired capacity or deny needed permits Proposed new coal plants continue to see their construction start dates pushed back or perhaps even cancelled as a result of these challenges All of these headwinds will likely continue or intensify 20

22 Contact Us For more information on coal plant shutdowns, please contact us. Stuart M. Pearman Partner and Energy Practice Leader ScottMadden, Inc Glenwood Ave Suite 480 Raleigh, NC Phone: