State of the Electricity Utility Industry

1
State of the Electricity Utility Industry

• David K. Owens
• Executive Vice President
• Edison Electric Institute
• Annual Fuel Oil/Energy Buyers Conference
• October 27, 2009

2
Americas Challenges

• Resolve financial crisis
• Stimulate economy and get America back to work
• Address Climate Change
• Transform our society to be greener and more
  efficient

3
A Significant Transformation is Underway
Stimulated by .

• Restructured Financial Market
• Major Initiatives to Address Climate Change
• Emerging Technologies
• Gaps / Lack of Clarity in Federal / State
  Decisions on Infrastructure and Market Issues

4
Financial Crisis Impacts

• Access to Capital
• Short-term lines of credit for small business
• Long-term investments

Ultimately Impacting Small Business, Consumers,
and Reliability
5
Overview

• Recession has dampened demand, but forecasted to
  rebound and grow
• Commodity, equipment, and labor costs are down,
  making it an ideal time to build and prepare for
  future demand increases
• Wall Street Restructuring affects access to
  capital markets and increasing cost of capital
• As one of the most capital-intensive industries,
  reduced access to capital markets at higher
  costs, means that enhanced liquidity and
  financial flexibility is important
• Utility industry at the beginning of a major
  investment cycle
• Driven by new technology, demand growth,
  efficiency and environmental CAPEX
• Addressing climate change and new priorities will
  be costly

6
Industry Capital Expenditures are Growing
Request Mark Agnew to Update this Slide 10/13/09

• Industry committed to reliability
• - making needed investments in generation,
  transmission, smart grid/
• distribution the environment
• Financial crisis initially brought sharp
  revisions for 2009
• Multi-year trend of soaring construction
  /materials costs reversed in Q3 2008
• Increased spending expected to continue into the
  future
• Total CAPEX for 2010-2030 1.5 trillion
• Excludes impact from climate legislation

U.S. Shareholder-Owned Electric Utilities
The Brattle Group, preliminary findings from
The Edison Foundation presentation titled
Transforming Americas Power Industry.
Represents the entire Power sector.
7
Industry Faces Difficult Decisions
To Invest or Not to Invest?
Defer or cancel infrastructure projects to
enhance current liquidity position
Electric reliability could be impacted when
economy and demand rebound
Opportunities with sharply declining commodity
and input costs
Higher financing costs
Uncertainty ?
8
View Forward
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President Obamas Energy / Environmental Views
Renewable Portfolio Standards
Climate Change
25 by 2025
80 reduction by 2050
H.R. 2454 20 by 2020
H.R. 2454 83 reduction by 2050
Smart Grid
Energy Efficiency
Increased Government Support
Overhaul of Federal Efficiency Codes
In H.R. 2454 and stimulus package
In H.R. 2454
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Climate Change Questions We Must Answer!

• How do you minimize the impact of compliance
  costs on low-income consumers?
• What must U.S. climate change legislation and
  carbon management strategy include to
• Ensure economic growth?
• Ensure energy security?
• Avoid unfairness?

11
Key Climate Provisions

• Economy Wide?
• Cap-and-Trade or Tax?
• Mitigating Customer Impacts?
• Allowances
• Offsets
• Strategic allowance reserve
• Other approaches
• Targets and Timetables?

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Targets and TimetablesQuestions / Concerns

• To meet short-term targets
• Power sector will rely on energy efficiency,
  renewables and natural gas
• In the medium term (i.e., 2020-2025)
• Targets should be harmonized with the development
  and commercial deployment of advanced climate
  technologies and measures
• (e.g., nuclear energy, advanced coal technologies
  with carbon capture and storage, PHEVs, smart
  grid)

13
The American Clean Energy and Security Act of
2009 (H.R. 2454) Economic Impact Projections
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Allocation of AllowancesPrimary Goals

• Help mitigate the impact of increased energy
  prices on consumers
• Assist in transition to clean energy economy
• Advance development and deployment of clean
  energy technologies, including energy efficiency

15
(No Transcript)
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Allowances Under Kerry-Boxer Bill (S.1733) Clean
Energy Jobs and American Power Act

• S.1733
• Does not specify how many allowances each covered
  industry would receive
• Contains the same allocation distribution as H.R.
  2454
• Total number of allowances for 2012-2016 are the
  same under H.R. 2454
• Auctions 25 of the allowances (15 in H.R.
  2454). Source of these additional allowances is
  unclear
• Establishes a minimum auction price of 10 in
  2012, escalating at 5 per year plus inflation
• Contains a so-called soft price collar

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What Will It Take to Address Climate Change?
There is no silver bullet!

• Renewables
• Energy efficiency
• Clean coal technologies
• Carbon capture and storage
• Nuclear
• Plug-in hybrid electric vehicles (Smart grid)

We need it all but it will be costly!
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The Enhanced Role for Renewables
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Renewable / Energy Efficiency Questions We Must
Answer!

• Renewable Technology
• How much can increased renewable capacity
  contribute going forward?
• How do we get transmission constructed for
  renewables?
• Energy Efficiency
• How significant of a role can energy efficiency
  play in the future?
• How can customers benefit and actively
  participate in energy efficiency programs from
  the residential and commercial perspectives?

20
State Renewable Energy Portfolio Standards

• 31 states with quota obligations RPS
• Each state has different natural resource
  endowment, different industrial and
  socio-economic characteristics
• So each state RPS has
• Different targets
• Different timelines
• Different eligible resources
• Different compliance entities
• Different compliance mechanisms
• Different enforcement and penalties

21
Federal PoliciesA Federal ERES?

• H.R. 2454
• The American Clean Energy and Security Act of
  2009
• S.1462
• The American Clean Energy and Leadership Act of
  2009
• Contingent on climate (HR 2454 / S.1733)

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Planned Capacity Additions Reflect State RPS
Requirements
US Generation Capacity in 2008 (1,061 GW in
Service)
Planned Capacity Additions to 2020 (352 GW)
Source Ventyx Global Energy and Bernstein
Analysis

• Non-hydro renewables make up 4 of US capacity
  today but 34 of planned capacity additions
  through 2020.

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Biggest Challenge for Renewables Transmission

• Planning
• Siting
• Cost Allocation

Renewables are Variable Resources!
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Integrating RenewablesOperational Challenges

• Higher RPS levels can create significant surplus
  energy
• Has created excess energy at night
• Requires more system backup to maintain
  reliability
• Quick start and fast ramping technologies
  (peaking / storage) to manage generation
  variability and maintain reliability when wind
  falls off or clouds appear
• Smart grid can help mitigate some of these
  problems
• Energy storage / off-peak electric vehicle
  charging can mitigate problem
• Smart grid will help enable these new
  technologies

25

• The New Role for Energy Efficiency

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Demand Projected To Increase 40 21 by 2030
Recession Impact?
Billon kiloWatthours
Sources U.S. Department of Energy, Energy
Information Administration
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The Energy Efficiency Challenge

• Average US household owns 24 consumer electronic
  products
• 2 DVRs use as much energy in 1 year as a
  refrigerator
• Play Station and X-Box use more electricity than
  a PC
• PCs and TVs now account for 10 of a homes
  electricity usage
• 99 of these products must be plugged in or
  recharged
• 42 Plasma TV uses more than twice as much as a
  standard 27 TV
• More efficient use of energy could significantly
  reduce energy bills
• Need to educate all consumers about how to save
  energy and use it more efficiently

28
Intensified National Commitment To Energy
Efficiency Is Needed

• Aggressive campaign for technologies
• Smart buildings
• Smart appliances
• Smart electric meters and grid
• Smart rates
• Use of smart technologies and new rate designs
  can
• Allow consumers to control their energy usage to
  save money
• Avoid wasting energy
• Control how and when appliances do their jobs
• Help utilities efficiently operate their systems
  and maintain reliability
• Help keep supply and demand in balance
• Support more efficient use of generating
  resources    
• Commercializing plug-in hybrid electric vehicles

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Energy Efficiency - Our 1st fuelAve. Cost
0.035 / kWh Saved
Source The Edison Foundation Institute of
Electric Efficiency EIA Form 861
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Energy Efficiency Business Model Components
Program Cost Recovery
Lost Margin Recovery
Performance Incentives
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• Coal Must Remain in the Mix

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Carbon Capture and Storage Challenges

• Capture
• Develop cost-effective means of capturing CO2
  from combustion
• Transport
• Ability to access current gas and CO2 pipeline
  structure
• Regulatory framework
• Liability concerns
• Storage
• Permitting and siting
• Liability concerns
• Full-scale demonstration projects
• Public education and acceptance

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New Coal GenerationCarbon Capture and Storage
(CCS) in (H.R. 2454)

• National strategy for a CCS regulatory
  framework
• Federal agencies to develop a (sec. 111)
• Geologic storage and propose regulations
• EPA to finalize regulations for under the Clean
  Air Act (sec. 112)
• Study of legal framework for geologic storage
  sites
• Establish task force (sec. 113)
• New Carbon Storage Research Corporation
• Funded by charge on deliveries of fossil fuel
  electricity
• Fund commercial-scale (gt250MW), integrated demo
  projects (sec. 114)
• 10 billion over 10 years 50 of funds reserved
  for utility projects
• Corporation is an affiliate of EPRI and not an
  agent of the U.S. government

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• And So Should Nuclear

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U.S. Electricity Sources Which Do Not Emit
Greenhouse Gases During Operation 2008
Source Energy Information Administration Updated
4/09
36
Expectations for the Future
Initial wave has 4 - 8 plants on line by
2015-2016
Suppliers ramp up component manufacturing
capability
Second wave begins construction when it is clear
that first wave can be licensed and built on time
and within budget
Second wave begins COL preparation
Source NEI
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U.S. Shale A Game Changer?Gas Production
Potential
Forecast
Historical
BCFD
Source Tristone Capital, Devon Energy
38

• SMART GRID
• A Game Changing Technology

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What is the Smart Grid?

• An advanced, telecommunication / electric grid
  with sensors and smart devices linking all
  aspects of the grid, from generator to consumer,
  and delivering enhanced operational capabilities
  that
• Provide CONSUMERS with the information and tools
  necessary  to be responsive to electricity grid
  conditions (including price and reliability)
  through the use of electric devices and new
  services (from smart thermostats to PHEV)
• Ensure EFFICENT use of the electric grid
  (optimizing current assets while integrating
  emerging technologies such as renewables and
  storage devices)
• Enhance RELIABILITY (protecting the grid from
  cyber and natural attacks, increasing power
  quality and promoting early detection and self
  correcting grid self-healing)

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Smart meter platform and home area network
technologies will take EE and DR to new levels
Giving customers the tools and the know-how to
be smarter energy consumers
HAN communication
SmartMeter communication
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The Changing Regulatory Environment
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Emerging New FERC FocusGoing Green -
Environment / Climate Platform

• Regulation of Carbon Markets
• Clarify jurisdiction boundaries FERC, CFTC, SEC
• Expand regulatory goals
• Regulation of Combined Efficiency and Renewable
  Electricity Standard (CERES)
• Oversee Energy Efficiency Credit System
• Prescribe standards and protocols for defining
  and measuring electricity savings
• Specify types of Energy Efficiency measures
• Receive and evaluate all state applications for
  eligible electricity savings
• Smart Grid Investment and Cost Recovery
• Distributed Energy Resources
• How do these areas fit together?
• How do they impact FERC / State relationships?

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Evolving Areas of Federal / State Collaboration
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The View Forward

• Respond to comprehensive energy and climate
  legislation
• Preserve all options
• Accelerate development of technologies
• Mitigate the impact of rising costs on consumers
• Ensure regulatory environment supports
  environmental initiatives
• Develop a new regulatory model which
• Stimulates new investment
• Provides timely cost recovery
• Equitably transforms our society to a greener and
  more energy efficient economy