after the election: the new look of energy & environmental...

After the Election: The New Look of Energy & Environmental Policy

Judy Chang

Principal The Brattle Group

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Copyright © 2012 The Brattle Group, Inc. www.brattle.com

After the Election

A Look at the Power Industry

Presented at:

EBC Environmental and Energy Industry Summit:

Post Election Implications for the Environmental and Energy Industries Foley Hoag Enterprise Center

Waltham, Massachusetts

November 9, 2012

Presented by:

Judy Chang

3

Contents

♦ Policy Direction that Makes a Difference

♦ Energy Consumption: “The Story of Five Forces”

♦ Fuels Markets and Impact on Power Generation

♦ Coal Retirement and Growth in Gas and Renewables

♦ The Future of the Grid

4

What Policy Direction Would Make A Difference? L

ikely

to

Occu

r

Un

lik

ely

to

Occu

r

Extension of PTC

Continued push ahead

on EPA regulation

around Regional Haze,

Mercury and Air Toxics

Standards (MATS),

Cross-State Air

Pollution Rule

(CSAPR), and others

Consideration for

some kind of tax on

carbon

Comprehensive

energy or climate

policy

Environmental

regulation over

fracking

National legislation

guiding transmission

development

5

Policies and Market Fundamentals Drive Much of

the Power Industry

♦ With all the uncertainties, the direction of the impact from

some drivers are clear

♦ The most important ones include:

• Supply/demand balance

• Fuel supply and technology costs

• Infrastructure development

• Market design that sends value signals to investors

♦ On top of it all: National and state policies are needed to

provide stability and certainty for investors across the

sector. The most important policies include:

• Renewable

• Efficiency

• Siting requirements

• Desire for job creation

6

Contents






7

Long term forecasts of peak demand are on a

downward trajectory

Source: NERC, 2011 Long Term Reliability Assessment

8

Five forces are creating the new normal

1. Weak economy

2. Demand-side management

3. Codes and standards

4. Distributed generation

5. Fuel switching

9

Weak Economy

Economic Recovery is Slow

♦ The economic recession caused a significant drop in

electricity demand and we have only partially recovered

from this drop

♦ The “pace and shape” of the economic recovery will

dramatically influence electricity demand, according to

NERC

♦ Some of the recessionary impacts may be permanent

• Some businesses have closed or relocated offshore

• Unemployment and underemployment has an effect of reducing

electric consumption and the purchase of electricity consuming

appliances

• Some consumers have become more frugal than before

10

Demand Side Management

DSM is Contributing to Reduced Demand Growth

♦ Behavior-modifying programs are the newest element in the energy efficiency

♦ Web portals and social media are raising the energy consciousness of

consumers

♦ In-home displays can promote savings by changing behavior

• Pilots have suggested a significant conservation effect from these devices

• 6.5% energy savings per device owner

♦ Bill comparison creates social pressure to conserve

Source: Opower

11

Codes and Standards

New Codes and Standards Contribute to Lower

Baseline Consumption

♦ The EIA is attributing declining per capita residential electricity sales to

Energy Independence and Security Act of 2007

♦ The EIA forecasts that lighting per household in 2035 will be almost half

of the 2010 level

Source: IEE, Assessment of Electricity Savings Achievable through New

Appliance/Equipment Efficiency Standards and Building Efficiency Codes

12

Distributed Generation

Rooftop Solar and Other DG are Here to Stay

♦ Distributed generation with net metering could lower demand significantly

♦ The growth in DG depends on:

• retail cost of electricity – Increasing

• cost of on-site generation – Decreasing

• net metering regulations – Varies by state

• storms and outages – More frequent than before

Source: National Renewable Energy

Laboratory: Renewable Electricity

Futures Study, Vol 2: Renewable

Electricity Generation

and Storage Technologies, p. 10-19

Capital Cost

Projections

for

Residential

Rooftop PV

Systems

($/kW of DC

capacity)

13

Fuel Switching and Other Forces

Economics of Fuels Can Encourage Customers to

Reduce Electric Consumption

♦ Lower gas prices from fracking could result in people

shifting away from electricity and towards gas for heating

♦ Oak Ridge National Laboratory has developed gas-fired

heat pumps, which could supply both heating and cooling

♦ Higher cost of electricity would further encourage customers

to switch away from electricity

♦ Other Forces are also suppressing demand growth:

• Disruptive end-use technologies

• An iEverything appliance, Green Buttons, and smart phones

• Federal and state legislation requires lower carbon emissions

14

Growth Story

Overall Viewpoint on Growth

♦ The drop in demand growth seems to be permanent, not

transitory

♦ The growth may not return with “normal” economic activity

♦ The new normal may be growth at about half of the pre-

recession value, in the 0.7% to 0.9 % a year range

♦ Survival of traditional utilities in a sub one-percent growth

world calls for new thinking

♦ Both utilities and regulators have to come up with new

solutions that delink earnings from sales

♦ As Fox-Penner argues in Smart Power, utilities should

consider becoming smart wires companies or integrated

energy service companies

15

Contents






16

Fuels

Abundance of Shale Gas Continues to Keep Price

of Natural Gas Low

♦ At prices below $2.75/mmBtu, natural gas is competing with Powder

River Basin coal (Source: Goldman Sachs Securities Division)

♦ This has a significant effect on short and long-term power generation

Sources and Notes:

Historical and futures price data from Bloomberg.

Oil price base case extended based on No. 2 futures at NY Harbor, then based on average of Brent and WTI futures escalation, then reverting to escalation at inflation rate over a 5-year transition period. Oil high and

low cases based on 50% of difference between AEO 2012 Reference case and High/Low Oil cases.

Gas prices escalate based on inflation after futures end. High and low cases are 30% above and 25% below base case.

Coal prices from futures, escalating with inflation thereafter.

17

Fuels

Coal Prices are Expected to Stay Relatively Flat

♦ Reduction in coal usage is expected to keep coal prices

relatively flat

♦ This could change significantly if coal exports continue to

increase significantly

Source: The Brattle Group

Discussion Paper on “Potential Coal

Plant Retirements: 2012 Update”

18

Fuels

Coal Plants Are Becoming Less Economic with

Low Gas Prices

♦ The effect of low gas prices is cutting into the profitability of

coal plants

♦ Increase in cycling further increases the fixed costs of coal

plants

Source: Goldman Sachs Securities

Division and EPA Air Market Program

as of August 13, 2012, presented at

Power Market Environment, July

2012

Merchant Generation in Eastern PJM

19

Contents






20

Power Market Dynamics

Projected and Announced Coal Retirements

Around the Country

♦ As of July 2012, roughly 30 GW of coal plants have

announced retirement by 2016

♦ The Brattle Group projects over 60 GW will retire due to

current outlook of market conditions and environmental

regulations

21


Coal Plant Retirement by Regional Transmission

Organization

In number and proportion, PJM

and MISO are expecting the most

coal plant retirements

22


Gas Price is a Major Contributor to Coal Retirement

$1 change in natural gas price can change the retirement

prospects significantly, even with lenient environmental

regulations

23


Gas Generation Dominates in Replacement

Capacity

♦Approximately ~50 GW of replacement generation

capacity will be needed by 2016, most of which will

be gas plants

♦ This could equate to an additional demand of about

6Bcf/d of gas from the replacement

♦ This additional demand on gas could raise price of

gas by about $0.50/MMBtu – which will increase

power prices by about $4-10/MWh

24

Renewables

Wind Penetration Has Already Increased Across North

America (and the World)

Source: The Brattle Group analysis

6.8%

11.3%

2.8%

7.7%

5.3%

5.5%

3.3%

0.9%

4.7%

1.8%

6.6%

1.6%

5.7%

17.0%

21.8%

6.3%

31.5%

16.6%

3.8%

0% 5% 10% 15% 20% 25% 30% 35%

MISOERCOT

PJMBPASPP

CAISONYISO

ISO-NE

OntarioQuébec

New BrunswickBritish Columbia

Alberta

GermanySpain

United KingdomDenmark

Ireland

Australia

Wind as % of Installed Capacity (MW)

25

Renewables

New England Class I-Equivalent RPS Requirements

Continue to Grow

States are reexamining existing policies and if gas prices

continue to stay low, some policy changes are likely

26

Renewables

Policy Uncertainties Will Continue As Long as Gas

Prices Stay Low

♦ Over the next five years, renewable supply in New England is expected

to be sufficient assuming off-shore wind is developed

♦ Long term contracts continue to be needed to support growth

27

Renewables

Forces Facing Renewable Generation

Forces Increasing Risks and Cost of Renewables

• Policy uncertainties (national & state)

• Complex siting and permitting

• Lack of transmission infrastructure

• Complex interconnection policies

• Curtailment risks

• System integration costs

Forces Reducing Risks and Cost of Renewables

• Long term power purchase contracts

• Reduction in equipment costs due to lower demand

• Economies of scale

28

Contents






29

Transmission

U.S. Historical Transmission Addition – Line Miles

Significant recent and projected transmission additions are still well below

additions made 40-50 years ago when much of the current grid was built

(2,000)

0

2,000

4,000

6,000

8,000

10,000

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Lin

e M

iles

Transmission Line Net Additions for 1960-2015

[1]: EEI (>132kV)

[2]: NERC (>200kV)

[3]: Ventyx (>200kV)

Projected Transmission Additions from NERC under Form EIA-411 (>200kV)

Projected Transmission Additions from NERC under Form EIA-411 (all)

[1]: Circuit miles of overhead electric lines from EEI's Historical Statistical Yearbook. Data excludes REA cooperatives.

[2]: Courtesy of the North American Electric Reliability Corporation. NERC data is only available for lines 200kV and above. Note: transmission line

additions are calculated as the difference in existing tranmission between the current and prior year (i.e. 2003 additions = 2003 miles - 2002 miles).

[3]: Ventyx Suite.

30

Transmission

Historical Transmission Additions – Investments

Annual Transmission Investment of

Investor-Owned Utilities by FERC Subregion

Southwest

Northwest

Midwest

South

Northeast

$0B

$2B

$4B

$6B

$8B

$10B

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

An

nu

al T

ran

smis

sion

In

ves

tmen

t ($

Bil

lion

s)

Source: The Brattle Group's analysis of FERC Form 1 data compiled in Ventyx's Velocity Suite.

31

Transmission Industry Investment is Increasing Transmission

U.S. Transmission Investments – through 2015

$60-80 billion in projected (2011$) investment for 2011-15

$0

$5

$10

$15

$20

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

(20

11

$ B

illi

on

)

Investments by investor-

owned entities based on

plant-in-service from

FERC Form 1

Reported coop, muni,

state, and federal power

historical investment

Estimated coop, muni,

state, and federal power

historical investment

Total projected

US investment

based on NERC

circuit-mile

data

Total projected

US investment

based on EEI

investment

trend

Total US-wide investment

Linked title (was linked to 'Bk_EEI-FERC'!$E$81 and ='Bk_EEI-FERC'!$E$82) has been deleted and replaced with manaul entry to match report but have new footnote citing TBG

Sources and Notes: The Brattle Group © 2012. The Brattle Group, Employment and Economic Benefits of Transmission

Infrastructure Investment in the U.S. and Canada, prepared by J. Pfeifenberger and D. Hou for WIRES, May 2011.

Total Estimated Historical and Projected Transmission Investment (2011$)

32

Transmission

Renewables Drive Significant Investment Activity

$180 Billion of Planned and Still Conceptual

Transmission Projects as of 2010

MISO /

PJM West

$77 B

CAISO

$12 B

Other

WECC

$35 B

SPP

$19 B

PJM

$18 B

NYISO

$4 B

ISO-NE

$11 B

Source: Map from FERC. Project data collected by The Brattle Group from multiple sources and aggregated

to the regional level. Updated as of April 17, 2011.

Southeast

$2 BERCOT

$5 B

Main Regions with Wind Generation Opportunities

Approx.130 mostly conceptual and often overlapping projects (>$100 million each) for a total of over $180 billion

1/3 to 1/2 of these regional projects unlikely to be realized.

A significant portion of these proposed and often highly conceptual projects (many not yet part of regional planning efforts by RTOs) are driven by large-scale renewables integration

33

Transmission

U.S. Transmission Investment: 20-year Outlook

Brattle database for $180 billion of major projects

$30 billion … already in RTO-approved plans

$80 billion … additionally proposed (non-overlapping)

$50-100 billion in US-wide incremental transmission needed to integrate renewables:

♦ To satisfy existing state-level RPS requirements

$40-70 billion

♦ For higher of existing state and 20% federal RPS

$80-130 billion

$240-320 billion in investments through 2030 (in 2011$)

♦ Major reliability, economic, and renewables projects

♦ Local baseline investments, including lower voltages and facilities replacements

34

Transmission

Mostly “Regulated” Transmission

♦ Transmission largely infrastructure investments based on state or regional planning with cost recovery at regulated rates

♦ While focusing primarily on regulated investments, non-incumbent transmission developers have become increasingly active.

♦ Merchant transmission projects and competition for developing regulated transmission have increased • Out-of-footprint investments by established transmission owners

• Independent transmission developers

• Elimination of “Right of First Refusal” of incumbent transmission owners for new builds approved in regional transmission plans

• Merchant opportunities for HVDC lines in or between regions with sustained price differentials

35

Transmission

Barriers to U.S. Transmission Investments

Numerous barriers reduce transmission investment below optimal levels:

♦ Siting and permitting barriers

♦ Planning barriers (particularly for multi-state and inter-regional projects) • Planning focused on reliability projects, some “economic” or “congestion relief” projects

• Only starting to learn how to plan for “public policy” (renewables) projects

♦ Cost recovery barriers • Issue most acute for multi-state, inter-regional, and multi-purpose projects

♦ Opposition based on economic and competitive impacts • By state regulators and load serving entities if increased export capability might

increase wholesale power prices

• By generators (including transmission owners with affiliated generation) if increased import capability would decrease wholesale power prices

• By established transmission owners to third-party transmission development within their footprint

FERC “incentives” help overcome but do not actually reduce key barriers

36

Transmission

Transmission Also Provides Environmental and

Renewable Access Benefits

♦ New transmission can reduce emissions by avoiding dispatch of high-cost, inefficient generation

• Can reduce SO2, NOx, particulates, mercury, and CO2 emissions by allowing dispatch of more efficient or renewable generation

• Can also be environmentally neutral or even result in displacement of cleaner but more expensive generation (e.g., gas-fired)

♦ Local-only or regional/national benefits?

• Reduction in local emissions may be valuable (e.g., reduced ozone and particulates) irrespective of regional/national impact

• May not reduce regional/national emissions due to cap and trade, but may reduce the cost of allowances and renewable energy credits

♦ Additional economic benefits of facilitating renewables development

37

Overall Take-Away

♦ Several policy drivers can make a big difference going

forward

♦ Aside from those policies, market fundamentals underlie

and drive pricing and investment values

♦ Overall the power industry will have large round of

retirement and reinvestment

♦ While many hurdles exist, there will be a forward-looking

wave of investments in power generation and the grid

♦ These investments will create employment and provide

system benefits, thus should be welcomed by policymakers

and politicians.

38 38

North America

Cambridge, MA San Francisco, CA Washington, DC

Europe

London, England Madrid, Spain

250 people + affiliations with leading academics

• Energy, Utilities, and Other Network Industries – approximately half the firm

• Commercial and Financial Litigation

• Finance, Securities, Tax, Valuation

Rome, Italy

39

Utility Industry and Regulatory Experience

• Climate Change Policy and Planning

• Cost of Capital, Regulatory Finance

• Demand Forecasting and Normalization

• Demand Response and Energy Efficiency

• Electricity Market Modeling

• Energy Asset Valuation

• Energy Contract Litigation

• Environmental Compliance

• Fuel and Power Procurement

• Incentive Regulation

• Market Design and Competitive Analysis

• Mergers and Acquisitions

• Rate Design and Cost Allocation

• Regulatory Strategy and Litigation Support

• Renewables

• Resource Planning

• Retail Access and Restructuring

• Strategic Planning

• Transmission

Valuation and Risk Management

We bring institutional expertise in key industry subjects,

including finance, resource planning, and regulatory

experience:

40

Brief Bio

Judy Chang is a Principal leading Brattle’s efforts in strategic planning for utilities. She is an energy economist with background in Electrical Engineering and Public Policy. She has recently worked on regulatory and market issues around the integration of renewable energy, developing analytical tools to assess the potential impact of market structure on renewable energy assets. She has provided expert testimonies before FERC, state agencies and Canadian regulators.

For several utility clients, Judy has led senior executives and company

leadership teams in developing long-term strategic plans through detailed understanding of potential impacts of future industry and regulatory changes. She has led executive teams in developing consensus by jointly addressing regulatory uncertainties in a structured manner.

Judy Chang Principal

Cambridge, MA Office

[email protected]

P: +1.617.234.5630

mailto:[email protected]

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