electricity outlook 2006 and 2007: taking the pulse of the industry roger w. gale ceo, gf energy...

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Electricity Outlook 2006 and 2007:Taking the Pulse of the Industry

Roger W. GaleCEO, GF EnergyPresentation for APPA CEO MeetingMarch 20, 2007

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TODAY’S SESSION

Look at 2006 Outlook resultsTest them against APPA CEO thinkingLook at 2007 questions and issues

04/19/23 APPA CEO Meeting 2

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Are these the Broad Trends?

•Wave of business model stability

•Revitalization of incumbents

•Increased drive for environmental change

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2007 Dynamics

Business risk…Customer risk

…Ideological…Pragmatic

New entrants…Revived Incumbents

…Just in time...Longer-term

…Federal control…State control

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Drivers

Locked-In Core Drivers

Global Climate

Massive Infrastructure Investment

Growth Through Capex

Balanced Generation Portfolio

Emerging Drivers Efficiency

Customer-Driven Demand

Real-time Management

Anti-Utility Backlash

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2006 GF Energy Outlook

Download atwww.gfenergy.com

2007 GF EnergyOutlook will be

published in June

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Strategic Consensus

• More conservative regulated integrated business with less competition.

• The obligation to serve and provide resource adequacy is resurging.

• More intense customer relations as real-time internet technology takes hold.

• Investor-owned companies believe they can forge deals with regulators that provide companies with sufficient organic growth and margin.

• Increasing pressure to control greenhouse gas emissions and that utilities have to increase their capex considerably in the future.

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Strategic Consensus...2

• Natural gas prices will not favor building more gas-fired generation.

• The regulatory environment will allow locking in long-term financials on large new generating plants

• There will be more mergers but small and mid-size companies will continue to dominate.

• More transmission will be built but there will still be uncertainties about regulating the grid and about pricing of competitive wholesale power.

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Global Climate Pressures

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Climate change pressure is increasing

5.2

6.4

2005

200688%

10%

2%

Importance of climate change, although still 10th on a list of 14 issues, has increased in importance since last year and most executives expect mounting pressure

Average Importance Rank

Increase

Decrease

Remain Same

Expected Change in Pressure To Act On Climate Change

Q13: On a scale of 1 to 10, how important will each of the following issue be to your company (1-3 years)? Q22: In the coming year, will the pressure to act on global climate change...

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2%

36%

26%21%

15%

Financial commitments to Greenhouse Gas reduction will expand

Q23. In each of the following time frames, do you expect that your organization will need to take financially significant actions as the result of mandated reductions of greenhouse gases? Q24. How would you characterize your organization’s investments, or incurred costs, to address greenhouse gas emissions?

34%

16%

66%

84%

5 Years 10 Years

Yes

No

Expect Financial Commitment to Greenhouse Gas Reductions

Current Investments or Costs to Address Greenhouse Gas Emissions

Modest, but projected to be

significant

Haven’t been accounting for

expense

Significant and growing

Modest until regulatory

landscape clear

Don’t Know

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Generation Growth

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Generation growth will come from renewables and nuclear

29%

42%

44%

54%

73%

Capacity will be built to meet rising demand, with most executives expecting an increase in cleaner technologies

Generation Developments(Very Likely)

Q30: How would you describe the likelihood of each of the following generation developments in the next 1-3 years? Would you describe each of the following as very likely, somewhat likely, or not likely?

Major Increase in Renewables

New Nuclear Plant Order

IGCC Will Move Forward

Coal Will Move Forward

LNG Terminals Built

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Generation will also see the greatest increase in capital spending

3%

5%

6%

12%

16%

59%

Q12: In which of the following industry segments will the biggest increase in capital spending occur?

Generation

Transmission

Environment

Distribution

Renewables

Efficiency & Demand-Side

Control

Area of Greatest Expected Increase in Capital Spending

Despite the growing commitment to renewables, Capital spending is now expected to increase significantly

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14%

16%

30%

Small renewables and wind investments are likely in the mid-term, even if a small portion of spending

Q35: In the next 3-5 years, which of the following types of new investments in electricity supply are most likely to be made n order to increase capacity in your region(s)?

53%

69%

70%

76%

78%

More Likely Mid-Term Generation Developments

Small Renewables

Natural Gas

Coal

IGCC

Hydro

Distributed Generation

Less Likely Mid-Term Generation Developments

Wind

Nuclear

Cooperatives are more likely to expect an increase in coal capacity in the mid-term (88%) and to think that current coal projects will very probably move forward successfully (56%)

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Nuclear Outlook

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27%

49%

18%

20%

35%

45%

3%

3%

2005 2006

1-3 Years

4-7 Years

Beyond 7Years

Never

Compared to 2005, industry executives have far greater expectations that nuclear will be built soonAlmost half expect orders in the next 1-3 years, and over 75% expect

orders in 1-7 years

Q36: When do you expect a new nuclear plant order in your region?Q40: In the next 10 years, do you agree that... *Caution: Small base (n=19)

Expected Timing of New Nuclear Capacity

25%

73%

Expect Nuclear Construction in 10 Years

South*

All Other Regions

Not surprisingly, the South – where all of the announced nuclear projects are located – expects the most construction.

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Transmission


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58%

66%

Transmission and grid reliability will increase

There is much greater confidence that we will actually build transmission matching the number of new strategic transmission project announcements

Q25: How likely is each of the following transmission scenarios in the next 1-3 years? On a scale of 1 to 5, with 5 being extremely likely and 1 being not at all likely?Q29: Do you think we are going to see significant increases in actual transmission construction?

74% 26%

Near-Term Transmission Developments Expected

(Extremely/Somewhat Likely)

Yes No

Significant Increase in Actual Transmission Construction

Significant Increase in Investment

Much More Investment in

Grid Reliability

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Efficiency and Demand-Response Involvement

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Most utilities expect to increase involvement in efficiency and end-user demands and controls in the near futureHowever, compared to other pressing near-term issues, ‘improved efficiency and customer demand-response’ was not ranked as high (6.2), placing 11th on a list of 14 issues

Q31: In the next 1-3 years, which of the following best describes how involved utilities will become in efficiency and end-use demand controls and management? Will they become

11%

58%

31%Much more involved

Somewhat moreinvolved

No more or lessinvolved

Anticipated Involvement in Efficiency and End-User Demand and Controls

Q13: On a scale of 1 to 10, how important will each of the following issue be to your company (1-3 years)?

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Long term, technology will enable users to manage consumption real-time

Q41: In the next 10 years, which of the following trends do you think will have begun to be implemented?

21%

32%

62%

81%

83%

84%

96%Internet-Based

Billing & Demand Measurement

Demand-Response Systems for End

User

Plug-In Hybrid Vehicles

Real-Time Pricing

Sensors on Most Consuming Devices

Micro-grids

Storage

The electricity industry will become real-time in a decadeCombined with cheap sensors and “instant” pricing, micro-grids will emergeThere is also wide-spread optimism about plug-in hybridsStorage is not expected to be robust

Long-Term Technological Innovations Expected

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Long-term customer technology will change dramatically

4.5

4.9

5.1

5.2

5.9Control Electricity Use in Premises

Control Bills Real-Time

Use Wireless Home Automation to Manage

Demand

Networked Energy Mgmt Systems

Buy Electricity

Long-Term Customer Behavior (Degree of Change)

Q39: Now, thinking about how electricity consumption might or might not change for customers, please rate each of the following on a scale of 1 to 10, with 1 meaning little change and 10 meaning very substantial change.

41%

59%

Yes

No

Real-Time Electricity Management Widespread at Residential Level

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2007 ISSUES AND QUESTIONS

Most Important IssuesGlobal ClimateEfficiencyGeneration


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MOST IMPORTANT ISSUESWhat are the 10 most important issues?


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ARE THERE ANY EVENTS OR DEVELOPMENTS LIKELY TO EMERGE THAT WILL CAUSE YOU TO RECONSIDER YOUR CURRENT BUSINESS STRATEGY?

?


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CAPITAL COMMITMENTS


Significant Negative Change

Significant Positive Change

a) Distribution-1 -2 -3 -4 -5 0 +1 +2 +3 +4

+5

a) Generation-1 -2 -3 -4 -5 0 +1 +2 +3 +4

+5

a) Transmission-1 -2 -3 -4 -5 0 +1 +2 +3 +4

+5

a) Energy efficiency and demand-side control-1 -2 -3 -4 -5 0 +1 +2 +3 +4

+5

a) Renewables-1 -2 -3 -4 -5 0 +1 +2 +3 +4

+5

a) Environment-1 -2 -3 -4 -5 0 +1 +2 +3 +4

+5

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EFFICIENCY, D-R AND SMART METERS


My organization’s spending in this area will...

IncreaseRemain

the SameDecrease

a) Efficiency 1 2 3a) Demand-

Response1

2 3

a) Smart Metering

12 3

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Global Climate


Not at all Likely

Extremely Likely

a) Federal Renewable Portfolio Standard (RPS) legislation will be passed by the current Congress

1 2 3 4 5

a) The will act independently to address climate change

1 2 3 4 5

a) The will join a post-Kyoto international agreement

1 2 3 4 5

a) The current Congress will pass significant climate change legislation in this Congress

1 2 3 4 5

a) Climate change legislation passed by the current Congress will allow coal-fired plants already under development to proceed

1 2 3 4 5

a) Climate change legislation passed by the current Congress will hit utilities harder than it does the transportation industry

1 2 3 4 5

a) In the coming year, pressure to act on climate change will increase

1 2 3 4 5

Questions:

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PREFFERED CLIMATE STRATEGY


Cap and trade ○Cap and Trade with “safety valve”

○

Carbon tax ○New market mechanisms ○Voluntary programs ○No action ○

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TIMEFRAME FOR CLIMATE ACTION


Not at all

Likely

Extremely Likely

2007 to 2009 1 2 3 4 52010 to 2014 1 2 3 4 52015 to 2019 1 2 3 4 52020 or later 1 2 3 4 5

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Your utility


More ○About the Same ○Less ○Not sure ○

•Compared to most utilities,

do you think a mandatory global climate law

will affect your organization...

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PLANNED COAL PLANTS BUILT


Most ○Some ○Only a few ○Not sure ○

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GENERATION ACTIONS


Very Likely

Somewhat Likely

Neither Likely Nor Unlikely

Somewhat Unlikely

Very Unlikely

LNG terminal projects will move forward successfully.A new nuclear plant will be ordered.There will be a major increase in renewable (wind, solar, biomass, etc.) projects.Natural gas prices will come down enough to favor an increase in gas turbine orders.There will be an increase in distributed generation.New environmental standards and/or uncertainties will make it much more difficult to build fossil plantsGlobal climate issues will have a significant impact on technology choices.Rail transport bottlenecks for coal delivery will be fixed.Coal imports will increase significantly.Captive coal shipper problems will continue

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CUSTOMER ACTIONS


a) Buy their electricitya) Control electricity use on their premisesa) Seek to control their bills real-timea) Invest in networked energy management systemsa) Apply wireless home automation to managing electricity demand

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IN 10 YEARS…


[ROTATE]Disagree Completely

Agree Completely

a) There will be many new nuclear plants under construction.

1 2 3 4 5 6 7 8 9 10

a) There will be a few large utilities that dominate the national electricity markets.

1 2 3 4 5 6 7 8 9 10

a) Competition will become more common at the retail level.

1 2 3 4 5 6 7 8 9 10

a) Telecommunications and electric power companies will have tended to converge.

1 2 3 4 5 6 7 8 9 10

a) There will be required CO2 capture 1 2 3 4 5 6 7 8 9 10a) Foreign companies will have expanded their

presence significantly.1 2 3 4 5 6 7 8 9 10

a) Most companies will have sold or spun off their transmission to independent owners.

1 2 3 4 5 6 7 8 9 10

a) New entrants will control a substantial share of the retail markets for electricity.

1 2 3 4 5 6 7 8 9 10

a) Renewables will have captured a significant market share.

1 2 3 4 5 6 7 8 9 10

a) Real-time electricity management at the residential level will be commonplace.

1 2 3 4 5 6 7 8 9 10

a) Mandatory global climate action will have been implemented

1 2 3 4 5 6 7 8 9 10

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WHAT ARE THE MOST IMPORTANT ISSUES ON YOUR DESK?

e.g., aging workforcecapital investment customer relationshipsgrowth


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GF Energy, LLC

GF Energy and its predecessor firms have built a solid reputation since 1988 as aggressive, creative and insightful strategy consultants—capturing emerging trends and new solutions.

Management StrategyEvery project gets a customized response, be it a strategic fit approach to optimize and fine-tune existing programs or a blank sheet approach for organizations undergoing major change and executive leadership transitions.

GF Energy works closely with chief executives, boards and stakeholders to restructure corporations around new goals that maximize performance and profitability, often serving as an independent credibility agent.

Business MarketingGF Energy develops, launches and implements marketing and advocacy campaigns, identifies US-based investment opportunities and carries out high-level due diligence for investors.

Policy ManagementBased in Washington, D.C., GF Energy works at the intersection of policy, politics and business producing white papers, analytic statements and other policy tools.

GF Energy Electricity Outlook For more than a decade, the Electricity Outlook has provided indispensable survey-based analyses of trends and issues.

GF Energy, LLC

Electricity Industry Management Counsel and Strategy 1100 Connecticut Ave, NW, Suite 1250

Washington, DC 20036 USAwww.gfenergy.com

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Roger W. Gale1.202.236.8198

[email protected]

http://www.gfenergy.com/

electricity outlook 2006 and 2007: taking the pulse of the industry roger w. gale ceo, gf energy...

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