Emerging Electric Industry Issues to

Shaping the Future

David K. Owens Executive Vice President Edison Electric Institute

AGA/EEI Beyond the Boardroom: Understanding the Energy Industry

October 21, 2013 AGA, Washington, DC

Agenda

Industry landscape 2013 and beyond Necessary Infrastructure Investments Our move to Natural Gas Environmental Outlook Distributive Energy Resources

Conclusion

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Infrastructure Investments

Industry Capital Expenditures

p = projected

43.0 41.1

48.4

59.9

74.1

83.0 77.8

74.2 79.3

94.4

83.5 79.3

30

40

50

60

70

80

90

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2013p 2014p

($ Billions) U.S. Shareholder-Owned Electric Utilities

Source: EEI Finance Department, company reports, SNL Financial (August 2012)

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Needed Infrastructure Investments to Address:

Reliability;

Environmental and other policy requirements; and

Continue the development of a grid for the 21st Century.

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Investment in Transmission and Distribution

EEI’s members invested a record $30.3 billion in T&D in 2011 (nominal $)

Short-term future investment looks bright, project 2012 investment of $33 billion in T&D (nominal $)

Anticipated decline in transmission investment post 2013 projected level, peak at $15.1 billion (real $2011)

0

5

10

15

20

25

2010 2011 2012 (projection)

Transmission

Distribution

Source: EEI Annual Property & Plant Capital Investment Survey [$Billions (Nominal $)]

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Electric Efficiency Budgets Are Growing

© 2011 The Institute for Electric Efficiency, www.edisonfoundation.net/IEE 7

2.7 3.2 4.4

5.4

6.8 7.5*

12.4**

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2020

*Lawrence Berkley National Lab (LBNL) MED Forecast **LBNL HIGH Forecast

Electric Efficiency Budgets (2007-2011 and 2020 LBNL Forecast)

Rate

-Pay

er F

undi

ng fo

r EE

($Bi

llion

, nom

inal

)

Our Emerging Move to Natural Gas

Prices Driving Switching Coal, Gas Futures (March 30, 2012)

Source: Nymex; Ventyx, Inc, The Velocity Suite; SNL

0

1

2

3

4

5

coal gas

9

Coal37.5%

Oi l0.6%

Natura l Gas

30.4% Nuclear18.9%

Hydro6.8%

Renewables

5.4%

Evolving Generation Mix

Coal

Gas

Nuclear

Oil Hydro

Other Renewables

0%

10%

20%

30%

40%

50%

60%

Source: DOE – Energy Information Administration

2012 (Estimate)

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Natural Gas: Coordination Issues

Different Market Structures

Electric-Gas Day

Infrastructure Financing/Sufficiency

Pipeline Services

Communication/Coordination

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Non-Hydro Renewable Sources More than Double between 2010 and 2035

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Renewable Portfolio Standard Policies…

www.dsireusa.org / September 2012.

29 states,+ Washington DC and 2

territories,have Renewable Portfolio

Standards (8 states and 2 territories have

renewable portfolio goals).

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Support for Clean Energy

Wind

$22/MWh production tax credit extended to end of 2013 as part of fiscal cliff deal

Credit now extended to projects that begin construction in current year

The credit stays in effect for ten years of production

Bloomberg predictions:

2013: 4.8 GW (1.5 GW w/o)

2014: 8 GW (3 GW w/o)

Solar • Federal investment tax

credit is in place through 2016

• The ITC is a 30% credit applicable to residential and commercial solar units

• Originally implemented in 2006

• Estimated historical impact of ITC: 1600% increase in solar power (about 76% per year).

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Environmental Outlook

Environmental Regulatory Challenges: 2013 and Beyond

Air

Climate

Water

Land & Natural

Resources

Waste & Chemical

Management

Coal Ash

PCBs in Electrical

Equipment

HazMat Transport

Transmission Siting and Permitting

Avian Protection

Endangered Species

Vegetation Management

316(b)

Effluent Guidelines Limitations

Waters of the United States

NPDES Pesticide Permits

NSPS- New Sources

NSPS-Existing Sources

BACT Permitting

International Negotiations

Mercury & Air Toxics

(MATS)

Interstate Transport

(CAIR/CSAPR)

Regional Haze/Visibility

Multiple NAAQS

New Source Review (NSR)

Waterbody- Specific

Standards 16

EPA Regulations Affecting Coal Plants

Mercury and Air Toxics Standards (MATS) – Dec 2011 Covers Coal and Oil Electric Generating Units (EGUs) > 25

MW 1400 Units Affected: 1100 Coal and 300 Oil 90 % Reduction of Mercury from Coal Plants Up to 4 years to comply (fifth year possible) Legal challenges and Congressional review

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EPA Regulations Affecting Coal Plants

Carbon Pollution Standard for New Power Plants – April 2012 1000 pounds of CO2 per megawatt-hour

Practical effect – eliminates new coal plants

Natural Gas Combined Cycle (NGCC) plants may not be able to meet standard under normal, real-world operating conditions.

New coal plants would have to use CCS, which has not been commercially demonstrated at utility scale.

EEI recommending separate standards for coal-based units and NGCC units • Coal- at least 2000 pounds of CO2 per megawatt-hour\

• NGCC – no lower than 1100 pounds of CO2 per megawatt-hour

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GHG NSPS for Existing Units: Key Issues

What fuel/technology will be basis for standards?

What form will standards take?

How will EPA address flexibility in guidelines?

What will the compliance timeline look like?

Will EPA provide guidance on state equivalency?

How will compliance be measured?

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Utilities Have Substantially Reduced Air Emissions While Increasing Electricity Production

1990 represents the base year. Graph depicts increases or decreases from the base year.

Source: U.S. Department of Energy, Energy Information Administration (EIA), U.S. Environmental Protection Agency (EPA), and U.S. Bureau of Economic Analysis.

May 2013 © 2013 by the Edison Electric Institute. All rights reserved.

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Emissions Reductions Facts

• The power sector has invested tens of billions of dollars to achieve substantial air emissions reductions.

• Annual emissions of sulfur dioxide (SO2) and nitrogen oxide (NOX) have been reduced about 79 and 76 percent, respectively, since 1990.

• Major reductions in particulate matter and hazardous air pollutants such as mercury also are underway.

• During the same period, electricity consumption has increased 36 percent and real GDP has increased 69percent.

CO2 Emissions and Intensity

Source: Developed from U.S. Energy Information Administration, Monthly Energy Review

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Obama Energy Agenda

“All-of-the-Above” Strategy

Invest in a Clean Energy Future

Promote Energy Efficiency

Reduce our Dependence on Oil

Tackle the issue of Climate Change

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Electric Distribution System is in Transition

The Electric Distribution System Is In Transition

Customers are gaining new distributed energy resource (DER) options, including distributed generation (DG)

The structure and operation of distribution systems will change as “smart” infrastructures are built out and new DER technologies are deployed Ultimately, power will flow in 2 directions across

distribution systems Supporting a safe and reliable grid infrastructure is critical

to the deployment of new technologies

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Distributive Generation What is Distributive Generation (DG)?

DG systems are small-scale, on-site power generation located at or near customers’ homes or business. Some common examples include solar panels, energy storage devices, fuel cells, microturbines, small wind and combine heat, and power systems.

Source: EIA

State Renewable Policies State Net Metering Policies

Public Policies Are Spurring DER Adoption

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43 States Have Net Metering + 17 States Have DG/Renewable DG Goals

Other Factors Contributing To The Transition

The Department of Defense, the largest energy user in the U.S., is actively seeking to implement renewables, “islanding” policies, and virtual net metering

Higher retail electric rates

Declining cost of PV

Evolution of “smart” infrastructure technologies (power electronics, storage, sensing and measurement, controls), high speed communications) ARRA funding for AMI deployment, smart grid demos

Storm outages 27

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New Regulatory Policy and Rate Design Are Needed

To ensure reliability: Enhance electric infrastructure

To ensure safety: Update interconnection standards & procedures

To ensure fairness: Adopt new approaches to designing rates for distributed

generation so all users of the grid contribute to grid infrastructure

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Rate Designs for Distributed

Generation

What’s the Problem?

How Much Should Utilities Be Compensated for Providing Service to Customers with Distributed Generation?

How Much Should Utilities Pay for Electricity from Distributed Energy Sources?

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Cost Impacts of Net Metering Do They Accord with Ratemaking Principles?

Prices to ratepayers should be based upon the actual cost to provide them electricity

Any subsidies (additional costs borne by some classes of ratepayers to benefit others) should be transparent and justified

“Societal benefits” (e.g., job creation, CO2 emissions reductions, energy independence) should be paid for by “society”, not electricity ratepayers

Net metering creates a hidden subsidy benefiting distributed generation owners at the expense of other electricity ratepayers that is being defended on the basis of the “societal benefits” that it provides

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What is the Best Rate Approach for DG? Straight Fixed/Variable Pricing (SFV)

Fixed costs of service (transmission, distribution, metering, customer support, taxes, interest expense) should be recovered in fixed monthly charges (customer charges and/or demand charges).

Much of these fixed costs are currently recovered in volumetric (per kWh) charges

A straight fixed/variable (SFW) rate design recovers fixed costs through fixed charges, and variable costs (fuel, purchased power) through per kWh charges

Distributed generation customers on an SFV rate will continue to fully compensate the utility for fixed costs of service, even if they are no longer taking electricity from the utility

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What if Straight Fixed/Variable Pricing Is Not An Option? Alternative Rate Designs for Distributed Generation

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Lessons Learned from Germany

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Les

sons Learned from German

The world is watching: The German revolt against renewables Quick Take: Environmentalists tout Germany as an exemplar of intelligent renewables policy. For instance, Germany long had a feed-in tariff for solar PV that paid "solar farmers" a premium price for their electricity. But some Germans are now beginning to revolt. Those policies currently call for Germany to produce 50% of all electricity from renewables by 2030 and 80% by 2050. The problem: The cost is now estimated at $1.35 trillion over the next 25 years German rates, already twice the U.S. average and the highest in Europe, are rising faster than anywhere else in Europe. Part of problem is a steep renewables surcharge that is added to every bill. According to a story in Der Spiegel, that surcharge is set to jump another 20% this year. Unless something is done, says the magazine, electricity will become "a luxury good" in Germany

Lessons Learned from Germany (continued)

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Les

sons Learned from German

Der Spiegel claims German consumers will be forced to pay $26 billion for renewable energy in 2013. The same amount of electricity purchased on the market would have cost about $4 billion. The problem is not just that electricity rates have skyrocketed. Renewables have also wreaked havoc on the German grid because of their variability, forcing rapid reactions as they surge up and down. To make matters worse, the government of Chancellor Angela Merkel has committed to wean Germany off nuclear power, which might otherwise have been used as a source of steady baseload power. By Jesse Berst, founder and Chief Analyst of SGN and Chairman of the Smart Cities Council, an industry coalition

Shaping the Future Is Transformational

New Opportunities A changing customer model A changing utility business model A changing regulatory model

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Conclusion

The U.S. electric grid delivers a valuable product essential to all Americans.

The electric power industry is leading the transformation to make the grid more flexible and more resilient to meet the growing demands of our digital society.

Everyone who uses the grid should help pay to maintain it and keep it operating reliably.

It is vital for our Nation to have a diverse supply of safe and reliable electricity, and electric rates should be fair and affordable for all customers.

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