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Elections and Energy ….
Likely Impacts on Utilities?
David K. Owens
Executive Vice President
Edison Electric Institute
Marketing Executives Conference
October 14, 2008
We Are In A Period Of
Significant Transformation
Capital Markets
Environment
Technology
Politics
The Challenge of Balancing Core Drivers
Rising Costs
Financial Crisis
and Prices
Climate
Change
Energy Efficiency
Enormous CapEx
Congress
$1.5 Trillion Dozen bills pending inNo
longer a declining cost industry
States becoming aggressive
Exceeds current capitalization
Fuel, infrastructure components,
Role of Renewables
Major new coal, nuclear and transmission
global industrialization and competition
> $1 Trillion ???
Demand Response
CriticalSmart
Political
Grid Issue
Low hanging fruit for Climate Change
Need to make it a sustainable business
“Smart” appliances, buildings, grid
What‘s Happened?
The “Downward Spiral”
Plummeting
Housing Prices
Rise in Delinquencies, Bankruptcies and
Foreclosures
Less Sales Force
Businesses to Scale
Back
High
Energy
Prices
Businesses and Consumers Cut Back on
Spending
Banks Strapped for Cash –
Tighten Up on Lending
Higher Unemployment
Financial Crisis Impacts …
Access to Capital
What’s At Stake?

Current investment $85 Billion annually for …





Upgrading distribution, transmission and generation
Deploying advanced distribution technologies, including smart meters
Increasing the integration of renewable resources
Building new and cleaner generation facilities
Lack of liquidity (inability to access capital markets at reasonable
rates) will …


Cause utilities to curtail or postpone critical infrastructure projects until
capital markets stabilize
Substantially increase short-term borrowing costs ultimately impacting
long-term capital investment needed to ensure reliable, affordable and
sustainable electric service to consumers
Why Do We Need the Investment?

Replace aging infrastructure

Maintain reliability

Address climate change and related environmental issues

Enhance energy efficiency technologies
Billon kiloWatthours
Demand Projected To
Increase 30% by 2030
Sources: U.S. Department of Energy, Energy Information Administration, Annual Energy Review 2006
and Annual Energy Outlook 2008 Early Release
*Electricity demand projections based on expected growth between 2006-2030
Causes for Rising Demand

Increasing population 11.18% in 10 years

Increased economic growth 50.1% in 8 years

Increased number of homes 47.85% in 8 years

Increased number of larger homes 72% in 9 years (over 2400 sq. ft.)

Increased number with central A/C 49% in 9 years

Plasma TVs up 50% 1st Qtr 05 from 1st Qtr 04

MP3 players up >17 million in one year

Average US household owns 26 consumer electronics products
Estimated Baseline For Needed
New Capacity Build -- 214 GW



Uses Final AEO 2008 load growth projection
Includes Brattle’s most recent fuel and construction cost estimates
Does not include aggressive energy efficiency and potential price response
impacts New Generation Capacity in U.S. Census Regions
by Type (GW) During 2010-2030
120
100
GW
80
Renewable
CT
Nuclear
CC
Coal
100 GW
Total Capital Cost:
$697 Billion
(Undiscounted Nominal)
59 GW
60
40
35 GW
20 GW
20
0
West
Midwest
Prepared for the Edison Foundation by The Brattle Group
South
Northeast
The Capital Investment Challenge

Industry investment in all segments through 2030 will be on the
order of $1.5 Trillion





Estimates do not reflect




Generation $505 billion (133 GW, assuming RAP efficiency)
Transmission $287 billion
Distribution $588 billion
Energy Efficiency $85 billion (EE and AMI cost for RAP efficiency)
Potential costs of new carbon policies that may be adopted
Potential new comprehensive federal energy legislation / policies
Potential new state energy policies
T&D investments significantly greater than projected generation
investment
Resurgence of Rate Cases –
Resurgence of Rate INCREASES?
20
18
16
14
12
10
8
6
4
2
0
Increases in Energy Prices Hit Low- and
Fixed-Income Households the Hardest

Income spent on energy for
households earning



>$50,000 / year - 7% of income
$10,000 - $30,000 / year – 20% of
income (25% of households)
<$10,000 / year - 46% of income
(8% of households)
Household Energy Expenditures
vs. After-Tax Household Income
50%
45%
One-third of
Americans
shoulder major
energy burden
40%
35%
30%

Households earning < $30,000


Mostly senior citizens, single
parents, and minorities
Force hard decisions about what
bills to pay … housing, food,
education, health care, and other
necessities
25%
20%
15%
10%
5%
0%
Over $50,000
$10,000 - $30,000
Sources: Redefining Progress; U.S. Census Bureau, Current Population Survey, 2006 Annual Social and Economic Supplement
Under $10,000
Rising Electricity Costs Have a More
Significant Effect on the Poor
Annual Electricity Expenditures
Percentage of Household Income
% of Household Income
25.0%
20.0%
Impact of 30%
Rate Increase
15.0%
10.0%
5.0%
0.0%
< $10,000
$10,000 to
$19,999
$20,000 to
$29,999
$30,000 to
$39,999
$40,000 to
$49,999
Household Income (2006$)
Source: 2006 Consumer Expenditure Survey, U.S. Bureau of Labor Statistics
$50,000 to
$69,999
$70,000 or
More
Strategic Issue
How do we mitigate rate shock?
Energy Efficiency / Demand Response
Construction work in progress
Automatic Adjustment Clauses
Forward test years
Pre-construction operating costs
Different billing approaches
Other
What About Climate Change?
China’s CO2 Emissions
Now Exceed U.S.
* Based on projected data from the International Energy Agency, November 2007.
U.S. Green House Gas Emissions
Produced By Many Sectors
Agriculture
7%
Residential
6%
Commercial
7%
U.S. Territories
1%
Electricity
Generation
32%
Industry
19%
Transportation
28%
Controlling Greenhouse Gas (GHG)
Emissions – Current Status

Congress seriously considering legislation aimed at reducing
GHG emissions

Supreme Court rules that carbon dioxide is a pollutant under the
Clean Air Act


EPA to regulate!
Some states, such as California, have adopted comprehensive
policies to limit GHG emissions
Key Questions In GHG Debate

Targets and timetable for GHG reductions?

Mechanisms to achieve cost-effective GHG reductions?

Cap and trade, tax or hybrid?

Include all sectors of the economy and all sources of GHG?

Consistency of compliance timetables with expected development
and deployment of needed technologies?
Challenge:
Technologies and Timeframes

Advanced coal technologies integrated with Carbon Capture and
Storage (CCS)
 Not commercially available until 2020-2025

Deployment of nuclear plants
 Not possible until 2015 at earliest
During the transition there will be a “dash to gas”
Driving up both electricity and gas prices
Controlling Greenhouse Gas (GHG)
Emissions

How do you …

Establish the price of carbon?

Minimize economic disruptions?

Ensure that low income consumers do not shoulder a
disproportionate impact?

Recognize early actions / investments made to mitigate GHG?

Take into account unintended aspects of GHG emission
regulation?
 Jobs?
Trade balances? Cost of goods and services?
EEI’s Climate Change Principles

Ensure development and cost-effective deployment of
“climate-friendly” technologies

Provide funding

Minimize economic disruption to consumers

Avoid harm to the competitiveness of U.S. industry

Ensure an economy-wide approach to GHG reductions
*The full text of the EEI climate change principles is available at www.eei.org.
Key Elements In GHG Debate

We need a full suite of technologies

Harmonize compliance dates and technology availability

An effective cost containment mechanism to avoid economic
disruption

Robust domestic and international offsets to lower costs and
promote effectiveness

Requirement that developing countries participate – China / India
What Will It Take?
There Is No Silver Bullet!






Energy Efficiency
Renewables
Clean Coal Technologies
Carbon capture and storage
Nuclear
Plug-in hybrid electric vehicles
We need it all …
but it will be costly!
CO2 Reductions –
What’s Technically Feasible?
• Higher fuel prices
• Lower GDP, load growth rate
• More renewables, nuclear
3500
U.S. Electric Sector
CO2 Emissions (million metric tons)
3000
EIA Base Case 2008
EIA Base Case 2007
2500
Achieving all targets is very aggressive, but potentially feasible
2000
Technology
EIA 2008 Reference
Target
Load Growth ~ +1.05%/yr
Load Growth ~ +0.75%/yr
Renewables
55 GWe by 2030
100 GWe by 2030
Nuclear Generation
15 GWe by 2030
64 GWe by 2030
No Heat Rate Improvement for
Existing Plants
40% New Plant Efficiency
by 2020–2030
1-3% Heat Rate Improvement for
130 GWe Existing Plants
46% New Plant Efficiency
by 2020; 49% in 2030
CCS
None
Widely Deployed After 2020
PHEV
None
10% of New Light-Duty Vehicle
Sales by 2017; 33% by 2030
< 0.1% of Base Load in 2030
5% of Base Load in 2030
Efficiency
1500
1000
500
Advanced Coal
Generation
DER
0
1990
1995
2000
2005
2010
2015
2020
(EPRI Prism – With EIA Update)
2025
2030
Range of Potential Impacts
From Climate Legislation?

Cost per household
$446 - $2927 in 2020 / year

Electricity prices

Natural gas prices

GDP

Employment

Coal consumption

Permit prices ($ / ton CO2 equivalent)

Total US GHG emission (mmtCO2-equivalent)
2030 (“Business As Usual” 9672 in 2030)
21% - 35% in 2020
20% - 39% in 2020
0.7% - 1.74% (~ $336B out of $~19.2T GDP)
1.1 - 2.78 million in 2020
42% - 66% in 2020
$18 - $48 / ton in 2020
4887 – 6654 in
It’s All About The Assumptions!
Who’s Assumptions Are Right?
Wide Ranges

New Renewables


Coal w/ Carbon Capture and Storage


3.5 GW <–> 268 GW by 2030
Energy Efficiency


25 GW <–> 250 GW by 2030
New Nuclear


6 GW <–> 176 GW by 2030
Major impact – How much?
Offsets

15% domestic only <–> 30% domestic and international
The Challenge of A New Political
Landscape

A movement for change


2009




Younger voters becoming a significant force
New President
New Congress
New Agency Heads (FERC, EPA, DOE, etc.)
New directions on a range of issues




Economy
War
Energy and the Environment
Health Care
View From Top – Senator McCain’s
Climate Change Positions

Goal


Mechanism


Cap-and-trade program
Implementation





Reduce carbon emissions by 60% below 1990 levels by 2050
All allowances allocated initially with an eventual transition to auctions
Proceeds to support development of advanced technologies (CCS,
nuclear, battery development)
Funds to provide financial backing green innovation, financing and transfer
fund to facilitate the commercialization of green technologies
Climate Change Credit Corporation to administer program
Coverage


Economy-wide approach
Exempt certain small businesses
View From Top – Senator McCain’s
Other Energy Issues

Nuclear



Energy R&D







Construct and operate 45 new reactors by 2030
Long-term target is 100 additional reactors
Reform government R&D infrastructure
Develop battery operated cars
Accelerated deployment of renewable technologies
Permanent extension of R&D tax credits – 10% of wages spent on R&D
$5000 / zero emissions car tax credit
$300 million prize for development of a more efficient battery
Energy Efficiency


Increase federal government energy efficiency
Increase efficiency of transmission grid, including deployment of
smart meters
View From Top – Senator McCain’s
Other Energy Issues

Oil and Gas Exploration


Energy Efficiency



Expand domestic oil and gas production
Increase federal government energy efficiency
Increase efficiency of transmission grid
Clean Coal



Accelerate development and deployment of clean coal facilities
Increase R&D funding
Develop carbon capture and storage
View From Top – Senator Obama’s
Climate Change Positions

Goal


Mechanism




All allowances to be auctioned
Use interim targets to stay on course
Proceeds to be used to support “development and deployment of clean
energy”, energy efficiency and transition assistance, invest in job training to
develop a clean energy workforce and energy-focus Green Jobs Corp
(5 million new jobs projected)
Coverage


Cap-and-trade program
Implementation


Reduce carbon emission 80% below 1990 level by 2050
Economy-wide approach
Supplementary measures


National Renewable Portfolio Standard – 25% by 2025
Nat’l Renewable Fuel Standard – 60 B gallons biofuels by 2030
View From Top – Senator Obama’s
Other Energy Issues

Nuclear






Ensure currently stored waste is using most advance storage caskets
Establish guideline for tracking / controlling / accounting for spent fuel
Must be built and operate safely and securely
Yucca Mountain is not an option
Supports new nuclear but no real details
Energy R&D





Commercialize PHEVs
Commercial scale renewable energy
Extend renewable production tax credit for 5 years
Create a clean technologies deployment venture capital fund
Permanently extend R&D tax credits
View From Top – Senator Obama’s
Other Energy Issues

Oil and Natural Gas



Energy Efficiency







Supports limited off-shore drilling
Reduce oil consumption by 35% by 2030
Overhaul federal efficiency codes
50% reduction of energy intensity by 2030
Zero emissions for federal buildings by 2025
Improve new / existing building efficiencies by 50%, 25% by 2030 (resp.)
Phase out incandescent light bulbs
Accelerate development and increase investment in the smart grid
Clean Coal


Develop and deploy new Clean Coal Plants / carbon capture and storage
Ban on new traditional coal plants w/o provision for reducing GHG
Legislating From the Middle

Letter from 10 Democrats to Majority Leader Sen. Reid stressing
8 principles (June 6, 2008)








Contain costs and prevent harm to US economy
Invest aggressively in new technologies and deployment of existing
technologies
Treat states equitably
Protect America’s working families
Protect US manufacturing jobs and strengthen international
competitiveness
Fully recognize agriculture and forestry
Clarify Federal / state authority
Provide accountability for consumer dollars
Legislating From the Middle

Sen. Bingaman (D-NM), Chair Senate Energy Committee (July 9,
2008)










Focus legislation only on emissions reductions not other goals
Don’t make it complicated
Be realistic about how well we can plan for the distant future
Involve all existing agencies and fully fund programs
Set ambitious but achievable targets
Don’t let costs get out of control
Make a commitment to technology
Work out how new climate law will relate to Clean Air Act – no duplication
Set achievable near-term deadlines
Have a single national cap-and-trade program for GHGs and pre-empt
states
The Challenge of New Technologies

Supply technologies





Demand technologies


Clean Coal Technologies – IGCC
Advanced new nuclear
Distributed generation
Renewables
Smart / energy efficiency devices
 Appliances, buildings / codes, thermostats, meters
Energy storage / transportation


Plug-in Hybrid Electric Vehicles
Thermal energy storage
How do we fund their development?
Funding New Technologies
Rep. Boucher’s Bill

Fossil-based utilities to hold referendum on a Carbon Storage
Research Corporation (CSRC)




Scope
 If approved by 2/3, funding for CSRC will come from assessments on
retail customers of fossil based electricity utilities
Governance
 CSRC operated as a division of the Electric Power Research Institute
Implementation
 Assessments to total ~$1 billion annually
 Fund large scale demonstration of CCS technologies – accelerate
commercialization
 Assessment ~ $10-12 annually for the average residential consumer of
fossil fuel based electricity.
Hearings (June 19, 2008)
 Critical issues – governance, cost recovery, fee computation
Summary:
Challenges Are Plentiful

Stability in financial markets is essential


Changing political landscape




Need significant infrastructure investment but costs increasing rapidly
No longer a declining cost industry


Potential impacts from climate legislation
Need to accelerate development and deployment of new technologies
Supply margins are declining and demand is increasing


Both candidates concerned about GHG
Legislating from the middle
Increasing concerns about the environment


Access to capital effects infrastructure expansion and reliability
Need significant outreach to explain the reasons for increasing cost
Energy efficiency is viable option

Need to create regulatory climate for making EE a sustainable business
The Path Forward
An Apollo Like Vision!

Secure a national (worldwide) commitment to reducing GHG
emissions




Accelerate the development of needed technologies


Involve all sectors of the economy
Aggressive education campaign - costs and benefits
Change attitudes about energy efficiency – all sectors
Substantially increase funding and related incentives to stimulate research,
development and deployment
Create excitement around engineering, mathematics and science

Public / private partnership to replace the aging workforce and encourage
the next round of technical and strategic leaders
Not because it is easy,
but because it is the right thing to do!