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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!