1. BOSTON CHICAGO DALLAS DENVER LOS ANGELES MENLO PARK MONTREAL NEW YORK SAN FRANCISCO WASHINGTON Governors’ Wind Energy Coalition November, 2011 Competitive Markets & Wind Power Paul J. Hibbard Challenge and Opportunity

2. Governors’ Wind Energy Coalition, November 2011 Page 2 Overview New England competitive market structure  Somewhat representative of entire Northeast Treatment of transmission  Reliability v. public policy Current resource mix  And potentially significant changes New development interests  Gas vs. renewables

3. Governors’ Wind Energy Coalition, November 2011 Page 3 Markets: Electricity (New England Example) Energy, capacity, reserves, ancillary services, transmission rights Financial signals for development stem from  Long-term capacity market signal (in strong revision)  Shorter-term energy, reserve, ancillary market revenues  Bilateral contracts indexed to regional markets  Transmission right revenues for new transmission development Demand response and energy efficiency a key player in capacity, energy markets (approaching 10% of market need) Renewables development booming Robust competition, major transmission investment

4. Governors’ Wind Energy Coalition, November 2011 Page 4 Transmission Development in the Market Context Reliability  ISO-NE identifies reliability needs, “backstop” transmission solution  Market can identify non-transmission solution (local generation, demand response, merchant transmission etc.)  Current efforts to better align the two …  Absent market response, “backstop” transmission pursued  Costs socialized Generation Interconnection  Viewed as a development cost (resource-neutral)  Level playing field for all generation options competing to meet need at lowest delivered price of electricity  Includes interconnection, any needed system reliability upgrades  (i.e., generator must be able to connect, and to do so without diminishing existing level of system reliability)  Developer pays – RESOURCES COMPETE ON DELIVERED PRICE BASIS

5. Governors’ Wind Energy Coalition, November 2011 Page 5 Combined Market Context Consistent with current legislative proposals  Policymakers set the standards (RPS with alternative compliance cost “cap”)  Let competitive markets produce the lowest-cost compliance path Financial signals for development flow from capacity, energy, and RPS markets, and emerging environmental requirements  Increasing renewable generation and development  Decreasing fossil generation and development? Compliance path (resources) not predetermined Encourages innovation, spurs new technologies, resources, compliance strategies Minimizes rate impacts on delivered price basis

6. Governors’ Wind Energy Coalition, November 2011 Page 6 New England: New gas dominates, but wind is emerging

7. Governors’ Wind Energy Coalition, November 2011 Page 7 Environmental Compliance New England is at risk of substantial retirements Primarily aging coal and oil; possibly some gas Will diminish surplus Many could be in key locations What will we be left with??

8. Governors’ Wind Energy Coalition, November 2011 Page 8 Options Not likely: Coal, oil, nuclear Demand response: continued strength, or diminishing returns? Gas Relatively cheap, relatively easy to develop Shale resources, sustained (?) low prices Wind No fuel risk Strong policy support Strong transmission development interest

9. Governors’ Wind Energy Coalition, November 2011 Page 9 Comparable Economics (if wind is coupled…)

10. Governors’ Wind Energy Coalition, November 2011 Page 10 But, transmission is an issue for wind (not gas)

11. Governors’ Wind Energy Coalition, November 2011 Page 11 Outlook Huge development interest for wind in the Northeast Market opportunities will emerge, supported by policy But natural gas outlook will challenge economics Key factor: state efforts to provide the right development conditions  Coordinated procurement/long-term contract options  Coordinated siting for transmission Order 1000: will FERC force the issue  Sets stage if states want to go there  But socialization of transmission jeapordizes region’s commitment to competitive electricity markets

12. Governors’ Wind Energy Coalition, November 2011 Page 12 Paul J. Hibbard Vice President phibbard@analysisgroup.com phibbard@analysisgroup.com 617.425.8171 Analysis Group, Inc. 111 Huntington Ave., 10th Floor Boston, MA 02199 ph: 617-425-8000 fax: 617-425-8001 www.analysisgroup.com