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Elections and Energy …. Likely Impacts on Utilities? David K. Owens Executive Vice President Edison Electric Institute Marketing Executives Conference.

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Presentation on theme: "Elections and Energy …. Likely Impacts on Utilities? David K. Owens Executive Vice President Edison Electric Institute Marketing Executives Conference."— Presentation transcript:

1 Elections and Energy …. Likely Impacts on Utilities? David K. Owens Executive Vice President Edison Electric Institute Marketing Executives Conference October 14, 2008

2 We Are In A Period Of Significant Transformation Capital Markets Environment Technology Politics

3 The Challenge of Balancing Core Drivers EnormousCapEx Enormous CapEx Rising Costs and Prices and Prices No longer a declining cost industry Fuel, infrastructure components, global industrialization and competition $1.5 Trillion Exceeds current capitalization Major new coal, nuclear and transmission Climate Change Dozen bills pending in Congress States becoming aggressive Role of Renewables > $1 Trillion ??? EnergyEfficiency Energy Efficiency Demand Response Smart Grid Low hanging fruit for Climate Change Need to make it a sustainable business “Smart” appliances, buildings, grid Financial Crisis Critical Political Issue

4 What‘s Happened? The “Downward Spiral” Banks Strapped for Cash – Tighten Up on Lending Plummeting Housing Prices Rise in Delinquencies, Bankruptcies and Foreclosures Businesses and Consumers Cut Back on Spending Less Sales Force Businesses to Scale Back Higher Unemployment High Energy Prices

5 Financial Crisis Impacts … Access to Capital

6 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

7 Why Do We Need the Investment? Replace aging infrastructure Maintain reliability Address climate change and related environmental issues Enhance energy efficiency technologies

8 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 Billon kiloWatthours

9 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% 1 st Qtr 05 from 1 st Qtr 04 MP3 players up >17 million in one year Average US household owns 26 consumer electronics products

10 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 Total Capital Cost: $697 Billion (Undiscounted Nominal) Prepared for the Edison Foundation by The Brattle Group

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12 The Capital Investment Challenge Industry investment in all segments through 2030 will be on the order of $1.5 Trillion 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) Estimates do not reflect 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

13 Resurgence of Rate Cases – Resurgence of Rate INCREASES?

14 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) 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 One-third of Americans shoulder major energy burden Sources: Redefining Progress; U.S. Census Bureau, Current Population Survey, 2006 Annual Social and Economic Supplement

15 Rising Electricity Costs Have a More Significant Effect on the Poor Source: 2006 Consumer Expenditure Survey, U.S. Bureau of Labor Statistics

16 How do we mitigate rate shock? Strategic Issue Energy Efficiency / Demand Response Construction work in progress Automatic Adjustment Clauses Forward test years Pre-construction operating costs Different billing approaches Other

17 What About Climate Change?

18 China’s CO 2 Emissions Now Exceed U.S. * Based on projected data from the International Energy Agency, November 2007.

19 U.S. Green House Gas Emissions Produced By Many Sectors Industry 19% Commercial 7% Residential 6% Agriculture 7% Transportation 28% Electricity Generation 32% U.S. Territories 1%

20 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

21 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?

22 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

23 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?

24 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.www.eei.org EEI’s Climate Change Principles

25 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

26 There Is No Silver Bullet! What Will It Take? 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!

27 EIA Base Case 2008 TechnologyEIA 2008 ReferenceTarget EfficiencyLoad Growth ~ +1.05%/yrLoad Growth ~ +0.75%/yr Renewables55 GWe by 2030100 GWe by 2030 Nuclear Generation15 GWe by 203064 GWe by 2030 Advanced Coal Generation 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 CCSNoneWidely Deployed After 2020 PHEVNone 10% of New Light-Duty Vehicle Sales by 2017; 33% by 2030 DER< 0.1% of Base Load in 20305% of Base Load in 2030 EIA Base Case 2007 CO 2 Reductions – What’s Technically Feasible? Achieving all targets is very aggressive, but potentially feasible Higher fuel prices Lower GDP, load growth rate More renewables, nuclear Higher fuel prices Lower GDP, load growth rate More renewables, nuclear (EPRI Prism – With EIA Update)

28 Range of Potential Impacts From Climate Legislation? Cost per household $446 - $2927 in 2020 / year Electricity prices 21% - 35% in 2020 Natural gas prices 20% - 39% in 2020 GDP 0.7% - 1.74% (~ $336B out of $~19.2T GDP) Employment 1.1 - 2.78 million in 2020 Coal consumption 42% - 66% in 2020 Permit prices ($ / ton CO 2 equivalent) $18 - $48 / ton in 2020 Total US GHG emission (mmtCO 2 -equivalent) 4887 – 6654 in 2030 (“Business As Usual” 9672 in 2030) It’s All About The Assumptions!

29 Who’s Assumptions Are Right? Wide Ranges New Renewables 6 GW 176 GW by 2030 Coal w/ Carbon Capture and Storage 25 GW 250 GW by 2030 New Nuclear 3.5 GW 268 GW by 2030 Energy Efficiency Major impact – How much? Offsets 15% domestic only 30% domestic and international

30 The Challenge of A New Political Landscape A movement for change Younger voters becoming a significant force 2009 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

31 View From Top – Senator McCain’s Climate Change Positions Goal Reduce carbon emissions by 60% below 1990 levels by 2050 Mechanism Cap-and-trade program Implementation 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

32 View From Top – Senator McCain’s Other Energy Issues Nuclear Construct and operate 45 new reactors by 2030 Long-term target is 100 additional reactors Energy R&D 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

33 View From Top – Senator McCain’s Other Energy Issues Oil and Gas Exploration Expand domestic oil and gas production Energy Efficiency 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

34 View From Top – Senator Obama’s Climate Change Positions Goal Reduce carbon emission 80% below 1990 level by 2050 Mechanism Cap-and-trade program Implementation 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 Economy-wide approach Supplementary measures National Renewable Portfolio Standard – 25% by 2025 Nat’l Renewable Fuel Standard – 60 B gallons biofuels by 2030

35 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

36 View From Top – Senator Obama’s Other Energy Issues Oil and Natural Gas Supports limited off-shore drilling Reduce oil consumption by 35% by 2030 Energy Efficiency 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

37 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

38 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

39 The Challenge of New Technologies Supply technologies Clean Coal Technologies – IGCC Advanced new nuclear Distributed generation Renewables Demand technologies 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?

40 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

41 Summary: Challenges Are Plentiful Stability in financial markets is essential Access to capital effects infrastructure expansion and reliability Changing political landscape Both candidates concerned about GHG Legislating from the middle Increasing concerns about the environment Potential impacts from climate legislation Need to accelerate development and deployment of new technologies Supply margins are declining and demand is increasing Need significant infrastructure investment but costs increasing rapidly No longer a declining cost industry 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

42 The Path Forward An Apollo Like Vision! Secure a national (worldwide) commitment to reducing GHG emissions Involve all sectors of the economy Aggressive education campaign - costs and benefits Change attitudes about energy efficiency – all sectors Accelerate the development of needed technologies 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!


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