June 19, 2014 Recent Electricity Trends and Coal Plant Retirements The Importance of Baseload Power Renewal Peter C. Balash, Ph.D. Deputy Director Strategic Energy Analysis and Planning

2 The analysis presented and conclusions drawn are solely those of the author(s), and do not represent the views of the United States Department of Energy Disclaimer

3 Electricity Trends and Projections – Growth and capacity needs may be under-projected Issue in Focus – “Ageless Baseload” – Is high utilization of aging capacity realistic? EIA “Response”: Accelerated Retirement Scenario – Infrastructure and reliability concerns All Bets on Gas – Elastic supply, or excessive optimism? Outline

Growth in electricity use slows, but still increases by 29% from 2012 to 2040 percent growth (3-year compounded annual growth rate) Source: EIA, Annual Energy Outlook 2014 Early Release 4 History Projections 2012 electricity use GDP Structural Change in Economy - Higher prices - Standards - Improved efficiency Period Annual Growth Electricity use GDP 1950s s s s s Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

5 Long-term relation of kWhgr/GDPgr = Implicit AEO 2014 relation = (2012 to 2040); 56% of long-term relationship Long-term relation of kWhgr/GDPgr = Implicit AEO 2014 relation = (2012 to 2040); 56% of long-term relationship Sources: Electricity, EIA, Monthly Energy Review, Table 7.6, Electric Power Month, STEO; GDP, Bureau of Economic Analysis, NIPA Table Real GDP Chained 2005 Dollars; Rates, AEO2014 Tables 8 and 20; and NETL analysis; IHS, North American Power Quarterly Briefing, May 5, 2014; “gr” stands for growth rate. Electricity and GDP Growth ~30 Year Avg. Year-over-Year Growth Rates, 1982Q1-2014Q1 For a medium-term comparison, IHS projects kWh growth of 1.8%/year and GDP growth of 3.0%/year from

6 Sources: BEA – NIPA Table 1.1.6; EIA – Monthly Energy Review; Annual Energy Outlook 2014; *kWh end use (consumption); dashed lines represent 6 th order polynomial fit SEAP AEO’14 Forecast kWh Growth Rate*: AEO’14 vs. SEAP

7 Growth of U.S. GDP vs. Generation Historic and Forecast Sources: BEA – NIPA Table 1.1.6; EIA – Annual Energy Review; Annual Energy Outlook 2014 AEO’14 Forecast “Structural Change in The Economy”, Anticipates Less Energy Required Per Unit of GDP; “Higher Prices” Also Assumed to Suppress Demand Real GDP Billions (2010$) Bubble Divergence Generation GDP Generation (BkWh) What If, in addition, GDP grew at AEO’05 rate? What if historic trend in kWh and GDP growth is applied to forecasted GDP? 672 BkWh* missing in 2040; Equivalent to 491 baseload BkWh ≈ 70 GW Baseload 672 BkWh* missing in 2040; Equivalent to 491 baseload BkWh ≈ 70 GW Baseload 1,187 BkWh* missing in 2040; Equivalent to 866 baseload BkWh ≈ 124 GW baseload 1,187 BkWh* missing in 2040; Equivalent to 866 baseload BkWh ≈ 124 GW baseload 2.46% CAGR 3.0% CAGR 124 GW

8 Total Electricity Consumption vs. GDP Forecasts (all AEOs extrapolated through 2040) AEO’05: $21.4 trillion GDP from 4,958 BkWh R-squared = Sources: EIA, Annual Energy Outlooks (editions AEO05 through AEO14; Annual Energy Review; BEA: Implicit Price Deflator and Real GDP) ‘05 ‘11 ‘10 ‘09 ‘08 ‘07 ‘06 AEO’14: $29.6 trillion GDP from 4,954 BkWh (2040) ’12 +$8.2 trillion (38.1%) more GDP from ~same kWh ‘ kWh difference from AEO’05 to AEO’14: 2,215 BkWh 2040 kWh difference from AEO’05 to AEO’14: 2,215 BkWh ’13

9 Electricity Trends and Projections Issue in Focus – “Ageless Baseload” EIA “Response”: Accelerated Retirement Scenario All Bets on Gas Outline

10 Generation by fuel As natural gas prices increase in the AEO2013 Reference case, the utilization rate of coal-fired generators returns to previous historical levels and continues to rise, to an average of around 74 percent in 2025 and 78 percent in 2040 “In the Reference case, coal-fired generation increases by an average of 0.2 percent per year from 2011 through Even though less capacity is available in 2040 than in 2011, the average capacity utilization of coal-fired generators increases over time. In recent years, as natural gas prices have fallen and natural gas-fired generators have displaced coal in the dispatch order, the average capacity factor for coal-fired plants has declined substantially. The coal fleet maintained an average annual capacity factor above 70 percent from 2002 through 2008, but the capacity factor has declined since then, falling to about 57 percent in As natural gas prices increase in the AEO2013 Reference case, the utilization rate of coal-fired generators returns to previous historical levels and continues to rise, to an average of around 74 percent in 2025 and 78 percent in Across the alternative cases, coal-fired generation varies slightly in 2025 (Figure 30) and 2040 (Figure 31) as a result of differences in plant retirements and slight differences in utilization rates. The capacity factor for coal-fired power plants in 2040 ranges from 69 percent in the High Oil and Gas Resource case to 81 percent in the Low Oil and Gas Resource case.” AEO’13 Issues in Focus (page 42) The “Ageless Baseload” Assumption

Gas-fueled units account for most projected capacity additions in the AEO2014 Reference case 11 U.S. electricity generation capacity additions gigawatts Source: Form EIA-860 & EIA Annual Energy Outlook 2014, Early Release Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

Electricity Generation by Fuel, billion kilowatthours Note: Includes generation from plants in both the electric power and end-use sectors. Source: History: U.S. Energy Information Administration (EIA), Annual Energy Review; Projections: AEO2014 Early Release (December 2013). Projections History 2012 Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

13 Average capacity utilization of natural gas combined cycle and coal generating capacity, percent Coal 2012 Source: AEO2014 Early Release (December 2013) History Projections Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

14 Aging Baseload Coal-fired Fleet in 2040 Existing Capacity in 2040 New AEO Capacity Reference – Ventyx Velocity Suite (existing units and announced retirements - EIA AEO 2014 (forecasted additions and Retirements) Includes AEO ‘14 additions after 2014 Accounts for announced retirements And EIA forecasted retirements Capacity-weighted Average Age 62 Operating at Highest Capacity Factors Ever at 62 Years Average Age? Virtually no new Coal Capacity to make up for aging and retired units

15 Coal unit capacity factors drop off as they age Data source and notes: Data from Ventyx's Energy Velocity. Unit age in each year was calculated then averaged; black line is 3 rd order polynomial of the entire data set. Approximation of actual industry capacity factor experience based on unit age 80% 60% 14%

16 Coal Capacity and Unit Ages in 2040 New Capacity ( ) Existing Capacity Historic Age-based Capacity Factor Trend ( ) AEO’13 AVERAGE Capacity Factor 2040 Historic AVERAGE Capacity Factor Existing Units ( ) 78% 64% AVERAGE Capacity Factor based on 2040 ages and 16 year historic operation 28% Capacity Factor (%) Reference – Ventyx Velocity Suite (existing units and announced retirements - EIA AEO 2013 (Reference case forecasted additions and retirements; AEO 2014 reference case generation) Includes AEO ‘13 additions after 2012 Accounts for announced retirements and EIA forecasted retirements Capacity-weighted average age 62 (average unit age 66) AEO’14 AVERAGE Capacity Factor % 80% 60% 14%

17 Potential Coal GWs - Reference Reference – Ventyx Velocity Suite; - EIA AEO’13 remaining coal unit identities; AEO 2014er reference case generation; missing generation estimate 144 average C.F. for new units to meet 2040 demand; includes AEO’13 estimate of retiring units beyond public announcements EIA AEO’14 Generation Generation from current fleet, plus additions, less announced & AEO 2013 retirements, based on historic age/capacity factor operating data (above) 80% 60% 14%  144 GW 1,007 BkWh  109 GW  56 GW  31 GW  79 GW Development needed today?

Coal & Nuclear Baseload Capacity by 2040 New Coal Capacity Existing Coal Capacity Existing Nuclear Capacity New Nuclear Capacity Reference – Ventyx Velocity Suite (existing units and announced retirements - EIA AEO 2014 (forecasted additions and Retirements) 60 years or older by 2040 Coal: 168 GW (66%) Nuclear: 43GW (42%) Coal: 168 GW (66%) Nuclear: 43GW (42%) Virtually no new Coal Capacity and very little Nuclear Capacity to make up for aging and retired units

19 Electricity Trends and Projections Issue in Focus – “Ageless Baseload” EIA “Response”: Accelerated Retirement Scenario All Bets on Gas Outline

20 Accelerated Nuclear and Coal Retirements Scenario (ANCR): Coal Retirements Doubled Source: EIA, AEO’14 ANCR Reference MATS fully implemented in 2016

21 Potential Coal GWs - ANCR Reference – Ventyx Velocity Suite; - EIA AEO’13 remaining coal unit identities; AEO 2014er reference case generation; missing generation estimate 144 average C.F. for new units to meet 2040 demand; includes AEO’13 estimate of retiring units beyond public announcements EIA AEO’14 ANCR Generation Generation from current fleet, plus additions, less announced & AEO 2013 retirements, based on historic age/capacity factor operating data (above) 80% 60% 14% Development needed today?  80 GW 563 BkWh  33 GW  19 GW

Additions and Retirements EIA AEO 2014, Reference and Accelerated Coal and Nuclear Cases Retirements Additions Effective Renewable Capacity Derate Adj. Renew. 5 Adj. Renew. 6 Renew. 26 Renew. 29 Twice as much baseload retires as is “replaced” by gas

Additions and Retirements EIA AEO 2014, Reference and Accelerated Coal and Nuclear Cases Retirements Additions Adj. Renew. 11 Adj. Renew. 13 Effective Renewable Capacity Derate Renew. 53 Renew. 64 Will gas capacity arrive in time? Vast majority of gas capacity additions come in well after coal retirements

24 Coal Retirements by 2020 AEO 2014 ANCR Side Case Retirements GW (210 units) Retirements GW (210 units) Estimated ANCR Case Coal Retirements* (less announced) GW by 2020 Estimated ANCR Case Coal Retirements* (less announced) GW by 2020 Announced Retirements GW (211 units) Announced Retirements GW (211 units) Coal Retirements 99 GW View Layer Off On Actual Retirements ( ) Announced Retirements Estimated ANCR Retirements (less Announced Retirements) Operating Units as of 2014 /Remaining units in 2020 after applied retirements Summer Capacities *NETL Best Estimate based on unit size, capacity factor, age, and competitiveness

25 Actual Retirements ( ) Announced Retirements Estimated ANCR Retirements (less Announced Retirements) New NGCC Builds by 2020 Actual Announcements View Layer Off On Under Construction +16 GW Under Construction +16 GW Proposed NGCC Builds 83 GW Permitted +18 GW Permitted +18 GW Proposed +49 GW Proposed +49 GW Off On New NGCC Builds Built in Under Construction Permitted Proposed NGCC Builds in 2010 – GW NGCC Builds in 2010 – GW Off On Off On View Coal Retirements Layer 2010-’13 20 GW 23 GW Committed 37 GW 25 GW Uncommitted 42 GW 58 GW Total 99 GW 106 GW New NGCC Retired Coal

26 Generation from Retiring Units, January 2014 Ventyx, based on EIA, and NETL projections

27 Electricity Trends and Projections Issue in Focus – “Ageless Baseload” EIA “Response”: Accelerated Retirement Scenario All Bets on Gas Outline

28 Natural Gas Consumption/Use AEO 2014 Reference and ANCR Cases Electric Power Industrial Net Exports Residential Data Sources: EIA MER 12/2013; EIA AEO 2014 (Reference and Accelerated nuclear and coal retirement case) Transportation * *Does not Include Pipeline and Distribution Does not Include GTL Heat & Power nor Lease & Plant Fuel AEO 2014 Reference case AEO 2014 Accelerated Nuclear and Coal Retirement case Commercial Large (5-6 Tcf) increases in gas for power and exports leaves little for industrial expansion 4.12

2025 Projections: NG Dry Production vs. Price* Source: EIA, various AEO editions, MER; BEA, Implicit Price Deflator, NIPA Table *Prices for AEO’01 through AEO’06 are Wellhead averages; prices for AEO’07 through AEO’14 are Henry Hub; Henry Hub tended to be at least 50 cents/mmbtu greater than wellhead price. AEO‘01, ‘02 extrapolated through 2025, based on projected growth rates. Cases: - High Economic Growth - Reference -Low Economic Growth Increasing Prices Decreasing Prices AEO’14AEO’14 AEO’03AEO’03 AEO’13AEO’13 AEO’12AEO’12 AEO’04AEO’04 AEO’11AEO’11 AEO’08AEO’08 AEO’05AEO’05 AEO’06AEO’06 AEO’10AEO’10 AEO’07AEO’07 AEO’09AEO’09 AEO’01AEO’01 AEO’02AEO’02 AEO’14: 2040 ANCR Long Run Supply Curve?

30 Coal and Natural Gas Price History and Forecasts $/MMBtu (year 2013$) Sources: EIA, Electric Power Monthly, Table 4.1; Monthly Energy Review; AEO 2014; AEO 2002 *Electric Power Sector prices AEO’14 forecast Natural Gas Coal From 2002 to 2011, actual price was, on average, 65% higher than what AEO’02 predicted AEO’02 Gas Price Prediction Historical Price A continuation of trend of AEO under predicting gas price would suggest AEO serves as price floor Price Floor :AEO Upside Risk: AEO+65%

31 Historic relationship between electricity demand and economic growth suggests current under-projection of required power generation – ~ GWeq. Reliance on high utilization of aging coal (and nuclear) baseload assets risky – Little historical basis for continued high utilization Considerable potential for new baseload assets due to aging of the current fleet – ~ GW Current projections presume gas for all needs – Potential risks for reliability, infrastructure bottlenecks, and price volatility Large-scale timing issue for baseload replacement Who gets the gas? Conclusions