1. Getting to 2050 CFA Society Presentation October 25, 2011 San Francisco, CA Ren Orans, Managing Partner Energy and Environmental Economics, Inc. Pathways to Deep Reductions in GHG Emissions

2. Agenda Climate Change-Why Should I Care? No Question we have a Monumental Task Ahead Achievable through Wedges? Electrification is Key! Duke Power Example 2

3. Energy and Environmental Economics, Inc. San Francisco-based consulting firm since 1989 Deep expertise in electricity sector Experienced in linking technical-economic analysis to policy decision-making and public process Skilled at placing near term energy choices in long- term, transformational perspective 3

4. The Climate Challenge Climate stabilization (at 450 ppm CO2e) requires global emissions to stop growing by 2015, and to fall 50 – 80% below 2000 levels by 2050 Reducing GHGs will mitigate climate change impacts, but temps will increase no matter what we do today Source: Intergovernmental Panel on Climate Change, Climate Change 2007: Synthesis Report

5. Climate Change- Why Should I Care? Economic Costs- Costs between 1 and 4 percent of GDP in 2050 Investment in Mitigation-Requires huge investment in new Infrastructure. Upfront investments are about 3 times economic costs which amounts to about $10 trillion over next 20 years. Adaptation-What is left over after mitigation, might be something on the order of $100 Billion per year. This also introduces a tremendous financing opportunity to mitigate, account for and insure against residual adaptation costs.

6. National GHG targets developing in the absence of an int’l framework Governing Body Source/DeclarationLegally binding? Greenhouse Gas Emissions Reduction Target G8G8 Hokkaido Toyako Summit No50% below current levels by 2050 AustraliaCarbon Pollution Reduction Scheme No60% below 2000 levels by 2050 European Union European Parliament Legislative Resolution, 17 December 2008 Yes20% reduction from 1990 levels by 2020 (goal of 60% to 80% below 1990 levels by 2050 in developed countries) United Kingdom Climate Change Act of 2008 Yes80% below 1990 levels by 2050 United States Obama administration policy goal, various legislative proposals Proposal only 80% reduction by 2050

7. U.S. Federal Proposals Call for Deep Cuts in GHG Emissions by 2050 Source: Pew Center on Global Climate Change, www.pewclimate.org

8. U.S. States with GHG Targets Arizona2000 levels by 2020 50% below 2000 by 2040 California1990 levels by 2020 80% below 1990 by 2050 Colorado20% below 2005 by 2020 80% below 2005 by 2050 RGGI states 10% below 1990 by 2020 Florida2000 levels by 2017, 1990 levels by 2025, and 80% below 1990 levels by 2050 Hawaii1990 levels by 2020 Minnesota15% below 2005 by 2015 30% below 2005 by 2025 80% below 2005 by 2050 Oregon10% below 1990 by 2020 75% below 1990 by 2050 Source: Pew Center on Global Climate Change, www.pewclimate.org Example states – not full list

9. California’s GHG Strategy AB 32: 1990 levels by 2020 80% of reductions to come from regulations 33% RPS by 2020 Energy efficiency Combined heat and power Light-duty vehicle emissions performance standards Low-carbon fuel standard for vehicles 20% of reductions to come from regional cap and trade Western Climate Initiative Executive Order S-3-05: 80% below 1990 by 2050

10. 10 California 2050 Study Key question What does California need to do to meet the 2050 GHG reduction goal? Infrastructure modeling approach Multi-sector, stock roll-over model Integrated electricity grid dispatch algorithms Use standard projections of CA population, economic growth Consistent w/ AB32 Scoping Plan Independent study sponsored by Hydrogen Energy International (HEI) 10

11. California’s Big Step Forward Assembly Bill 32 0 100 200 300 400 500 600 700 1990199419982002200620102014201820222026203020342038204220462050 Million metric tonnes CO2e Today 2020 Goal under AB32 2050 Goal Executive order Business as usual projection Transportation Electricity Industry

12. Greenhouse Gas Savings for 2050 Source: Energy and Environmental Economics, Inc 2009 Greenhouse Gas Reductions in California

13. Emissions Reductions by Source 13

14. Behavioral ChangeTechnological Change Types of Change 14

15. Conservation & Energy Efficiency “Smart Growth” 10% reduction in vehicle miles traveled relative to baseline Unprecedented levels of energy efficiency Transition to zero net energy homes by 2020 Extensive retrofits of existing buildings 15

16. Low-Carbon Biofuels 100% of California's biomass feedstock for ethanol plus 7% of US feedstocks (DOE EIA 2007) Feedstocks include Ag Residues, Grasses and Forest Trimmings 7% assumes a distribution proportional to fuel consumption across all 48 States Assumes 1.8 billion gallons per year of algal biodiesel and bio-jet fuel Sufficient to meet 25% of biodiesel and 10% of bio-jet fuel demand in 2050 compliant case California Biofuel Availability Eliminate consumption of gasoline by 2050 replacing it with some mix of low-carbon electricity and low-carbon fuels Aggressive biofuel assumptions don’t meet all transportation energy needs – biofuels likely to become premium fuel 16

17. Electrification & Electricity Demand Electricity demand could nearly double by 2050 Increase in demand driven by electric vehicles Nearly all electricity must be from low-carbon generation 17

18. 18 Electrification and Loads “Flat” load profile in 2050 Compliant case“Peaky” demand in 2050 Baseline 2050 Baseline Case 2050 Compliant Case High levels of energy efficiency help to decrease demand and flatten the demand profile Off-peak electric vehicle “smart charging” & electrification will flatten load shape, increase overall demand & need for baseload generation 18

19. 19 Low-Carbon Generation 1. High Renewable Case 2. High Nuclear Case 3. High CCS Case 4. Blended Case

20. 20 Investments to decarbonize electricity are significant in all low-carbon cases 20

21. 21 Generation Capacity in 2050

22. Technology Wish List Efficiency Zero net energy buildings Extensive building retrofits Electrification Batteries for electric vehicles Smart charging for electric vehicles Biofuels Zero carbon ethanol Zero carbon algal fuels Zero Carbon Gen Carbon capture and storage Large scale energy storage Nuclear waste storage 22

23. Retail Rates, Risk and Greenhouse Gas Reductions Example from Duke Energy Carolinas E3 Case Study

24. 24 Duke Energy Carolinas Duke Energy Carolinas is focused on coal and nuclear: 1.Energy efficiency and conservation 2.Transition away from coal power 3.Transition from natural gas power  renewables 4.Electrification of fossil fuel uses Source: Duke Energy Carolinas, 2010 Integrated Resource Plan

25. Investment Decision Timeline Power plant investments made today have 20 – 40 year lifetime at minimum Only one to two investment cycles before 2050, when goal is to have a decarbonized energy system To what degree should utilities tolerate ratepayer risk of future emissions abatement costs? Solar Nuclear Carbon capture & storage Wind

26. 26 Duke Energy Carolinas Case Study ScenarioDescription 1. Business-as- usual, no CO 2 price Modeled roughly after Duke Carolinas 2010 Integrated Resource Plan, assumes no carbon abatement costs 2. Business-as- usual, w/ CO 2 price Same as #1, but includes moderate carbon abatement costs 3. Coal retirement Same as #2, including CO 2 cost, but coal is replaced with natural gas fired generation 4. Low risk electrification Same as #3, but assumes a high penetration of electric vehicles. New loads are served with new natural gas-fired generation. Scenario also assumes off-peak charging of electric vehicles. Electrification does not increase RPS compliance costs. Utility receives 100% of the GHG savings credits achieved in transportation sector from electric vehicles 5. High risk electrification Same as #4, but assumes uncontrolled charging of electric vehicles. Scenario assumes electrification increases the cost of decarbonizing the utility generation portfolio to meet the RPS, and provides no utility credit for GHG savings achieved in transportation sector from electric vehicles

27. 27 Duke Energy Carolinas Case Study E3 developed five scenarios for 2011 – 2030 Scenarios test variations in generation mix & vehicle electrification assumptions

28. 28 Duke Energy Carolinas Case Study Assume retired coal is replaced with natural gas Assume new electrification loads are met with natural gas

29. 29 Scenario Results: Greenhouse Gas Emissions Emissions are nearly flat in BAU scenario Emissions risk or benefit from electric vehicles

30. 30 Scenario Results: Retail Rate Impacts Low risk case: rate impacts are lower than BAU largely because of CO 2 cost savings credited from vehicle electrification High-risk case: If utilities do not receive emissions savings credit from electric vehicle, rate impacts are high

31. 31 Ratepayer Risk & Electrification Electrification & natural gas pathway can be: Lower cost for customers; Lower risk (for ratepayers and/or shareholders); and Lower emissions than BAU coal and nukes pathway. Done wrong, electrification represents an emissions and cost risk to utilities Electrification is unlikely to achieve high penetrations without concerted policy efforts and support of electric utilities Current federal incentives for EVs unlikely encourage the market transformation and breakthroughs that are needed

32. 32 Summary of Challenges and Opportunities GHG reductions pose a substantial financing challenge Initially mitigation in both power, buildings and transportation sectors Utilities and larger customers should account for and possibly hedge against emissions abatement risk and cost Similar to sinking fund for disposal of nuclear waste Lack of policy does not translate to zero future costs Electrification is key to mitigation challenge

33. Thank You Ren Orans Energy and Environmental Economics, Inc. 101 Montgomery Street, Suite 1600 San Francisco, CA 94104 (415) 391-5100 ren@ethree.com Presentation Available at: http://ethree.com/documents/E3_2050_CFA_25Oct11.ppt