transmission summit 2014

Copyright © 2014 ScottMadden, Inc. All rights reserved. Report _2014-02_v1

Changing Resources and

Implications for Transmission

Transmission Summit 2014

March 12, 2014

Copyright © 2014 by ScottMadden, Inc. All rights reserved.

Unique perspective built on 30 years of energy experience

Solutions for clean and renewables sources of energy, smart energy management, and sustainability

Who We Are

1

ScottMadden Overview

ScottMadden is a management

consulting firm with more than 30 years

of deep, hands-on experience.

We deliver a broad array of consulting

services—from strategic planning

through implementation—across many

industries, business units, and

functions.

WHAT IT TAKES W E D O

TO GET IT DONE

R I G H T

More than 2,400 projects

More than 300 clients including 20 of the top 20 energy utilities

Every business unit, every function

EN

ER

GY

More than 1,100 projects

Clients range from entertainment to energy to high tech

Unmatched experience with more clients and more solutions C

OR

PO

RA

TE

&

SH

AR

ED

SE

RV

ICE

S

CL

EA

N T

EC

H &

SU

ST

AIN

AB

ILIT

Y


Introduction

￭ Demand is declining; it makes all other issues harder to manage

￭ The generation mix is changing—trends in these resources matter and it is far from clear how

it will all shake out

￭ Renewables are here to stay

￭ Distributed generation (DG) is a game changer, but not everywhere and not immediately

2


Declining Demand Growth

An Important Backdrop…

3

The Energy Information Administration (EIA) projects demand growth in the United States to

remain below 1% for the foreseeable future

According to NERC, the 10-year annual growth rate for on-peak summer demand is expected to

fall to an all time low of 1.23% for 2014–2023

The proliferation of demand side management and energy efficiency, coupled with expanding

customer-side supply alternatives, will likely suppress demand growth for the foreseeable future

U.S. Demand Growth, 1950–2040

Source: EIA, NERC LTRA 2013


Sources of Electricity

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Gig

aw

att

Hou

rs (

mill

ion

kilo

watt

ho

urs

)

Electricity Net Generation by Fuel Type from All Sectors (1949–2012)

Coal Petroleum Natural Gas

Other Gases Nuclear Hydroelectric Pumped Storage

Hydroelectric Power Wood Waste

Geothermal Solar/PV Wind

Generation

4 Notes: Gigawatt hours exclude pumped storage and any other negative values. *Includes electric power, commercial, and industrial sectors

Source: EIA Annual Energy Review, Table 7.2a


The Fuel Mix is Changing…

5

Coal 29%

Petroleum 5%

Natural Gas 42%

Nuclear 9%

Hydro 7%

Wind 5%

Solar 0%

Wood 1%

Pumped Storage

2%

2012 Nameplate Capacity by Source* (1,167,995 MW)

Coal 42%

Geother-mal 1%

Hydro 9%

Natural Gas 20%

Nuclear 14%

Petroleum 11%

Pumped Storage

2%

Solar 0%

Wind 0%

Wood 1%

1990 Nameplate Capacity by Source* (783,012 MW)

Notes: *Includes electric power, commercial, and industrial sectors. Other fuels not labeled are less than 1%. Solar includes PV and Thermal.

Source: EIA 860

Generation


Significant Coal Plant Retirements Will Occur

Generation – Coal

6

Significant coal retirements are underway: environmental regulations are increasing pressure on

coal-fired generators to invest in new air-quality controls or to retire (before year-end 2015)

This capacity will largely be offset by new gas-fired generation

Announced Coal-Fired Plant Retirements (as of Sept 2013)

Sources: SNL Financial; ScottMadden analysis


Coal Retirement Estimates

36

33-38*

39*

49

35-50

62

75

59-77

~100†

Reuters/Factbox

Barclays

BMO Capital Markets

EIA

Standard & Poor's

Black & Veatch

Sanford Bernstein

Brattle

Union of ConcernedScientists

Selected Projections of Environmental-Driven Coal Plant Retirements (in GWs)

Generation – Coal

7

The timing and magnitude of coal retirements range from 33 to

> 100 GWs, depending on the source and timing.

Notes: † 59 GWs “ripe for retirement” in addition to estimated 41 GWs announced; *includes ~9 GWs retired in 2012

Sources: Industry news; SNL Financial; corporate announcements; ScottMadden analysis

Timing

2032

2033

2020

2016

2040

2020

2015

2015


Natural Gas Prices: Making a Turn in 2015?

Generation – Natural Gas

8

60-65 0.5 0.7 1

1.5

3.5

4

6-10

0

5

10

15

20

25

30

Current PrimaryMetals

Petro-chemicals

Ammonia/Methanol

Gas-to-Liquids

MexicanExports

NaturalGas-FiredGeneration

LNGExports

BC

F/D

ay

Potential U.S. Gas Demand Growth through 2020 (BCF/Day)

90

85

80

75

70

65

60

Various Forecasts Show Still Low Gas Prices for Years,

but Demand May Push Them up after 2014

Projected Natural

Gas Price ($/MMBTU) 2013 2014 2015 2016 2017 2018

BMO 3.85 4.00

Deutsche Bank 3.71 4.25 4.50 4.75

Morgan Stanley 3.65 3.50 4.00 4.25 4.70

Credit Suisse 3.70 3.90 4.20 4.40 4.50

Macquarie 3.69 3.64 4.18 4.66 5.00 5.25

Sources: Investment analyst reports; Energy Intelligence Natural Gas Week; SNL Financial; Industry News

Source: Macquarie

￭ With the advance of shale gas, prices in the natural gas market have shifted from demand-clearing to supply-clearing

￭ However, many expect a step change in 2015–2016 as demand from power generation and LNG exports picks up

￭ Continued strong demand is expected from industrial customers including petrochemicals

￭ Shifts in basis differentials continue as well

• Observers say that Henry Hub may be waning as the benchmark for eastern U.S. gas prices for power generation and end use

• Increasingly, supply/demand dynamics are reversing, with northeast U.S. supply and Gulf Coast demand

￭ Production growth is expected to expand in 2014 despite still-low prices


Baseload Generation’s Natural Gas Challenges

9

Historically, the difference between marginal-operating costs of generation technologies produced a

step-like supply curve

The shale gas revolution has decreased the marginal cost of natural gas plants, thereby moving

natural gas down the supply curve and eliminating the well-defined step in marginal cost between

coal and natural gas plants

Notes: MISO load data reflects 2013 conditions; natural gas data reflects Henry Hub spot prices

Sources: Ventyx;; EIA; ScottMadden research

0

20

40

60

0 25,000 50,000 75,000 100,000

$/M

Wh

Cumulative Capacity (MW)

2007 Supply Curve

2013 Supply Curve

Minimum Load

5th Percentile

Average Load

95th Percentile

Maximum Load

Midcontinent ISO 2007 and 2013 Supply Curves

and 2013 Load at Various Durations

Combined cycle

turbine enters

supply curve



Electric and Gas Convergence – Regional Differences


10

Complicates solution

Facilitates solution

Southeast

Coal retirements; gas-fired

replacements

Modest winter gas demand

Bilateral market; traditional cost-

based regulation of generation

Shale supply in adjacent regions

Midwest

Massive anticipated gas-fired

replacements

High winter gas demand; large gas

demand centers

Bid-based market

Shale supply in adjacent regions

Problem being worked

New England

End-of-the-(gas) line; history of gas

issues

High winter gas demand; large gas

demand centers

Nearby sources declining

Constrained interfaces – gas and

power

Bid-based market

LNG import capability

Problem being worked

New York

End-of-the-(gas) line; delivery capacity

constraints

Bid-based market

NYISO, NYPSC engaged in various

activities to assess gas/electric

interactions, gas infrastructure needs

Abundant shale supply

Regulatory/legal uncertainty on fracking


Electric and Gas Convergence – Regional Differences (Cont’d)


11

Desert Southwest

Heavy reliance upon gas-fired

generation, with more on horizon

California

Large intermittent resource build-out,

aggressive targets

Heavy reliance upon gas-fired generation

“Peaky,” low cap-factor gas needs for

renewable capacity backstop

Available gas supply in West

Generally more temperate

Large gas demand centers

Bid-based market

Generator, gas transmission

communication taking place

Northwest/Mountain West

Large intermittent resource build-out

Significant hydro resources; difference

between capacity & energy

Significant coal-fired capacity;

retirements not immediate

Available Rockies, Canadian supply

Largely traditional (non-bid-based)

market

Recent pipeline expansions

Working group established for

Northwest

Complicates solution

Facilitates solution

Texas

Coal retirements; gas-fired

replacements

Already highly dependent on

gas-fired generation

Modest winter gas demand

Bid-based market

Ample conventional and

unconventional supply

Separate interconnection


Current Capacity and Future Development

Hydro 52% Wind

40%

Solar 2%

Geothermal 2%

Biomass 4%

Renewable Capacity 2012 (150,336 MW)

Generation – Renewables

12

0

10,000

20,000

30,000

40,000

50,000

MW

s

Announced Early Development

Advanced Development Construction Begun

U.S. Total Renewable Development: 74,844 MW

(2014-2026)

Sources: EIA; SNL Financial; ScottMadden analysis


Spotlight on Wind and Negative Prices

Generation – Renewables

13

0%

5%

10%

15%

ERCOTWest

MISOMinnesota

MISOIllinois

PJMN. Illinois

MISOMichigan

2006

2007

2008

2009

2010

2011

2012

2013

Real-Time Hourly Market

Percent of Year with Negative Prices

“Federal incentives for renewable

energy…have distorted the competitive

wholesale market in ERCOT…With the

federal production tax credit, wind

resources can actually bid negative

prices into the market and still make a

profit. We’ve seen a number of days

with a negative clearing price in the

west zone of ERCOT where most of the

wind resources are installed…The

market distortions caused by

renewable energy incentives are one of

the primary causes, I believe, of our

current resource adequacy

issue…[T]his distortion makes it

difficult for other generation types to

recover their cost and discourages

investment in new generation.”

— PUC of Texas Chairman

Donna Nelson testifying before the

Texas Senate Natural Resources

Subcommittee (Sept. 2012)

Negative Real-Time Hourly Prices: During periods of

significant wind and low demand, wind facilities can profitably operate as long as negative prices are offset by the value of the federal production tax credit

Declining Frequency of Negative Prices: After peaking in the 2009–2010 timeframe, the frequency of negative real-time hourly prices declined with changes to market structures and the addition of transmission connecting wind resources and load centers

Sources: Ventyx; The NorthBridge Group; ScottMadden research


Retirements – Actual and Threatened

Generation – Nuclear

14

SONGS

2,150 MW

Byron 2,346 MW

Crystal River

*1,052 MW

Kewaunee

574 MW

Clinton

1,078 MW

Quad Cities

1,819 MW

Notes: *1,052 includes terminated 175 MW rerate

Source: SNL Energy

Vermont

Yankee

604 MW

Indian Point

2,075 MW


Distributed Generation Today

￭ There are several factors that ScottMadden believes will lead to pressure on the traditional

utility business model:

• Current cost of electricity and the relative price of alternatives

• Net metering policies

• Interconnection policies

• Photovoltaic (PV) power purchase agreements (PPAs)

• Third-party carve-outs for DG

￭ These are not emerging uniformly across the country

Distributed Resources

15

State Ranking of Residential Solar Installations

Rank State MW (dc)

Thru Q3 2013

% of U.S.

Total

1 California 832.8 48.2%

2 Arizona 180.9 10.2%

3 New Jersey 147.2 7.9%

4 Hawaii 136.3 7.9%

5 Colorado 78.8 4.4%

As of Q3, 2013 residential solar installations reached

1,745 MW, with 78% in five states.

Sources: GTM Research, SEIA


Prospects for Distributed Resources


16 Sources: ScottMadden analysis; inputs from DSIRE, IREC, American Council for An Energy-Efficient Economy; U.S. EIA; and other sources

Where jurisdictions are “better” on more factors (e.g., easier interconnection; third-party solar

PPAs permitted; net metering; lower differential between utility-supplied power and installed solar

PV), they scored higher on the map

The states that score highest are most likely to a significant influx of distributed resources (DR)

0–2

3–5

6–8

9–11

12–14

Map Score

Better


Long-Term Drivers for Distributed Generation Driver 2013 2023 Notes

Renewable

Portfolio

Standards

Early compliance and slow growth in retail sales will limit impact of renewable portfolio standards in the future

Financial

Incentives

Federal investment tax credit (ITC) for solar will decrease from 30% to 10% in 2017; ITC for geothermal, small wind, and some other technologies set to expire

State and utility incentives are declining as technology costs continue to decline

Installed Costs Installed costs continue to decline as the solar industry reduces soft costs (e.g., permitting,

customer acquisition, etc.)

Net Metering Net metering policies are being challenged as concerns over cross-subsidization between

customers continue to grow

Interconnection Interconnection policies are well-established and not expected to change dramatically

Retail

Electricity

Prices

Retail electricity prices continue to rise, creating a favorable environment for DG alternatives

Utility

Knowledge

Utilities continue to gain operational experience integrating and managing DG resources on the grid

Customer

Preference

Customers continue to express interest in programs or options that offer access to renewables at reasonable premiums or discounts to retail electricity rates

Smart Grid/

Microgrids

Advancements in distribution automation and a growing interest in microgrids will facilitate the implementation of DG


17 Sources: EIA, GTM Research, Database of State Incentives for Renewable Energy, EEI

Favorable drivers Neutral drivers Driver will hinder or slow growth


Its Complicated…

￭ Shifts in the generation mix are occurring…

• We will continue to see changes to baseload generation as natural gas replaces coal

and nuclear

• Renewables integration will remain a priority

• Transmission will need to be built to accommodate these resources

￭ System planning is becoming more complicated

• The types and sizes of generation resources are changing

• Transmission planning will need to consider the availability of different types of resources

• Location and timing will matter more and more as the system is assessed

￭ Operation of the grid will require more sophisticated visualization and tools

• Visualization and coordination with myriad resources will become important in areas of

high penetration of alternative resources

• Utilities, RTOs, and ISOs will need to consider these resources as they manage the real-

time environment

What Do These Changes Mean for Transmission?

18

Transmission owners and operators are being pulled in multiple

directions: manage large scale retirements, integrate utility-scale

renewables, accommodate alternative resources…


Cristin Lyons

Partner

ScottMadden, Inc.

2626 Glenwood Avenue

Suite 480

Raleigh, NC 27608

[email protected]

O: 919-781-4191 M: 919-247-1031

19

mailto:[email protected]

transmission summit 2014

Education

generation natural gas

gws generation coal

gas demand growth

coal petroleum natural

mw coal

natural gas prices

new gas

significant coal retirements