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Changing Resources and
Implications for Transmission
Transmission Summit 2014
March 12, 2014
2. 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
ENERGY
More than 1,100 projects
Clients range from entertainment to energy
to high tech
Unmatched experience with more
clients and more solutions
CORPORATE&
SHAREDSERVICES
CLEANTECH&
SUSTAINABILITY
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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
4. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
5. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
GigawattHours(millionkilowatthours)
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
6. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
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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
8. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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 Concerned
Scientists
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
9. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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 Primary
Metals
Petro-
chemicals
Ammonia/
Methanol
Gas-to-
Liquids
Mexican
Exports
Natural
Gas-Fired
Generation
LNG
Exports
BCF/Day
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
10. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
$/MWh
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
Generation – Natural Gas
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Electric and Gas Convergence – Regional Differences
Generation – Natural Gas
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
12. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
Electric and Gas Convergence – Regional Differences (Cont’d)
Generation – Natural Gas
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
13. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
MWs
Announced Early Development
Advanced Development Construction Begun
U.S. Total Renewable Development: 74,844 MW
(2014-2026)
Sources: EIA; SNL Financial; ScottMadden analysis
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Spotlight on Wind and Negative Prices
Generation – Renewables
13
0%
5%
10%
15%
ERCOT
West
MISO
Minnesota
MISO
Illinois
PJM
N. Illinois
MISO
Michigan
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
15. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
16. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
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Prospects for Distributed Resources
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
18. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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
Distributed Resources
17 Sources: EIA, GTM Research, Database of State Incentives for Renewable Energy, EEI
Favorable drivers Neutral drivers Driver will hinder or slow growth
19. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
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…
20. Copyright © 2014 by ScottMadden, Inc. All rights reserved.
Cristin Lyons
Partner
ScottMadden, Inc.
2626 Glenwood Avenue
Suite 480
Raleigh, NC 27608
cmlyons@scottmadden.com
O: 919-781-4191 M: 919-247-1031
19