Electric Industry Outlook Challenges and Opportunities that Impact EEI Members and Their Federal Customers

Steve Kiesner Director

National Customer Markets

Federal Utility Partnership Working Group

May 22, 2013 San Francisco, CA

Agenda

Necessary infrastructure investments to address: Reliability

Environmental and other policy requirements

And continue the development of a grid for the 21st Century

Our move to natural gas and what it means to customers

How technology is changing our world and those of our customers

Potential Federal-Utility Partnerships with Electrification as a transportation fuel

2

Infrastructure Investments

Richard McMahon Vice President, Finance and Energy Supply

Commission lays out U.S. energy efficiency roadmap through 2030

Cyber Attack on U.S. Electric Grid ‘Gravest Short Term Threat’ to National Security, Lawmakers Say

Utility smart grid spending almost doubles worldwide in 2012 ‘GreenWire

U.S. coal-fired power plant retirements top 9,000 MW in 2012

Next Generation Substation Automation Solution for Smart Substations

Infrastructure

Industry Capital Expenditures

p = projected

43.0 41.1

48.4

59.9

74.1

83.0 77.8

74.2 79.3

94.4

83.5 79.3

30

40

50

60

70

80

90

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p 2013p 2014p

($ Billions) U.S. Shareholder-Owned Electric Utilities

Source: EEI Finance Department, company reports, SNL Financial (August 2012)

5

4% 7%6%

6%11%

9%14%

15%

25%20%

41%

42%

$0 B

$20 B

$40 B

$60 B

$80 B

$100 B

Projected Functional CapEx

Source: EEI Finance Department, company reports (August 2012)

2010P 2012P

$82.8 B

as of August 2010 as of August 2012

$94.4 B

Generation

Distribution

Transmission

Gas-Related

Environment

Other

6

Investment in Transmission and Distribution

EEI’s members invested a record $30.3 billion in T&D in 2011 (nominal $)

Short-term future investment ramps up, project 2012 investment of $33 billion in T&D (nominal $)

0

5

10

15

20

25

2010 2011 2012 (projection)

Transmission

Distribution

Source: EEI Annual Property & Plant Capital Investment Survey [$Billions (Nominal $)] 7

Electric Efficiency Budgets Are Growing Too

© 2011 The Institute for Electric Efficiency, www.edisonfoundation.net/IEE

8

2.7 3.2 4.4

5.4

6.8 7.5*

12.4**

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2020

*Lawrence Berkley National Lab (LBNL) MED Forecast **LBNL HIGH Forecast

Electric Efficiency Budgets (2007-2011 and 2020 LBNL Forecast)

Rate

-Pay

er F

undi

ng fo

r EE

($

Billi

on, n

omin

al)

Supply Picture and Environmental Requirements: Changing the Way We Run Our Businesses

Shale Gas Fields

10

Environmental Regulatory Challenges: 2013 and Beyond

Air

Climate

Water

Land & Natural

Resources

Waste & Chemical

Management

Coal Ash

PCBs in Electrical

Equipment

HazMat Transport

Transmission Siting and Permitting

Avian Protection

Endangered Species

Vegetation Management

316(b)

Effluent Guidelines Limitations

Waters of the United States

NPDES Pesticide Permits

NSPS- New Sources

NSPS-Existing Sources

BACT Permitting

International Negotiations

Mercury & Air Toxics

(MATS)

Interstate Transport

(CAIR/CSAPR)

Regional Haze/Visibility

Multiple NAAQS

New Source Review (NSR)

Waterbody- Specific

Standards 11

$-

$2

$4

$6

$8

$10

$12

$14

$/m

mB

TU

Henry Hub Central Appalachia Powder River Basin PRB delivered CAP delivered

Prices Driving Switching Coal, Gas Futures (March 30, 2012)

Source: Nymex; Ventyx, Inc, The Velocity Suite; SNL

0

1

2

3

4

5

coal gas

Natural Gas Capacity Additions

-15000

-5000

5000

15000

25000

35000

45000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

CC SC Coal Retirements

Source: EEI; Ventyx Inc., The Velocity Suite

Announcements

MW

Coal37.5%

Oi l0.6%

Natura l Gas

30.4% Nuclear18.9%

Hydro6.8%

Renewables

5.4%

Evolving Generation Mix

Coal

Gas

Nuclear

Oil Hydro

Other Renewables

0%

10%

20%

30%

40%

50%

60%

Source: DOE – Energy Information Administration

2012 (Estimate)

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Natural Gas: What Customers Need to Watch closely…

With the electricity industry’s increasing move to gas, what does that mean to supply/demand/prices? Can the electric industry get long-term supply contracts? Can we get dedicated pipeline capacity? Cold winter scenario – how firm is our supply?

Will the transportation sectors go toward gas? What does that do to supply & price?

What about LNG exports?

What about Renewables at your facilities?

Real and perceived environmental issues?

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Changing Electric Companies

Richard McMahon Vice President, Finance and Energy Supply

Old (De-reg) vs. “New Retail Environment”

First wave of retail competition during late 1990s was driven by coalition of legislators, regulators, and large C&I customers

Influenced by deregulation of other industries

Scope constrained by regulatory rules, available technologies

New retail “competition” is technology driven—new customer supply options Enabled by policies and capabilities of the smart grid

New retail competition represents a fundamental challenge to existing utility business models

Central Generation Model

EPRI

Public Policies Are Accelerating the Transition

29 states plus D.C. have RPS programs, 17 with mandates for solar and other DG

Net metering policies – present in 43 states

Feed-In tariffs – adopted or proposed in a few states

Virtual net metering – present in 14 states

Subsidies, rebates, tax incentives, financing incentives. CA is providing $1.9 Billion over 10 years

Zero net energy goals and targets, microgrids

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Other Factors Contributing to the Transition

Department of Defense, the largest energy user in the U.S., is actively seeking to implement renewables, “islanding” policies, and virtual net metering

Higher retail electric rates

Declining cost of PV

Evolution of “smart” infrastructure technologies (power electronics, storage, sensing and measurement, controls), high speed communications)

ARRA funding for AMI deployment, smart grid demos

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Installed PV capacity (MWdc)

Source: SEIA, U.S. Solar Market Insight, 2011 Q2; Lawrence Berkeley National Laboratory, Tracking the Sun IV, September 2011; EEI

Source: SEIA, U.S. Solar Market Insight, 2010

Distributed Generation/Solar PV Growth

PV Installations (MWdc)

0

500

1,000

1,500

2,000

2,500

3,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q2

Utility Behind the meter

2010 U.S. PV Installations by State and Market Segment

Challenges Ahead for Utilities in Smart Grid World

Constant pressure to reassess smart grid technologies

A blizzard of mandates RPS, EE

Carbon constraints

Grid modernization

Electric companies will have to prosper in the face of changing requirements

And retain all of their “traditional” responsibilities Must cope with legacy costs for a system ill equipped for new

trends

Future

It’s not whether, it’s when - Pace will vary dramatically (it’s already happening in some markets)

The grid will be distributed, diverse, and much more complex Generation expansion will run the gamut (centralized to co-gen, DR)

Customers will be grid-connected and grid-involved

T&D infrastructure will have to be transformed to accommodate this diversity

Distribution must be upgraded to handle of world of variable RE along with controllable demand and challenges users likes EV and server farms

Future (2)

Managing the grid will become more complex and costly as we move closer to RPS targets System balancing and stand by generation costs

Energy Storage and EVs will be game changers

New utility business models will emerge – but no single model will dominate the market. Instead there will be a continuum of choices: From suppliers of pure electrons to “behind the meter services” to pure wires

company.

Utilities are going to figure where they want to be along that continuum

The Transition Will Drive Investment Needs

Legacy distribution systems will need to be re-developed to support bi-directional and variable power flows safely and reliably

Investments in: Physical infrastructure – including interconnections

Operating systems

Communication systems

Risk management, including cyber-security

Coordination with transmission and generation systems

Technological obsolescence will be an increasing challenge

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Criteria for a Successful Transition

EEI and its members want to ensure that the transition is accomplished in a manner that protects Reliability Safety Fairness for all customers Ability of regulated utilities to participate in evolving

DER markets Expansion of utility-customer collaborations

• Universal buy-in that these investments are necessary

26

The Need for New Regulatory Policies

To ensure reliability: Ensure economic investments

To ensure safety: Update interconnection standards & procedures

To ensure fairness Innovative approaches to customer market segments

27

Unlimited Potential

Mining · Ports · Manufacturing · Fleets · PEVs · Retail · Warehousing

28

Multi-Pronged Communications Approach

C&I CUSTOMERS (Off-road and fleet, mining, airports,

ports, material handling)

CONSUMERS (PEVs: The Electric Generation)

EXPANSION OF ELECTRIFICATION Through the Voice of the Customer

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Conclusion

Utility industry going through a major investment cycle, driven by the need to address:

Reliability - approx $1.8 Trillion in the next 20 twenty years

Environmental Requirements: EPA regulating CAA and other requirements

Energy Efficiency priorities (Expected to spend $8-10 billion in 2013 vs. $ 2.7 B in 2007)

An Increasing Amount of Rate Cases to Pay for Investments

Natural Gas is changing our world…

Technology is changing our world…it’s only the beginning

Legislative and Regulatory initiatives can also change our business

Let’s sit down to discuss electrification opportunities and learn from one another

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