Strategic Issues and Opportunities Facing the Energy Industry: What Would Yogi Berra Say?

ScottMadden recently performed original research employing five years of CAISO data to examine the duck curve and its causes. Our research confirmed that the 2013 duck curve prediction made by CAISO is coming true and faster than expect. But, it also revealed some surprises about what is causing the duck curve and, therefore, how to manage it. The presentation, shared at S&P Global Market Intelligence’s 30th Annual Power and Gas M&A Symposium, focused on a broad range of topics including the “duck curve.”

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Power and Gas M&A Symposium

    • Interactive Strategic Issues Discussion:
      What Would Yogi Berra Say?
    • February 14, 2017

Discussion Outline

    • Changing Supply and Demand Mix
      Technology Innovation
      Changing Regulatory Compact
      Adaptive Utility Strategies
      Impact of a New Administration

Changing Supply and Demand Mix

New natural gas, wind, and solar-powered generation represent the majority of capacity added since 2005 and projected additions through 2025. In the same time frame, coal- and oil-fired generation will have declined and will continue to decline at a historic pace.

    • Capacity Outlook
    • Changing Supply and Demand Mix
    • NOTES:
      *Charts reflect SNL/NERC data for actual capacity and EIA data for future capacity.Future capacity is based on both actual planned/under construction projects and unplanned additions/retirements according to EIAs AEO 2017 reference case
      SNL Financial; EIA; ScottMadden analysis
    • Different EIA forecasts show little variation in new renewables and natural gas combined cycle capacity additions through 2025.
    • Net Additions: +12.9 GWs

Duck Curve

    • 2013 California Independent System Operator (CAISO) produces analysis showing how renewable resources would impact grid conditions
      Iconic duck curve is born, predicting as variable generation grows so too will the midday trough of load served by conventional supply
      ScottMadden analyzed average hourly production data from CAISO from January 2011 through June 2016 to understand: Is it what most people think it is?
    • Changing Supply and Demand Mix
    • The California Duck Curve Chart
    • SOURCE:
    • Net Load March 31

Duck Curve Is Real and Growing Faster than Expected

    • Lowest March Daytime Net Load, 20112016
    • SOURCES:
      CAISO; ScottMadden analysis
    • Changing Supply and Demand Mix

Net Loads Shrinking and Ramps Increasing (20112015)

    • Daily Daytime Minimum Net Load
    • SOURCES:
      CAISO; ScottMadden analysis
    • Changing Supply and Demand Mix
    • Daily Late-Day Three-Hour Ramp

Most Severe on the Weekends

    • Average Net Load by Day of the Week, 2015
    • SOURCES:
      CAISO; ScottMadden analysis
    • Changing Supply and Demand Mix

Driven by Utility-Scale Solar, Not Distributed Resources

    • California and Hawaii Average System Load, 20112015
    • SOURCES:
      SNL Financial; ScottMadden analysis
    • Changing Supply and Demand Mix

Duck Curve Key Takeaways

    • Operational data suggests that projections of the duck curve effect in California are real and in some cases occurring sooner than expected
      Lower net loads than forecast
      Increasing ramps throughout the year
      Most severe on the weekends
      Multiple seasons, not just spring months
      Driven by utility-scale solar in California, not rooftop solar
      Understanding the unique causes and behavior can help inform mitigation strategies
      Mitigation strategies should recognize differing behavior depending on the day of the week and the time of the year
      Operational challenge associated with utility-scale solar present the potential for more targeted utility-scale solutions
      But, if you have a distributed solar issue like Hawaii, you will need a solution targeted to distributed resourcesLack of distributed solar does not make you immune: The duck curve may migrate to other regions sooner than expected
      States to watch in the near term include: Arizona, Georgia, Nevada, North Carolina and Texas
      Each of these states are forecasted to have >3,000 MWs of utility-scale solar by the end of 2021
    • Changing Supply and Demand Mix

Declining Demand Growth

    • Reading the Headlines: Whered the Load Growth Go?
      U.S. MWH sales growth was only 1.7% cumulatively from 2005 to 2015
      Industry consensus forecasts continued sales growth decline
      Opinions of causes vary de-industrialization, slow GDP growth, slowing population growth, efficiency
      The good news: revenues per MWh have grown
    • Changing Supply and Demand Mix

Declining Demand Growth (Contd)

    • Identifying the Culprit: Industrial Did It
      The reason is not de-industrializationor declining numbers of industrial customers; in fact, industrial customer count has grown
      Instead, the industrial mix has changed to less energy-intensive industries: highly energy-intensive industries
      Growth Sightings: All Regions Are Not Created Equal
      Regions with significant oil and gas resources (e.g., around TX, OK, ND) averaged >0.5% annual sales growth since 2008
      36 states averaged negative or no annual sales growth since 2008
    • Changing Supply and Demand Mix
    • Weighted Electric Retail Sales CAGR (2008 to 2014)

Technology Innovation

Distributed Energy Resources

    • Decentralized Generation (DG) Grew by 40% in 2015
      Solar Photovoltaic (PV) capacity is 2.7 times all other DG combined; 1.7% of total generation
      How much: Year-end 2015 DG totaled nearly 18.2 GWs, nearly tripling since 2010
      Where: Top five statesCA, NJ, AZ, MA, and FLare nearly half of DG. CA is 31%
    • Technology Innovation
    • DG as % of Total Nameplate Capacity within State
    • NOTES:
      The grid-synchronized category includes commercial and industrial generators less than 1 MW in capacity that are grid connected and grid synchronized. The C&I standby category includes commercial and industrial generators less than 1 MW in capacity that are not connected nor synchronized to the grid. The net metered category refers to residential, commercial, and industrial generators that are less than 2 MWs in capacity and maintain a net-metering agreement with the local utility. Due to the nature of the data, it is possible some systems may be double counted. Figures are from 2015, the most recent data available.
    • Decentralized Generation by Use and State

Top 5 = 45.26% of total DG

    • Distributed Energy Resources by State and Type
    • DG making headway; solar PV dominating
      3 main types
      PV (73%)
      Internal combustion standby at C&I sites
      Grid-synchronized generation at C&I sites
      DG expansion drivers
      Favorable policies (NJ, NY, MA)
      Favorable (solar) resources (CA, AZ)
      Declining PV costs
      High residential electricity prices
    • Technology Innovation
    • Top States for Cumulative Installed Decentralized Generation
      (2014 and 2015)
    • U.S. Decentralized Generation by Use and Resource Type
      (Year-End 2015)
    • Internal Combustion
    • Combustion Turbine
    • Hydroelectric
    • Storage
    • 2014:
      Top 5 = 54.48% of total DG

Energy Storage

    • Energy storage is growing but its penetration remains modest compared with traditional power supply resources
      Storage can play different roles depending upon scale and discharge duration making classification difficult
      Storage is a hybrid, part G, part T, part BTM
    • Key to its value proposition is the ability to stack these roles without double-counting, e.g.,
      Variable supply smoothing
      Ancillary services
    • Technology Innovation
    • SOURCE:
      DOE/ERPI Energy Storage Handbook in Collaboration with NRECA, February, 2015
    • Trans. congestion relief
      Peak load shaving
      Dist. voltage support

Electric Vehicles: Convergence of IoT, Autonomy, Ride-Sharing

    • Technology Innovation
    • Big Money and Increasing Interest Coming out of the Shadows
    • EV development now focused on autonomy, sharing (utilization), and charging infrastructure
      With $2 to $3 gasoline and average passenger car age of over 11 years (compare 8.5 years in the mid-1990s), EV adoption will be a slow process
    • SOURCES:
      Inside EVs; EDTA; industry news
    • But Enthusiasm May Need to Be Tempered

Changing Regulatory Compact

State vs. Federal Jurisdiction

    • Making a Marketand Adjusting Itand Adjusting It
      FERC restructured the power industry in 1996 with Order 888 to unleash market forces and drive down prices
      Over time, pure wholesale electricity markets have been adjusted
      Price caps and minimum offer price rules
      Administratively drawn demand curves
      Capacity markets/capacity performance products
      PJM has proposed a change in capacity auction design
      Remove subsidized resources/commensurate load
      Devise price administratively (nudges price upward)
      Replace subsidized resources
      States Are Pushing to Manage Outcomes
      Expanding and incentivizing renewables and distributed energy resources
      Suppressing price increases and spikes for state residents and businesses
      Encouraging generation development and retention of existing power plants
      Implementing their own environmental/carbon policies
    • Changing Regulatory Compact

State vs. Federal Jurisdiction Recent Battlegrounds

    • Changing Regulatory Compact

State vs. Federal Jurisdiction (Contd)

    • A Delicate, but Uncertain, Balance
      Recent Supreme Court decisions have been narrowly tailored to avoid categorically affording federal or state primacy
      States can have measures to encourage new or clean generation
      But these must be untethered from wholesale market participation
      So what the hell does untethered mean?
      This makes the so called bright line between state and federal jurisdiction hard to see. This uncertainty could lengthen lead time and increase risk and related costs for generation investment
      The Energy & Commerce Subcommittee of the House Energy & Commerce Committee has begun hearings to examine the Federal Power Act in light of the evolution and jurisdictional conflicts in the organized wholesale electric markets
    • Changing Regulatory Compact

REV vs. California and a Continuum of Approaches

    • Changing Regulatory Compact
    • NOTES:
      *Includes four states with statewide DG compensation rules other than net metering.
    • Laissez Faire to Radical Redesign: A Continuum of Responses
      Key Questions

As of July 2016, 41 states, plus D.C., and three U.S. territories (American Somoa, U.S. Virgin Islands, and Puerto Rico) have mandatory net metering rules in place, but the state of the debate varies widely.

    • Net Metering
    • Changing Regulatory Compact
    • States with net metering policies(41 states + DC + 3 territories)
    • States with voluntary utility policies (2 states)


    • U.S. Territories:
    • States with DG compensation rules other than net metering (4 states + 1 territory)


    • SOURCES:
      DSIRE (; SNL Financial; National Conference of State Legislatures (; ScottMadden analysis
    • Net Metering Rules by State (July 2016)

Adaptive Utility Strategies

Strategy Comparisons

    • Shifting focus back to the core business, increasing grid investments, and testing expanded customer-centric offerings.
    • Adaptive Utility Strategies
    • NOTES:
      DER means distributed energy resources
      SNL Financial; industry news; investor presentations; company annual reports; EIA; GTM; Rocky Mountain Institute

Mergers and Acquisitions

    • Gas and electric utilities continue to look for opportunistic acquisitions, especially in the rate-regulated utility and pipeline space.
    • Adaptive Utility Strategies
    • Many Strategies, One Rationale: Sustainable Growth
      17 transactions totaling more than $37 billion announced through late September
      In Q2 and Q3, buyers shifted focus to peers in search of geographic adjacencies and economies of scale (Great Plains/Westar) and portfolio diversification (Algonquin/Empire District and NextEra/Oncor)
      Southern especially active in 2016
      50% equity stake in Southern Natural Gas Pipeline
      Some continue to expand midstream gas capabilities as a core business (Dominion/Questar, DTE Energy/Appalachia) or as a continuation of a convergence play tied to increasing amounts of gas-fired generation and increased midstream participation (Southern)
    • Its likely not a coincidence that vertically integrated electric utilities target T&D-only electric or gas utilities as prime acquisition targets. They have only one shot for a large acquisition using their balance sheet capacity, and as such they are likely to pick a utility with the most sustainable business model
      -Angie Storozynski, Macquarie Research

Mergers and Acquisitions (Contd)

    • Adaptive Utility Strategies
    • NOTES:
      *Includes sales of minority interests, deals announced but not closed, and joint venture investments (e.g., Southern and Kinder Morgans Southern Natural Gas JV); deal value is equity portion of acquisition value, excluding debt assumption. **Not reflected in deal value summary
      SNL Financial; Macquarie Research; UBS; Morgan Stanley; J.P. Morgan; Barclays; ScottMadden analysis
    • Expect More of the Same, But What about Interest Rates?
      Vertically integrated utilities expected to seek out T&D (electric and/or gas) opportunities to achieve growth while limiting regulatory risk (vs. generation)
      Utilities to partner with unconventional energy services and emerging technology developers complementary revenue streams and manages threats
      Increasing ratios could threaten earnings accretion and tilt scale toward organic growth strategies
    • U.S. Energy Utility and Selected Midstream Sector Deal Value by Announcement Date (Quarter) and by Target Sector Type (in $ Millions)*

Behind-the-Meter: Competition or Cooperation?

    • Adaptive Utility Strategies
    • SOURCES:
      Industry news

Impact of a New Administration

Pundits Greatest Hits

    • Impact of a New Administration
    • House Republicans have warned the Obama administration against rushing through controversial regulations and have threatened to use Congressional Review Act resolutions to nix major rules that are finalized at the end of Obamas term. Given that CRA procedures count back 60 legislative days, such actions potentially imperil a host of rules completed in recent months. Platts (Nov. 23, 2016)
    • SOURCES:
      Morgan Stanley; Deutsche Bank; UBS; FitchRatings; SNL Financial; Van Ness Feldman

Pundits Greatest Hits (Contd)

    • Impact of a New Administration
    • SOURCES:
      Morgan Stanley; Deutsche Bank; UBS; FitchRatings; SNL Financial; Van Ness Feldman

Pundits Greatest Hits (Contd)

    • Impact of a New Administration
    • SOURCES:
      Morgan Stanley; Deutsche Bank; UBS; FitchRatings; SNL Financial; Van Ness Feldman

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