Supply Trends – What Are The Impacts on Transmission?

A Presentation to Infocast’s 15th Annual Transmission Summit, Washington D.C., February 29 – March 2, 2012
Post Date: 2012/03/12

Todd Williams, director at ScottMadden, presented, “Supply Trends – What Are The Impacts on Transmission?” at Infocast’s 15th Annual Transmission Summit. This presentation focused on important developments in generation and how they will impact transmission.

Supply uncertainty is at unprecedented levels, primarily driven by EPA regulations, decreasing natural gas prices and renewable energy portfolio requirements. The impacts of a shift in electric generation moves from coal to natural gas needs to be examined closely, such as the the unknowns associated with growing interdependency of gas and electric industries. The impact of new generation, extended outages for retrofits, and required transmission must be understood by transmission planners and operators to ensure continued grid reliability. The mismatch in planning cycles between generation and transmission makes this even more problematic.

SNL Energy editor, JP Finlay, provides a wrap-up of Mr. Williams’ presentation, click here to access the full article on SNL.


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Supply Trends What Are the Impacts on Transmission?

    • Infocast Transmission East Summit 2012
      March 1, 2012
    • Contact: toddwilliams@scottmadden.com


Outline

    • Environmental Regulations Fixed or Fleeting?
      Generation Technologies Where is the Silver Bullet?
      Planning Reserve Margins Feast or Famine?
      Supply Shakeup Is Transmission Ready?
      Case Study: A Tale of Two Retirements
      Closing Thoughts

1



Environmental Regulations Fixed or Fleeting?

    • Sources: EPA; Van Ness Feldman; Bryan Cave; World Resources Institute; NERC 2011 Long Term Reliability Assessment; Industry news
    • Strong industry reaction. Political and judicial arm wrestling. Invest in retrofits or retire?

2

  • Major Implications
  • Short Compliance Timelines
  • Big Coal Retrofit
  • Small Coal Retrofit
  • New CCGT
  • Used CCGT
  • $800/kW
  • $1,700- $2,400/kW
  • $800-$1,200/kW
  • $400/kW
  • Negative Economics

?



Environmental Regulations Fixed or Fleeting? (Contd)

  • Rhetoric
    Studies demonstrate that regional reserve requirements could be compromised by the cumulative impact of EPAs actions, which indicate that between 2012 and 2018, the nations power grid will be stressed in ways never before experienced and could pose a reliability concern. NERC, 2011 Long Term Reliability Assessment
    EPAs regulations will result in only a modest level of retirements. EPA rules have never caused the lights to go out and they wont this time. No one is suggesting that there wont be localized reliability issues, but we dont need to choose between reliability and pollution. Gina McCarthy, EPA Assistant Administrator for Air and Radiation
    There is just no way in the world you can make a rule final in 2011 and expect people to comply with it by January 2012. It is as close to lunacy as you can get. Mike Morris, Chairman and CEO, AEP
    Provides needed regulatory certainty and can be implemented on time without threatening reliability. Exelon Press Release
    Litigation
    States and generators have sought stays of all three EPA proposed rules
    Legislation
    U.S. House leaders had already been battling EPA over GHG regulation
    Legislative solution is unlikely, at least prior to the Presidential election

3

  • Sources: SNL Financial; Roll Call; National Journal, EPA


Generation Technologies Where is the Silver Bullet?

    • Coal?
      Nuclear?
      Renewables?
      Distributed Generation?
      Gas?

4

  • Source: EIA
    Note: Excludes capacity in operation before 1950.
    Hydro is run-of-river and pumped storage; excludes tidal, etc. Coal includes lignite and refined coal, but does not include petcoke, black liquor, and the like. Gas does not include propane or syngas. Oil includes residual, distillate, and “other” oil, which includes waste oil products like butane, sludge oil, tar oil, and propane.
  • Installed Capacity (MW)


King Coal Dead or Dethroned?

    • Divergent estimates on coal plant retirements
      EPA only looked at each regulation, not the combined effect
      Final rule more aggressive than draft
      Based on combined effects, NERC projects incremental coal capacity losses between 10 to 23 GW through 2018
      Some post-Cross-State Air Pollution Rule coal generation retirement analyses
      EPA: 4.8 GW (1% of capacity) and no impact on power prices
      Bernstein: 32 GW (9% of U.S. coal-fired capacity)
      Burns & McDonnell: 40 to 50 GW
      Bentek: 50 GW retired or converted to gas
      Black & Veatch: 65 GW
      Fitch: 83 GW (combined rules effects)

5

  • Top 10 states At Risk are in the Eastern Interconnection
  • Note: *Utility Maximum Achievable Control Technology/National Emissions Standards for Hazardous Air Pollutants
    **As of May 2011, before release of final rule
    Sources: Deutsche Bank; FitchRatings: Sanford C. Bernstein; SNL Financial ; NERC 2011 Long Term Reliability Assessment, Table 34


King Coal Dead or Dethroned? (Contd)

  • There are a significant number of U.S. coal-fired plants without an Air Quality Control System (AQCS) (SCR and FGD) installed, representing a significant amount of supply capacity

But a significant number of units could potentially be shut down with minimal total supply impacts

Impact on grid reliability is a different question, and one that is challenging to examine systematically

6

  • Source: Power Magazine, April 2011, NETL database, EIA Form 860


Nuclear Renaissance Deferred or Done?

    • NRC Fukushima task force recommendations
      10 recommendations, including:
      Strengthen station blackout mitigation
      Enhance spent fuel pool makeup capability/monitoring
      Strengthen on-site emergency response
      NRC is considering requiring nuclear power plant operators in the U.S. comply with several new regulations by the end of 2016
      The first rule was proposed last week
      Coordinated industry response
      Increased political pressure, especially at state levels, e.g., siting, certification, rate recovery
      Southern Company (Vogtle) and SCANA (Virgil C. Summer) preceding a fig leaf for everyone else
      Dec 2011: NRC approves AP1000 reactor designs, clearing the path for expansion at both facilities
      Feb 2012: NRC approves the issuance of the Combined Construction and Operating License (COL) for Vogtle units 3 and 4, the first such license ever approved for a U.S. nuclear plant
      10- to 12-year build cycle means next decade at best before nuclear is a material add to supply
      Reduces the chances for a grand bargain in D.C., i.e., comprehensive federal legislation encompassing a clean energy standard, including renewables, energy efficiency, and support for new nuclear
      A contrarian viewcould this be good, long term, for nuclear new build?

7

  • The problems are political (Fukushima) and economic (cheap shale gas and low power prices)
  • Sources: NRC, SNL


Renewables Game Changer or Window Dressing?

    • Renewables continue to growNERC predicts a 3% increase in renewable on-peak capacity from 2011 to 2021, primarily from wind and solar
      Clean energy investments continue to increase, despite economic uncertainty and PR problems like Solyndra
      Worldwide totaled $260B in 2011, up 5% from 2010
      Investment since 2004 has grown at 26% CAGR
      Cleantech investment expected to grow, but headwinds remain: European financial crisis, overcapacity, and possible PTC expiry by 2013
      Variability and current lack of cost effective storage solutions, means neither solar nor wind has the ability to supply day to day base load electricity. Systems will rely heavily on fossil solutions to compensate for reliability
    • PTC Expiration and Extension Years
    • Under ARRA, PTC extended through 2012 in-service date; grant in lieu of PTC through 2011
    • $5.50/W
    • $3.18/W
    • $3.91W
    • Source: GTM Research

8

  • Demand Spike Results in Module Undersupply and Upward Price Shocks

6,000
5,000
4,000
3,000
2,000
1,000
0
MW
$6.00

  • Real Module Prices and Annual Global PV Installations (19932008)

$5.00
$4.00
$2.00
$1.00
$0.00

  • 2007 $/W

$3.00

  • Global PV Installations (MW)
  • Real Module Price (2007 $/W)

93
94
95
96
97
98
99
00
01
02
03
04
05
08
06
07

  • Sources: SNL Financial; DOE Berkeley Natl Laboratory; DSIRE.org; Greenbiz.com; Ernst & Young; National Venture Capital Association; Bloomberg New Energy Finance; GTM Research, The United States PV Market Through 2013: Project Economics, Policy, Demand and Strategy (Dec. 2009), NERC 2011 Long Term Reliability Assessment


Distributed Resources and Energy Storage Sensible or Speculative?

  • Increasing focus on on-site renewables (solar PV) and emerging storage applications
    Barriers: price signals, siting, viability of technology, etc.
    Key issues:
    With technology advancements and cost improvements, will distributed energy resources be a disruptive or sustaining technology?
    Is distributed generation on equal footing with supply?
    Ownership models: utility vs. third-party?
    Rates and tariff design: who pays for infrastructure?
  • Sources: California Energy Commission; Federal Energy Management Program; Dept. of Energy; Electricity Storage Association; Claytonchristensen.com; ScottMadden analysis
  • Installed Costs Remain High
  • Cost of Electric Storage Remains High as Well

9



Natural Gas Panacea or Pandoras Box?

  • Good NewsAbundant, cleaner, and cheap (for now)
    Natural gas prices are not projected to return to pre-recession levels in the near to intermediate term
    Some contrarians, however, posit $6/MMBTU natural gas by 2015
    However, demand may pull up prices, and impact of worldwide demand creates uncertainty
    Slow increase in medium term industrial gas demand, tempered by the sluggish U.S. economy
    Short-term gas demand from power generation is projected to increase, but levels off longer term (~10 years)
    More Canadian gas, now displaced by U.S. shale gas, may go to Asia
    Will U.S. exports cause domestic prices to swell?
    Other unknowns also exist
    EPA FY2013 budget calls for tripling research on hydraulic fracturing
    Unknowns associated with growing interdependency of gas and electric industries

10

  • Actual
  • EIA Projected
  • EIA Actual and Projected Henry Hub Average Spot Price and Selected Forecasts ($/MMBTU) (in 2010$)
  • We have been through a gas boom and bust cycle before
  • Sources: Industry news; EIA; IEA; FERC; SNL Financial; Natural Gas Week; Washington Times


Natural Gas Panacea or Pandoras Box? (Contd)

      11

    • Interstate Natural Gas Pipelines (as of Year-End 2009)
    • Gas-power interdependence is back on the front burner
      EPA regulations, cheap shale gas, and increasing renewables penetration lead swings to gas generation
      FERC had looked at this in the mid-2000s, as post-merchant, pre-Katrina bubble led to a significant increase in the ratio of gas to total generation
      Recent weather events (Texas, Southwest) have refocused attention on increased year-round power sector gas demand
      Emerging pipeline adequacy and operations concerns
      Capacity constraints Flow patterns
      Scheduling differences Curtailment
      Pipeline pressure and line pack
    • Sources: EIA; SNL Financial; NERC
    • More gas fired generation will require additional pipeline infrastructure, increased coordination with pipeline operators, and developing operational strategies to minimize fuel delivery issues


Potential Resource Adequacy Trouble Spots:
Year When Planning Reserve Margins Fall Below NERC Reference Margin Level

    • Planning Reserve Margins Feast or Famine?
    • Wholesale power prices have two primary drivers
      Fuel prices
      Reserve margins
      North American Electric Reliability Corp. generic, assumption-based estimates of reserve margins diverge
      Risk of precipitous decline exacerbated by estimated lead times for develop-build
      Nuclear: 1012 years
      Coal: 57 years
      Wind: 3 years
      Gas: 2 (CT) to 3+(CC) years
      Transmission: 10 years

12

  • NERC predicts that most Eastern Interconnection regions may see Planning Reserve Margin issues between 20152018
  • Source: NERC 2011 Long-Term Reliability Assessment, Fig. 57 (Nov. 2011)


Supply Shakeup Is Transmission Ready?

      13

    • Planning Cycles
      Traditionally long lead time for developing and constructing transmission may not keep pace with generation requirements as driven by new regulations
      Varied planning horizons for different asset types complicates transmission planning
      Assets currently contemplated have unique operating characteristics (operate based on pricing, load, contractsnot system conditions)
      Assets are being added to the resource mix that may not actually operate under all scenarios
      Operations
      Retirement of larger or strategically placed units may cause changes to power flows and stability dynamics
      Enhancements and investments to transmission systems may be needed to provide reactive and voltage support, address thermal constraints and provide system stability
      Outage Coordination
      Given tight window for compliance, many units that will be retrofitted may need to take concurrent long-term maintenance outages, causing resource adequacy concerns
    • New generation, outages for retrofits, and required transmission must be coordinated in order to ensure continued bulk system reliability
    • Sources: NERC 2011 Long Term Reliability Assessment; Industry news


Case Study A Tale of Two Retirements

      14

    • Cromby Generation Station
    • Eddystone Generation Station
    • Sources: Clean in Competitive Markets, Exelon EEI Nov. 2010; BusinessWire, Oct 18, 2011
    • Unit 1 144 MW (coal)
      Unit 2 201 MW (natural gas or fuel oil)
      Located 25 miles NW of Philadelphia International Airport
    • Total 1,114MW (including coal, natural gas, and oil units)
      Unit 1 and 2 294 MW each (coal)
      Located just south of Philadelphia International Airport
    • From announcement to retirement, grid reliability upgrades required
      2 to 2.5 years to complete


Closing Thoughts

  • Supply uncertainty is at unprecedented levels
    Is your current transmission plan based on generation assumptions that are less certain?
    The mismatch in planning cycles between supply and transmission makes it unlikely that all major assumptions made at the beginning of the transmission planning cycle will still be true when facilities come on line
    And, almost inconceivable that they will remain true for the 50-year useful life
    This is exacerbated by the number of players planning supply and, increasingly, transmission
    Despite this uncertainty, we are embarking on another step-function increase in transmission build
    This is needed in part because of the backlog and long latency between planning and reality
    Is the transmission planning and development process flexible enough to accommodate the policy mandates currently in place or coming?
    During the 10-year transmission planning horizon (possible), and almost certainly during the 50-year useful life:
    Disruptive technologies will be introduced (or a lot of VC money will go down the drain)
    Discontinuous public polices and market rules will be enacted
    This unprecedented uncertainty makes planning more challenging than ever before, especially for transmission
    Our advice
    Maintain a questioning attitude
    Make assumptions and conventional wisdom explicitand challenge them!
    Consider more than one state of the world

15



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