Elections and Energy …. Likely Impacts on Utilities? David K. Owens Executive Vice President Edison Electric Institute Marketing Executives Conference.

Elections and Energy ….Elections and Energy ….Likely Impacts on Utilities? Likely Impacts on Utilities?

David K. OwensExecutive Vice PresidentEdison Electric Institute

Marketing Executives ConferenceOctober 14, 2008

We Are In A Period Of Significant Transformation

Capital MarketsEnvironmentTechnologyPolitics

The Challenge of Balancing Core DriversThe Challenge of Balancing Core Drivers

EnormousEnormous CapExCapEx Rising CostsRising Costs and Pricesand Prices

No longer a declining cost industryFuel, infrastructure components,

global industrialization and competition

$1.5 Trillion Exceeds current capitalization

Major new coal, nuclear and transmission

Climate ChangeClimate ChangeDozen bills pending in Congress

States becoming aggressiveRole of Renewables

> $1 Trillion ???

EnergyEnergy EfficiencyEfficiencyDemand ResponseDemand Response

Smart GridSmart GridLow hanging fruit for Climate Change

Need to make it a sustainable business “Smart” appliances, buildings, grid

Financial Crisis Financial Crisis

Critical Political IssueCritical Political Issue

What‘s Happened?What‘s Happened?The “Downward Spiral”The “Downward Spiral”

Banks Strapped for Cash – Tighten Up on Lending

Plummeting Housing Prices

Rise in Delinquencies, Bankruptcies and Foreclosures

Businesses and Consumers Cut Back on Spending

Less

Sal

es F

orce

Bu

sines

ses

to S

cale

Ba

ck

Higher Unemployment

High Energy Prices

Financial Crisis Impacts … Financial Crisis Impacts …

Access to CapitalAccess to Capital

What’s At Stake?What’s At Stake?

Current investment $85 Billion annually for … Upgrading distribution, transmission and generation Deploying advanced distribution technologies, including smart meters Increasing the integration of renewable resources Building new and cleaner generation facilities

Lack of liquidity (inability to access capital markets at reasonable rates) will … Cause utilities to curtail or postpone critical infrastructure projects until

capital markets stabilize Substantially increase short-term borrowing costs ultimately impacting

long-term capital investment needed to ensure reliable, affordable and sustainable electric service to consumers

Why Do We Need the Investment?Why Do We Need the Investment?

Replace aging infrastructure

Maintain reliability

Address climate change and related environmental issues

Enhance energy efficiency technologies

Demand Projected To Demand Projected To Increase 30% by 2030Increase 30% by 2030

Sources: U.S. Department of Energy, Energy Information Administration, Annual Energy Review 2006 and Annual Energy Outlook 2008 Early Release*Electricity demand projections based on expected growth between 2006-2030

Bill

on k

iloW

atth

ours

Causes for Rising DemandCauses for Rising Demand

Increasing population 11.18% in 10 years

Increased economic growth 50.1% in 8 years

Increased number of homes 47.85% in 8 years

Increased number of larger homes 72% in 9 years (over 2400 sq. ft.)

Increased number with central A/C 49% in 9 years

Plasma TVs up 50% 1st Qtr 05 from 1st Qtr 04

MP3 players up >17 million in one year

Average US household owns 26 consumer electronics products

Estimated Baseline For Needed Estimated Baseline For Needed New Capacity Build -- New Capacity Build -- 214 GW214 GW

Uses Final AEO 2008 load growth projection Includes Brattle’s most recent fuel and construction cost estimates Does not include aggressive energy efficiency and potential price response impacts

New Generation Capacity in U.S. Census Regions by Type (GW) During 2010-2030

0

20

40

60

80

100

120

West Midwest South Northeast

GW

RenewableCTNuclearCCCoal

35 GW

59 GW

100 GW

20 GW

Total Capital Cost: $697 Billion(Undiscounted Nominal)

Prepared for the Edison Foundation by The Brattle Group

The Capital Investment ChallengeThe Capital Investment Challenge

Industry investment in all segments through 2030 will be on the order of $1.5 Trillion Generation $505 billion (133 GW, assuming RAP efficiency) Transmission $287 billion Distribution $588 billion Energy Efficiency $85 billion (EE and AMI cost for RAP efficiency)

Estimates do not reflect Potential costs of new carbon policies that may be adopted Potential new comprehensive federal energy legislation / policies Potential new state energy policies

T&D investments significantly greater than projected generation investment

Resurgence of Rate Cases –Resurgence of Rate Cases –Resurgence of Rate INCREASES?Resurgence of Rate INCREASES?

Increases in Energy Prices Hit Low- andIncreases in Energy Prices Hit Low- andFixed-Income Households the HardestFixed-Income Households the Hardest

Income spent on energy for households earning >$50,000 / year - 7% of income $10,000 - $30,000 / year – 20% of

income (25% of households) <$10,000 / year - 46% of income

(8% of households)

Households earning < $30,000 Mostly senior citizens, single

parents, and minorities Force hard decisions about what

bills to pay … housing, food, education, health care, and other necessities 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Household Energy Expendituresvs. After-Tax Household Income

Over $50,000 $10,000 - $30,000 Under $10,000

One-third of Americans

shoulder major energy burden

Sources: Redefining Progress; U.S. Census Bureau, Current Population Survey, 2006 Annual Social and Economic Supplement

Rising Electricity Costs Have a More Rising Electricity Costs Have a More Significant Effect on the PoorSignificant Effect on the Poor

Source: 2006 Consumer Expenditure Survey, U.S. Bureau of Labor Statistics

How do we mitigate rate shock?

Strategic Issue

Energy Efficiency / Demand ResponseConstruction work in progressAutomatic Adjustment ClausesForward test yearsPre-construction operating costsDifferent billing approachesOther

What About Climate Change?What About Climate Change?

China’s COChina’s CO22 Emissions Emissions Now Exceed U.S.Now Exceed U.S.

* Based on projected data from the International Energy Agency, November 2007.

U.S. Green House Gas Emissions U.S. Green House Gas Emissions Produced By Many SectorsProduced By Many Sectors

Industry

19%

Commercial

7%

Residential

6%

Agriculture

7%

Transportation

28%

Electricity

Generation

32%

U.S. Territories

1%

Controlling Greenhouse Gas (GHG) Controlling Greenhouse Gas (GHG) Emissions – Current StatusEmissions – Current Status

Congress seriously considering legislation aimed at reducing GHG emissions

Supreme Court rules that carbon dioxide is a pollutant under the Clean Air Act EPA to regulate!

Some states, such as California, have adopted comprehensive policies to limit GHG emissions

Key Questions In GHG DebateKey Questions In GHG Debate

Targets and timetable for GHG reductions?

Mechanisms to achieve cost-effective GHG reductions? Cap and trade, tax or hybrid?

Include all sectors of the economy and all sources of GHG?

Consistency of compliance timetables with expected development and deployment of needed technologies?

Challenge:Challenge: Technologies and TimeframesTechnologies and Timeframes

Advanced coal technologies integrated with Carbon Capture and Storage (CCS) Not commercially available until 2020-2025

Deployment of nuclear plants Not possible until 2015 at earliest

During the transition there will be a “dash to gas” Driving up both electricity and gas prices

Controlling Greenhouse Gas (GHG) Controlling Greenhouse Gas (GHG) Emissions Emissions

How do you …

Establish the price of carbon?

Minimize economic disruptions?

Ensure that low income consumers do not shoulder a disproportionate impact?

Recognize early actions / investments made to mitigate GHG?

Take into account unintended aspects of GHG emission regulation?

Jobs? Trade balances? Cost of goods and services?

Ensure development and cost-effective deployment of “climate-friendly” technologies

Provide funding

Minimize economic disruption to consumers

Avoid harm to the competitiveness of U.S. industry

Ensure an economy-wide approach to GHG reductions

*The full text of the EEI climate change principles is available at www.eei.org.

EEI’s Climate Change PrinciplesEEI’s Climate Change Principles

Key Elements In GHG DebateKey Elements In GHG Debate

We need a full suite of technologies

Harmonize compliance dates and technology availability

An effective cost containment mechanism to avoid economic disruption

Robust domestic and international offsets to lower costs and promote effectiveness

Requirement that developing countries participate – China / India

There Is No Silver Bullet!There Is No Silver Bullet!

What Will It Take?What Will It Take?

Energy Efficiency Renewables Clean Coal Technologies Carbon capture and storage Nuclear Plug-in hybrid electric vehicles

We need it all …but it will be costly!

0

500

1000

1500

2000

2500

3000

3500

1990 1995 2000 2005 2010 2015 2020 2025 2030

U.S

. Ele

ctri

c S

ecto

rC

O2 E

mis

sio

ns

(mill

ion

met

ric

ton

s)

EIA Base Case 2008

Technology EIA 2008 Reference Target

Efficiency Load Growth ~ +1.05%/yr Load Growth ~ +0.75%/yr

Renewables 55 GWe by 2030 100 GWe by 2030

Nuclear Generation 15 GWe by 2030 64 GWe by 2030

Advanced Coal Generation

No Heat Rate Improvement for Existing Plants

40% New Plant Efficiency by 2020–2030

1-3% Heat Rate Improvement for 130 GWe Existing Plants

46% New Plant Efficiency by 2020; 49% in 2030

CCS None Widely Deployed After 2020

PHEV None10% of New Light-Duty Vehicle

Sales by 2017; 33% by 2030

DER < 0.1% of Base Load in 2030 5% of Base Load in 2030

EIA Base Case 2007

COCO22 Reductions – Reductions – What’s Technically Feasible? What’s Technically Feasible?

Achieving all targets is very aggressive, but potentially feasible

• Higher fuel prices• Lower GDP, load growth rate • More renewables, nuclear

• Higher fuel prices• Lower GDP, load growth rate • More renewables, nuclear

(EPRI Prism – With EIA Update)(EPRI Prism – With EIA Update)

Range of Potential Impacts Range of Potential Impacts From Climate Legislation?From Climate Legislation?

Cost per household $446 - $2927 in 2020 / year

Electricity prices 21% - 35% in 2020

Natural gas prices 20% - 39% in 2020

GDP 0.7% - 1.74% (~ $336B out of $~19.2T GDP)

Employment 1.1 - 2.78 million in 2020

Coal consumption 42% - 66% in 2020

Permit prices ($ / ton CO2 equivalent) $18 - $48 / ton in 2020

Total US GHG emission (mmtCO2-equivalent) 4887 – 6654 in 2030 (“Business As Usual” 9672 in 2030)

It’s All About The Assumptions!

Who’s Assumptions Are Right?Who’s Assumptions Are Right?Wide RangesWide Ranges

New Renewables 6 GW <–> 176 GW by 2030

Coal w/ Carbon Capture and Storage 25 GW <–> 250 GW by 2030

New Nuclear 3.5 GW <–> 268 GW by 2030

Energy Efficiency Major impact – How much?

Offsets 15% domestic only <–> 30% domestic and international

The Challenge of A New Political The Challenge of A New Political LandscapeLandscape

A movement for change Younger voters becoming a significant force

2009 New President New Congress New Agency Heads (FERC, EPA, DOE, etc.)

New directions on a range of issues Economy War Energy and the Environment Health Care

View From Top – Senator McCain’sView From Top – Senator McCain’s Climate Change Positions Climate Change Positions

Goal Reduce carbon emissions by 60% below 1990 levels by 2050

Mechanism Cap-and-trade program

Implementation All allowances allocated initially with an eventual transition to auctions Proceeds to support development of advanced technologies (CCS,

nuclear, battery development) Funds to provide financial backing green innovation, financing and transfer

fund to facilitate the commercialization of green technologies Climate Change Credit Corporation to administer program

Coverage Economy-wide approach Exempt certain small businesses

View From Top – Senator McCain’sView From Top – Senator McCain’s Other Energy Issues Other Energy Issues

Nuclear Construct and operate 45 new reactors by 2030 Long-term target is 100 additional reactors

Energy R&D Reform government R&D infrastructure Develop battery operated cars Accelerated deployment of renewable technologies Permanent extension of R&D tax credits – 10% of wages spent on R&D $5000 / zero emissions car tax credit $300 million prize for development of a more efficient battery

Energy Efficiency Increase federal government energy efficiency Increase efficiency of transmission grid, including deployment of

smart meters

View From Top – Senator McCain’sView From Top – Senator McCain’s Other Energy Issues Other Energy Issues

Oil and Gas Exploration Expand domestic oil and gas production

Energy Efficiency Increase federal government energy efficiency Increase efficiency of transmission grid

Clean Coal Accelerate development and deployment of clean coal facilities Increase R&D funding Develop carbon capture and storage

View From Top – Senator Obama’sView From Top – Senator Obama’s Climate Change Positions Climate Change Positions

Goal Reduce carbon emission 80% below 1990 level by 2050

Mechanism Cap-and-trade program

Implementation All allowances to be auctioned Use interim targets to stay on course Proceeds to be used to support “development and deployment of clean

energy”, energy efficiency and transition assistance, invest in job training to develop a clean energy workforce and energy-focus Green Jobs Corp (5 million new jobs projected)

Coverage Economy-wide approach

Supplementary measures National Renewable Portfolio Standard – 25% by 2025 Nat’l Renewable Fuel Standard – 60 B gallons biofuels by 2030

View From Top – Senator Obama’sView From Top – Senator Obama’s Other Energy Issues Other Energy Issues

Nuclear Ensure currently stored waste is using most advance storage caskets Establish guideline for tracking / controlling / accounting for spent fuel Must be built and operate safely and securely Yucca Mountain is not an option Supports new nuclear but no real details

Energy R&D Commercialize PHEVs Commercial scale renewable energy Extend renewable production tax credit for 5 years Create a clean technologies deployment venture capital fund Permanently extend R&D tax credits

View From Top – Senator Obama’sView From Top – Senator Obama’s Other Energy Issues Other Energy Issues

Oil and Natural Gas Supports limited off-shore drilling Reduce oil consumption by 35% by 2030

Energy Efficiency Overhaul federal efficiency codes 50% reduction of energy intensity by 2030 Zero emissions for federal buildings by 2025 Improve new / existing building efficiencies by 50%, 25% by 2030 (resp.) Phase out incandescent light bulbs Accelerate development and increase investment in the smart grid

Clean Coal Develop and deploy new Clean Coal Plants / carbon capture and storage Ban on new traditional coal plants w/o provision for reducing GHG

Legislating From the MiddleLegislating From the Middle

Letter from 10 Democrats to Majority Leader Sen. Reid stressing 8 principles (June 6, 2008) Contain costs and prevent harm to US economy Invest aggressively in new technologies and deployment of existing

technologies Treat states equitably Protect America’s working families Protect US manufacturing jobs and strengthen international

competitiveness Fully recognize agriculture and forestry Clarify Federal / state authority Provide accountability for consumer dollars

Legislating From the MiddleLegislating From the Middle

Sen. Bingaman (D-NM), Chair Senate Energy Committee (July 9, 2008) Focus legislation only on emissions reductions not other goals Don’t make it complicated Be realistic about how well we can plan for the distant future Involve all existing agencies and fully fund programs Set ambitious but achievable targets Don’t let costs get out of control Make a commitment to technology Work out how new climate law will relate to Clean Air Act – no duplication Set achievable near-term deadlines Have a single national cap-and-trade program for GHGs and pre-empt

states

The Challenge of New TechnologiesThe Challenge of New Technologies

Supply technologies Clean Coal Technologies – IGCC Advanced new nuclear Distributed generation Renewables

Demand technologies Smart / energy efficiency devices

Appliances, buildings / codes, thermostats, meters

Energy storage / transportation Plug-in Hybrid Electric Vehicles Thermal energy storage

How do we fund their development?

Funding New TechnologiesFunding New TechnologiesRep. Boucher’s Bill Rep. Boucher’s Bill

Fossil-based utilities to hold referendum on a Carbon Storage Research Corporation (CSRC) Scope

If approved by 2/3, funding for CSRC will come from assessments on retail customers of fossil based electricity utilities

Governance CSRC operated as a division of the Electric Power Research Institute

Implementation Assessments to total ~$1 billion annually Fund large scale demonstration of CCS technologies – accelerate

commercialization Assessment ~ $10-12 annually for the average residential consumer of

fossil fuel based electricity. Hearings (June 19, 2008)

Critical issues – governance, cost recovery, fee computation

Summary:Summary:Challenges Are PlentifulChallenges Are Plentiful

Stability in financial markets is essential Access to capital effects infrastructure expansion and reliability

Changing political landscape Both candidates concerned about GHG Legislating from the middle

Increasing concerns about the environment Potential impacts from climate legislation Need to accelerate development and deployment of new technologies

Supply margins are declining and demand is increasing Need significant infrastructure investment but costs increasing rapidly

No longer a declining cost industry Need significant outreach to explain the reasons for increasing cost

Energy efficiency is viable option Need to create regulatory climate for making EE a sustainable business

The Path ForwardThe Path ForwardAn Apollo Like Vision!An Apollo Like Vision!

Secure a national (worldwide) commitment to reducing GHG emissions Involve all sectors of the economy Aggressive education campaign - costs and benefits Change attitudes about energy efficiency – all sectors

Accelerate the development of needed technologies Substantially increase funding and related incentives to stimulate research,

development and deployment

Create excitement around engineering, mathematics and science Public / private partnership to replace the aging workforce and encourage

the next round of technical and strategic leaders

Not because it is easy, but because it is the right thing to do!