Smart Power: the Future of Electric Utilities in the US and China, Peter Fox-Penner (June 2012)

Presented to the Beijing Energy Networkby Peter Fox-Penner

and Judy Chang

June 27, 2012

1850 M Street NW, Suite 1200Washington, DC 20036, United States

[email protected]@Brattle.com

Views expressed in these slides are solely those of the authors. Copyright © 2012, The Brattle Group, Inc.

The Future of Electric Utilities in the U.S. and China

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Today, Utilities Everywhere Face Four Gigantic Disruptive Forces

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Disruptions Affecting U.S. and EU Utilities

ᅁ The result: Increasing prices, lower sales, loss of market to competitors.

$ 1 trillion investment (U.S.)

by 2030

Enables lower sales, distributed

power, and much more competition

Sales barely increasing each

year

New firms take market share

away from centralized grid

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Decarbonization �– U.S.

ᅁ No U.S. national climate policy yet, but regional

policies and proposed Clean Energy Standard

ᅁ Few new coal-fired plants, no CCS, and almost

all new fossil fuel plants will be gas

ᅁ Environmental rules could force 30-60 GW of

coal plant closures

ᅁ State and federal renewable laws mandate 65

GW (2025) - - mostly wind

ᅁ Integrating renewables and storage into grid

requires operating changes and new capital

U.S. Generation- 2012

U.S. Generation- 2035

Sources: �“Annual Energy Outlook 2012, Early Release,�” and �“Annual Energy Outlook 2011,�” Energy Information Administration.

42%

27%

36%

33%

20%

18%

14%

12%

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ᅁ Total generation decarbonization

~ $1 trillion

ᅁ New transmission to integrate

renewables and maintain

reliability- $ 250 billion

ᅁ Replace aging distribution system

with smart grid - $600 billion

ᅁ Price increases so far have been

moderated by the fall in price of

natural gas

Substantial Costs of Decarbonization Lead to Price Increases

Sources:Peter Fox-Penner, �“Smart Power,�” Presented at Exelon�’s Annual Attorney Meeting, Philadelphia.�“U.S. Natural Gas Wellhead Price,�” Energy Information Administration, 2012.�“Electric Power Annual 2011,�” Energy Information Administration, October 2011.

U.S. Average Annual Retail Price of ElectricityCent Per KWh, Real $2005

$/M

CF

¢/K

Wh

75%

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Power Sales and Energy Efficiency (EE)ᅁ Energy efficiency policy is a mixture of national standards, state utility programs, and

private firms selling energy efficiency (�“ESCOs�”) �– no nationwide strategy

ᅁ U.S. power use is projected to increase around 0.8%/yr with current policies, but growth could be much less

U.S. Projected Power Demand

Source: �“Annual Energy Outlook 2012 �– Early Release,�” Energy Information Administration, 2011.

AEO 2010 �– 0.89%/ year

AEO 2008 �– 1.10%/ year

AEO 2012 �– 0.76%/ year

Smart Power �– 0.51%/ year

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DG In The U.S. and Europe

ᅁ The price of solar panels in the U.S.

dropped by 50 % in 2011. Even with

declining feed-in tariffs, solar conditions

are expected to rise steadily.

ᅁ Buildings will integrate PV (and later

microwind) as well as geothermal-

California is targeting 100% Net Zero

buildings by 2030

ᅁ Community-scale PV and wind increases

resilience, reducing cascading failures

Utility Scale vs. Distributed Solar (CSP and PV)

Overnight Costs for Wind and PV(Onshore Wind and PV)

Sources: �“Annual Energy Outllok 2011,�” The Energy Information Administration, 2011; �“U.S. Solar Market Insight 2011 Year-In-Review�”, Solar Energy Industries Association, 2011.

Inst

alle

d M

W20

10$/

kW

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Over Time, the Smart Grid Will Change Everything

Enable time-based rates (�“dynamic pricing�”)

and smart EV charging with 5-15% bill

savings.

End billing based on cumulative commodity

KWh �– enable value-added services.

Enable behavioral and information-based

energy efficiency.

Create multidirectional distribution grids with

storage.

Allow better management of distribution grid:

outages, voltage, maintenance, more.

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Summary of the U.S. and EU Challenges

ᅁ Trillions of dollars of investments needed in generation,

transmission, and distribution

ᅁ Sales are barely increasing, so average costs and rates rising

for many years to come

ᅁ New competitors can enter and steal customers away by

offering retail power and energy efficiency services

ᅁ Today�’s electric utilities will only get weaker and farther from the

customer if they keep their traditional business model

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Contrasts With China

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China�’s Electric Power Industry is in a Very Different Position Than the U.S.

Growth is 5% - 12% a year doubling the system in <10 yrs; demand is 70% industrialScale economies and vertical integration are still significantLarge-scale supplies are far from load centers very largegrid buildoutGoals from 12th Five Year Plan:

�• 11.4% non�–fossil fuel generation by 2015, and renewable energy resources 20% by 2020

�• Optimize existing capacity and distribution system �• Construct gas and pumped storage to meet peak demand�• Develop distributed energy resources�• Smart and strong grid- develop inter-provincial transmission, a strong grid

backbone, and deploy smart grid technologies

Yet China still has the fundamental challenges of trillions of RMB of investment, higher power costs, and opposition to higher rates

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Some of China�’s Electric Power Challenges- From an Analytic Perspective

Are changes needed to pricing and contracts?

Is further structural reform needed?

With rapid expansion in so many areas, how can long term system

costs be minimized?

Rapid urbanization and distance to large sources raise questions of

best resilience and strategy.

Will the smart grid operate based on non-price factors or price?

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Renewable Integration Issues Can be Defined Across Different Timeframes

Primary Frequency Response

Frequency Regulation

(AGC)

Generation Commitment

and Capacity

Generation and

Transmission Capability

Load-Following/

Energy Blocks

Ancillary Services

Energy

Operations Planning

Resource Adequacy & Procurement

Seconds Months/YearsMinutes Hours Days

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Simulating Wind and Solar Impact on Grids

Frequency Regulation requirement for each 5 minute interval is estimated with two components of variance of load and generation:

1. 5-minute forecast error, PLUS 2. intra-5-minute volatility

5-minute schedule

average actual 5-minute load

Minute-by-minute deviations from 5-

min schedule

5-minute forecast error

intra-5-min volatility

t t+5

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Renewable and Storage Topics Have Gained Worldwide Attention

Storage can be used to complement and integrate renewable energyBut the cost of energy storage needs to drop significantly

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Thank You

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About The AuthorsDr. Peter Fox-Penner is a consulting executive and internationally recognized authority on energy and electric power industry issues. He is a principal and chairman of The Brattle Group, a leading international economic consulting firm.

In his consulting practice, Dr. Fox-Penner advises energy companies, government agencies, and their counsels on energy regulatory and market policy issues. Although his work has spanned most areas within the energy field, his current primary focus is on electric industry competition and structure, global climate change, and energy efficiency policies.

Dr. Fox-Penner�’s background includes co-founding Environment2004, the Environmental Alliance, and Patriot's Energy Pledge; service as a senior official in the U.S. Department of Energy and the White House Office of Science and Technology Policy; and staff positions in the Illinois Governor�’s office. He has a Ph.D. in economics from the business school at the University of Chicago and M.S. and B.S. degrees in engineering from the University of Illinois.

Contact: [email protected] or +1.202.955.5050.Peter Fox-Penner

ChairmanThe Brattle Group

Judy ChangPrincipal

The Brattle Group

Judy Chang is an energy economist with a public policy and engineering background. She has expertise in the analysis of electricity power markets and advises clients on the financial and regulatory issues relating to renewable energy investment and procurement decisions. She is experienced in leading utility executives, board members, and stakeholders in making challenging strategic decisions complicated by pressures from customers, policy makers, regulators, and wholesale and retail competitors. Ms. Chang has authored expert reports and submitted expert testimony before the U.S. Federal Energy Regulatory Commission and state regulatory authorities regarding power market issues. Her other recent work includes evaluating the potential impact of integrating renewable energy onto power systems. Accordingly, she has designed and helped develop a model that estimates the operational effects and the associated costs of variable resources on a grid.

Ms. Chang has authored a number of articles and reports and presented at a variety of industry conferences. She holds a Master�’s in Public Policy from Harvard University�’s Kennedy School of Government, is a member of the Board of Directors of the Massachusetts Clean Energy Center.

Contact: [email protected] or +1.617.864.7900.

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