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Todays Energy Landscape: Exploring economic environmental and Exploring economic, environmental and technological trends October 11, 2010 Presentation to the PJM Board Sue Tierney Managing Principal Managing Principal BOSTON CHICAGO

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Today’s Energy Landscape:

Exploring economic environmental and Exploring economic, environmental and technological trends

October 11, 2010 Presentation to the PJM Board Sue Tierney Managing Principal

BOSTON CHICAGO DALLAS DENVER LOS ANGELES MENLO PARK MONTREAL NEW YORK SAN FRANCISCO WASHINGTON

Managing Principal

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PJM Board – October 2010

Disclaimer for today’s remarks:

I am here speaking for myself and no other party or interest. I am here speaking for myself and no other party or interest. Analysis Group has clients who are PJM market participants.

  • I am a member of the board of directors of EnerNOC.
  • I am representing none of those parties here; no one is paying

for my participation today.

  • Out of an abundance of caution relating to potential

appearance of conflicts, I will not directly raise issues relating to demand response activities.

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PJM Board – October 2010

Today’s Energy Landscape – An overview The big features of the terrain – The big features of the terrain hazy overcast

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Michael Hajjar - high altitude http://infosthetics.com/archives/2010/03/high_altitude_the_stock_market_trends_as_realistic_mountain_ranges.html

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PJM Board – October 2010

A dozen points on the landscape – p p with implications for electricity markets The overall setting The overall setting Washington, the states Transmission Other infrastructure Natural gas EPA regulations Prices – part 2 Markets Green technologies Prices – part 1 Climate issues Big gorillas p Big gorillas

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PJM Board – October 2010

#1 – The overall setting

Energy is back on the back pages – behind back pages – behind the economy, tea parties, most p , everything else: A temporary reprieve or a change in luck…..?

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SLIDE 6

PJM Board – October 2010

The economic The economic recovery: ti i timing, pace, implications…

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http://www.businessweek.com/managing/economic_recovery/blog/archives/economic_recovery.gif

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PJM Board – October 2010

DOE EEREWind Power Budget (’75‐’10)

Buckle up – era of continued high

DOE EEREWind Power Budget ( 75 10)

g uncertainty

Average Natural Gas Spot Price – Henry Hub ($/MMBtu)

Era of big investment In generation…. ge e at o Era of uncertainty Regarding electric Industry restructuring Roller coaster: Gas prices, climate Legislation, ARRA Industry restructuring

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http://depletedcranium.com/the-economics-of-natural-gas-for-those-with-poor-memories/; http://www.ohiomathworks.org/themeparks/coastequation.gif ; http://www1.eere.energy.gov/windandhydro/images/wind_barchart_history_2010.gif ; http://www.osti.gov/energycitations/product.biblio.jsp?osti_id=5666526; http://www1.eere.energy.gov/wip/m/sep_history.html

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PJM Board – October 2010

#2 – Public Policy….

The States The States leading W hi t Washington: Back to the future?

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PJM Board – October 2010

Prospects for action on energy, climate: Climate?

What a

Climate? Transmission?

What a difference 24

Renewable portfolio standard? Effi i t

months makes…..

Efficient energy standard? R&D? R&D? Oil and gas legislation?

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PJM Board – October 2010

Issues on states’ agenda:

G j b Green jobs Rate cases Smart grid Energy efficiency Concerns abo t Concerns about prices…

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http://www.sustainy.com/wp-content/uploads/2009/01/green-jobs-green-collar-blue-collar.jpg;

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PJM Board – October 2010 ¢/KWh Average Retail Electricity Price – All Customers by State - 2009

18.00 20.00

¢/KWh

Relatively low percentage coal-fired generation

g y y

14.00 16.00

Relatively high percentage coal-fired generation

10.00 12.00 6.00 8.00 2.00 4.00 Page 11 0.00 Data: Energy Information Administration, 826 database

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PJM Board – October 2010

(kWh/person)

Electricity Use Per Person (KWh) by State and US: 2007

25000 30000

y ( ) y

20000 15000 10000 5000 Page 12 WY KY DC AL WV ND SC LA TN IN AR MS MT NE ID OK IA NC MO VA KS GA TX OH NV DE SD WA MN OR WI FL US PA AZ MD IL NM MI CO UT CT NJ VT AK ME MA NH HI NY RI CA

Data: Energy Information Administration, State Energy Data System (most recent annual data available as of 3‐12‐10)

Susan Tierney, Analysis Group, stierney@analysisgroup.com, 4-2010

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PJM Board – October 2010

25

Btu (1000s) per GDP Dollars

20 25

Total Energy Consumed Per Dollar of Real GDP - 2007

15 20 10 15 5 10 5 Page 13 LA AK ND WV MS MT KY AL OK AR IN SC TX KS NM ID ME IA TN NE OH MO SD GA WI UT MI PA US MN NC VA WA IL OR VT FL CO NV AZ NJ HI MD NH DE RI CA MA CT NY DC

Data: Energy Information Administration, State Energy Data System (most recent annual data available as

Susan Tierney, Analysis Group, stierney@analysisgroup.com, 4-2010

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PJM Board – October 2010

#3 –

Natural gas: Natural gas: a sure-bet game changer or changer, or something else?

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http://www.consumerenergyreport.com/wp-content/uploads/2010/01/fracking-production1.gif

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PJM Board – October 2010

#4 –

EPA’s upcoming regulations: The next big e e t b g event?

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PJM Board – October 2010

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PJM Board – October 2010

Coal capacity by emission control

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PJM Board – October 2010

Small coal plant (by vintage and controls) (<300 MW)

Page 18 Credit Suisse, “A Thought: CATF is First Step in Changing the Coal Fleet,” July 7, 2010

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PJM Board – October 2010

Complying with EPA regulations: Two issues: Two issues: Retirements R t fit Implications for:

  • Markets

Retrofits Many tools

  • reliability
  • economic activity
  • public health

Federal State public health

  • energy transformation

Industry actors Delay in not helpful

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y p

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PJM Board – October 2010

Providing Relief in Extreme Cases: Providing Relief in Extreme Cases: Statutory, Regulatory, and Market Safeguards

Agency Source of Authority / Instrument of Implementation Measure – Examples Implementation Regional Wholesale Electricity Markets (e.g: PJM, ISO-NE, etc.) Enforcement of Market Rules, Reliability- Must-Run (RMR) agreements, Forward Capacity Markets, etc. RMR agreements allow units to operate only to ensure reliability while minimizing adverse environmental impacts. Forward capacity markets provide a mechanism to signal the need for new capacity additions Rapid-response planning initiatives to address any apparent reliability issues. State Public Utility Commissions Regulatory oversight of utilities Adopt ratemaking policies that encourage system reliability and environmental goals including ones that address utilities’ financial disincenti es here EE and DR programs lo er financial disincentives where EE and DR programs lower utility revenues. Supervision to assure prudent response to environmental requirements – looking at various options (retirements, equipment additions, off-system purchases, reserve sharing, etc.) U.S. Department of Energy Section 202(c) of the Federal Power Act Override CAA-derived control requirements in limited i emergency circumstances U.S. Environmental Protection Agency Cap-and-trade based regulations Section 112(i)(3)(B) of the CAA Emissions trading mechanisms enable greater compliance flexibility to manage potential reliability concerns Extend deadlines for utility MACT rule where necessary to maintain electric system reliability Page 20 U.S. President Section 112(i)(4) of the CAA Extend deadlines for utility MACT rule where necessary to maintain electric system reliability MJ Bradley, S Tierney, P Hibbard, C Van Atten, August 2010

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PJM Board – October 2010

#5 –

Green technologies technologies, clean fuels, smart grids: Will we put our money where

  • ur mouth is?

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  • ur mouth is?
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PJM Board – October 2010

#6 – Prices (part 1)

Electricity prices: What’s the “new normal”? normal”?

  • low commodity costs?
  • higher delivery costs?

higher delivery costs?

  • net effects?

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http://1.bp.blogspot.com/_XQdBajgEN60/Sc_l7AvTAqI/AAAAAAAAAx8/aRqdr2v08VA/s400/Elect ricity+Prices+History.jpg

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PJM Board – October 2010

#7 – Transmission….

What about transmission: What, when, where, why, how…?

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PJM Board – October 2010

What we want from transmission……

Goals relating directly to the electric system Goals relating to national interests (e.g., domestic energy resource development, ad anced technolog advanced technology development and deployment) Goals relating to other

Electricity is Electricity has strategic

Goals relating to other external systems (e.g., local economic development)

a service has strategic attributes

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PJM Board – October 2010

#8 –

Other Other Infrastructure,

  • ld and new?
  • ld and new?

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http://rempower.com/blog/wp-content/uploads/2008/12/aging%20infrastructure.jpg

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PJM Board – October 2010

#9 –

Prices – Part 2 – R t d i Rate design

Page 26 NERC, Long-Term Reliability Assessment, 2009, Figure 7

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PJM Board – October 2010

#10 –

Competitive Competitive markets: What do they What do they look like this d d ? decade?

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PJM Board – October 2010

#11 –

Climate issues: F th t For the moment, focus on adaptation issues

Assessing adaptation to climate change – with implications for energy

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change with implications for energy

“Climate Change in the Northeast,” A Report of the Northeast Climate Impacts Assessment, October 2006.

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PJM Board – October 2010

Natural Systems and

ill t ti ill t ti

The Energy Systems – illustrative

Water supply

F il F l

illustrative illustrative

Fuel inputs energy transformation delivery use Fossil Fuel Extraction Fuel Vehicles Retail Fuel Transport Fuel Transport

Water supply Drought

Fuel Fossil Fuel Extraction Fuel Transport Vehicles Retail Fuel Transport Refining, Processing Thermal Power- Vehicles

P

Air quality Temperature

P

Refining, Processing Thermal Power Vehicles Production Renewable Fuels Production Non- Thermal

Power

Transmission

A li Industries

Temperature (air, water) Solar radiation

A li

Power

Transmission

Industries Non- Thermal Production

  • Solar
  • Biomass
  • Wind

Thermal Power Production Buildings Power Distribution Appliances

Solar radiation Wind

Appliances Buildings Power Distribution Thermal Power Production Wind

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  • Hydro

Erratic, intense storms

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PJM Board – October 2010

Electric Transmission System Damage Electric Transmission System Damage

Page 30 http://www.chinadaily.com.cn/english/doc/2005-08/30/xin_000802300906798107585.jpg

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PJM Board – October 2010

Thermal and non-thermal power production – Thermal and non-thermal power production – water for supply, cooling

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U.S. Climate Change Science Program, Effect of Climate Change on Energy Production and Use in the United States: Synthesis and Assessment Product 4.5, Public Comment Draft, November 30, 2006 (“USCCSP Energy”).

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PJM Board – October 2010

Energy Systems: Limited Understanding of Energy Systems: Limited Understanding of Potential Vulnerabilities

Droughts Snow pack Frequency & intensity

E.g., regional implications for:

Energy facilities in coastal areas Hydroelectric supplies

The geography of

q y y

  • f storms

Invasive species Heating and cooling Hydroelectric supplies Transmission capacity Biomass production (e.g.,

forests switchgrass

energy production & use matters

degree days

Sea level rise # of days in summer

forests, switchgrass

Air conditioning demand and technology “Peakiness” of power production

L f d ti it heat waves

Wind resources Solar radiation Loss of power production capacity Availability and location of wind, solar

resources Reliabilit of regionall concentrated facilities

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Reliability of regionally concentrated facilities

(e.g., Gulf oil & gas)

Cost-effectiveness of technology options

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PJM Board – October 2010

#12 –

Big Gorilla…. Gorilla….

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PJM Board – October 2010

Implications for energy p gy subsidies, programmatic support, R&D funding….. I li ti f Implications for new sources of federal funds

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http://www.carenvy.ca/wp-content/uploads/2009/03/korn-followtheleader-front.jpg

federal funds……

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PJM Board – October 2010

Susan Tierney Analysis Group 111 Huntington Avenue, 10th Floor 111 Huntington Avenue, 10 Floor Boston, MA 20199 617-425-8114 stierney@analysisgroup com stierney@analysisgroup.com

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