Published on March 17, 2014
Copyright © 2014 ScottMadden, Inc. All rights reserved. Report _2014-02_v1 Changing Resources and Implications for Transmission Transmission Summit 2014 March 12, 2014
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Unique perspective built on 30 years of energy experience Solutions for clean and renewables sources of energy, smart energy management, and sustainability Who We Are 1 ScottMadden Overview ScottMadden is a management consulting firm with more than 30 years of deep, hands-on experience. We deliver a broad array of consulting services—from strategic planning through implementation—across many industries, business units, and functions. WHAT IT TAKES W E D O TO GET IT DONE R I G H T More than 2,400 projects More than 300 clients including 20 of the top 20 energy utilities Every business unit, every function ENERGY More than 1,100 projects Clients range from entertainment to energy to high tech Unmatched experience with more clients and more solutions CORPORATE& SHAREDSERVICES CLEANTECH& SUSTAINABILITY
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Introduction ￭ Demand is declining; it makes all other issues harder to manage ￭ The generation mix is changing—trends in these resources matter and it is far from clear how it will all shake out ￭ Renewables are here to stay ￭ Distributed generation (DG) is a game changer, but not everywhere and not immediately 2
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Declining Demand Growth An Important Backdrop… 3 The Energy Information Administration (EIA) projects demand growth in the United States to remain below 1% for the foreseeable future According to NERC, the 10-year annual growth rate for on-peak summer demand is expected to fall to an all time low of 1.23% for 2014–2023 The proliferation of demand side management and energy efficiency, coupled with expanding customer-side supply alternatives, will likely suppress demand growth for the foreseeable future U.S. Demand Growth, 1950–2040 Source: EIA, NERC LTRA 2013
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Sources of Electricity - 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 GigawattHours(millionkilowatthours) Electricity Net Generation by Fuel Type from All Sectors (1949–2012) Coal Petroleum Natural Gas Other Gases Nuclear Hydroelectric Pumped Storage Hydroelectric Power Wood Waste Geothermal Solar/PV Wind Generation 4 Notes: Gigawatt hours exclude pumped storage and any other negative values. *Includes electric power, commercial, and industrial sectors Source: EIA Annual Energy Review, Table 7.2a
Copyright © 2014 by ScottMadden, Inc. All rights reserved. The Fuel Mix is Changing… 5 Coal 29% Petroleum 5% Natural Gas 42% Nuclear 9% Hydro 7% Wind 5% Solar 0% Wood 1% Pumped Storage 2% 2012 Nameplate Capacity by Source* (1,167,995 MW) Coal 42% Geother- mal 1% Hydro 9% Natural Gas 20% Nuclear 14% Petroleum 11% Pumped Storage 2% Solar 0% Wind 0% Wood 1% 1990 Nameplate Capacity by Source* (783,012 MW) Notes: *Includes electric power, commercial, and industrial sectors. Other fuels not labeled are less than 1%. Solar includes PV and Thermal. Source: EIA 860 Generation
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Significant Coal Plant Retirements Will Occur Generation – Coal 6 Significant coal retirements are underway: environmental regulations are increasing pressure on coal-fired generators to invest in new air-quality controls or to retire (before year-end 2015) This capacity will largely be offset by new gas-fired generation Announced Coal-Fired Plant Retirements (as of Sept 2013) Sources: SNL Financial; ScottMadden analysis
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Coal Retirement Estimates 36 33-38* 39* 49 35-50 62 75 59-77 ~100† Reuters/Factbox Barclays BMO Capital Markets EIA Standard & Poor's Black & Veatch Sanford Bernstein Brattle Union of Concerned Scientists Selected Projections of Environmental-Driven Coal Plant Retirements (in GWs) Generation – Coal 7 The timing and magnitude of coal retirements range from 33 to > 100 GWs, depending on the source and timing. Notes: † 59 GWs “ripe for retirement” in addition to estimated 41 GWs announced; *includes ~9 GWs retired in 2012 Sources: Industry news; SNL Financial; corporate announcements; ScottMadden analysis Timing 2032 2033 2020 2016 2040 2020 2015 2015
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Natural Gas Prices: Making a Turn in 2015? Generation – Natural Gas 8 60-65 0.5 0.7 1 1.5 3.5 4 6-10 0 5 10 15 20 25 30 Current Primary Metals Petro- chemicals Ammonia/ Methanol Gas-to- Liquids Mexican Exports Natural Gas-Fired Generation LNG Exports BCF/Day Potential U.S. Gas Demand Growth through 2020 (BCF/Day) 90 85 80 75 70 65 60 Various Forecasts Show Still Low Gas Prices for Years, but Demand May Push Them up after 2014 Projected Natural Gas Price ($/MMBTU) 2013 2014 2015 2016 2017 2018 BMO 3.85 4.00 Deutsche Bank 3.71 4.25 4.50 4.75 Morgan Stanley 3.65 3.50 4.00 4.25 4.70 Credit Suisse 3.70 3.90 4.20 4.40 4.50 Macquarie 3.69 3.64 4.18 4.66 5.00 5.25 Sources: Investment analyst reports; Energy Intelligence Natural Gas Week; SNL Financial; Industry News Source: Macquarie ￭ With the advance of shale gas, prices in the natural gas market have shifted from demand-clearing to supply-clearing ￭ However, many expect a step change in 2015–2016 as demand from power generation and LNG exports picks up ￭ Continued strong demand is expected from industrial customers including petrochemicals ￭ Shifts in basis differentials continue as well • Observers say that Henry Hub may be waning as the benchmark for eastern U.S. gas prices for power generation and end use • Increasingly, supply/demand dynamics are reversing, with northeast U.S. supply and Gulf Coast demand ￭ Production growth is expected to expand in 2014 despite still-low prices
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Baseload Generation’s Natural Gas Challenges 9 Historically, the difference between marginal-operating costs of generation technologies produced a step-like supply curve The shale gas revolution has decreased the marginal cost of natural gas plants, thereby moving natural gas down the supply curve and eliminating the well-defined step in marginal cost between coal and natural gas plants Notes: MISO load data reflects 2013 conditions; natural gas data reflects Henry Hub spot prices Sources: Ventyx;; EIA; ScottMadden research 0 20 40 60 0 25,000 50,000 75,000 100,000 $/MWh Cumulative Capacity (MW) 2007 Supply Curve 2013 Supply Curve Minimum Load 5th Percentile Average Load 95th Percentile Maximum Load Midcontinent ISO 2007 and 2013 Supply Curves and 2013 Load at Various Durations Combined cycle turbine enters supply curve Generation – Natural Gas
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Electric and Gas Convergence – Regional Differences Generation – Natural Gas 10 Complicates solution Facilitates solution Southeast Coal retirements; gas-fired replacements Modest winter gas demand Bilateral market; traditional cost- based regulation of generation Shale supply in adjacent regions Midwest Massive anticipated gas-fired replacements High winter gas demand; large gas demand centers Bid-based market Shale supply in adjacent regions Problem being worked New England End-of-the-(gas) line; history of gas issues High winter gas demand; large gas demand centers Nearby sources declining Constrained interfaces – gas and power Bid-based market LNG import capability Problem being worked New York End-of-the-(gas) line; delivery capacity constraints Bid-based market NYISO, NYPSC engaged in various activities to assess gas/electric interactions, gas infrastructure needs Abundant shale supply Regulatory/legal uncertainty on fracking
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Electric and Gas Convergence – Regional Differences (Cont’d) Generation – Natural Gas 11 Desert Southwest Heavy reliance upon gas-fired generation, with more on horizon California Large intermittent resource build-out, aggressive targets Heavy reliance upon gas-fired generation “Peaky,” low cap-factor gas needs for renewable capacity backstop Available gas supply in West Generally more temperate Large gas demand centers Bid-based market Generator, gas transmission communication taking place Northwest/Mountain West Large intermittent resource build-out Significant hydro resources; difference between capacity & energy Significant coal-fired capacity; retirements not immediate Available Rockies, Canadian supply Largely traditional (non-bid-based) market Recent pipeline expansions Working group established for Northwest Complicates solution Facilitates solution Texas Coal retirements; gas-fired replacements Already highly dependent on gas-fired generation Modest winter gas demand Bid-based market Ample conventional and unconventional supply Separate interconnection
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Current Capacity and Future Development Hydro 52%Wind 40% Solar 2% Geothermal 2% Biomass 4% Renewable Capacity 2012 (150,336 MW) Generation – Renewables 12 0 10,000 20,000 30,000 40,000 50,000 MWs Announced Early Development Advanced Development Construction Begun U.S. Total Renewable Development: 74,844 MW (2014-2026) Sources: EIA; SNL Financial; ScottMadden analysis
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Spotlight on Wind and Negative Prices Generation – Renewables 13 0% 5% 10% 15% ERCOT West MISO Minnesota MISO Illinois PJM N. Illinois MISO Michigan 2006 2007 2008 2009 2010 2011 2012 2013 Real-Time Hourly Market Percent of Year with Negative Prices “Federal incentives for renewable energy…have distorted the competitive wholesale market in ERCOT…With the federal production tax credit, wind resources can actually bid negative prices into the market and still make a profit. We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed…The market distortions caused by renewable energy incentives are one of the primary causes, I believe, of our current resource adequacy issue…[T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.” — PUC of Texas Chairman Donna Nelson testifying before the Texas Senate Natural Resources Subcommittee (Sept. 2012) Negative Real-Time Hourly Prices: During periods of significant wind and low demand, wind facilities can profitably operate as long as negative prices are offset by the value of the federal production tax credit Declining Frequency of Negative Prices: After peaking in the 2009–2010 timeframe, the frequency of negative real-time hourly prices declined with changes to market structures and the addition of transmission connecting wind resources and load centers Sources: Ventyx; The NorthBridge Group; ScottMadden research
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Retirements – Actual and Threatened Generation – Nuclear 14 SONGS 2,150 MW Byron 2,346 MW Crystal River *1,052 MW Kewaunee 574 MW Clinton 1,078 MW Quad Cities 1,819 MW Notes: *1,052 includes terminated 175 MW rerate Source: SNL Energy Vermont Yankee 604 MW Indian Point 2,075 MW
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Distributed Generation Today ￭ There are several factors that ScottMadden believes will lead to pressure on the traditional utility business model: • Current cost of electricity and the relative price of alternatives • Net metering policies • Interconnection policies • Photovoltaic (PV) power purchase agreements (PPAs) • Third-party carve-outs for DG ￭ These are not emerging uniformly across the country Distributed Resources 15 State Ranking of Residential Solar Installations Rank State MW (dc) Thru Q3 2013 % of U.S. Total 1 California 832.8 48.2% 2 Arizona 180.9 10.2% 3 New Jersey 147.2 7.9% 4 Hawaii 136.3 7.9% 5 Colorado 78.8 4.4% As of Q3, 2013 residential solar installations reached 1,745 MW, with 78% in five states. Sources: GTM Research, SEIA
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Prospects for Distributed Resources Distributed Resources 16 Sources: ScottMadden analysis; inputs from DSIRE, IREC, American Council for An Energy-Efficient Economy; U.S. EIA; and other sources Where jurisdictions are “better” on more factors (e.g., easier interconnection; third-party solar PPAs permitted; net metering; lower differential between utility-supplied power and installed solar PV), they scored higher on the map The states that score highest are most likely to a significant influx of distributed resources (DR) 0–2 3–5 6–8 9–11 12–14 Map Score Better
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Long-Term Drivers for Distributed Generation Driver 2013 2023 Notes Renewable Portfolio Standards Early compliance and slow growth in retail sales will limit impact of renewable portfolio standards in the future Financial Incentives Federal investment tax credit (ITC) for solar will decrease from 30% to 10% in 2017; ITC for geothermal, small wind, and some other technologies set to expire State and utility incentives are declining as technology costs continue to decline Installed Costs Installed costs continue to decline as the solar industry reduces soft costs (e.g., permitting, customer acquisition, etc.) Net Metering Net metering policies are being challenged as concerns over cross-subsidization between customers continue to grow Interconnection Interconnection policies are well-established and not expected to change dramatically Retail Electricity Prices Retail electricity prices continue to rise, creating a favorable environment for DG alternatives Utility Knowledge Utilities continue to gain operational experience integrating and managing DG resources on the grid Customer Preference Customers continue to express interest in programs or options that offer access to renewables at reasonable premiums or discounts to retail electricity rates Smart Grid/ Microgrids Advancements in distribution automation and a growing interest in microgrids will facilitate the implementation of DG Distributed Resources 17 Sources: EIA, GTM Research, Database of State Incentives for Renewable Energy, EEI Favorable drivers Neutral drivers Driver will hinder or slow growth
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Its Complicated… ￭ Shifts in the generation mix are occurring… • We will continue to see changes to baseload generation as natural gas replaces coal and nuclear • Renewables integration will remain a priority • Transmission will need to be built to accommodate these resources ￭ System planning is becoming more complicated • The types and sizes of generation resources are changing • Transmission planning will need to consider the availability of different types of resources • Location and timing will matter more and more as the system is assessed ￭ Operation of the grid will require more sophisticated visualization and tools • Visualization and coordination with myriad resources will become important in areas of high penetration of alternative resources • Utilities, RTOs, and ISOs will need to consider these resources as they manage the real- time environment What Do These Changes Mean for Transmission? 18 Transmission owners and operators are being pulled in multiple directions: manage large scale retirements, integrate utility-scale renewables, accommodate alternative resources…
Copyright © 2014 by ScottMadden, Inc. All rights reserved. Cristin Lyons Partner ScottMadden, Inc. 2626 Glenwood Avenue Suite 480 Raleigh, NC 27608 firstname.lastname@example.org O: 919-781-4191 M: 919-247-1031 19
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