Electricity Restructuring: A Fine Mess

1
Electricity Restructuring A Fine Mess

• Electricity markets are under stress due to
  higher fuel prices and the costs of new
  generation
• Legislative eruptions in a number of organized
  states IL, MD, VA, OH, and PA indicate
  problems in the wholesale markets
• What does Washington think? FERC feels the heat
  as Congress remains a sleeping giant

2
Electricity Markets are Under Stress

• Forward electricity market prices are much higher
  year-to-year in the beginning of a cycle that
  could last for years
• Natural gas prices are increasingly important to
  setting electricity prices in every region of the
  country
• The increasing cost of new construction will add
  to upward pressure on price as demand in most
  regions has caught-up with the last wave of
  natural gas generation investment between
  1995-2004

3
Fuel Prices to Remain Strong

• Electricity price increases resulting from high
  fuel prices
• Natural gas often determines prices at the margin
• While US gas production has increased in the past
  two years, the markets anticipate continuing high
  prices
• Gas generation will increase demand as the price
  of LNG will be bid-up due to global competition
  for supply

4
Forward Gas Prices Remain Strong
Source Forward gas prices are Nymex. Annual
average spot gas are Platts.
5
Increasing Coal Prices

• Coal is often on the margin in the Midwest and
  Southeast and plays a major role in setting
  average prices over time
• The price of Central Appalachian coal has doubled
  in the past year and forward markets suggest
  continued high prices for next three years
• The majority of Powder River Basin coal costs are
  for transportation, and railroads have the power
  when contracts are renewals

6
Coal Prices Increasing and Strong
Source Forward coal prices are Nymex. Coal Spot
Prices are Bloomberg.
7
New Generation/Increased Capital Costs

• Input costs for new plants have almost-doubled
  since 2003 including labor, copper, zinc,
  nickel, aluminum, iron, steel, cement
• We will pay more- not less- for the next new
  round of plant construction
• Major financial risks affect coal and nuclear
  plant construction
• Wind and new nuclear technologies are riskier
  than mature technologies

8
Estimated Cost ofNew Generation
Source Compiled by FERC Staff from various
sources. Cost estimates exclude carbon capture
and sequestration costs.
9
Carbon Pricing Is Affecting Investments

• Its likely Congress will put a price on carbon
  duringthe next presidency
• Without CCS, coal emits 4 times the carbon as
  natural gas combined cycle plants per MWH
• Uncertainty about when and how carbon policy is
  implemented has resulted in cancellation/postponem
  ent of 50 coal plants since Jan 2007 26 remain
  under construction
• However climate debate ends, coal and natural gas
  production costs will increase
• As long as carbon policy is unresolved, it will
  remain difficult to invest in coal plant

10
Back to the Future Natural Gas is the Near-term
Fuel of Choice

• Neither new coal nor nuclear units will supply
  new capacity for a decade
• Renewable sources are a growing share of total
  new generation but will remain relatively small
  sources to total need
• Demand response and energy efficiency will be
  important but wont eliminate the need for new
  capacity
• Natural gas will continue to be the leading fuel
  for at least the next five years Gas
  consumption for power increased 55 since 2000
  Estimates for a 70 increase by 2017

11
Net Natural Gas Generation by Region
(TWh)

• Region 2000 2007 Difference
• Northeast 66.3 103.9 37.6
• RFC 41.0 64.5 23.5
• SERC 86.9 150.5 63.6
• FRCC 42.0 96.7 54.7
• ERCOT 155.9 163.3 7.4
• Midwest 44.2 62.8 18.5
• WECC-Rockies and SW 28.1 77.6 49.5
• WECC-CA and NW 115.4 129.7 14.4

Source Derived from Energy Velocity
(differences due to rounding).
12
Capital Costs Increasing
Power Capital Costs Index (PCCI)
Source Cambridge Energy Research Associates.
71023-12
13
NERC Net Load Projections through 2016

• Region Total Difference (GW) Percent Change
• Northeast 9.7 17
• RFC 23.2 13
• SERC 28.2 14
• FRCC 7.1 15
• ERCOT 14.7 24
• Midwest 17.2 21
• WECC-Rockies and SW 7.6 25
• WECC-CA and NW 10.9 10
• Total 108.8 14

Source Derived from NERC 2007 Long Term
Reliability Assessment, Oct. 2007 and NERC data
request, June 2008.
14
The State of Electricity Restructuring

• Restructuring isnt going well no traditional
  states are considering restructuring
• States that restructured have had political
  eruptions that are not over
• High prices are not putting steel in the ground
  
• Congestion pricing, marginal cost pricing, and
  capacity charges are adding to residential
  customer bills

15
The RTO/ISO Structures

• Created by FERC following passage of the 1992
  Energy Policy Act
• RTOs are voluntary structures/ no statutory
  protection
• FERC is under pressure to get markets right
• GAO study this fall
• Public power and municipal utilities unhappy with
  RTOs

16
What is The Likely Outcome?

• You cant be something with nothing.
• Congress will have hearings/ the states will
  continue to press changes to wholesale markets
• FERC will have new leadership in January
• So long as commodity prices stay high, investment
  languishes, and the states agitate on high
  prices, sector uncertainty will persist