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The Math Does Not Lie: Factoring the Future of the U.S. Electric Power Industry
Greg Aliff, Deloitte LLP Marlene Motyka, Deloitte Financial Advisory Services LLP Branko Terzic, Deloitte Services LP

January 16, 2013

Agenda
Objectives of Paper Planning for the Near Term The Math The Numerator The Denominator The Math at Work Electricity Sector’s Response

Copyright © 2013 Deloitte Development LLC. All rights reserved.

Objectives of Paper

Two emerging trends Steeply rising costs Moderating electricity consumption 4 Copyright © 2013 Deloitte Development LLC.Objective To explore what is changing in the electric industry and introduce a straightforward approach to examine the future through a simple framework using a mathematical equation. . All rights reserved.

S. . electricity consumption will change between 2012 and 2020? It will: • • • • • Increase at an average annual rate of 2% or more Increase at an average annual rate of less than 2% Remain essentially the same Decrease at an average annual rate of less than 2% Decrease at an average annual rate of 2% or more Copyright © 2013 Deloitte Development LLC. All rights reserved.Poll question #1 How do you think U.

Planning for the Near Term .

Summer nuclear plants are expected to take 9 to 10 years to complete 7 Copyright © 2013 Deloitte Development LLC.C. . W. took 5 years to come online • Georgia Power’s Vogtle and SCANA’s V.2020 Eight years is not far away: • Longview Power’s 695 MW (net) supercritical pulverized coal-fired power plant in Maidsville.V.Planning for the Near Term .. All rights reserved. completed recently.

many unknown factors will impact the U. they can focus on the variables and analyze them in relation to each other − The math does not lie. All rights reserved. economy • Coal.S. 8 Copyright © 2013 Deloitte Development LLC. if constituents use a simple mathematical equation as the framework.S. .Planning for the Near Term During eight short years. such as: • The global and U. electric power industry. natural gas and nuclear fuel prices • Federal and state policy and regulation • Technological advances • Changing customer behaviors and demands Despite uncertainty.

The Math .

All rights reserved.The future can be evaluated with a simple mathematical equation Cost of electricity sold ($) Cost per kWh sold ($/kWh) Number of kilowatt hours (kWh) consumed 10 Copyright © 2013 Deloitte Development LLC. .

The Denominator: kWh Consumed Consumption • Changes in weather • Changes in the economy • New sources of electricity demand • Technological advances in energy efficiency • Customer attitudes and behaviors .Variables to Include in the Equation The Numerator: Cost of Electricity Sold Capital and Operations Costs Capital costs • Generation. transmission and distribution additions • Environmental regulation compliance • Renewable portfolio standards • Nuclear safety regulations • Cost of capital/interest rates Operations costs • Cost of fuel • Incremental operations costs of environmental compliance retrofits • New operating technologies 11 Copyright © 2013 Deloitte Development LLC. All rights reserved.

and operating costs) Compliance with Renewable Portfolio Standards (RPS).Poll question #2 Which of the following variables do you think will have the greatest impact on the electricity sector’s costs from 20122020? • • • • Investment in generation. . (associated depreciation and interest costs) Smart Grid Deployment (associated depreciation and interest costs) Copyright © 2013 Deloitte Development LLC. All rights reserved. interest. transmission. and distribution (associated depreciation and interest costs) Environmental compliance costs (associated depreciation.

The Numerator .

.1 Generation Investment Grid reliability and renewables integration • From $100-$120 billion in new transmission assets between 2012 and 2020. Pfeifenberger and Delphine Hou. The Future of the Electric Grid.6 billion investment in new smart meters alone through 2015.S. and Canada.S. 1 Estimate Copyright © 2013 Deloitte Development LLC. overnight capital costs.Working Group for Investment in Reliable and Economic Electric Systems.2 Transmission Investment Changing infrastructure and smart meter installations • $4. Dec 2011 and estimated 29 million smart meters to be deployed from mid 2012 through 2015 (IEE – 14 Utility-Scale Smart Meter Deployments. 3 Based on $150-$400 per meter deployment cost. 2 Based on The Brattle Group. prepared for WIRES .The Numerator − Capital Costs Aging fleet and early retirements • Over $150 billion in new generation capacity from 2012-2020.4 to $11. and lead time for various technologies. Employment and Economic Benefits of Transmission Infrastructure Investment in the U. MIT. All rights reserved. Energy Information Administration’s (EIA) forecasts for new additional capacity. May 2012). Johannes P. Plans& Proposals. May 2011.3 Distribution Investment based on U.

All rights reserved.estimated incremental compliance Environmental Compliance cost of nearly $55 billion through 20201 Investment Twenty-nine states have set mandatory Renewable Portfolio Standards (RPS) and eight states set voluntary goals • U. 2 U. Regulatory Impact Analysis for the Final Mercury and Air Toxics Standards. . Partnership for Renewable Energy Finance “Ramping Up Renewables: Leveraging State RPS Programs Deloitte Development LLC.62 GW of renewable capacity annually between 2012 and 2020 to meet RPS2 Renewables Capacity Investment New safety regulations required by the Nuclear Regulatory Commission (NRC) post-Fukushima will result in new compliance-related investment at nuclear plants Nuclear Safety Investment 1 15 U. December 2011.S. state and local environmental regulations • EPA’s Mercury and Air Toxics Standards (MATS) . needs to add 3.The Numerator − Capital Costs Evolving federal.S.S. Environmental Protection Agency. p 3-14 Copyright © 2013 and Uncertain Federal Support” 2012.

2004-2012 (through August) 6 5 Interest Rate (%) 4 3 2 1 0 Average: 4.The Numerator − Capital Costs Future interest rates remain uncertain but are likely to increase from the current record low Interest rate on a 10-year T.8% Source: U. All rights reserved.1 % Average: 1.S. .Note. Department of the Treasury 16 Copyright © 2013 Deloitte Development LLC.3 % Average: 3.

“Incorporating Environmental Costs in Electric Rates. Ethylene – Good Today. Goldman Sachs Chemical Intensity Day. Source: Jim Lazar and David Farnsworth. . p. Better Tomorrow – A Year Later. October 2011. Lyondellbasell. All rights reserved.S.15 2 1Tim 17 Copyright © 2013 Deloitte Development LLC.” Regulatory Assistance Project (RAP). shale production economical Fuel for Electric Generation Recent technological advancements such as smart grid and electricity storage could decrease operations costs New Technologies Emissions retrofits’ can increase electric plant operating costs other than fuel by over 50 percent2 Emissions Retrofits Roberts.50/MMBtu1 to make much of U.The Numerator − Operations Costs Natural gas price needs to rise to ~$4. March 2012 Based on a sample 300 MW coal fired power plant and investment costs converted to $/kWh using a 15 percent fixed charge rate and 60 percent capacity factor.

The Denominator .

. All rights reserved. Economy • “Permanent demand destruction”? • Recovery uncertain? • Changing electricity consumption trends by businesses and consumers Increases kWh consumed 19 Uncertain Impact on kWh consumed Decreases kWh consumed Copyright © 2013 Deloitte Development LLC.S. manufacturing • Advances in energy efficiency New sources of demand Energy Efficiency • Customers will be able to “do the same Technology with less” kWh consumed Customer Behavior U.Kilowatt hours consumed • Increased electronics • Computer server farms • Electric vehicles (EV) • Water management • Resurgence of U.The Denominator .S.

 adjusting the thermostat in the summer and winter (61 percent). • While interest in purchasing smart energy technologies is relatively low. and  changing over to compact fluorescent lights (60 percent). . it is noticeably growing. All rights reserved. with younger adults clearly more receptive to making the investment * Deloitte Development LLC. • The primary steps taken were behavioral in nature –  turning off lights (78 percent).200 demographically-balanced household decision makers • 83 percent of consumers reported they took steps to reduce their electricity consumption – up from 68 percent in the 2011 Study. May 2012 20 Copyright © 2013 Deloitte Development LLC. Deloitte reSources 2012 Studies: Insights into Corporate Energy Management Trends and Insights into Emerging Trends of Energy Customers.  shutting down electronics when not in use (65 percent).Consumer Resourcefulness Extends to Electricity Findings of Deloitte reSources 2012 Study* of over 2.

* Deloitte Development LLC. • 35 percent of businesses report some level of self-generation of electricity with another 17 percent planning to do so in the future. Deloitte reSources 2012 Studies: Insights into Corporate Energy Management Trends and Insights into Emerging Trends of Energy Customers. May 2012 21 Copyright © 2013 Deloitte Development LLC. • Of these companies.Businesses’ commitment to energy management practices intensifies Findings of Deloitte’s reSources 2012 Study* of business activities of over 600 companies with greater than 250 employees: • 90 percent of U. . 45 percent in 2011. • The average target for reduction in electricity consumption is 23 percent over approximately a 3.S. businesses have set goals for managing electricity usage with 49 percent having reported formal goals vs.5 year period. 85 percent cite reducing electricity costs as essential to staying competitive – up from 76 percent in 2011. All rights reserved.

. All rights reserved.3 percent .e.21 percent by 2012 .37.20 percent by 2020 Source: Department of Energy and Department of Defense 22 Copyright © 2013 Deloitte Development LLC. a total of 30% by the end of fiscal year 2015 The Department of Defense (DOD) Energy Reduction Targets Even Greater: • Annual energy intensity decrease in DOD facilities using a baseline year of 2003 . i.12 percent in 2012 .5 percent by 2020 • Renewables as a percentage of energy consumption.Federal Government Impacts on Consumption Federal Facilities Energy Reduction Targets: • Annual energy intensity decrease by 2015 using 2003 as a baseline year .

. which one have you taken? • • • • • Turning off lights Shutting down electronics when not in use Adjusting the thermostat in the summer and winter Changing over to compact fluorescent lights More than one of the above Copyright © 2013 Deloitte Development LLC.Poll question #3 As a consumer. have you taken steps to reduce your energy consumption? If so. All rights reserved.

The Math at Work .

S.The Math in Action: The numerator is going up and the denominator may well be going down over time for the first time in the history of the U. . All rights reserved. electric industry 25 Copyright © 2013 Deloitte Development LLC.

economically priced technologies designed to enable greater consumer and business control over their electricity consumption? Since variables affecting results will vary from company to company. .The New Math Suggests a Dilemma • Will rising electricity costs and prices lead to further decreases in the denominator and even higher costs per kWh? • Will the price to individual consumers invoke even greater end-user investment in energy efficiency? • Will there be a wave of new. All rights reserved. every company must do its own math 26 Copyright © 2013 Deloitte Development LLC.

The Electricity Sector’s Response .

. All rights reserved. acquisitions.Avenues to Evaluate • Identify and reduce/defer controllable costs • Consider mergers. or strategic dispositions where significant synergy savings can be achieved Reduce numerator Increase electricity demand • Electric vehicles (EV) • Computer servers/data centers Grow denominator Identify new regulated revenue streams • Utility’s value proposition to on-site generation • Opportunities in residential and business electricity generation or storage • Incremental value for EV beyond electricity? • Opportunities in related areas such a water scarcity 28 Copyright © 2013 Deloitte Development LLC.

All rights reserved.Poll question #4 Which potential new revenue stream holds the most promise for the electricity sector? • • • • On-site generation Residential and business electricity generation or storage Electric vehicles Water scarcity (e. . desalination) Copyright © 2013 Deloitte Development LLC.g.

Examples of recent changes from the traditional model include: • Deregulation of generation • Decoupling of electric rates • Renewable portfolio standards • Demand response programs 30 Copyright © 2013 Deloitte Development LLC. All rights reserved.Another Avenue: Change the regulatory paradigm Evaluate changes to the current regulatory paradigm with policy makers and regulators against the backdrop of the New Math to arrive at mutually acceptable solutions. .

Explore Alternative Business Models Changing global marketplace and energy landscape suggests a re-evaluation of future business strategies Invest in new unregulated revenue streams • Diversify the company’s overall marketplace risk Evaluate opportunities for new products and services • Bundle electricity services with other services. . All rights reserved. regulated or unregulated Re-consider business structures: • Consider joint ventures and public-private partnerships Ride the technology wave • Customer acceptance of new technologies creates new electricity demand. Best Buy’s Geek Squad Expansion 31 Copyright © 2013 Deloitte Development LLC. e.g.

Navigating the Future The U. The time for true innovation in the electricity sector may have arrived 32 Copyright © 2013 Deloitte Development LLC.S. but it could be navigating uncharted waters in the form of significantly rising costs to produce and deliver a unit of product in the face of consistently flat or declining electricity consumption. All rights reserved. . electric power industry has weathered previous storms.

Question and Answer .

Join us February 20 at 2 PM ET as our Energy & Resources series presents: ERM Governance – Board Oversight of Risk Management Programs at Energy Companies .

Copyright © 2013 Deloitte Development LLC. Click the CPE icon in the dock at the bottom of your screen. .Eligible viewers may now download CPE certificates. All rights reserved.

.com Copyright © 2013 Deloitte Development LLC.com Marlene Motyka mmotyka@deloitte.Contact info Branko Terzic bterzic@deloitte.com Greg Aliff galiff@deloitte. All rights reserved.

Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. All rights reserved. tax. by means of this presentation. or other professional advice or services. business. legal. financial. you should consult a qualified professional advisor. investment. This presentation is not a substitute for such professional advice or services. Copyright © 2013 Deloitte Development LLC.This presentation contains general information only and Deloitte is not. . rendering accounting. nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business.

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