State of the Electric Industry: Challenges and Opportunities

1
State of the Electric Industry Challenges and
Opportunities

• Grace D. Soderberg
• Director, Energy Supply
• Edison Electric Institute
• June 22, 2009

2
Americas Challenges

• The recession has resulted in dampened demand,
  but demand is forecast to rebound and grow into
  the future
• Commodity, equipment, and labor costs are down,
  making it an ideal time to build and prepare for
  future demand increases
• The utility industry is at the beginning of a
  major investment cycle
• Driven by new technology, demand growth,
  efficiency and environmental CAPEX
• Addressing climate change and new priorities
• Wall Street Turmoil access to capital markets
  and increasing cost of capital for needed utility
  investments
• As one of the most capital-intensive industries,
  reduced access to capital markets at higher
  costs, means that enhanced liquidity and
  financial flexibility is important

3
Long-Term Projections of Growth in Electric Sales
(Reduced but Still Upward Sloping)
1.6 Annual
Source U.S. Department of Energy Energy
Information Administration (EIA) Annual Energy
Outlook (AEO) 2006-2009
4
Industry Capital Expenditures
( Billions)
p projected
Source SNL Financial, company reports and EEI
Finance Dept.
5
Long-term Decline in Credit Quality1992 vs. 2008
4/16/1992
12/31/2008
6
Industry Capital Expenditures

• Industry committed to reliability
• - making needed investments in generation,
  transmission, smart grid/
• distribution the environment
• Financial crisis initially brought sharp
  revisions for 2009
• Multi-year trend of soaring construction
  /materials costs reversed in Q3 2008
• Increased spending expected to continue into the
  future
• Total CAPEX for 2010-2030 1.5 trillion
• Excludes impact from climate legislation

U.S. Shareholder-Owned Electric Utilities
The Brattle Group, preliminary findings from
The Edison Foundation presentation titled
Transforming Americas Power Industry.
Represents the entire Power sector.
7
Industry Faces Difficult Decisions
To Invest or Not to Invest?
Defer or cancel infrastructure projects to
enhance current liquidity position
Electric reliability could be impacted when
economy and demand rebound
Opportunities with sharply declining commodity
and input costs
Higher financing costs
8
President Obamas Stimulus Vision

• A rapid, aggressive response to the financial
  crisis using all the tools we have
• Fight for fair trade
• Invest in a clean energy economy and create 5
  million new green jobs
• Create new job training programs for clean
  technologies
• Boost the renewable energy sector and create new
  jobs
• Invest in the sciences
• Create a national network of public-private
  business incubators
• Electricity sector
• Energy efficiency
• Smart Grid
• Transmission
• Electric Drive Transportation

9
American Recovery and Reinvestment Act (ARRA) -
Energy Stimulus Funding
Total 78 Billion
10
President Obamas Energy / Environmental Views
Renewable Portfolio Standards
Climate Change
25 by 2025
80 reduction by 2050
Smart Grid
Energy Efficiency
Increased Government Support
Overhaul of Federal Efficiency Codes
11
Climate Policy in the 111th Congress

• HR 2454 passed by House Energy Commerce
  Committee
• 3 below 2005 levels by 2012 17 below by 2020
• Allocates percentage of allowances
• Allows use of offsets
• Has Strategic Reserve but no price collar or
  safety valve
• Includes combined renewable energy/efficiency
  standard
• 20 of generation by 2020 (15 renewable, 5
  efficiency)
• Performance standards for new coal plants

12
Climate Policy in the 111th Congress

• Electricity Sector 35 of all allowances
• Exclusively for the benefit of customers
• 30 to Local Distribution Companies (LDCs)
• 50 based on emissions, including purchased power
• 50 based on retail sales
• 5 to merchant coal generators and generators
  with long-term contracts (PPAs)
• Up to 3.5 for merchant coal
• PPAs get allowances equal to carbon costs

13
Climate Policy in the 111th Congress

• Next Steps
• As many as 8 other committees may take it up
  (Agriculture, Ways Means, etc.)
• Waxman wants committee process done by July 4
• House Floor in July?
• Senate Action
• Start with HR 2454 or own bill?
• ENR and EPW committees
• Sen. Boxer formed working groups to address key
  issues
• Current focus on RES and energy, then on
  transmission and climate?

14
Financial Impacts

• EPA
• Household spending would drop by about 140/year
  by 2020 gas prices would increase 33
  cents/gallon by 2030
• CRAI (for National Black Chamber of Commerce)
• By 2015 730/year less in household purchasing
  power, electricity rates would increase 7.3 by
  2015 gas prices by 12 cents/gallon
• Heritage Foundation
• By 2035, electricity rates would increase by 90,
  gas prices by 74, household energy bills by
  1,500
• Depends on Assumptions

15
Looking Forward
16
A New Set of Challenges

• Respond to comprehensive energy and climate
  legislation
• Preserve all options
• Accelerate development of technologies
• Mitigate the impact of rising costs on consumers
• Ensure regulatory environment supports
  environmental initiatives
• Developing a changed regulatory model which
  stimulates new investment , provides timely cost
  recovery, and equitably transforms our society to
  a greener and more energy efficient economy

17
Thank YouQuestions and Discussion

• Grace D. Soderberg
• Director, Energy Supply
• Edison Electric Institute
• June 22, 2009