Navigant Ca Rps Infocast Webinar 3 Feb2011

DISPUT E S & INVES TI GATI O N S • ECONOM I C S • F INA N CI A L ADVIS O RY • MANAGE M E N T CONSU LT I NG

©2011 Navigant Consulting, Inc.

Confidential and proprietary. Do not distribute or copy.

February 3, 2011

California’s Evolving Renewable Portfolio Standard

Trends and Implications

1©2011 Navigant Consulting, Inc.

Confidential and proprietary. Do not distribute or copy. E N E R G Y

Important Notice

This presentation was prepared by Navigant Consulting, Inc. exclusively for the benefit and internal use

of Infocast and/or its affiliates or subsidiaries. No part of it may be circulated, quoted, or reproduced for

distribution outside these organization(s) without prior written approval from Navigant Consulting.

This presentation is incomplete without reference to, and should be viewed solely in conjunction with

the oral briefing provided by Navigant Consulting.

February 3, 2011

©2011 Navigant Consulting, Inc. All rights reserved. Navigant Consulting is not a certified public accounting firm and does not provide audit, attest, or public

accounting services. See www.navigantconsulting.com/licensing for a complete listing of private investigator licenses. Investment banking, private placement,

merger, acquisition and divestiture services offered through Navigant Capital Advisors, LLC., Member FINRA/SIPC.

http://www.navigantconsulting.com/licensing



Navigant is a specialized consulting firm and global leader in renewable energy technology and strategy.

Navigant(2,100 Employees)

• Publicly traded since 1996 (NYSE: NCI)

• 2009 revenues -$707 million

• 40 offices in North America, Europe, and Asia

Renewable Energy(60 Employees)

Energy Practice (270+ Employees)

• Power Systems, Markets and Pricing

• Business Planning and Performance Improvement

• Energy Efficiency

• Emerging Technologies and Renewable Energy

Professionals

• Expertise in wind, solar, geothermal, biomass, hydropower, storage and smart grid

• Recognized thought leaders committed to RE

Global Practice

• Over 200 RE engagements world wide in last 3 yrs

• Public and private sector clients in 10+ countries

• 25% of clients are non-U.S.

Navigant named "Best Advisory – Renewable

Finance, North America" in the 9th and 10th Annual

Environmental Finance and Carbon Finance

Market Surveys



Overview

•Present an overview of the RPS policy landscape.

•Highlight current renewable energy supply and demand in California and the broader Western region.

• Illustrate the factors affecting valuation of Tradable Renewable Energy Credits (“TRECs”).

•Highlight potential implications for renewable energy developers, investors and utilities.

This presentation

will:

Presentation Overview



Presenter Bios

Dan Bradley Dan Bradley is a Director with Navigant’s Energy Practice where he specializes in resource planning, procurement, and electric markets. He has assisted clients in procuring over 2,000 MW of generation and transmission and in excess of 2,000,000 Renewable Energy Credits (RECs/SRECs), resource strategies, resource decision making, and development of market intelligence databases. Mr. Bradley regularly represents clients in meetings at the PJM Interconnect and has participated in FERC settlement conferences. Mr. Bradley holds an MBA from Clemson University.

Frank SternFrank Stern is a Director with Navigant’s Energy Practice. He works with utilities and related organizations helping them make wise choices about energy resources. Mr. Stern has over 20 years of experience, has been an invited speaker at major industry conferences, has over 20 publications in journals and conference proceedings, and has testified a variety of energy industry issues before state commissions and regulatory agencies. He is a registered professional engineer and an accredited appraiser.

Fred Wellington Fred Wellington is a Managing Consultant in Navigant’s Energy Practice, where he specializes in clean energy markets. He advises project developers, financiers and investor/publicly-owned utilities on renewable energy markets, Renewable Energy Credits (REC/SREC) valuation and trading, solar business strategies, and clean energy options and costs. Mr. Wellington also advises state and federal government agencies on clean energy policies and greenhouse gas reduction strategies. Mr. Wellington has authored several publications on clean energy topics including articles in the Harvard Business Review and Public Utilities Fortnightly. He is a Chartered Financial Analyst (CFA) and holds an MS and an MBA.



Table of Contents

Table of Contents

1 » California RPS Policy Landscape

2 » Renewable Energy Supply and Demand

3 » Factors Influencing Forward TREC Prices Curves

4 » Implications and Key Takeaways



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There has been quite a bit of activity concerning the California RPS over the past two years.

California RPS Policy Landscape>>History of California’s RPS

20102009 2011

SB 14 (33%Target) Vetoed

SB 722 Amended /

Debated

SB 722 Fails to Pass Assembly

CPUC Authorizes TRECs Then Stays

Decision

Draft CARB RPS Rules Released

CARB 33% Rules Finalized TREC

Decision Finalized

EO S-21-09 Issued Requiring 33% by 2020.

CARB Begins Rulemaking

SB 23 Introduced (33% Target Bill)

2002

RPS Introduced

SB 722 Introduced (33%

target bill)



There are multiple agencies involved in the RPS in California, with CEC, CPUC, CARB, and WREGIS all playing significant roles.

California RPS Policy Landscape>>Major Agencies Involved in Implementing RPS

• CPUC sets the RPS baseline & procurement targets and approves/denies IOU procurement plans and PPAs.

• CPUC also determines if compliance with the RPS is achieved.

California Public Utility Commission

Western Renewable Energy Generation Information

System

•WREGIS is a renewable energy generation and REC monitoring system.

• The CEC certifies eligible facilities for RPS generation.

• CEC is also responsible for siting and permitting.

California Energy Commission

• CARB is the lead implementing agency for AB 32, the state’s Greenhouse Gas law, which now includes a Renewable Energy Standard requiring utilities to meet 33% of retail sales with renewable energy.

California Air Resources Board

Other Agencies:

• CAISO

• Joint Powers Authorities such a SCPPA, NCPPA, TANC.

• Federal agencies such as BLM, FERC, Dept. of Interior.

IOUs Must Comply with Both Structures



There are different jurisdictions that promulgate renewable energy mandates in California.

California RPS Policy Landscape>>Different Jurisdictions

Market Structure Under 20% Target (CPUC)

Market Structure Under 33% Target (CARB)

Proposed Market Structure Under SB 23 (Assembly Bill)

• This is the structure currently governing the market.

• It is administered by the CPUC and results from the original RPS law, SB1078 (2002) and revised by SB 107 (2006).

• The recent TREC ruling applies to this structure.

• Under Executive Order S-21-09, California Air Resources Board (CARB) was instructed to promulgate rules governing a 33% target.

• This was ordered after Gov. Schwarzenegger under the authority of AB 32, the state’s sweeping greenhouse gas law.

• This is a separate regulation from the 20% target RPS.

• Following the failure of SB 722 (33% RPS bill that failed to pass in 2010), Senators Simitian, Kehoe and Steinberg introduced SB 23 in Dec. 2010.

• SB 23 largely mirrors the structure in SB 722.

• Support for the bill and its timing is unclear.

• It is also unclear how it would eventually interact with the existing RPS systems.

Each jurisdiction envisions a different underlying market structure which can have important impacts on renewable energy development.



There are different market structures under the different jurisdictions, that dictate compliance with renewable energy mandates.

California RPS Policy Landscape>>Differences in RPS Structure

Market Structure Under 20% Target (CPUC)

Market Structure Under 33% Target (CARB)

Proposed Market Structure Under SB 23 (33% Law)

Targets&Timing

• 1% annually until 20% by 2010

• 3 year grace period

• 20% by 2014

• 24% by 2017

• 28% by 2019

• 33% by 2020

• 20% by 2013

• 25% by 2016

• 33% by 2020

Covered Entities

• The three IOUs

• Electric Service Providers (ESPs)

• Com. Choice Aggregators (CCAs)

• The three IOUs,

• ESPs and CCAs

• Municipal Utilities (> 200 GWh in sales)

Location/ Type of Bundled

Transactions

• Qualifying renewable energy delivered to a California Balancing Authority

• Bundled contracts that make use of dynamic transfer arrangements

• Qualifying renewable energy generated in Western Electricity Coordinating Council (“WECC”)

• >=50% by 2013, 65% by 2016 and 75% thereafter of renewables must interconnect with CA Balancing Authority or dynamically transferred to CA

• <=25% by 2013, 20% by 2016 and 15% thereafter can be firmed and shaped transactions

Unbundled Transactions

(TREC)

• TRECs allowed for up to 25% of a utility’s obligation and capped at $50/MWh until 2013.

• Bundled contracts that do not make use of dynamic transfer arrangements

• Unlimited• <=25% by 2013, 15% by 2016 and

10% thereafter can be unbundled TRECs

Penalty • $50/MWh up to $25m annually• Various – considered a

violation of emission limitation under Health and Safety code

• Delegated to CPUC



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The IOUs are moving towards the 33% target; project delays and cancellations could impact their ability to meet the obligation.

Renewable Energy Supply and Demand >>IOU Progress

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Current Level of Renewable Energy Additions for California IOUs

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Adding POUs to the RPS target significantly increases the amount of renewable energy needed to meet the 2020 target.

Renewable Energy Supply and Demand>>Projected Load and Renewable Energy Demand

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Total POUs Total IOUs

33% Target Incl. POUs

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Projected Load for IOUs and Publicly-Owned Utilities (POUs)

2020 Target

Source: CPUC 33% RPS Calculator v1.3

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There are several issues that can impact the level, timing and cost of renewable energy generation to satisfy California’s RPS targets.

Renewable Energy Supply and Demand>>Major Issues Affecting Available Supply

Competition for Resources

TransmissionProject Development

Risk

Major Issues Affecting Supply Available to Meet California RPS

• The transmission situation in California and the broader Western interconnect is complex, with congestion in some areas and available capacity in others.

• This can affect not only bringing out of state renewable resources to serve California load, but also can impact in-state generators that need to build interconnection.

• The location of renewables with respect to the location of the various load pockets is a major factor.

• Other Western states have RPS targets and demand for local renewable energy resources.

• This can result in competition for the lowest cost / highest quality resources between local utilities in these states and California utilities looking to import this power.

• This can also impact unbundled TREC supply insofar as unbundling the renewable attributes leaves the underlying null power less attractive to local utilities (because it would not count towards its RPS targets).

• Renewable energy projects face multiple hurdles to bring the project to completions.

• Issues such as permitting, interconnection requirements, financing and PPA negotiations all can impact whether a given project will be developed, and equally as important, when the project will come online.

• Permitting, in particular, is a big hurdle especially for major transmission additions and for large renewable projects.

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The transmission system in California is complex, with new lines being considered to accommodate new renewable generation.

Renewable Energy Supply and Demand>> Transmission Situation in California

High /Medium Potential Transmission Upgrades and Corridors

Malin

Captain Jack

Round Mountain

Olinda

High Potential

Medium Potential

New Lines

New Substations

Existing

High Potential

Medium Potential

NV Tracy

Dixie Valley

Table Mountain

Tracy

Tesla

Los Banos

Vaca Dixon

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a

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Gates

Carrizo1

Silver Peak Bordon

Gregg

Control

NEVADA

ARIZONA

Eldorado

Kramer 500 kV

Llano

Vincent

Primm

Ivanpah

Pisgah 500 kv

Lugo

Colorado River sub.

Red Bluff San Bernardino/Vista

IID Imperial Valley

Dixieland El Centro

Coachella Valley Mirage

Devers

Sycamore Cyn North Gila

Palo Verde

Eastside 500 kV

Collinsville

Westley

Wilson

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ub Barren Ridge

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• Depending on the level of “pre-existing” uses for the transmission system and the location of potential renewables, the following segments of the transmission system within California could be heavily congested:

• The facilities between the Pacific Northwest and Northern California

• The facilities between the Sacramento area and the Bakersfield area

• The facilities between the Bakersfield area and Southern California

• The facilities extending into Southern California from Southern Nevada and Western Arizona

• Studies done to date by the California Transmission Planning Group (CTPG) have indicated that the “High and Medium Potential” transmission facilities and corridors shown on the map to the right of this slide could allow the State to meet a majority of the 33% RPS target by 2020.

• The CTPG will be continuing its studies regarding the required transmission facilities during 2011.



In addition to California, seven other states in the broader WECC region have RPS requirements.

Source: January 2011, Database of State Incentives for Renewable Energy (DSIRE)

RPS mandate

RPS goal

OR25% (large utilities),

5%-10% (small utilities) by 2025

WA15% by 2020

MT15% by 2015

NV25% by 2025

AZ15% by 2025

NM20% (IOUs), 10% (co-ops) by 2020

CO30% by 2020 (IOUs),

10% munis and co-ops

UT20% by 2025 goal

Renewable Energy Supply and Demand>> RPS Requirement in WECC

RPS Requirements in Western States Excluding California

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Note: While not shown on this graphic, renewable energy demand in British Columbia and Alberta can also affecting available supply for the California RPS due to these Canadian Provinces being included in WECC.



35.1%

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0.3%

0.0% 0.0% 2.0%

App Pending Feasibility Operating

Permitted Proposed Restarted

Site Prep Testing Under Const

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Estimated Online Date

No Estimated Online Date

Renewable Energy Supply and Demand>> Current RPS Generation Queue in California

CAISO Renewable Generation Queue by Current Status

CAISO Renewable Generation Queue by Estimated Online Date

A significant number of projects in the generation queue are in very early stages of development; some having no estimated online date.

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TRECs can now be used to comply with the California RPS.

Factors Influencing Forward TREC Prices Curves>> CPUC TREC Decision

CPUC TREC Decision Update (R. 06-02-012)

• Final ruling was issued January, 13, 2011 reinstated the original ruling (issued in March, 2010).

• Decision allows unbundled TRECs to be used towards a utility’s RPS compliance obligation under the following conditions:

• Unbundled TRECs may not be used for more than 25% of an entities compliance obligation through to 2013.

• The cost of the TREC must not exceed $50/MWh through to 2013.

• Decision defines a TREC transaction as:

• An unbundled transaction in which an entity procures only a TREC and not the underlying energy.

• A bundled transaction (conveying both TRECs and energy) where the generator’s first point of interconnection is not with a California Balancing Authority and the transaction does not make use of dynamic transfer arrangements.

• TRECs cannot be banked for more than 3 years. Once retired, they can be counted towards a utility’s target under the flexible compliance rules.

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Factors Influencing Forward TREC Prices Curves>> Unbundled versus Bundled Renewable Energy

TRECs convey title to renewable energy attributes and can be unbundled and sold separately from the underlying energy.

Bundled Renewable Generation

(1 MWh)

“Null” Energy(1 MWh)

“A renewable energy credit (REC) for compliance with the California renewables portfolio standard (RPS) is a certificate of proof, issued through the Western Renewable Generation Information System, that one megawatt-hour of electricity

was generated by an RPS-eligible renewable energy resource and delivered for consumption by California end-use retail customers. A REC includes all renewable and environmental attributes associated with the production of electricity

from the eligible renewable energy resource, including any avoided emission of pollutants to the air, soil or water; any avoided emissions of carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur

hexafluoride, or any other greenhouse gases that have been determined by the United Nations Intergovernmental Panel on Climate Change, or otherwise by law, to contribute to the actual or potential threat of global climate change;* and the

reporting rights to these avoided emissions, such as Green Tag reporting rights.”

The underlying null energy, if separated from the TREC, can be used to meet load but not an RPS obligation.

A TREC, whether bundled with or unbundled from the energy, is required to demonstrate RPS compliance.

California TREC Definition

Definitions differ by state

1 TREC

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TREC prices are sensitive to supply/demand, the wholesale cost of energy at which the market clears and the mix of renewables in the market.

Factors Influencing Forward TREC Prices Curves>> Key Variables Affecting TREC Prices

Key Variable Driver Directional Impact on TREC Prices

Power Prices• Natural gas prices• Power market fundamentals• Renewable integration costs

• Increases in wholesale power prices in pools typically decrease REC prices

• Higher integration costs could increase TREC prices insofar as developer needs to recover costs

TREC Demand

• RPS targets and compliance rules

• Future load growth

• Regulatory limits on TREC usage

• Increases in demand typically increase REC prices

• Conversely, lower demand results in lower prices

TREC Supply

• Resource availability

• Market conditions and production of existing projects

• Project development constraints

• Other utility demand for TRECs

• Increases in renewable energy supply beyond RPS requirements depress REC prices

• Localized REC demand can limit exports to other states, thereby limiting supply

RenewableSupply Mix

• Environmental constraints (e.g. water, habitat, etc.)

• NIMBY issues• Technological development,

particularly solar

• RECs prices are tied to least cost generators

• Regions with higher capacity factor facilities (e.g., biomass, geothermal) generate lower cost RECs in larger quantities than regions that depend on wind and solar facilities

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There are specific factors to California influencing TREC supply and demand, which differ in their likely impact on forward price curves.

Factors Influencing Forward TREC Prices Curves>> California Specific Factors

Inclusion of POUs in RPS•Requiring POUs to comply with the RPS effectively increases the demand

curve which puts upwards pressure on prices.

•A cap percentage on TRECs usage effectively reduces the demand curve for TRECs, leading to downward pressure on prices.25% Cap of TRECs to 2013

•Price caps effectively act as ceiling on TREC price curves.$50/TREC Cap to 2013

Lack of TREC Price Transparency

•A lack of transparency in the marketplace on transacted prices for unbundled TRECs can lead to increased price volatility.

RPS Demand in Western States

•RPS targets in other states – or a new RPS program in a state that currently does not have an RPS – can decrease TREC supply available for California.

Energy Demand in Other States

•The availability of unbundled TRECs necessarily requires native demand for energy.

•Local utility demand for energy-only contracts could be small or require firming and shaping from natural gas.

Renewable Project Financing

•Financing projects based on projected TREC revenue is dependant on long term contracts.

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The recent reinstatement of the TREC rules reduces some uncertainty, but some questions remain.

Implications and Key Takeaways>> Implications for Developers and Investors

• Rule allows only 25 percent of RPS requirements to be met with TRECs until 2013. CARB structure allows more.

• Development outside CA may be less expensive in some cases and will depend on transmission and local demand for energy if targeting unbundled TREC sales.

Should I build in CA or outside?

• For the most part yes, under CPUC rules

• Not necessarily, under CARB rules.

Do I have to deliver

power to CA?

• Permitting and interconnection processes takes time.

• The 25% limit and $50/MWh price cap sunset in 2013.

• Competition for resources can lead to pricing issues.

When should I build?

• Transmission interconnection and the development of new transmission facilities will impact timing, cost and location of project.

• Developers need to understand the transmission issue.

Will there be transmission?

• Given competition for resources and cost consideration, valuation of TRECs will increasingly be important.

• Investors will have to become comfortable with the market structure and liquidity.

Can I use RECS for

financing?

24



TRECs provide another option for compliance, however different procurement strategies may be required.

Sunset of 25% cap on TRECs provides some motivation to delay procurement plans–more options become available as the market opens up.

Sunset of $50/TREC cap on TRECs provide motivation to acquire now – supply of out of state unbundled TRECs depends on local demand for energy in that

state - at a higher cost and without ability to claim it against RPS targets.

Competition for lowest cost resources provide motivation to secure good projects sooner, especially in other states that need them for native RPS requirements.

IOUs will need to comply with both CPUC and CARB requirements, which differ in terms of structure.

The recent changes in the RPS structures provide conflicting signals for utilities.

Implications and Key Takeaways>> Implications for Utilities

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The California RPS is Complex and Evolving – Watch This Space.

Costs Will Be Driven by Supply and Demand in WECC, not only California

• While significant eligible renewable resources are available for RPS compliance, transmission constraints (and timing of new lines), project development risk and competition for resources will dictate the value ascribed to both physical renewable energy and their attributes.

Accurate TREC Valuation is Complex and Increasingly Important

• Forward TREC price curves are driven by supply and demand characteristics in the market – which in turn is driven by RPS market structure and underlying power market fundamentals.

• Accurate TREC valuation is increasing important to both buyers and sellers.

Underlying RPS Market Structure is Important and Changing

• The underlying RPS market structure determines when, where and how renewable facilities get built.

• The different CARB and CPUC markets structures continue to change. Watch this space closely.

Implications and Key Takeaways>> Key Takeaways

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KeyC O N T A C T S



KeyC O N T A C T S



KeyC O N T A C T S



Questions?


Confidential and proprietary. Do not distribute or copy.30

E N E R G Y

Dan BradleyDirectorNew York, NY917-498-3846 [email protected]

Frank SternDirectorBoulder, CO303-728-2513 [email protected]

Fred Wellington, CFAManaging ConsultantSan Francisco, [email protected]

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Navigant Ca Rps Infocast Webinar 3 Feb2011