Southwest Power Pool Annual Looking Forward ReportStrategic Issues Facing the Electricity Business

Prepared by

Boston Pacific Company, Inc. As an Independent Advisor to the SPP Board of Directors

Craig R. Roach, Ph.D. Vincent Musco Sam Choi Andrew Gisselquist

April 29th, 2014

PURPOSE

A. Report contributes to longer-term strategic planning by the Board

B. Eight issues in all, including five updates

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ISSUES

I. The Shale Gas Revolution (Update)

II. EPA’s Continuing Environmental Campaign (Update)

III. Decentralization of the Grid and the Changing Utility Business

Model

IV. Fundamental Changes in Transmission Planning (Update)

V. A Possible Rise in Retail Rates (Short Update)

VI. Long-Term Demand Shock: Electric Vehicles (Short Update)

VII. Introduction to Energy Storage

VIII. Anticipating New Science and Technology

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I. THE SHALE GAS REVOLUTION (UPDATE)

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A. Still alive and well, but more expensive

EIA forecasts that:

1. Natural gas will provide 38% of America’s energy production in 2040, up from 31% in 2012; the only source with substantial increase in share1

2. By 2040, 80% of total natural gas from unconventional sources, with two-thirds of unconventional from shale2

3. USGS estimates of shale gas resources up 10% in 2013 as compared to year earlier31. U.S. Energy Information Administration, “AEO2014 Early Release Overview,” December 16, 2013.

2. Ibid.3. U.S. Geological Survey, “National Oil and Gas Assessment 2013 Assessment Updates,” last modified May 24, 2013, http://energy.usgs.gov/OilGas/AssessmentsData/NationalOilGasAssessment/AssessmentUpdates.aspx . ; U.S. Geological Survey, “USGS National Assessment of Oil and Gas Resources Update (August, 2012): Continuous Gas Resources (Includes coalbed gas, shale gas, and tight gas) [citation omitted],” last modified August 2012, http://certmapper.cr.usgs.gov/data/noga00/natl/tabular/2012/Summary_12_Cont_Gas.pdf .

I. THE SHALE GAS REVOLUTION (UPDATE)

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4. EIA forecasts natural gas will account for 35% of electricity generation, up from 30% in 20124

4. U.S. Energy Information Administration, AEO2014 Early Release Overview, December 16, 2013, p. 12, figure 11.5. Ibid.

I. THE SHALE GAS REVOLUTION (UPDATE)

Figure 1: Electricity generation by fuel, 1990-2040 (trillion kilowatt-hours) 5

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5. EIA forecasts natural gas prices at Henry Hub to increase by 2.83% per year in real terms from 2013 to 20406

6. Price volatility is back at delivery points

a. $120.70/MMBtu on January 21, 2014 at New York City7

6. U.S. Energy Information Administration, “Oil and Gas Supply, Reference case,” AEO2014 Early Release Overview Interactive Table Viewer, accessed April 16, 2014, http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2014ER&subject=8-AEO2014ER&table=14-AEO2014ER&region=0-0&cases=ref2014er-d102413a. Percentage calculated by Boston Pacific.7. U.S. Energy Information Administration, “Short-Energy Outlook,” March 11, 2014, http://www.eia.gov/forecasts/steo/uncertainty/.

I. THE SHALE GAS REVOLUTION (UPDATE)

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B. Still an Economic Revolution, too1. Downstream “Renaissance”

a. Sasol announced a new $16-$21 billion dollar gas-to-liquids plant to be built in Louisiana8

b. “Dow Chemical Co. will create 150 permanent jobs and spend $1.7 billion to build a hydrocarbon cracker [plant] in…Texas” 9

c. “The Canadian methanol company Methanex Corp. is relocating two $550 million methanol plants from Chile to Geismar, Louisiana….The U.S. investment comes as limited gas supplies in Chile have kept Methanex factories there operating below capacity” 10

d. “Orascom Construction Industries of Egypt is building a new green field nitrogen fertilizer plan in southeast Iowa to supply Corn Belt customers. The new plant [is] the first world-scale, natural gas-based fertilizer plant built in the United States in nearly 25 years…” 11

8. IHS Global, “A Manufacturing Renaissance,” America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy: Volume 3, September 2013, 24.9. Ibid., 27.10. Ibid., 29.11. Ibid., 30.

I. THE SHALE GAS REVOLUTION (UPDATE)

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C. Update on Studies of Environmental Impact1. Awaiting major EPA report on water quality

2. Water scarcity report by Ceres:“75 percent of shale oil and gas are located in regions with medium or higher baseline water stress levels.” Is “water management” “getting sufficient attention?”12

12. Monika Freyman and Ryan Salmon, Hydraulic Fracturing & Water Stress: Growing Competitive Pressures for Water, Ceres, May 2013, 5.

I. THE SHALE GAS REVOLUTION (UPDATE)

Source: Monika Freyman and Ryan Salmon, Hydraulic Fracturing & Water Stress: Growing Competitive Pressures for Water, Ceres, May 2013, p. 6, figure 1.

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3. Seismic Activity

a. USGS studies in central Oklahoma

• “Show one to three magnitude 3.0 earthquakes or larger occurred yearly from 1975 to 2008, where the average grew to around 40 earthquakes from 2009 to mid-2013”13

b. Durham university: England

• “The likelihood of inducing felt seismicity by hydraulic fracturing is thus extremely small but cannot be ruled out”14

c. More a problem with wastewater injection than with hydraulic fracturing

13. United States Geological Survey, “Earthquake Swarm Continues in Central Oklahoma,” October 22, 2013.14. Richard Davies et al., Induced Seismicity and Hydraulic Fracturing for the Recovery of Hydrocarbons, Durham Energy Institute, April 2013, 18.

I. THE SHALE GAS REVOLUTION (UPDATE)

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II. EPA’S CONTINUING ENVIRONMENTAL CAMPAIGN

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II. EPA’S CONTINUING ENVIRONMENTAL CAMPAIGN

A. GHG Regulations under development1. New Source Performance Standards have been proposed15

a. 1,000 – 1,100 lbs CO2/MWh

b. Partial CCS required for coal

2. Existing power plants

a. Guidelines to be proposed by June 1, 201416

b. Less strict

c. “Source-based” or “System-based”17

15. Proposed Rule issue by Environmental Protection Agency, “Standards of Performance for Greenhouse Gas Emissions from New Stationary Sources: Electric Utility Generating Units,” EPA_HQ-OAR-2013-0495-0001, January 8, 2014. 16. Office of the Press Secretary, President Barack Obama’s State of the Union Address, January 28, 2014, www.whitehouse.gov/the-press-office/2014/01/28/president-barack-obamas-state-union-address.17. Ayres Law Group, “EPA Regulation Under Clean Air Act Section 111(d): An Overview,” December 2013, http://www.ayreslawgroup.com/policy-alerts/111d-overview-2/. 12

II. EPA’S CONTINUING ENVIRONMENTAL CAMPAIGN

B. Legal Challenges

1. Potential challenges to upcoming GHG regulations18

2. GHG prevention of significant deterioration19

3. CSAPR20

4. MATS21

5. Particulate Matter NAAQS22

18. Environmental Protection Agency, “U.S. Court of Appeals – D.C. Circuit Court Upholds EPA’s Actions to Reduce Greenhouse Gases under the Clean Air Act,” September 9, 2013. 19. Ibid.20. “On Petitions for Review of a Final Rule of the Environmental Protection Agency,” In the U.S. Court of Appeals for the District of Columbia Court, August 21, 2012, http://www.cadc.uscourts.gov/internet/opinions.nsf/19346B280C78405C85257A61004DC0E5/$file/11-1302-1390314.pdf. 21. U.S. Court of Appeals for the D.C. Circuit, “Oral Arguments Recordings,” White Stallion Energy Center, LLC. v. EPA, December 10, 2013. 22. “Joint Reply Brief of Petitioners,” In the United States Court of Appeals for the District of Columbia Circuit, No. 13-1069 (consolidated with 13-1071, On Petitions for Review of the United States Environmental Protection Agency, December 19, 2013.

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C. U.S. Emissions Update1. Emissions have declined

Source: Boston Pacific figure using data from U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990 – 2012 , April 15, 2014, pp. ES-5 – ES-7, table ES-2, p. ES-22, table ES-7, http://www.epa.gov/climatechange/Downloads/ghgemissions/US-GHG-Inventory-2014-Main-Text.pdf .

2. Methane emissions unlikely to unseat natural gas as preferred low-carbon bridge fuel23

II. EPA’S CONTINUING ENVIRONMENTAL CAMPAIGN

23. A.R. Brandt et al., “Methane Leaks from North American Natural Gas Systems,” Science 343, no. 6172 (February 2014) 733-35, https://www.sciencemag.org/content/343/6172/733.summary. 14

III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

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III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

A. Existential Threat, Complement, or Both?1. Headlines: “Utility 2.0,”24 entirely new business model25

2. Decentralized Technologies include:

a. Small generators of all technologies connected to the distribution system

b. Cogeneration

c. Energy Storage

d. Smart Meter technology

e. Microgrids

24. Mani Vadari and Gerry Stokes, “Utility 2.0 and the Dynamic Microgrid,” Public Utilities Fortnightly, November 2013, 42-46, 64.25. Ronald L. Lehr, “New Utility Business Models:  Utility and Regulatory Models for the Modern Era,” The Electricity Journal 26, issue 8 (October 2013) 35-53. 16

III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

3. DG’s “Foothold” in U.S.

a. U.S. DOE: “12 million DG units installed across the country, with a total capacity of 200 GW,” including 84 GW of cogeneration26

b. About 1 GW of Microgrids in North America

c. However, about 1,000 GW of centralized generation in U.S.

26. U.S. Department of Energy, The Potential Benefits of Distributed Generation and Rate-Related Issues that May Impede Their Expansion, February 2007, ii-iii.

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III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

4. DG and grid are complements

a. Grid makes DG better

• EPRI: “[I]n nearly all settings the full value of DG requires grid connection to provide reliability, virtual storage and access to upstream markets”27

b. DG makes grid better

• EPRI: DG provides benefits to the grid, including “improve[d] voltage quality and reduced system losses,” “reduced environmental impact,” and “defer[ed] capacity upgrades”28

5. DG can offset transmission investment

a. Synapse warning to ISO New England: Fail to account for DG, will overbuild the grid29

27. EPRI, The Integrated Grid:  Realizing the Full Value of Central and Distributed Energy Resources, 2014, 7.28. Ibid., 30.29. Sarah Jackson et al., Forecasting Distributed Generation Resources in New England: Distributed Generation Must be Properly Accounted for in Regional System Planning, Synapse Energy Economics, Inc., June 7, 2013, 1. 18

III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

B. Drivers of Demand for Decentralization1. Cybersecurity

a. White House: new voluntary standards

b. Low-tech sabotage

• WSJ: “U.S. Risks National Blackout From Small-Scale Attack”30

2. Severe weather

3. Rates

30. Rebecca Smith, “U.S. Risks National Blackout From Small-Scale Attack,” The Wall Street Journal, March 12, 2014, http://online.wsj.com/news/articles/SB10001424052702304020104579433670284061220.

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III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

C. Developments in Supply of Distributed Technologies1. Solar PV – weather tight, certified roofing material (Dow Solar)

2. Cogeneration – Achieving ~75% efficiency (fuel inputs per energy/manufacturing output)

3. Microgrids – Princeton University example

a. 15 MW gas turbine

b. 9 MW steam-driven cooling unit

c. 9 MW of chilled water storage

d. 0.5 MW back pressure steam turbine

e. 2.5 MW of CHP cogeneration

f. 5 MW of solar PV

g. 1 MW of diesel generation

h. 1 MW of demand response

i. 43 MW total capability

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III. DECENTRALIZATION OF THE GRID AND THE CHANGING UTILITY MODEL

D. Net Metering, DG Grid User Fees1. Net metering: allows DG customers to “offset their

electricity purchases from the grid” and to be paid for excess generation delivered to the grid, often at the fully bundled retail rate31

2. Utilities alleging a cross-subsidy, proposing new fees for DG customers

a. Arizona utility charging distributed generation customers $0.70/kW per month for access to grid services

31. David B. Raskin, “The Regulatory Challenge of Distributed Generation,” Harvard Business Law Review Online, 2013, 41-42, http://www.hblr.org/wp-content/uploads/2013/12/Raskin_The-Regulatory-Challenge-Of-Distributed-Generation.pdf.

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IV. FUNDAMENTAL CHANGES IN TRANSMISSION PLANNING

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IV. FUNDAMENTAL CHANGES IN TRANSMISSION PLANNING

A. RTO’s Competitive Transmission Solicitations1. Response to Order 1000, “ROFR” removal requirement

2. Like PURPA for transmission, but…

3. Solicitations are subjective, can be challenged, may favor incumbents

a. California ISO example

4. Competition within and to improve the grid

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IV. FUNDAMENTAL CHANGES IN TRANSMISSION PLANNING

B. More Flexibility for Merchant Transmission1. New FERC policy

2. Helpful, but challenges remain

a. Finding creditworthy customers

b. Siting, local regulations, etc.

3. For SPP, need new RPS and/or competitive reform in Southeast

4. Competition within and to improve the grid

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V. A POSSIBLE RISE IN RETAIL RATES

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V. A POSSIBLE RISE IN RETAIL RATES

A. Conditions Ripe for Higher Rates, Bills1. EIA forecasts natural gas prices to rise 2.83%/year

through 2040, real terms32

2. Interest rates rise as QE ends

3. NARUC on CapEx: $2 trillion between 2010 and 2030 on environmental compliance, grid33

4. Demand: Down 2.2% from 2008-2012 levels; flat forecasts

32. U.S. Energy Information Administration, “Oil and Gas Supply, Reference case,” AEO2014 Early Release Overview Interactive Table Viewer, accessed April 16, 2014, http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2014ER&subject=8-AEO2014ER&table=14-AEO2014ER&region=0-0&cases=ref2014er-d102413a. Percentage calculated by Boston Pacific. 33. NARUC, “Managing CapEx Risk Against the Odds,” 2014 Winter Meetings Agenda, February 10, 2014.

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V. A POSSIBLE RISE IN RETAIL RATES

B. But Rate, Bill Data, and Forecasts – All Moderate1. Residential rates up 2.9% from 2012 to 2013

2. Monthly residential bills up 1.45% from 2012 to 2013

3. EIA: Residential rates to rise 14.7% from 2013 to 2040, real terms

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V. A POSSIBLE RISE IN RETAIL RATES

C. Anecdotal Evidence of Possible Rise

1. PSE&G: 31% rise in transmission rates

2. FirstEnergy CEO: “Rate consequences” for $4.6 billion in grid spending

3. National Grid: RI residential rates up 12.1% in 2014 due to natural gas prices

4. Indiana Utilities: Residential rates rise 30% from 2012 to 2030, in real terms

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VI. ELECTRIC VEHICLES

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VI. ELECTRIC VEHICLES

A. EV Growth1. Tesla’s stock price – 380% increase in less than a year34

2. EV annual sales grew 83% (from 2012 to 2013)35

3. EV compounded annual sales growth of 134% since 2011

34. From April 23, 2013 to February 28, 2014: “Historical Stock Prices,” NASDAQ, http://www.nasdaq.com/symbol/tsla/historical. 35. “Electric Drive Sales Dashboard,” Electric Drive Transport Association, http://www.electricdrive.org/index.php?ht=d/sp/i/20952/pid/20952.

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VI. ELECTRIC VEHICLES

B. EV Competition1. Hybrids – better market

penetration than EVs36

2. EIA:37

a. 1 million EVs by 2022-2023

b. By 2040, gasoline ICE vehicles – 79% of total vehicles on the road, EVs only 2%

c. Substantial fuel efficiency gains for gasoline ICE vehicles

Table 4: Fuel Efficiency by Vehicle Propulsion Type

Source: Energy Information Administration

Performance Increase

2014 2040 %

Conventional Fuel Cars Gasoline ICE Vehicles 36 53 47% TDI Diesel ICE 45 56 24%Alternative Fuel Cars 100 Mile Electric Vehicle 132 137 4% 200 Mile Electric Vehicle 125 141 13% Plug-in 10 Gasoline Hybrid 60 82 37% Plug-in 40 Gasoline Hybrid 73 88 21% Electric-Gasoline Hybrid 51 71 39%

Fuel Efficiency in Miles per GallonVehicle Propulsion Type

36. “Hybrids, Diesels, and Alternative Fuel Vehicles,” fueleconomy.gov, last modified March 19, 2014, http://www.fueleconomy.gov/feg/alternatives.shtml. 37. U.S. Energy Information Administration, “Light-Duty Vehicle Stock by Technology Type, United States Reference Case,” AEO2014 Early Release Overview Interactive Table Viewer, accessed April 16, 2014. 31

VI. ELECTRIC VEHICLES

C. EV Challenges1. Range anxiety

2. Lithium-ion battery fires

3. Need breakthrough or gasoline ICE vehicles remain top choice

D. Demand shock in SPP is remote

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VII. INTRODUCTION TO ENERGY STORAGE

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VII. INTRODUCTION TO ENERGY STORAGE

A. Momentum in Energy Storage1. New project investment in California – potentially $3 billion38

2. Investment and industry executives betting on energy storage – batteries are primary focus39

B. Formative Policy1. FERC Orders40

2. California mandate for 1,325 MW of energy storage41

38. Cassandra Sweet and Rebecca Smith, “For Storing Electricity, Utilities Push New Technologies,” The Wall Street Journal, February 27, 2014. 39. Ibid.40. Frequency Regulation Compensation in the Organized Wholesale Power Markets, Order No. 755, 18 CFR Part 35 (October 20, 2011), 137 FERC ¶ 61,604 (2011); Third-Party Provision of Ancillary Services; Accounting and Financial Reporting for New Electric Storage Technologies, Order No. 784, 18 CFR Parts 35, 101, and 141 (July 18, 2013), 144 FERC ¶ 61,056 (2013); Small Generator Interconnection Agreements and Procedures, Order No. 792, 18 CFR Part 35 (November 22, 2013), 145 FERC ¶ 61,159 (2013).41. “Decision Adopting Energy Storage Procurement Framework and Design Program,” Order Instituting Rulemaking Pursuant to Assembly Bill 2514 to Consider the Adoption of Procurement Targets for Viable and Cost-Effective Energy Storage Systems, Rulemaking 10-12-007, Before the Public Utilities Commission of California, October 17, 2013, 2.

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VII. INTRODUCTION TO ENERGY STORAGE

C. Leading Technologies1. Pumped hydro

2. Compressed air energy storage

3. Batteries

4. Flywheel energy storage

D. Range of Applications

Figure 18: Electric Grid Energy Storage Services

Source: Abbas A. Akhil et al., DOE/EPRI 2013 Electricity Storage Handbook in Collaboration with NRECA, Sandia National Laboratories, July 2013, p. 2, table 2.

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VIII. ANTICIPATING NEW SCIENCE AND TECHNOLOGY

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VIII. ANTICIPATING NEW SCIENCE AND TECHNOLOGY

A. Anticipating New Science and Technology1. Need to, but quantitative models have shortcomings

2. Toward a qualitative approach, Hughes states:

a. “Not driverless vehicles carrying society to destinations unknown and perhaps undesired”42

b. “Rich texture of technical matters, scientific laws, economic principles, political forces, and social concerns”43

42. Thomas P. Hughes, Networks of Power: Electrification in Western Society, 1880-1930 (Baltimore: The John Hopkins University Press, 1983), 462.43. Ibid., 1.

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VIII. ANTICIPATING NEW SCIENCE AND TECHNOLOGY

B. Strategic Storytelling Using All These Drivers

1. Parallels between nuclear and wind power

2. A Carbon Tax Swap: policy choice driving technology

3. A new story for nuclear: SMRs

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