Southwest Power Pool Annual Looking Forward substantial economic benefits from the production of shale

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  • SPP-LF CONFIDENTIAL DRAFT April 11, 2014

    Southwest Power Pool

    Annual Looking Forward Report

    Strategic Issues Facing the

    Electricity Business

    Craig R. Roach, Ph.D.

    Vincent Musco

    Sam Choi

    Andrew Gisselquist

    Prepared by:

    Boston Pacific Company, Inc.

    As an Independent Advisor to the

    SPP Board of Directors

    April 22, 2014

    1100 New York Avenue, NW, Suite 490 East Washington, DC 20005 202-296-5520 www.bostonpacific.com

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    TABLE OF CONTENTS

    I. Executive Summary ............................................................................................................... 1

    II. The Shale Gas Revolution (An Update) .............................................................................. 12

    A. Latest Shale Gas Forecasts................................................................................................. 12

    B. The Shale Revolution Continues to be an Economic Revolution ...................................... 19

    C. Ongoing Review of Potential Environmental Impacts ...................................................... 20

    D. LNG Export Updates ......................................................................................................... 26

    III. EPA’s Continued Environmental Campaign ....................................................................... 28

    A. Status of EPA Regulations on GHG Emissions ................................................................. 29

    B. EPA Regulations on Other Air Emissions ......................................................................... 34

    C. Update on U.S. GHG Emissions, Including Methane Emission Estimates ....................... 38

    IV. Decentralization of the Grid and the Changing Utility Business Model ............................. 41

    A. Decentralized Technology: Existential Threat, Complement, or Both? ............................ 42

    B. Drivers of Demand for Decentralization: Cybersecurity, Weather, Rates ......................... 44

    C. Developments in Supply of Distributed Technologies: Solar PV, Cogeneration,

    Microgrids .......................................................................................................................... 46

    D. Net Metering and Monthly Grid User Fees ....................................................................... 50

    V. Fundamental Changes in Transmission Planning (Update

    Based on New Information) ................................................................................................. 54

    A. Right of First Refusal Out, Competitive Solicitations In ................................................... 55

    B. More Flexibility for Merchant Developers ........................................................................ 58

    C. Decentralization and Distributed Generation: Disruptive Impact on Transmission

    Planning? ............................................................................................................................ 61

    VI. A Possible Rise in Retail Rates ............................................................................................ 64

    A. Significant Changes in Variables Driving Retail Rates ..................................................... 65

    B. Aggregated Rate and Bill Data .......................................................................................... 68

    C. Utilities Seeking Significant Rate Increases ...................................................................... 69

    VII. Long-Term Demand Shock: Electric Vehicles (Short Update) ........................................... 72

    VIII. An Introduction to Energy Storage ...................................................................................... 78

    A. Formative Policy ................................................................................................................ 79

    B. Energy Storage Technologies ............................................................................................ 80

    C. Energy Storage Applications ............................................................................................. 86

    IX. Anticipating New Science and Technology ......................................................................... 89

    A. Parallels Between Nuclear and Wind Policy ..................................................................... 90

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    B. A Carbon Tax Swap: Policy Choice Driving Technology................................................. 93

    C. A New Story for Nuclear: SMRs? ..................................................................................... 98

    LIST OF TABLES AND FIGURES........................................................................................... 102

    GLOSSARY ............................................................................................................................... 104

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    ABOUT BOSTON PACIFIC COMPANY, INC.

    Boston Pacific Company, Inc. is a consulting and investment services firm, located in

    Washington, D.C., specializing in the electricity and natural gas industries. For 27 years we have

    provided information and insight to our clients who span the full range of stakeholders: state

    regulatory commissions, regional transmission organizations, energy consumers, competitive

    power producers, electric utilities, gas pipeline companies, and electric transmission companies.

    We are nationally recognized experts on the electricity business as documented by our service as

    expert witnesses throughout North America. Boston Pacific also is an industry leader in

    designing and monitoring major power procurements of every type for state commissions across

    the country, as well as open seasons for merchant transmission lines. In addition, Boston Pacific

    has extensive, hands-on experience with a full range of power technologies including clean coal,

    on- and off-shore wind, geothermal, waste-to-energy, solar photovoltaics, and natural gas-fired

    combined-cycle. For 10 years, we have served as an independent advisor to the Board of

    Directors of the Southwest Power Pool RTO on a full range of issues related to market design

    and operation.

    For more information on Boston Pacific, please visit us at www.bostonpacific.com.

    DISCLAIMER

    The data and analysis in this report are provided for informational purposes only and

    shall not be considered or relied upon as market advice. Boston Pacific makes no representations

    or warranties of any kind, express or implied, with respect to the accuracy or adequacy of the

    information contained herein. Boston Pacific shall have no liability to recipients of this

    information or third parties for the consequences arising from errors or discrepancies in this

    information, for recipients’ or third parties’ reliance upon such information, or for any claim,

    loss or damage of any kind or nature whatsoever arising out of or in connection with (1) the

    deficiency or inadequacy of this information for any purpose, whether or not known or disclosed

    to the authors, (2) any error or discrepancy in this information, (3) the use of this information, or

    (4) any loss of business or other consequential loss or damage whether or not resulting from any

    of the foregoing.

    http://www.bostonpacific.com/

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    I. Executive Summary

    his is the fourth year in which Boston Pacific Company, Inc. (Boston Pacific) has

    prepared a separate Annual Looking Forward Report for the Southwest Power

    Pool (SPP) Board of Directors. As with its predecessors, this report is intended to

    contribute to the longer-term strategic planning by the board. To that end, we focus on broad

    market and regulatory events that (1) potentially could have a significant impact on SPP’s

    markets and/or (2) could require the board’s special attention.

    Boston Pacific very much appreciates the input to and guidance for this report provided

    by the board’s Oversight Committee.

    A. The Shale Gas Revolution (An Update)

    The shale gas revolution is important to the SPP Board because the price of natural gas is

    typically the principal determinant of SPP energy market prices. So far, the revolution has

    benefited ratepayers by keeping prices low. A key question for the board is whether the shale

    gas revolution will continue benefiting SPP ratepayers and how long that benefit will last. The

    overall message here is that the shale gas revolution is alive and well in terms of production and

    reserves, but that the price for natural gas may rise more than previously forecast. Still, the

    board should maintain a healthy skepticism when looking at the output of computer models,

    T