ForElectricUtilitiesTheFutureisHere

SouthernStatesEnergyBoard28September2015

RichardMcMahon

VicePresident,EnergySupplyandFinanceEdisonElectricInstitute

EdisonElectricInstitute

TheEdisonElectricInstitute(EEI)istheassociationthatrepresentsallU.S.investor-ownedelectriccompanies.Ourmembersprovideelectricityfor220millionAmericans,operateinall50statesandtheDistrictofColumbia,anddirectlyemploymorethan500,000workers.Withmorethan$85billioninannualcapitalexpenditures,theelectricpowerindustryisresponsibleformillionsofadditionaljobs.Reliable,affordable,andsustainableelectricitypowerstheeconomyandenhancesthelivesofallAmericans.EEIhas70internationalelectriccompaniesasAffiliateMembers,and250industrysuppliersandrelatedorganizationsasAssociateMembers.Organizedin1933,EEIprovidespublicpolicyleadership,strategicbusinessintelligence,andessentialconferencesandforums.

Agenda

›  ElectricUtilityIndustryCAPEXanditsDrivers

›  ImpactsontheGenerationFleetandtheGrid

›  EnvironmentandCPP

›  CyberandGridSecurity

›  LessonsLearnedFromEurope

›  TheEvolvingGrid

4

Notes: TotalcompanyspendingofU.S.Investor-OwnedElectricU>li>es,consolidatedattheparentorappropriateholdingcompany.Projec>onsbasedonpubliclyavailableinforma>onandextrapolatedforcompaniesrepor>ngfewerthanthreeprojectedyears(13%and18%ofindustryfor2016and2017).

Source:EEIFinanceDepartment,companyreports,SNLFinancial(May2015).

IndustryCapitalExpenditures

Actuals

Projections(July2014)

Projections(May2015)

103.3

83.879.2

108.299.9

91.6

48.4

59.9

74.1

82.877.7

74.378.6

90.3 90.3

98.1

30

40

50

60

70

80

90

100

110

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

($Billions)

6% 6%6% 7%10% 12%

15%17%

22%21%

41% 37%

$0B

$20B

$40B

$60B

$80B

$100B

2012P 2013P

Generation

Distribution

Transmission

Gas-Related

Environment

Other

ProjectedFunctionalCapEx

2012P 2013P

$94.4B

asofAugust2012 asofOctober2013

$95.2B

Genera<on Distribu<on Transmission Gas-Related Environment Other

Source:EEIFinanceDepartment,companyreports(October2013)

Notes:Totalcompanyfunc>onalspendingofU.S.Shareholder-OwnedElectricU>li>esProjec>onsbasedonpubliclyavailableinforma>onandextrapolatedforcompaniesnotrepor>ngfunc>onaldetail(1.6%).

DriversofIndustryInvestment

Environmentalregula<ons

Staterenewableenergypolicies

Financialincen<ves

Lownaturalgasprices

Diversifica<onDecliningtechnologycosts

Customerdemand

HenryHubSpotPrice

NaturalGasMarketLowPricesandGrowingProduction

U.S.EnergyInformationAdministration,AnnualEnergyOutlook2014andNaturalGasSpotandFuturesPrices

NaturalGasProduction,tcf

1

2

3

4

5

6

7

2011 2012 2013 2014

Residential PV

Utility-Scale PV

Cost of Solar PV ($/Watt)

Source: GTM/SEIA Solar Market Insight Data is the average of quarterly data for each year.

SolarPVCostsHaveDeclined

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Residential Utility-Scale

Cost of Solar ($/Watt in 2014)

Source: GTM/SEIA Solar Market Insight Data is the average Q1-Q4 2014. Data only includes cost of PV technologies

Large-ScaleUtilitySolarPVisAboutHalfTheCostofResidentialRooftopSolarSolarPVcostsdecline

82%FROM 2010-2014, ADDITIONS OF NEWSOLAR CAPACITY HAVE GROWN

PER YEARON AVERAGE

60% OF ALL INSTALLED SOLAR CAPACITYIS LARGE-SCALE UTILITY SOLAR CAPACITY

$9billion/yearEXPECTED GROWTH OF INVESTMENTIN SOLAR PV TECHNOLOGIES

FROM 2014-2020

96%UTILITIESREPRESENTOF ALL ACTIVE & PLANNEDCOMMUNITY SOLAR CAPACITY IN THE UNITED STATES

4GWIN 2014, NEARLY OF LARGE-SCALE SOLAR CAPACITY WERE INSTALLED

$3.66RESIDENTIALROOFTOP SOLARHAD AN AVERAGE COST OF

PER WATT IN 2014

$1.68LARGE-SCALEUTILITY SOLAR PVHAD AN AVERAGE COST OF

PER WATT IN 2014

COMPARED TO

Utilities Lead the Way on Solar Power

CleanerFleet

Newgenera<ngcapacityisfueledbynon-hydrorenewablesandnaturalgas

AnnouncementsofNewGenera<ngCapacity(2014)

Source:EEI;VentyxInc.,TheVelocitySuite.DataasofDecember31,2014

Genera<ngCapacityAddi<ons

Non-HydroRenewableSourcesMorethanTriplebetween2010and2040

Source:DOE–EnergyInformationAdministration,AnnualEnergyOutlook2014,March2014

Agenda

› EnvironmentandCPP

EnvironmentalRegulatoryChallenges:2015andBeyond

13

Air

Climate

Water

Land&NaturalResources

Waste&Chemical

Management

CoalAsh

PCBsinElectricalEquipment

HazMatTransport

TransmissionSitingandPermitting

AvianProtection

EndangeredSpecies

VegetationManagement

316(b)

EffluentLimitationGuidelines

WatersoftheUnitedStates

TotalMaximumDailyLoads(TMDLs)

NSPS-NewSources

NSPS-ExistingSources

BACTPermitting

InternationalNegotiations

Mercury&AirToxicsStandards

(MATS)

InterstateTransport

(CAIR/CSAPR)

RegionalHaze/Visibility

MultipleNAAQS

NewSourceReview(NSR)

Waterbody-SpecificStandards

CO2EmissionsandIntensity

14

Source:DevelopedfromU.S.EnergyInformationAdministration,MonthlyEnergyReviewMarch2014

CleanPowerPlan:KeyIssuesforPowerSector

§  Paceandtimingofcompliance/reliability

–  Glidepath/2020reductionscliff

–  Reliability

–  Earlyaction

§  BSERapproachandassumptions

§  Treatmentofzero-emissionsgeneration:nuclear&hydropower

§  TreatmentofnewNGCCunitemissions

§  Treatmentofinterstaterenewables

Agenda

› CyberandGridSecurity

17

GridSecurityIsaTopPriority

›  Theelectricindustry’sapproachtoprotectcriticalassetsisknowasdefenseindepthwhichincludes:§  preparation

§  prevention

§  responseandrecovery

toaddressthewidevarietyofhazardstoelectricgridoperations

›  Effectiveinfrastructureprotectionisprotectingthemostcriticalgridcomponentsagainstthemostlikelythreats–manmadeornaturalphenomena.

›  ElectricSubsectorCoordinatingCouncil–CEOdriven18

Agenda

› LessonsLearnedFromEurope

Germany:ImpactsontheEconomy

Is electricity becoming a luxury good?

German Competitiveness Threatened by High Energy Costs

“Germany’senvironmentagencyreportedthatthecountry’scarbonemissionswentupagain,risingby1.2%in2013.TheenvironmentministersaidthatGermanymaymissitstargetofreducingcarbonemissionsby40%in2020,comparedwith1990levels,anastonishingadmissionfromacountrythatspent€16billionsubsidisingrenewableenergylastyear.”

Agenda

› TheEvolvingGrid

Reliability•  Sufficientcapacitythe

systemcanrelyon•  Fueldiversity

EconomicSustainability•  Lowcost/efficientsystem•  Reasonablereturn/sustained

investments

EnvironmentalSustainability•  Achievecarbontargets•  Reduceotherpollutants

•  AccurateEnergyPriceFormation

•  FairandCompetitiveCapacityMarketDesign

•  CompensatingValuableResourceAttributes

KeystoRealizingMarketStructureObjectives

22

Ifweproperlycompensateforattributesgeneratorsprovideinthewholesalemarket,itwouldtemporarilyraisewholesaleprices…

WholesaleMarketEnergyPriceFormationChallenges

WithMarketInterv

ention

(HybridMarket)

CustomerEnergyCost

LongRunCost

(MarketBasedDesign)

Time

withmarketreform

However,whenlowpricesinduceneededunitstoshutdown,totalenergycosttocustomerswouldrisetoreflectshortage/

costofnewbuild

2

…However,itwouldminimizeshutdownsandtheneedfornew

builds

4

3

Out-of-marketinterventioncansuppresswholesalepowerpricesandcustomerenergycostintheshort

term

1

Illustrative

ChangingElectricDistributionGrid:CentralizedtoDistributed

IntegratedGrid

Platform

Today Future

Sourcegraphs:EPRI

NewTechnologiesandResidentialDemandChargesEmpowerConsumers

EvolutionofRates:Three-PartRates

Betterreflectcostsandeliminatecost-shiftPromoteenergyefficiency

Potentiallylowercostsforcustomers

Three-PartRate

VolumetricChargeVariable.Basedonconsumer’smonthlyelectricityconsumption(e.g.fuelcosts)

FixedChargeFixed.Basedonfixedcostsincurredbyutility(e.g.likemetering,poles)

DemandChargeFixedbutcanvaryovertime.Basedonacustomer’smaximumkWdemandoverabillingcycle(e.g.transmissionandgenerationcapacity)

Gettingthere

Thetransitiontothreepartratesshouldbecarefullyplannedandgradual

Theratechangewillaffecteachcustomerdifferently

Changingtothreepartrateshouldberevenueneutralforutilities

Threepartratescanresultinlowerelectricitybillsforconsumers,promotereductionofpeakdemand

BasedonRyanHledik,RediscoveringResidentialDemandCharges,TheElectricityJournal,Vol.27,Issue7,Aug/Sept2014

Conclusion

›  TheU.S.electricgriddeliversavaluableproductessentialtoallAmericans.

›  Theelectricpowerindustryisleadingthetransformationtomakethegridcleaner,safer,morereliable,moreflexibleandmoreresilienttomeetthegrowingdemandsofourdigitalsociety.

›  Policiesandregulationshavesometimesadverseunintendedconsequences.

›  Itisvitaltorecognizetheadvantagesofthecurrentsystemandofpromotingchangesthatempowercustomerswhileensuringthatourgridisreliable,affordableandclean.

Questions?

RichardF.McMahon,Jr

VicePresident,EnergySupply&Finance

EdisonElectricInstitute

rmcmahon@eei.org