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Credit Implications in Renewable Portfolio Standards Compliance

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  • This slide shows that nationally we not really increased green generation over the last 15 years. We’ve stayed roughly even. But virtually every day you read about new wind or solar development. And it’s true. American Energy Wind Association (AWEA) says that the U.S. added an impressive 5,244 MW of new wind capacity in 2007, more than double that added in 2006, also a record year. U.S installed wind now is ~17,000 MW But as a percentage of total generation, we barely moved the blades, so to speak. Wind to total U.S. generation was just 0.6% in 2006 and 0.8% in 2007. And, for all but wind generation, the growth of renewables has had a negligible impact on U.S. power supply over the past 15 years. Based on existing RPS through 2015, we think that about 6,000 MW of new renewable capacity come on line each year to meet the 2015 targets.
  • The cost of RPS comes down to the cost of conventional versus renewable generation—the wedge between the two over time. This slides show cost data for different types of generation costs from May 2008 (already arguably out of date) without: 1) PTC 2) transmission 3) carbon regulation Point is, that with nuclear 10 years out and coal on hold, you’re really looking at the cost of gas versus wind. And while at $7 gas you’re getting close, this does not factor in cost to get wind to load or integration (back up power) because wind is intermittent. On the other hand, also does not consider benefit of PTC. LBL said 2006 wind prices were only marginally competitive with wholesale power prices—and likely to be uncompetitive in 2007. And when you look at cost of conventional technologies versus solar there is clearly a gap. So we would think RPS will cost something to implement. Yet when you review studies, they predict little cost impact. LBL study of 26 studies for 18 states with RPS. 70% found that rate impacts of meeting standard in the last year are less than 1%.
  • EIA April 15, 2008 slide by Howard Gruenspecht (Deputy Administrator) EIA April 15, 2008 slide by Howard Gruenspecht (Deputy Administrator)
  • Transcript

    • 1. NARUC Staff Subcommittee On Accounting & Finance Fall 2008 Meeting Credit Implications in Renewable Portfolio Standards Compliance Richard W. Cortright, Jr. Managing Director Utilities and Infrastructure Group October 15, 2008
    • 2. EEI Estimate Of Future Capital Spending
    • 3. Construction Cost Growth Well Above General PPI Growth Source: The Associated General Contractors of America, July 2008 All= 100 in 12/01
    • 4. Investor-Owned Utility Credit Ratings --- Then And Now
      • At The Beginning Of The Last Major Generation Construction Cycle In Which Utilities Were The Principal Participants (The 1970’s), The Senior Debt Ratings Of Most U.S. Investor-Owned Were In The ‘ A’ and ‘AA’ Category. They Were Well Positioned For What Was To Come. Today, In Advance of A Major Capital Expenditure Period, The Ratings of Companies Engaged in Power Generation Are Significantly Lower… In the ‘BBB’ Category, And Frequently Weaker.
    • 5. U.S. Power Industry Ratings Distribution ***Includes merchant generation and independent power companies ( e.g. Constellation Energy, AES)
    • 6. Rate Case Statistics Authorized Rate of Return Statistics SNL Financial LC 24 11.24 28 11.21 1994 13 11.44 27 11.58 1995 17 11.12 18 11.40 1996 12 11.30 10 11.33 1997 10 11.51 10 11.77 1998 6 10.74 6 10.72 1999 13 11.34 10 11.48 2000 5 10.96 16 11.06 2001 18 11.09 14 11.21 2002 25 10.99 20 10.96 2003 22 10.63 21 10.81 2004 25 10.43 25 10.51 2005 14 10.43 26 10.35 2006 34 10.23 37 10.31 2007 # of Gas Rate Cases Gas: Return on Equity (%) # of Electric Rate Cases Electric: Return on Equity (%) Date
    • 7. The Feasibility Challenge of Renewable Portfolio Standards
    • 8. Pronouncement By International Electric Executives
      • "Climate Strategies Must Be Compatible With Market Economies, Deliver Timely And Economically Efficient Greenhouse Gas Reductions And Establish A Long-term Carbon Reduction Value That Is Moderate, Does Not Harm Local Economies And Stimulates Future Investments In Zero- And Low-Carbon Emission Technologies And Processes. It Is Vital That Effective Economic Safeguards Are Incorporated In These Strategies To Limit The Potential Impacts Of Carbon Policy On Jobs And Economic Growth.“
      • --- Statement By The 2008 International Electricity CEO Summit
    • 9. A Big Upswing in Renewables Will Be Unprecedented
    • 10. Renewables Portfolio Standards State Goal
      • PA: 18% ** by 2020
      • NJ: 22.5% by 2021
      CT: 23% by 2020 MA: 15% by 2020 + 1% annual increase (Class I Renewables) WI : requirement varies by utility; 10% by 2015 goal IA: 105 MW MN: 25% by 2025 (Xcel: 30% by 2020) TX: 5,880 MW by 2015
      • AZ: 15% by 2025
      CA: 20% by 2010
      • * NV: 20% by 2015
      ME: 30% by 2000 10% by 2017 - new RE State RPS
      • Minimum solar or customer-sited RE requirement
      • * Increased credit for solar or customer-sited RE
      • **Includes separate tier of non-renewable “alternative” energy resources
      HI: 20% by 2020 RI: 16% by 2020
      • CO: 20% by 2020 (IOUs)
      • *10% by 2020 (co-ops & large munis )
      • DC: 11% by 2022
      DSIRE: www.dsireusa.org September 2008
      • NY: 24% by 2013
      MT: 15% by 2015 IL: 25% by 2025 VT: (1) RE meets any increase in retail sales by 2012; (2) 20% by 2017 Solar water heating eligible *WA: 15% by 2020
      • MD: 20% by 2022
      • NH: 23.8% in 2025
      OR: 25% by 2025 (large utilities ) 5% - 10% by 2025 (smaller utilities) * VA: 12% by 2022 MO: 11% by 2020
      • *DE: 20% by 2019
      • NM: 20% by 2020 (IOUs)
      • 10% by 2020 (co-ops)
      • NC: 12.5% by 2021 (IOUs)
      • 10% by 2018 (co-ops & munis)
      ND: 10% by 2015 SD: 10% by 2015 * UT: 20% by 2025
      • OH: 25%** by 2025
    • 11. A “Do More Before You Do Some” Approach
    • 12. Falling Short
    • 13. Technology Costs Determine Green Premium, If Any Source: California Energy Commission and Standard & Poor’s
      • IGCC PRB Is Integrated Gasification Combined Cycle Using Power River Basin Coal
      • Natural Gas Combined Cycle Costs Assume Gas Price Of $7/Mmbtu
      • Thermal Generation Costs Exclude Any Estimates Of Carbon Capture Expenses
      • Cost Estimates Exclude The Benefits Of Subsidies, Including The PTC And ITC
    • 14. Impact of a CO 2 Value On Fossil Fuel Prices
      • Placing A Value On GHG Through Either A Tax Or A Cap-and-trade Program Has A Relatively Large Impact On The Delivered Price Of Coal. This Reflects Both The Substantially Lower Price Of Coal Relative To Other Fossil Fuels Under Baseline Conditions And Its Higher Emission Of Co 2 Per Unit Of Energy
      • Yet, A $25/Ton Value On CO 2 Raises Gasoline Prices By Only About 23 Cents Per Gallon .
      • *April 2008 **.124 mmbtu/gallon of gasoline
      22.5 2.65 4.5 0.53 11.75 0.053 Gas 13 3.70 2.6 0.74 28.05 0.074 Oil** 259 4.70 51.9 0.94 1.81* 0.094 Coal percent $ percent $ Impact of $50 per ton CO 2 value Impact of $10 per ton CO 2 value Delivered Price (June 2008*, all sectors, per million Btu) CO 2 content per million Btu Fuel
    • 15. Willingness to Pay For Solutions
    • 16. Transmission Constraints As Major Hurdle To RPS Realization
    • 17. Key Take-Aways
      • RPS Targets Are Aggressive, Given Timelines And Existing Base
      • Lack Of Transmission, Perennial PTC And ITC Extension Doubt Are Factors That Could Slow RPS Achievement
      • Projections Of Retail Rates Under RPS Are Currently Modest But Will Increase Rapidly
      • Credit Impact Will Be On A Case By Case Basis But Given Large Capital Programs Of Most Utilities Will Tend To Add To Existing Rate Pressure
    • 18. Turmoil On Wall Street: Lights Out In Paducah?
    • 19. A Perspective
      • “ If The Current Financial Crisis Is Not Resolved Quickly, Financial Pressures On Utilities Will Intensify Sharply, Resulting In Higher Costs To Our Customers And, Ultimately Could Compromise Service Reliability.”
      • Tom Kuhn, EEI President
    • 20. Utility Debt (And Leases) At Year-End 2007
      • ($MM)
      • Rating Debt
      • AAA ---
      • AA 2,672
      • A 109,462
      • BBB 221,695
      • BB 37,779
      • B or Lower 16,273
      • TOTAL 387,881
    • 21. Near-Term Utility Maturities
      • Total Utility Debt Due Twelve Months From June 30, 2008 Is About $50 Billion , Of Which Only $3 Billion Is Speculative
      • Availability Under Committed Bank Revolvers Totaled About $110 Billion, Which Generally Mature Between 2010 And 2012.
    • 22. Anecdotal Observations Since Lehman Bankruptcy
      • Some Utilities Successfully ‘Tested’ Their Revolvers In Absence of Lehman Commitment (Typically Only 5%-8% of Any Revolver)
      • A-2 Commercial Paper Has Been Issued Overnight By A Few Utilities At A 5% Interest Rate; Virtually A Closed Market
      • PECO Energy’s ( “A” Secured) Efforts To Tap The Debt Markets Were Beaten Back Until September 25, When It Issued $300 Million Five Years At 5.60%, Or 263 Over Treasuries
      • South Carolina Gas & Electric (“A-” Secured) Priced A 10-Year Deal At 6.5%, Or 265 Over Treasuries
      • Wisconsin Electric (“A-” Unsecured) Issued A Five-Year Deal at 6%, Or 300 Over Treasuries
        • Last December, West Penn (BBB) Issued 10 Yr At A Spread Of Approximately + 200 bps .
    • 23. Responses to Liquidity Concerns
      • “ In light of the uncertain market environment, we made this proactive financial decision to increase our liquidity and cash position, and to bridge our access to the debt capital markets. This improves our flexibility as we continue to execute our business plans.”
      • David Hauser, CFO Of Duke Energy , referring to decision to draw down $1 billion on September 30 from its Bank Credit Agreement
      • AEP drew down $1.4 billion under its existing credit facilities on october 8 “to increase its cash position while there are disruptions in the debt markets. The borrowings provide AEP flexibility and will act as A bridge until the capital markets improve.”
              • 8-k filed by AEP October 10, 2008
    • 24. Conclusions
      • Regulated Utilities Are As Well Positioned As Any Market Sector To Contend With The Currently Clogged Credit Markets
      • The Liquidity That Utilities Secured During The Go-Go Years Of The Credit Push Should Serve Them Well
      • Credit Will Be More Costly For An Indeterminate Period Of Time
      • Projects Will Be Delayed, With More Budget Dollars Redirected Toward Maintenance From New Construction, Which Will Inevitably Increase The Threat To Reliability
      • Investors Will Be Evaluating The Relationship Between Utilities And Their Commissions As Closely As They Ever Have