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The McGraw-Hill Companies
Generation & Transmission Industry Trends
Douglas M. Logan, Principal
Platts Research & Consulting / RDI
Presented to:
PES Policy Development Coordinating Committee
IEEE Summer Power Meeting
Chicago - July 24, 2002
2
Outline
• North American generation outlook
• Global generation outlook
• Transmission trends
• Regulatory trends
3
North American Generation Development
NEWGen July 2002 database shows 715,000 MW of projects in the U.S. and Canada.
112,812
100,000
40,180
167,752
116,295
91,638
86,464
Operating
Under Constr
Advan Develop
Early Develop
Proposed
Tabled
Canceled
4
Tabled and Canceled Projects
Tabled and canceled projects have surged since November 2001.
0
5,000
10,000
15,000
20,000
25,000J
ul-
98
Oc
t-9
8
Ja
n-9
9
Ap
r-9
9
Ju
l-9
9
Oc
t-9
9
Ja
n-0
0
Ap
r-0
0
Ju
l-0
0
Oc
t-0
0
Ja
n-0
1
Ap
r-0
1
Ju
l-0
1
Oc
t-0
1
Ja
n-0
2
Ap
r-0
2
Ju
l-0
2
Tabled/Canceled Date
Ca
pa
cit
y A
dd
itio
ns
- M
W
Tabled
Canceled
5
What Is Getting Tabled or Canceled?
NEWGen March 2002 database shows 66,500 MW of projects in April 2001 database tabled or canceled since April 2001.
0
5,000
10,000
15,000
20,000
25,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2050
RDI On-line Date as of April 2001
Ca
pa
cit
y A
dd
itio
ns
MW
Early Develop
Advan Develop
Under Constr
Operating
Status in April 2001
6
What Is Getting Built?
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
Operating UnderConstr
AdvanDevelop
EarlyDevelop
Proposed
Ca
pa
cit
y A
dd
itio
ns
MW
Other
Renewable
Gas CT
Gas CC & Cogen
Coal
Gas still rules.
7
North American Generation Capacity Additions
After removing tabled or canceled projects there are 537,000 MW of “active” projects in the U.S. and Canada. But ...
0
20,000
40,000
60,000
80,000
100,000
120,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 ?
On-line Year
Ca
pa
cit
y A
dd
itio
ns
- M
W
Proposed
Early Develop
Advan Develop
Under Constr
Operating
8
North American Additions in Historical Perspective
The current boom is modest relative to what happened in the 1970s.
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
1970 1975 1980 1985 1990 1995 2000 2005 2010
Ann
ual C
apac
ity A
dditi
ons
- M
W
Under Devel
Under Const
Operating
9
Projected U.S. Supply / Demand Balance
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
SU
PP
LY
/DE
MA
ND
- M
W
EXISTING + OTHER NEW PEAK PEAK + RESERVE
Surpluses may persist in some regions through 2008. But shortages may return if generation development fails to pick up again.
10
Wholesale Power Market Price Trends
0
50
100
150
200
250
300
350
400
450Ja
n-9
7
Apr-
97
Jul-
97
Oct
-97
Jan-9
8
Apr-
98
Jul-
98
Oct
-98
Jan-9
9
Apr-
99
Jul-
99
Oct
-99
Jan-0
0
Apr-
00
Jul-
00
Oct
-00
Jan-0
1
Apr-
01
Jul-
01
Month
ly A
vera
ge M
W D
aily
On-P
eak P
rice
-
$/M
Wh
CINERGYERCOTFLORIDAMID-CNEPOOLNP15PALO VERDE
High prices in the West collapsed a year ago.Midwest price spikes have not recently recurred.
11
Projected Wholesale Power Market Prices
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.002001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Pro
ject
ed M
ark
et Pri
ce $
/MW
h
CALIF ECAR
ERCOT FRCC
MAAC NE
High prices last year in the West and moderate prices elsewhere have given way to low prices as surplus develops.
12
RDI Baseline Gas PriceForecast
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
1998 2000 2002 2004 2006 2008 2010 2012 2014
RE
AL
20
02
$/ M
MB
TU
Henry HubNew York City HubChicago HubAECO-C, ABTopock, AZOpal, Rockies
The long-term price outlook is between $2.75 and $3.50 per mmBtu.
13
Sources of U.S. Incremental Supply
• The Gulf-of-Mexico, the Rocky Mountains, Eastern Canada, and Arctic supply all will share a role with LNG in growing the U.S. gas supply base.
• Several of these marginal sources – deep onshore gas, LNG, the Eastern Canadian offshore areas - and the Northern Frontier have surprisingly similar full-cycle development costs.
(5,000)
(4,000)
(3,000)
(2,000)
(1,000)
-
1,000
2,000
3,000
2000 2002 2004 2006 2008 2010 2012 2014
INC
RE
ME
NT
AL
SU
PP
LY
- M
MC
FD
LNG
CANADIAN IMPORTS
ROCKY MOUNTAINS
OFFSHORE GULF OF MEXICO
OTHER U.S. L48 SOURCES
14
Global Generating Capacity Additions
0
20,000
40,000
60,000
80,000
100,000
120,000
140,0002001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Ann
ual C
apac
ity A
dditi
ons
- M
W
North America
Latin America
Asia
E Europe & FSU
Western Europe
Africa & Middle East
The global outlook is heavily dependent on what happens in Asia.
15
Global Generating Capacity Additions
-
20,000
40,000
60,000
80,000
100,000
120,000
140,0002001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Annual C
apaci
ty A
dditio
ns
- M
W
Other
GT
CC/Cogen
Coal
16
Trend in Planned Transmission Additions
0
2,000
4,000
6,000
8,000
10,000
12,000
1996-2005
1997-2006
1998-2007
1999-2008
2000-2009
2001-2010
Planning Horizon
Su
m o
f M
iles
4.0%
3.4%3.3%
3.4%
4.0%
5.0%
The declining trend in planned transmission additions has bottomed out.
Source: NERC ES&D database, various years.
Planned additions as % of existing miles
17
Length Distribution of Planned Transmission Additions
0
20
40
60
80
100
120
140
160
<0 0-10 10-20 20-50 50-100 100-200 200-300 >300
Length Miles
Nu
mb
er
of
Pro
jec
ts
Planned additions are still dominated by short projects.
Source: NERC ES&D database, 2001.
18
Generation DevelopmentMid-Atlantic
The current pattern of generation development is dominated by gas-fired projects near load centers.
Source: NEWgen database; POWERmap.
19
Financing Transmission Projects
• Rolled in– ERCOT Transmission Expansion
• Allocated between system & generation– PJM RTEP
• Participant funded with firm rights– Path 15 Upgrade
• Merchant– Neptune
20
Path 15 Upgrade - Participants
• Trans-Elect 72% $249.6M Line• PG&E 18% 55.1M Substations• Western, PM 10% 1.3M Land
21
What Is a Merchant Project?
• Assumes full market risk• Creates tradeable transmission rights• Makes initial capacity allocation by open
season• Allows access by competitors• Is subject to market monitoring• Does not impair existing rights• Is subject to RTO coordination & reliability
requirements
22
Trans-Elect
• Formed early 1999• First “truly independent” transmission
company• First acquisition July 4, 2001• Goal: Two acquisitions per year• Owns 12,600 miles of line, acquired from:
– TransAlta– Consumers Energy
23
Business Plan
• Roll-up of transmission assets in North America
• Purchase from:– Investor-owned utilities– Municipals and cooperatives
• Construction of additional transmission capacity
• Privatization of government facilities
Source: Presentation by Fred Buckman, January 24, 2002.
24
Business Plan
• Premises– Transmission is not a growth asset.– Transmission divestiture is a growth
strategy.– Transmission divestiture is a solution to
the issue of marketplace independence.
Source: Presentation by Bernie Schroeder, March 25, 2002.
25
Business Plan
• The case for divestiture– Utility stock prices have under-performed
most major averages.– Aggressive restructuring is rewarded in
share price.– Regulators will reward divestiture.– Passive control devalues asset.
Source: Presentation by Bernie Schroeder, March 25, 2002.
26
Business Plan
• Benefits to the seller– No more FERC regulation– Opens up several options to improve shareholder
value– Creates cash for seller– Regulatory incentives for independent acquisition
to be shared with seller– Expansion and quality of service assured by “for-
profit transmission utility with the single goal of maintaining high standards of reliability”
– Seller controls reinvestment of sale proceeds
Source: Trans-Elect web site.
27
Business Plan
• Buyer’s expectations with divestiture– Higher ROE– Favorable capital gains treatment– Favorable capital structure treatment– Incentives to invest new capital– Long-term rate freezes.
Source: Presentation by Bernie Schroeder, March 25, 2002.
28
How Trans-Elect Will Make Money -- The Risks
• What is assured– Regulated rate of return
• What is not assured– ROE premium on acquisition– Recovery of acquisition premium– ROE premium on new facilities– Performance-based regulation
29
FERC’s Repeated Attempts to Create Open Power Markets
• Attempt #1 - Orders No. 888 & 889– To establish non-discriminatory access
• Attempt #2 - Order No. 2000– To promote independent control of systems
• Attempt #3 - July 2001 Mediation Orders– To address recalcitrance and potential problems
with small RTOs
• Attempt #4 - Standard Market Design– To address unwillingness to form super-RTOs
FERC’s orders are multiple attempts to eliminate discrimination in transmission access and administration.
30
RDI Transmission Study
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