Striking the Balance between Policy and Development of New Generation in Today’s Market - Steve Remillard, Competitive Power Ventures, Inc

D l i N G i i T d ’ M kDeveloping New Generation in Today’s Market

“Opportunity and Challenges”

Marcus Evans 10th Annual Generation Summit

Presented by:

Steven RemillardVice President

Competitive Power VenturesCompetitive Power Ventures

S I L V E R S P R I N G | B R A I N T R E E | S A N F R A N C I S C O | T O R O N T O

Overview

The Nation’s Energy Needs and Economic RecoveryEconomic downturn has suppressed demandpp

Historically, when economy rebounds, demand increases steeply

Current Market Conditions Creating Opportunity & ChallengesOpportunity Driverspp y

• Current energy market dynamics

• Environmental policy impacts

• Reliability

Th f i• The next wave of generation

The Challenges• Regional market policies impeding

new generation

• Regulatory uncertainty & risks

• Long term revenue to support financing

• Financeability

Clean Power – Energizing North Americawww.cpv.com

Competitive Power Ventures (“CPV”)p ( )

Background and StrategyCPV is a leading North American electric power generation d l t ( bl d t l fi d) d tdevelopment (renewable and natural gas‐fired) and asset management company headquartered in Silver Spring, Maryland, with offices in Braintree, Massachusetts; San Francisco, California; and Toronto, Canada

CPV has concentrated on a clean energy strategy utilizingCPV has concentrated on a clean energy strategy utilizing wind‐powered and high efficiency natural gas generation to meet growing demand in high load areas

CPV is owned by: CPV management, Warburg Pincus and several individual investors

ExperienceCPV has significant power plant development, financing, construction, and asset management experience.

CPV and its team of professionals are established power plant developers and managers, with f p f p p p g ,experience in developing, acquiring, financing or selling more than 20,000 MW of power generation assets.

Currently 85 employees led by 11 seasoned professionals with, on average, 20+ years of industry experience


Transactional experience – acquired and monetized over $10 Billion in power generation assets

Status of North American Power Markets

Low Electric DemandLoad growth throughout the United States in

recent years has been anemic with

compounded annual growth rates less than

2%

Low demand drivers:

• Economic recession

• Energy efficiency programs

Some exceptions include:

• ERCOT with a compound annual

growth forecast of 2.32%

• MRO‐MAPP with a compoundedMRO MAPP with a compounded

annual growth of 2.09%


Status of North American Power and Energy Marketsgy

Low Natural Gas Prices & Abundant Supply Increased economic pressure on older and less efficient generation

• Shale gas reserves have been a game changer

• Natural gas generation now dispatched ahead of coal generation

P i S bili Ab d l h i i dPrice Stability ‐ Abundant supply has mitigated gas price volatility

Decreases in spot and forward natural gas prices in combination with low demand for electricity have

d i t d f tcaused energy margins to decrease for generators

Natural gas provides a cost effective environmental alternative to nation’s fleet of older, dirtier and less efficient generation

E l i i t l l ti ld lt i• Evolving environmental regulations could result in 50+ GW of coal generation retirements before 2020 with the largest potential share occurring in the SERC and RFC regions of NERC


Source: The Brattle Group, “Potential Coal Plant Retirements: 2012 Update”, October 2012

Challenges Facing Coal & Older Less Efficient Generation g g

Stricter Environmental RegulationsEvolving or approved environmental regulations include:

• National Ambient Air Quality Standards

• Greenhouse Gas (“GHG”) Regulations‐ GHG Tailoring Rule

• Cross‐State Air Pollution Rule (“CSAPR”) Mercury and Air Toxics Standards (“MATS”)

• Section 316(b) ‐ Significant ramifications for existing once‐through cooling as well as surface water intakes

• Coal Combustion Residuals (“CCR”)

DOE study released in November 2012 predicts• New coal plant construction will effectively be put on

hold until 2040 due to evolving environmental regulations and low natural gas prices

EconomicsIncreased environmental compliance cost coupled with low natural gas prices will make older lesswith low natural gas prices will make older, less efficient coal facilities less competitive

RetirementDOE studies indicate construction of coal plants will not be cost effective until 2040

“….by 2030 about 90% of the lost coal‐fired capacity would be replaced by natural gas..”


DOE

Challenges Facing Renewables Energy Projectsg g gy j

Expiration of Production Tax Credits (“PTCs”)The “Boom‐Bust” Cycle• Renewable generation has experienced sharp declines

following the expiration of the PTC, the “Boom‐Bust” cycle

PTC Extended 1 More Year• Based on history, we can expect a significant decline inBased on history, we can expect a significant decline in

renewable generation following the PTC expiration in 2013

Existing Renewable Generation is Exceeding National Goals

Current renewable generation exceeds the nation’s renewable generation targets• Some states (IA, TX, WA and OR) are drivers in achieving

national targets

Saturation of Renewable Energy Credits (“RECs”) in key markets are suppressing pricing and need for RECs

Regulatory uncertainty due to changing RPS policy


g y y g g p y

Challenges Facing New Nuclear Generation g gNew Nuclear Generation Is Not Likely Option For the Future

Safety • The Fukushima Daiichi nuclear power plant earthquake• The Fukushima Daiichi nuclear power plant earthquake

catastrophe in March 2011 has raised new questions about the safety of nuclear power, especially in light of all the recent natural disasters

Construction Cost Uncertainty• Significant costs overruns for recent nuclear projects jeopardize

viability of developing future nuclear generation‐ Cost overruns are largely driven the changing regulatory environment and long construction periods

• U.S. Energy Department loan guarantees for the construction of two nuclear reactors in Georgia still require the approval of Congress – the ability to finance future nuclear projects remains uncertainrequire the approval of Congress the ability to finance future nuclear projects remains uncertain

Environmental • Long‐term storage of nuclear waste has proven politically difficult in some cases because of

environmental concerns as evidenced by the previous protracted discussions surrounding Yucca Mountain

Safer, More Economical and Environmentally Responsive Alternatives Exist• Natural gas generation is an environmental clean alternative and safer alternative

• Supplies of natural gas are abundant and prices are projected to remain low which make natural gas generation very economical long‐term

N l i id i l fl ibili


• Natural gas generation provides more operational flexibility

• Natural gas generation construction costs are more certain and therefore more financeable

The Next Wave of New Generation

With the potential retirement of significant generation capacity, natural gas generation is the logical replacement technology

Manageable development and construction periods (4‐5 years)

• New gas fired generation can be developed and constructed to replace the nation’s fleet of old, dirty and uneconomic generation

i b i bi ffi i iIncreasing combustion turbine efficiencies

• Improved turbine efficiencies provide cleaner and more economical generation

Lower emissions (NOx and CO2)

I d i l fl ibiliImproved operational flexibility

• Daily startup and cycling capabilities

• Faster startup times and ramp rates

• Improved turn down capabilities while• Improved turn‐down capabilities while still maintaining emissions compliance

• Fuel flexibility

Higher availability and reliability


Issues Impeding the Next Wave of New Generationp g

Capacity Market Structure – ISO‐NE, PJM, New York, ERCOT Some type of revenue surety is needed to facilitate financing of new generationyp f y f f g f g

Constant changing rules capacity markets present challenges for new generation• ISO‐NE – Recent FERC approval of major capacity market rule revisions and “pay for

performance” concept advanced by ISO NE

PJM P d difi ti t th Mi i Off P i R l (“MOPR”) di• PJM – Proposed modifications to the Minimum Offer Price Rule (“MOPR”) are pending before FERC

• New York – Revised “In City Mitigation” rules coupled with reversal of previously granted exemption for Astoria II

CO ill i k d i d l d• ERCOT –Will a capacity market construct designed to resolve resource adequacy concerns be enough to incent the new generation

State Procurement Processes Challenged at the Federal Level – MD and NJNJ

States continue to explore the best way to address reliability concerns and overall policy objectives (environmental and economic)


Financing Challenges in Today’s Marketg g y

Traditional Financing Structures Are Being Challenged

Merchant financing is limited/rare in today’s marketMerchant financing is limited/rare in today s market

Capacity markets in most ISO markets are not forward looking

enough to incent development or of sufficient term to support financing

Some markets do not provide a forward looking capacity price indicator – NYSome markets do not provide a forward looking capacity price indicator NY

Development of new generation is a multi‐year process

Capacity prices 6 or 12 months out are not enough of an indication of what capacity prices will be when new generation enters the market

While other markets may provide a forward looking capacity price the term may not be sufficient toWhile other markets may provide a forward looking capacity price, the term may not be sufficient to support financing – PJM, ISO NE

While capacity prices 3 years forward is a helpful indicator for development, surety of 1 ‐ year term on revenue of future prices to Development of new generation is a multi‐year process

Regulatory “Out” Risk

Allocation of regulatory uncertainties to new generation will continue to impede

development/construction


Balancing the Issuesg

Energy Market Dynamics Indicate a Need for New GenerationShrinking generation supply due to retirements resulting from g g pp y g f

economic and environmental pressure

Reserve Margins will be eroded without replacement generation

Reliability will become an increasingly more significant factor

Wildcard: What if there is an economic recovery?

How Will We Develop and Build New Generation?Current energy markets present significant barriers for developers

• Market signals are not aligned with capital markets

• Current prices do not support new build without a long term contract suitable for financing

Need long‐term financial arrangements to facilitate financing of new generation

• State sponsored contracts• State sponsored contracts

State Sponsored Contracts, Existing Generators and Market DesignState sponsored contracting to facilitate new builds impacts on the existing markets

• Capacity prices reduce


• Capacity prices reduce

– “‐” Impacts existing generators

Looking ForwardgWhat do we do?

Continue on the Current Path – Status Quo

Supply continues to shrink withoutSupply continues to shrink without

replacement generation

• Result: Jeopardize reliability

Continue to dis‐incent long‐term contracts

• Result: No financing – No new builds

Shrinking reserve margins, minimal forward looking price signals and lack of long‐term stable revenue surety

• Result: No new builds – What if there is an economic recovery?

OrOr,

Market Adaptations

Alignment of energy and capital markets

Bifurcated Capacity Markets f p y

A Role for States in Getting New Generation Built

Maryland, New Jersey, Connecticut and New York have all stepped in to encourage new generation

procurement where the markets have failed.


How will ISOs/FERC stymie or encourage further state involvement?

To Continue the Discussion:

Steve RemillardSteve RemillardVice President Competitive Power Ventures50 Braintree Hill Office Park, Suite 300Braintree, MA 02184Braintree, MA 02184781‐848‐[email protected]


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Striking the Balance between Policy and Development of New Generation in Today’s Market - Steve Remillard, Competitive Power Ventures, Inc