Eric AckermanDirector, Alternative Regulation

EEI/AGA Accounting ConferenceMay 16, 20016New Orleans

Industry Update:Industry Vision 2030

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Overview

Transformative change- Distributed energy growing at scale- Modernizing the grid, integrating variable renewable energy- Working with a new kind of customer - Evolving new kinds of energy businesses

Industry vision 2030 - Grid modernization - Customer solutions - Clean energy

Conclusions- Facilitating needed regulatory innovation

Markets Are Changing: DER Is Growing At Scale

Effectively all incremental growth in capacity will come from customers

30%

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Growing Capital Expenditures

103.395.8

90.6

108.6101.2

92.2

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)

Actuals

Projections (July 2014)

Projections (Sept. 2015)

Source: EEI Finance Department, company reports, SNL Financial (September 2015).

Notes: Total company spending of U.S. Investor-Owned Electric Utilities, consolidated at the parent or appropriate holding company.Projections based on publicly available information and extrapolated for companies reporting fewer than three projected years (11% and 12% of industry for 2016 and 2017).

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Projected Functional CapEx

$95.2 B

as of October 2013 as of September 2015

$108.6 B

6% 6%7% 5%

12% 12%

17% 18%

21%26%

37%

32%

$0 B

$20 B

$40 B

$60 B

$80 B

$100 B

Generation

Distribution

Transmission

Gas-Related

Environment

Other

2013P 2015P

Notes: Total company functional spending of U.S. Investor-Owned Electric Utilities. 2015P total does not sum to 100% due to rounding. Projections based on publicly available information and extrapolated for companies not reporting functional detail (1.3% of industry).

Source: EEI Finance Department, company reports (September 2015).

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Traditional Distribution System: designed for one-way power flow from transmission to meet peak load

Graphic: Duke Energy

1110

12Old design paradigm:• Like a water system – larger wire

decreasing to smaller wire at customer• Largely analog protection and control

systems• Voltage managed by controlling drop

from transmission to customer• “If it works at peak load, it always works”

Diagram illustrates the major components of the traditional system used to deliver electricity to homes and businesses. From left to right : (1)power plants and renewables, (2) transmission lines, (3) transmission to distribution substation, (4) distribution feeder, (5) power pole, (6) fuse, (7) tap line (the type of line that runs along many streets, (8) pole-top or pad-mount transformer, (9) service lines to individual homes, (10) Pole mounted capacitor banks or line regulators to adjust voltage downstream, (11) Pole mounted switches mechanical, automated line sectionalizers and automated reclosers used to isolate sections of line, reconfigure circuits and automatically restore sections after an outage, (12) substation load tap changers and capacitor banks to adjust feeder voltage

Integrated Distribution System: Designed for resiliency & multi-way power flows across distribution with millions of integrated DER

Major components of an Integrated Grid. (1) Distribution circuit designs that enable bi-directional flow and increased resiliency, (2) Digital protection systems and distributed controls and phasor measurement units (PMUs), (3) Substation energy storage to manage distribution peaks and circuit balancing, (4) Automated circuit switches for line sectionalizing and restoration, (5) Communicating line sensors for fault current, power and power quality measurement, (6) power electronics based power flow controllers to manage voltage, VAr and power quality, (7) Community energy storage units, (8) Unified operational field area telecommunications network linking edge devices to substations and utility wide area network, (9) Advanced distribution operational software and data management systems, (10) Integrated T&D&DER situational & control systems with bulk power system ISO/Balancing Authorities

The Power Supply Is Getting Cleaner and Greener

Source: ABB; The Velocity Suite. Projected additions data is based on existing plans announced by companies and projected retirements include plants to retire based on their age.

Capacity additions and retirements, actual and projected

2013

ProjectedIndustry investments are confirming the trend toward an ever-cleaner generation fleet.

Our National Fuel Mix Is Changing

Source: Department of Energy, Energy Information Administration

2005 National Fuel Mix 2015 National Fuel Mix(estimate)

1/3 carbon free and 1/3 natural gas

U.S. Power Sector CO2 Emissions Are Declining

As of the end of last year, industry CO2 emissions were 15 percent below 2005 levels, and nearly one-third of U.S. power generation came from zero-emissions sources. This trajectory will continue and be accelerated under the Clean Power Plan.

Source: Developed from U.S. Energy Information Administration, Monthly Energy Review March 2014

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Social Business: Engaging Customers Anytime, Anywhere

56% of US adults have smart phones 91% of US adults have cell phones 58% of Americans perform online research concerning the products and services that they

are considering purchasing & 31% of cell phone users bank online U.S. e-commerce sales totaled $225.5 billion last year, up 15.8% from $194.7 billion in 2011 Macy’s increased traffic and improved conversion rates for its online sites, resulted in a 41.0%

growth in its online sales in 2012 compared with 2011

Source: Pew Research

82% of US Adults use the Internet & 56% using smart phones

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Customer Evolution

Choice Always On Personalization Information Abundance Accelerating Technology Advancement

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Self-ManageCost

Self-RelianceReliability

Self-RelianceSupply

Optimization

Customers continue to evolve based on general consumer and business expectation trends and experiences across the US.

Customer-Grid EvolutionCustomer DER driven by resilience, economics & environmental objectives

• Increasingly networked, increasingly transactive

14© Copyright 2014, Newport Consulting Group, LLC

Operational Evolution: 1978-2001Transactive Energy: 2020+

DER at scale will likely lead to multi-party transactions and the creation of local balancing & distributed markets to integrate customer DER

Industry Vision

A future which is: Reliable

Sustainable

Affordable

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Recognizing the value of the grid The indispensable enabler of clean energy Unbundling existing grid services, incenting innovative new services

Building modern energy grids Preserving leadership in planning and operations! Explaining the challenges - integrating renewables, protecting core customers, managing

granular data for the new planning, strengthening cybersecurity defenses Demonstrating solutions

Financing modern energy grids Promoting alternative regulatory policies and mechanisms to mitigate lag, preserve credit Facilitating new planning and procurement procedures to provide regulatory certainty

Partnering with leading technology companies Facilitating new regulatory frameworks that support revenue sharing

Strategy re. Grid Modernization

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Reform rates To make fixed vs variable costs more transparent To gain increased flexibility for custom services

Shape market rules Offer DER on both sides of the meter – CHP, local generation, microgrids, storage, district

energy, EV charging Transferable policy models

Facilitate increased electrification Vehicles – cars, buses, trucks Off road – ports, airports, etc . Other applications

Develop forums for collaboration and partnerships Mobilize customers and partners to help advocate for enabling regulatory policies

Customer Solutions

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Expedite reforms governing wholesale electricity markets in ways that will enhance fuel diversity and reliability.

Achieve policies leading to full cost-recovery for prematurely retiring coal-based generation.

Develop interconnection policies that will simplify and clarify the integration of clean generation sources, including renewables and distributed generation, while maintaining reliability and safety protocols.

Create policies that will continue to enable full participation by utilities in all aspects of renewables and energy storage.

Continue support for policies that eliminate cost-shifting caused by net metering.

Develop policies that support the ongoing transition of the fleet.

Ensure that environmental regulations and policies facilitate the integration of new clean generation sources.

Clean Energy

Conclusions

The EEI/industry vision Reliable Sustainable Affordable

The incumbent utility needs to retain control Planning & operating the distribution system Visibility re. DER

Regulatory innovation is critical! Updating rates is a top priority Gaining new flexibility to work with customers to develop

customized products & services Developing new technology partners