Imperial Valley Renewable Energy Summit

March 13, 2014Jonathan M. Weisgall

Vice President, Legislative and Regulatory AffairsMidAmerican Energy Holdings Company

• Changes, challenges and uncertainties facing the industry – with focus on California

• Political/policy energy issues facing Congress

• Looking ahead: 2014 midterm elections and 2016

Topics

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Changes, Challenges and Uncertainties

in the Energy Industry

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• Changing environmental standards: EPA rules (MATS; NSPS; regional haze; cooling water intake structures; coal ash) and pressure to change resource mix

– 60 GW of coal plants to retire by 2017 (20% of U.S. coal fleet)– Retirements just getting under way – only 18 GW retired so far– Another 48+ GW of closures over next four years– Impact on reliability? Pushback from winter “polar vortex”

• 89% of the 7,000 MW of coal in AEP’s system slated for retirement needed and in operation during recent cold snap

• MidAmerican: 75% capacity factors in our 7 coals plants slated for MATS retirement (to be replaced by gas, which ran 2% – but need for capacity and transportation)

• Market entry by competitive third parties in power supply and ancillary services

Disruptive Changes Facing U.S. Utilities

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• Changing relationship between utility and customer:– Customer wants choice– Introduction of new technologies (smart grid,

digitizing equipment for controls and communication, e.g. NEST thermostats)

– Increase in customer autonomy (distributed generation)

– Customer as generator– Utilities are used to selling power, not buying it

Disruptive Changes Facing U.S. Utilities

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• Rising expectations for reliability• Aging plants (nearly 80% of coal plants >30

years old)• Move from centralized power to distributed

generation• Flat load growth – due to:

– Low economic recovery from recession– Distributed generation– Energy efficiency

Disruptive Changes Facing U.S. Utilities

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• Demand increases in the U.S. have all but stopped

• The recession has brought with it, for the first time ever, contraction in U.S. electricity demand

Growth in Electricity Use Expected to Slow

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• U.S. oil and natural gas policy for the last 40 years has been based on: – Resource scarcity – Growing demand

• Both assumptions have changed recently– Huge new shale gas/oil supplies – U.S. 2011 electricity demand 2007-2013: virtually

unchanged

Changes in Assumptions

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• No price on carbon, but utilities act like there is one• Renewables and nuclear need a price or penalty on

carbon emissions in order to grow• Impact of intermittent resources and renewable

integration costs• Minimal growth while investment needs and

mandates increase – RPS obligations: build renewables – Associated transmission – Compliance with EPA rules (pollution controls, fuel switching)

• With flat demand and rising capital needs, the unit cost of electricity will rise

Uncertainties in the Market

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• Goals: – Reliability – Affordability – Sustainability

• How to accomplish with tensions among them?• How to de-risk them?• How to integrate them with:

– Flat to lower growth? – Growing pressure for lower greenhouse gas

emissions?

Electricity Market Challenges

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California “Duck” Chart – Impact of Solar

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Implications of the “Duck” Chart

• Net load = hourly demand minus wind and solar • Midday net load drops 22,000 MW 12,000 MW

– Solar pushes gas off the system in the middle of the day– Impact on over-generation? Prices?

• Peak power not 2-5 pm but 6-8 pm; solar at zero• Huge operational challenges• Underscores need for ramping and flexible

generation that can respond quickly to system needs– Steep ramps – as much as 13,000 MW in 3 hours by 2020– Multiple ramps per day

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• System peak loads in the West occur after 6:00 pm (blue)

• Market prices are highest during system peak (green)

• Solar and wind peak production is not coincident with either peak load or peak prices (red)

Non-coincidence of Western Peak Load, Prices and Wind and Solar Production

The graph depicts the timing of the maximum of the curves, not the absolute amounts

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Peak Use vs. Solar and Market Prices*

System Peak Load Solar Palo Verde Market Prices

*July monthly averages

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Utah Study Area

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Study areaAugust 2, 2010

Customer Use Solar Production

• Reliability impact of coal plant retirements– Coal: 45% of electricity mix in 2011; 38% in 2012 – Natural gas: 25% in 2011; 31% in 2012

• Will low natural gas prices continue? Volatility? • Coal plant’s 30-day on-site fuel supply vs. gas plant’s

reliance on daily “just in time” deliveries from pipeline• Limit/prohibit exports of domestically produced gas?• Will gas become the coal of tomorrow? EPA fracking

regulations?• Sierra Club’s Michael Brune: “We’re going to be

preventing new gas plants from being built wherever we can”

Uncertainties – Coal and Natural Gas

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Natural Gas Prices

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U.S. Spot Prices

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• Renewable barriers – Boom-bust cycle of tax incentives (PTC) – Renewable integration challenges (duck chart)– Low natural gas prices

• Policy drivers – which will continue? – Tax policies: PTC; ITC; MLP; state tax policies;

comprehensive tax reform? Come back to later– RPS mandates:

• 29 states with RPS programs• 2013: bills in 14 states to water down or repeal them all

rejected – EPA regulations of coal plants

Uncertainty – Renewables

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• Impact of: – Flat to lower demand for electricity? – Less reliance on coal, more on natural gas and

renewables?– Increased energy efficiency? – EPA regulations?

• Significant decline in GHG emissions– 2012: U.S. power sector CO2 emissions were 15% below

2005 emission levels – Lowest levels since 1996 – (2020 reduction target under Waxman-Markey climate

change bill was 17% below 2005 levels)

Results of These Changes and Trends?

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• DOE grant/loan program expired 12-31-11• Wind production tax credit expired 12-31-13• Solar investment tax credit will expire 12-31-16• Bonus depreciation expired 12-31-13• RPS appetite filling up• PPA prices falling dramatically• Fewer projects with more bidders• Bidders accepting lower returns• Auctions vs. bilateral negotiations

The Evolving Renewables Market

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• California– 44% reserve margin; large-scale projects more difficult to

come by– Three large IOUs collectively served 20% of their 2011-

2012 retail electricity sales with renewable power – two years ahead of schedule

– Must meet 25% by 2016 and 33% by 2020• Wind PTC “start of construction” – seeing rush to

install wind developments in 2014-2015• Solar: large growth market for commercial behind-

the-meter projects and residential rooftop development

Near-term Prospects for Renewables

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Jan.-Sept. 2013 U.S. Generation: 3.08 Billion MWh

Coal39.0%

Petroleum0.7%

Natural Gas27.7%

Other0.6%

Nuclear19.2%

Hydro6.8%

Biomass1.4%

Geothermal0.4%

Solar0.2%

Wind4.0%

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U.S. Wind Power Capacity Growth2,327 MW under construction

In the 4th quarter 2013

Q323

U.S. Solar Power Capacity Growth

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• There currently are in excess of 10,250 MW of solar electric capacity operating in the U.S.

• The overall solar electric market remains on pace for another record year, with an estimated 1,780 MW of PV and 800 MW of concentrating solar power projected to come on-line in 4th quarter 2013

• The future remains strong in the near-term

Average Solar PV Price Decline

• Utility scale systems typically run lower, in the $2.00-$2.50/watt range

Average solar panel efficiency is up 20% over the last five years

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• SONGS and OTC plant closures – replace with:– Renewables or even more natural gas-fired

generation?– Energy storage?– Energy efficiency?– Demand response?– Distributed generation?

• Impact of need for flexible capacity on geothermal• Upgrade existing gas plants to allow greater

flexibility?• Surge in rooftop solar; need for rate redesign

California Challenges

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OTC and SONGS Retirement

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California Power Mix

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• California pushing hard for more renewable energy and energy efficiency, but gas remains key

• State aims to have 33% of power generation from renewables by 2020

• Gas likely to remain important as fast-ramping power resource, in off-peak periods

• Mitigating over-generation• Renewable integration requires right mix of:

– Flexible resources with fast start-up and ramp capabilities– Energy storage– Demand response – Dispatchable renewable generation

• Need for diversification of renewable resource technologies and locations to help smooth integration

– In-state vs. out-of-state renewables– Transmission hurdles

California Challenges

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• Requires SCE, PG&E and SDE&E to procure 1,325 MW of energy storage by 2020

• Procurement flexibility:– Utility may defer up to 80% of

procurement target to next cycle– Over-procurement in a cycle can

reduce procurement of future cycle– Utility may shift up to 80% of target

MWs between transmission and distribution domains

• Pumped storage eligibility limited to 50-MW projects

• No energy related requirement (duration of discharge)

California Energy Storage Mandate

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• Operational challenges:– Increased supply volatility – more than 20,000 MW wind/solar

capacity needed to meet 33% RPS– Uncertainty surrounding thermal resources – approximately

12,000 MW of thermal generation will be repowered or retired– Reduce greenhouse gas emissions to 1990 levels by 2020– Less predictable load patterns with increasing rooftop solar and

electric vehicles• Benefits of increased regional coordination

– Energy imbalance market – Additional flexibility to support operation– Mitigate over-generation – Lower energy costs– Efficient use of reserves

California Challenges

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Regional Transmission Organizations

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Western Interconnection Balancing Authorities

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CAISO-PacifiCorp Energy Imbalance Market

• Balances electricity supply and demand every five minutes by choosing least-cost resource to respond to energy imbalance in real-time during times of under- or over-generation

• Leverages geographical diversity to optimize available regional resources

• Automation more efficiently dispatches resources across balancing authorities that rely on manual dispatch and extra reserves to maintain reliability

• Takes advantage of unused capacity on transmission lines

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EIM Basics

• EIM is not a Regional Transmission Organization (RTO) – All participating balancing authorities maintain control of their

assets and associated reliability compliance obligations• EIM participation is voluntary• Will not affect PacifiCorp’s “contingency reserve”

obligations or reserve sharing agreements• Does not require that parties consolidate balancing

authority areas• Does not change PacifiCorp’s balancing responsibilities

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Projected EIM Benefits• Good for affordable, sustainable, reliable themes• Cost savings:

– Savings from serving imbalance from the most economic resources, drawn from a larger pool of resources

– Annual benefits to PacifiCorp/CAISO customers $21-$129 million

• Improved renewable integration: – Helps integrate renewable resources by capturing the benefits of

geographical diversity of load and resources – Optimizes the use of renewable energy

• Increased reliability: – Increases operational awareness and responsiveness to grid

conditions across a larger footprint (CAISO, PacifiCorp, BPA)

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EIM Implementation• EIM implementation is on schedule for October 2014 to go

live• Market design stakeholder process is nearly complete

– The process resulted in five revisions of the market design document– Robust stakeholder participation in meetings held in Folsom, Phoenix

and Portland

• Additional stakeholder initiatives are underway, including:– ISO’s tariff design process– PacifiCorp’s stakeholder process– ISO’s governance process– BPA’s stakeholder process related to the PacifiCorp/ISO EIM

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Political Outlook

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• 2013: 72 laws passed by Congress and signed (fewest in >100 years)

– H.R. 1071 specifies size of the precious-metal blanks to be used in making National Baseball Hall of Fame commemorative coins

– H.R. 2383 names new bridge over the Mississippi River from St. Louis to Illinois as the ‘‘Stan Musial Veterans Memorial Bridge’’

– H.R. 1092 names an air traffic control center in Nashua, NH– H.R. 2289 renames Section 219(c) of the Internal Revenue

Code as the Kay Bailey Hutchison Spousal IRA– S. 459 adds 3 acres of parking at Minutemen Missile National

Historic Site in South Dakota– H.R. 3302 names a Veterans Affairs medical center in Bay

Pines, FL

Continued Deadlock

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• 2013: House passed 309 bills the Senate won’t consider• 2013: Senate passed 289 bills the House won’t consider• 1947-48 “Do Nothing” Congress: passed 511 bills• Congress’ approval ratings (Gallup Poll since 1974):

– January 2014: 13% – January 2013: 14%– January 2012: 13%– All-time low: 9% (November 2013)– Historic average: 33%– Rarely above 20% in last three years– Shared disdain: 17% of Republicans, 11% of independents, and

14% of Democrats approve of Congress (January 2014)

Continued Deadlock

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But Some Progress in Congress

• Functioning at a minimal level• 2-year budget deal passed in Jan. 2014

– First budget deal since 2011– Will ease new round of sequestration cuts for 2014– No cuts in entitlements; no tax increases; cease-fire– Guarantees no government shutdown

• “Clean” debt ceiling passed Feb. 2014– No hostages– Another blow to Tea Party

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• Mainstream Republicans are pushing back against the Tea Party

• Business groups (Chamber of Commerce) are engaging in primaries

• Water Resources Development Act bill passed House 417-3 shortly after the shutdown, despite opposition from Freedom Works and Heritage Action

• Speaker John Boehner on Tea Party colleagues: “knuckleheads”

Is Change in the Air?

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A Moment of Bipartisanship?

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• Senate Finance Committee Chairman Max Baucus (D-MT) approved as new U.S. ambassador to China

• Senate Energy and Natural Resources Committee Chairman Ron Wyden (D-OR) new Finance chairman

– Will push for production tax credit and other tax extenders• Sen. Mary Landrieu (D-LA) will take over Energy

Committee– Conservative Democrat from oil and gas state (but MISO)– Will use chairmanship to message for her tough re-election

in fall– First talk as chair: no mention of “carbon” or “climate”

Senate – New Committee Chairs

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Policy Outlook: Which Energy Issues Will/Should Congress

Address?

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• You’re an environmental activist on Election Day 2008. Democrats win White House, Senate and House

• Would you believe that in 2014: – No successor treaty to the Kyoto Protocol? – Congress would not have enacted climate change

legislation? – Domestic oil production would be soaring even after a

catastrophic offshore oil spill? – Environmental community would be debating whether it

should support nuclear power?– Americans are more likely to believe that there are signs that

aliens have visited Earth (77%) than that humans are causing climate change (44%)? (NY Times 1-18-14)

Election Day 2008: Think of 2014

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• Outlook for any energy legislation: bleak to zero (gridlock)

• Do we have a U.S. energy policy? No; tax/environmental policies

• With deadlock, role of executive branch increases (EPA)

• With deadlock, role of states in crafting energy policy increases

Energy Legislation in 2014

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• Congress can spend, regulate/investigate, tax

• Spend:– Department of Energy grants and loan

guarantees (expired 12-31-11): no – Research and development funding: yes – More stimulus funding: no – Department of Defense spending: yes

Energy Legislation in 2014

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• Regulate/investigate:– Cap and trade or any other climate change legislation: no– Federal clean (or renewable) energy standard: no– Energy efficiency

• Bipartisan bill passed Senate committee 19-3 in May 2013• Senate floor – how to prevent amendments on Keystone, climate?

– Prohibit EPA from regulating fracking: no – Prohibit EPA designating coal ash as hazardous waste: no– Stop or delay implementation of EPA rules: no – Natural gas export restrictions: no – New agency to manage nuclear waste: needed but unlikely – Cyber security: no; executive order instead– Physical security (Metcalf): FERC will try to preempt Congress

Energy Legislation in 2014

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• Investment tax credit (ITC) (solar):– Energy Policy Act of 2005: 30% from 1-1-06 – 12-31-07– 2008 law extended solar ITC through end of 2016 at 30% – Solar industry opted for ITC and not production tax credit – After 12-31-16: ITC will revert to 10% without new legislation– ITC extension would benefit both utility-scale solar and solar roofs

• Production tax credit (PTC):– Energy Policy Act of 1992 – wind only– Expired three times, then reinstated; led to boom and bust cycles – Energy Policy Act of 2005 added geothermal and biomass– Extended in 2007, 2009 and 2013 – 2007-2012 average investment in U.S. wind: $18 billion– Wind: 35% of all new capacity added 2007-2012

Energy Tax Credit Legislation

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Historic Impact of PTC Expiration on Annual Wind Capacity Installation

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• 1-1-13: Fiscal cliff bill; extended PTC through 12-31-13• Change in language from in service by 12-31-13 to “start

construction” by 12-31-13• IRS guidance

– Projects that start in 2013 and completed by 2016 qualify – Projects that start in 2013 can also qualify after 1-1-16 if the

“continuous construction” or “continuous efforts” test is met• 1-1-13 – 6-30-13: one wind MW installed• 3Q 2013: 68.3 MW added (v. 13,131 MW in 2012)• 2014 wind power capacity additions: 6,000-10,000 MW

2013 PTC Extension

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• All 55 “tax extenders,” including PTC, expired 12-31-13 • Talk of tax extenders held in abeyance while Congress

considered comprehensive tax reform • Senate view:

– Comprehensive tax reform dead– Finance Committee Chairman Ron Wyden (D-OR) will move

extenders bill quickly, then to Senate floor – “Springboard to comprehensive tax reform”

• House:– Ways and Means Committee Chairman Dave Camp (R-MI) still

pushing tax reform; Republican leadership paying lip service– Start of construction language – a de factor extension?

2014: PTC Extension?

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• Senate has historically led on PTC extensions• What kind of extension?

– Straight one-year extension?– Permanent extension?– Phase-out?– Move to technology-neutral PTC?– Obama administration calling for permanent PTC

• Legislative vehicle? Can’t pass as a stand-alone bill– No more compelling tax/spending bills in 2014 – No bill until post-2014 midterm elections? If so, perhaps

extend PTC through 12-31-15?– If Republican wins Senate in 2014, PTC dead

2014: PTC Extension?

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What If the PTC Dies?

• How to justify the PTC against:– Tax reform– Deficit reduction– Corporate welfare– Special interest carve-out– Charge of market distortion (nuclear industry; negative bidding)

• What happens if PTC isn’t extended?– Renewable technologies will compete unsubsidized– Wind development cycle will correlate to price of natural gas– Domestic manufacturing industry will consolidate to survive– Cost of renewable energy will become more apparent to

customers– Main driver will be state RPS programs

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• No agreement on goals except to broaden the tax base and lower rate

– Generate more revenue? (Democrats want additional $1 trillion in revenue, Republicans none; no agreement)

– Pursue corporate tax reform (Democratic view) or corporate and personal (Republican view)?

• Politically risky; can it pass?• Not a high priority for Obama; need presidential

leadership (Reagan 1986)• Republican leadership: Why divert attention away from

Obamacare?

Comprehensive Tax Reform? Unlikely

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New Business Models

• New tax structures needed resembling oil/gas industries?• Master limited partnership and real estate investment

trusts (REITs) (used for pipelines)– MLPs: taxed as partnership; profits taxed once (no corporate taxes)– Shares can be traded like traditional stock (e.g. Kinder Morgan)– Low-capital-cost ways of financing infrastructure/broader investment– MLP/REIT: neither is available to renewable energy investors– Both would cost Treasury less than solar ITC and wind PTC – Do these run counter to tax reform?

• Carbon tax? No…. but– Trade-off: strip EPA of authority over GHG emissions? – Major source of revenue – or could be made revenue neutral

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Looking Ahead: 2014 Midterm Elections

and 2016

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• Voter turnout– Presidential: 51%-61%– Midterms: 35%-41%

• 2010 midterms – Republicans gained:– 63 House seats– Control of governorships and legislatures in 12 states

• Skewed towards white and elderly voters– 2010 youth vote dropped 60% from 2008

• Frequently seen as a referendum on the incumbent president

• Record number of independent voters

Midterm Trends

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Party IdentificationYearly Averages 1988-2013

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• Currently 55-45; GOP needs to win six seats to take over• Republicans will gain seats; coin toss as to takeover• Math hurts the Democrats:

– Democrats defending 21 Senate seats, Republicans 13– Only one GOP seat (ME) in a state Romney failed to win– Six Democratic seats in states Romney carried by 14 or more points

(LA, AR, WV, SD, MT, AK)• 13 of 15 most vulnerable seats are held by Democrats• Only two Republican seats even in question: GA and KY • Key issues:

– Obamacare (polls: fix it, don’t repeal it)– Obama popularity– Intra-party Republican fights (Tea Party)

2014 Senate Races

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• Obama’s ratings are low:– Approval ratings in the low 40s, as high as 45%

• Almost identical to George W. Bush at this point in his presidency• Trailing far behind Reagan (low 60s at this point)• Trailing Clinton (high 50s)

• Disapproval ratings >50% in 10 of the 21 states where Democrats are defending Senate seats

– High in open Democratic seats in WV (67.3%), MT (60.9%) and SD (59.3%)

– Also high in two of Democrats’ most vulnerable states: AR (57%) (Mark Pryor) and AK (55.4%) (Mark Begich)

2014 Senate Races – Obama Popularity

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• Will Republicans field weak Tea Party candidates as in 2010 –Christine O’Donnell (DE), Ken Buck (CO), Sharon Angle (NV) – and 2012 (Todd Akin (MO), Richard Mourdock (IN))?

• Sen. John McCain (R-AZ)– 2008 Republican presidential candidate– Faced Tea Party challenge in 2010

• 7 of 12 Republican senators running in 2014 face Tea Party primary challengers

– Time, energy and money spent on primaries hurt in general election– Must take seriously – Sens. Bob Bennett (UT-2010), Lugar (IN-2012)

• Sen. John Cornyn (R-TX): second most conservative senator– Other Texas senator (Ted Cruz) won’t endorse Cornyn

2014 Senate Races – Tea Party

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• Most likely to change:– SD: Tim Johnson (D) retiring; former Gov. Mike Rounds (R)– WV: Jay Rockefeller (D) retiring; Rep. Shelley Moore Capito (R)– AK: Mark Begich (D); contentious GOP primary– MT: Max Baucus (D) retiring; Lt. Gov. John Walsh now incumbent– LA: Mary Landrieu (D) vs. Rep. Bill Cassidy (R)– NC: Kay Hagan (D): State House Speaker Thom Tillis – GA: Saxby Chambliss (R) retiring; Michelle Nunn (D)– KY: Mitch McConnell (R) vs. Alison Grimes– MI: Carl Levin (D) retiring; Rep. Gary Peters vs. former Secretary of

State Terri Lynn Land– IA: Tom Harkin (D) retiring: Rep. Bruce Braley (D) vs. open GOP field– CO: Mark Udall (D) vs. Rep. Cory Gardner (Ken Buck dropped out)

2014 Senate Races

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• Current Congress: 234-201 Republican advantage• Democrats need 17 for majority in 2014• House Republicans:

– 204 (90%) won with 55% of the vote or more– 140 (60%) won by 60% or more– Their main worry: not a Democrat unseating them in general election,

but loss in Republican primary to conservative challenger• 46% of House Republicans have been there for three years or

less; deficit/spending more important than national security• 93% of House Republicans occupy districts carried by

Romney; 96% of Democrats represent Obama-won districts

2014 House Outlook – Little Change

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• Republican challenges:– Last Republican to win more than 300 electoral votes: Bush (1988)– 18 states + DC voted Democratic last six elections, with 242 of the 270

electoral votes needed to win– Republicans have lost the popular vote in five of last six elections

• Republican advantage: only once since World War II (1988) has a party won the presidency three times in a row

• Democratic candidate: Hillary Clinton (support of 73% of Democrats)• Democratic danger: more emphasis on Clinton than 2014 Senate• Republican candidate:

– Wide open race – no early favorite, no establishment pick– Governors: Pence (IN), Walker (WI), Jindal (LA), Kasich (OH), Christie (NJ)– Former candidates: Gingrich, Santorum, Perry, Huckabee, Trump, Cain– Sitting senator – Cruz, Rubio or Paul?– Bring back Jeb Bush? Another Bush-Clinton election?

Looking Ahead – 2016

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