Addressing Electric Reliability and High Energy Costs This Winter and Beyond: Policy Solutions

1. Addressing Electric Reliability and High Energy Costs This Winter and Beyond:Policy Solutions Restructuring Roundtable Boston, MA December 9, 2005 Daniel L. Sosland Executive Director Environment Northeast December 9, 2005

2. Non-profit environmental research and advocacy organization with staff of lawyers and policy experts based in Connecticut, Maine and Boston working in the New England and Eastern Canadian region • Projects Include: Energy Conservation and Renewable Energy, Climate Change Solutions and Diesel Emissions Reduction Restructuring Roundtable, December 9, 2005

3. Reliability and Policy Solutions: Context • States and Region Can’t Control Commodity Energy Prices, but Can Control Demand • Energy Efficiency • Lower cost • Effective Quickly • Ancillary Economic and Environmental Benefits • Need to Pursue Short and Long Term Policies to Optimize Low Cost Efficiency Options • Existing Programs • Additional Opportunities • Longer Term: • Supply Options are Constrained and Expensive • New supply sources are problematic: nuclear, coal, oil, LNG, gas Restructuring Roundtable, December 9, 2005

4. Natural Gas Supply CostsCommodity Price Increases Energy traders believe the price of natural gas will remain high through the end of next year Price Increase due to increasing US demand, declining US production, inability to site import facilities, and recent hurricanes Restructuring Roundtable, December 9, 2005

5. Fuel Oil Supply CostsFuture Commodity Prices Same trend for oil – prices way up and expected to stay that way Restructuring Roundtable, December 9, 2005

6. Electricity Supply Costs • The electric generation price increases the region is experiencing are large and driven by rising natural gas prices • In the competitive New England wholesale electric market, natural gas generation is usually on the margin and setting the market clearing price for power (fuel costs make up a large portion of operating costs) Average Locational Marginal Prices (LMPs) are up ~100% from last year Source: ISO New England, Weekly Market Summary, October 17-23, 2005 Restructuring Roundtable, December 9, 2005

7. Natural Gas and Oil Cost Impacts on Consumer’s Bills • Households in New England should plan on a very expensive heating season • the fuel portion of a natural gas customer’s annual bill (not including the fixed distribution costs paid to utilities) has gone from ~$300 in 1995 to ~$600 in 2004 and this coming year could reach $1,300 • Average households in New England using heating oil have seen their bill go from approximately $350 in 1995 to $800 in 2004 and costs could break $1,500 this year • Price increases of 100% requiring an additional $600-700 to heat homes this year is not something households have budgeted for; low income households may not be able to manage costs • East Coast consumers are acutely affected by changing fuel oil prices because 3 out of 4 US households using fuel oil are located in the Northeast Census Region Restructuring Roundtable, December 9, 2005

8. Natural Gas Supply CostsIncreasing Trade Deficits Dollars sent out of region to pay for high priced fuel are no longer available to invest in the rest of the region’s economy Restructuring Roundtable, December 9, 2005

9. Fuel Oil Supply CostsIncreasing Trade Deficits Dollars sent out of region to pay for high priced fuel are no longer available to invest in the rest of the region’s economy Restructuring Roundtable, December 9, 2005

10. Energy Procurement Options: Supply v. Efficiency Improvements Restructuring Roundtable, December 9, 2005

11. Electric Efficiency ProgramsCurrent Programs • Electric efficiency and conservation programs are up and running in every state but are limited in most cases by an arbitrary spending cap • New England spends about $7 billion on electric generation but only $250 million on efficiency investments • Efficiency improvements cost as little as $9/MWh for commercial and industrial investments and $10-40/MWh for residential while generation cost around $55/MWh a year ago and has now climbed to over $100/MWh • Efficiency investments boost the state economy and have led to thousands of additional jobs across the New England states, while assisting the region meet environmental goals Restructuring Roundtable, December 9, 2005

12. Restructuring Roundtable, December 9, 2005

13. Electric Efficiency ProgramsAdditional Resources are Available • Conservative studies of the efficiency resource that is achievable today show that we can eliminate load growth and have demand for electricity decline over time With natural gas generation on the margin, these demand reductions significantly reduce the strain on natural gas supplies Restructuring Roundtable, December 9, 2005

14. Natural Gas & Fuel Oil Efficiency Economic Benefits • Recent analysis and modeling by the State of Connecticut using the REMI model illustrates the benefits of expanded investments in natural gas and fuel oil efficiency programs (www.ctclimatechange.com) • The analysis and results can be extrapolated to other states that are considering expanding investments in this area Restructuring Roundtable, December 9, 2005

15. Natural Gas & Fuel Oil Efficiency Environmental Benefits • Recent analysis and modeling by the State of Connecticut using the EPA’s COBRA model illustrates the environmental benefits of expanded investments in natural gas and fuel oil efficiency programs (www.ctclimatechange.com) • The analysis and results can also be extrapolated to other states Development of Natural Gas and Fuel Oil conservation programs were the top near-term policies identified to assist the State of Connecticut achieve its climate goals – they achieve the largest emissions reduction with an economic benefit to the state Restructuring Roundtable, December 9, 2005

16. Energy Policy Solutions Near Term • Low Income Bill Relief for Natural Gas and Heating Oil Customers • Expand LIHEAP Funding – federal and state dollars • Connecticut and Massachusetts emergency bills • Has to be repeated every year, but essential given the need • Expand Low Income Weatherization • Investments made this year save in all subsequent years • Create and Expand Efficiency Programs with Fast Paybacks or Ease of Implementation • Rebates for high efficiency furnaces and boilers • Expand funding for any highly cost-effective, existing commercial and industrial programs • Focus on natural gas and fuel oil savings Restructuring Roundtable, December 9, 2005

17. Energy Policy Solutions Longer Term - State Level • Electric and natural gas standard offer customers: • Require least-cost procurement of energy resources with efficiency competing directly with supply for default customers • Require minimum spending levels for all suppliers (minimum SBC spending level or require a minimum portfolio percentage) • Use New Policy Mechanisms: e.g., Conn Class III Portfolio Standard for Efficiency and CHP • Remove the incentive to sell more energy – separate electric and natural gas distribution company profits from sales (aka decoupling) • Develop comparable cost-effective efficiency programs for fuel oil and propane customers • Advanced energy building codes and efficiency standards Restructuring Roundtable, December 9, 2005

18. Energy Policy Solutions Longer Term Regional Level: Capacity and Congestion • Efficiency – Reduces Demand at Lower Costs than Adding Supply • Goal: Incorporate Energy Efficiency on a Level Playing Field to Capture Demand Reductions in Congested Areas • Congestion Occurs at 1% of Yearly Hours – A/C load • Tailor C&LM to Peak Drivers • Build Baseload Reductions through Comprehensive Efficiency • See Connecticut DPUC: Docket 05-07-14PH1 • Utilize efficiency among the tools to reduce prospective Federally Mandated Congestion Charges • LICAP or Its Replacement should allow efficiency to compete with supply ($/MW and based on ability to reduce the demand curve) Restructuring Roundtable, December 9, 2005

19. Conclusions • High prices prompt recognition that the region needs a more efficient and cost-effective approach to energy use, both near term and longer term • Real question on the table is: what should our energy system look like in future? • We can’t simply build our way out of the problem (how many people think new coal and nuclear plants will be built in New England, and how many pipelines and LNG terminals will be tolerated?) • We need to advance efficiency policies for all fuels in order to have a cleaner, less expensive energy system • Efficiency investments return $$ to customer’s wallets and to the local economy, create jobs, make the region more competitive, and reduce air & global warming pollution – we need to adopt state and regional policies to capture cost-effective efficiency Restructuring Roundtable, December 9, 2005

20. Contact Information Daniel L. Sosland Executive Director dsosland@env-ne.org (207) 236-6470 PO Box 313 Rockport, ME 04856-0313 Derek K. Murrow Director of Policy Analysis dmurrow@env-ne.org (203) 495-8224 101 Whitney Avenue New Haven, CT 06510 Restructuring Roundtable, December 9, 2005