The Cost & Impacts of New Environmental Regulations and the Opportunity for a New, Cleaner Electrical Grid (Project

1. The Cost & Impacts of New Environmental Regulations and the Opportunity for a New, Cleaner Electrical Grid (Project No. 37897) Cyrus Reed Conservation Director Lone Star Chapter, Sierra Club 512-740-4086 Cyrus.reed@sierraclub.org

2. Overview ERCOT Study Incomplete and Flawed Opportunity for PUC and ERCOT to take steps now to position yourself for future challenges Continue Push for Transformative Technologies Air Quality and Water Resource Challenges are Real under Present Electric Resources Commit to a plan for more complete report and recommendations to Legislature in 2013

3. ERCOT Study Incomplete and Flawed Incomplete List of Upcoming Regulations – Ozone and Haze could be big deals; Supreme Court case opens up potential for global warming regulations in September Previous Studies suggest much greater pain on coal industry, including in Texas Coal companies & utilities already reacting to these regulations and increasing costs by examining retire vs. retrofit Some utilities in Texas already considering retirements

4. NO2 NAAQS BACT for GHGs SO2 NAAQS Review PM2.5 PSD Increment Rule Ozone NAAQS Reconsideration Repeal of PM10 Surrogacy CEQ Climate Change Guidance HAPs Standards for non-EGU Boilers Coal Ash Waste Regulation CAIR Replacement Rule Section 316(b) Water Intake Standards OSM Regulation of Ash Minefills PM2.5 NAAQS Reconsideration Haze FIP Hazardous Air Pollutant MACT Standards Ozone NAAQS Area Designations NSPS for EGUs (NOx / SO2/ PM / CO2) NSPS for non-EGU boilers (NOx / SO2/ PM / CO2) Secondary SO2 and NOx NAAQS ELGs for Electric Generating Units Upcoming EPA Rulings

5. Previous Studies Show Much Greater Impact and Costs Synaps, Replace with Gas

6. Just the facts from the studies • Brattle Study – some 13,000 MWs of coal plants in Texas might become unprofitable if forced to add equipment • Sanzillo Study – Debt levels plus $3.6 billion in retrofit costs make Big Brown, Monticello & Martin Lake plants worthless • Bradley study – Texas Region has 28,889 MW of CC Natural Gas above 500 MWs that is underutilized (44%) and could replace older coal plants • CPS Energy said it prefers retiring Deely rather than add some $500 million in scrubbber and air pollution costs – ERCOT study list only $34 million in costs

7. Coal Already On the Brink? Since October 2008 only 1 coal plant has broken ground for construction - the Kemper IGCC plant in MS A total of 48 existing coal plants were announced for retirement in 2010, to be replaced with cleaner burning fuels, renewable energy, and energy efficiency.  In late 2010 Colorado established a plan to shut down 902 megawatts of existing coal capacity.  The plan was approved by the Colo PUC and the retirements start this year (2011).  In June 2011 American Electric Power, one of the country's largest consumers of coal, announced a plan to retire 25% of its coal fleet (includes a unit at the Welsh Plant in Pittsburg, TX).  Announced coal plant retirements in 2010 in Colorado, Arizona, Utah and Oregon will result in the retirement of nearly 10% of the entire Western coal fleet. In April 2011  Washtington state Governor Chris Gregoire signed a bill that will end all coal burning in the state by 2025.  The Energy Information Agency now projects that no new coal plants will be built in 2011 without significant incentives. CPS Energy announces plan to end Deely by 2018 or sooner

8. Coal Already Retired & Announced for Retirement, USA

9. The Case for Shutting Down TXU Older Plants: Monty, Marty, & Browny The Case to Retire Big Brown, Monticello and Martin Lake Coal Plants, Tom Sanzillo, TR Rose Associates The Case for Retirement of Coal Plants Weak financial fundamentals: Prolonged natural gas/low power prices. Wind competition. Questionable Long-Term Outlook/Shaky revenues. Environmental liabilities -- $3.6 Billion: the case for retirement done. Major water user and creator of ozone in Dallas region Private equity deal makes retirement priority. Keeping the Lights On Graduated Shutdown. 5,280 MW manageable. Natural Gas reserves and new construction. ERCOT Planning: Other Generation and Energy Resources.

10. With Great Power Comes Great… Opportunity! • Take concrete steps today to position yourself for future challenges • Implement SB 1125 Sooner Rather than Later • Transition to 0.4% of peak demand goal • Allow more varied and direct energy efficiency programs • Encourage ERCOT to adopt rules now to allow market-based demand response programs – PJM has tripled DR over last five years • Work with SECO to implement reporting requirements of SB 898 and SB 924 (energy efficiency goals and reporting by political entities, Cooperatives and Municipalities) • Work with SECO and ESL to incorporate building code efficiencies into planning and forecasting (HB 51) •  Continue to push for better demand and supply forecasting short and long-terms – incorporation of building codes, EE programs, demand side, etc.

11. We can mitigate some of potential cost and challenge of upcoming regulation through demand response & EE • ERCOT 2011 Report on Capacity, Demand and Reserves: Program Amount Saved, 2015 • EE Program – SB 1125 681 MWs • LARS –Industrial 1,063 MWs • LARS- Commercial & Residential ? (500 MWs) • EE Programs – Coops, Munis • and Political Subdivisions ? (1,500 MWs) • Implementation of Building Codes ? (500 MWs) Potential Savings of Peak Demand 4,344 MWs (?)

12. Implement 500 MWs Rule ERCOT 2011 Report on Capacity, Demand and Reserves, Proposed Projects with Interconnection Agreements, 2012 Take Action at July 8th Open Meeting to implement 500 MW Rule and make it effective by 2016 Make at least half solar Legislature took no action but did confirm “you’ve got the power”

13. Transition to Transformative Technologies • Coastal and offshore wind • Major new additions in CREZ and coastal and off-shore announced • Figure out market protocols and give them the percentage they deserve • Might want to treat coastal vs. West Texas wind differently • Get market rules fleshed out for storage • SB 941 • NPRR 340 • Work of ETWG at ERCOT • Implement SB 981 for renewable distributed to get those markets moving now • Prioritize Co-location -Figure out colocation of resources at CREZ lines and prioritization lines for storage, solar, wind and yes natural gas • Identify and address barriers to entry for large-scale solar • Get the market rules right so these technologies can enter the market and start to develop scale by the time they are needed • Potential for TERP & other investments to lead to transformative electric vehicle infrastructure

14. Air Quality and Water Resource Challenges are Real and Part of Answer will be New Cleaner Electric Grid Reducing emissions from rural power plants by adding on SCRs or retiring these old plants may be far less expensive than cleaning up urban sources

15. Water Needs for Electricity are Real and so too is Drought and other needs National Drought Mitigation Center • Water availability is expected to decline by 35% • The current drought throughout Central Texas sets the trend for what we can expect in the future. • Droughts are expected to get worse and thus energy sources that require little or no water will be far more viable

16. Plan for the Future Follow this workshop with a commitment to plan for the future like it or not, the federal rules are what are or will be Question is how will Texas position itself to provide the clean, affordable, reliable energy its economy needs? nothing prevents PUCT from collaborating with RRC, TCEQ, TDHCA, TWDB, SECO and other state agencies to assess our position and plan for success

17. Plan for success Use PUC study proposed in SB 15 as a blueprint for an approach • Consider an 18-month timeline for this report, include collaboration with RCT and TCEQ • Include public process, including potential for advisory committee – use utilities and interested parties to do your work for you • identify the tools you will need to address these issues before the 83rd Texas Legislature convenes and make sure state leaders understand these challenges and the options to address them. • Be prepared to answer the questions by January of 2013 and what recommendations are needed • May need to look at retirement strategy and transition strategy for early retirement, including use of natural gas reserve capacity • Forgiveness for environmental sins including consent decrees for reliability only • Purchasing commitment for state needs • Use of state credit for loan guarantees for transitional resources