October 22, 2010 National Commission on Energy Policy

1. Upcoming Power Sector Environmental Regulations:Framing the issues about potential reliability/cost impacts October 22, 2010 National Commission on Energy Policy Workshop on Power Sector Environmental Regulations Sue Tierney Managing Principal BOSTON CHICAGO DALLAS DENVER LOS ANGELES MENLO PARK MONTREAL NEW YORK SAN FRANCISCO WASHINGTON

2. Point of view • Today’s remarks are my own perspective. • My starting point is my understanding that: • public health and electric reliability objectives both are “givens”; • the national and regional health benefits of implementing updated clean air rules warrant action – and the geographic distribution of benefits resembles that of the costs.

3. Point of view • I recently co-authored report for Clean Energy Group: Ensuring a Clean, Modern Electric Generating Fleet while Maintaining Electric System Reliability • Co-authors: Paul Hibbard of Analysis Group; and Michael J Bradley, Chris Van Atten and others at MJB Associates; • CEG participating companies are some of the nation’s largest generators of electricity, with over 170,000 MW of electric generating capacity (including 110,000 MW of fossil generating capacity) in the U.S., and serve nearly a fifth of all U.S. electric customers. Calpine Corporation Constellation Energy Entergy Corporation Exelon Corporation NextEra Energy National Grid PG&E Corporation Public Service Enterprise Group • Our report focused on air rules (CATR, MACT rules). http://www.mjbradley.com/documents/MJBAandAnalysisGroupReliabilityReportAugust2010.pdf; http://www.analysisgroup.com/article.aspx?id=10786

4. Some key questions: • What can we tell now about the impact on electric industry reliability of EPA’s rules on plant retirements, retrofits? • What tools are available to manage through the transition in a reliable way? • What may be the biggest challenge to assuring reliability during a compliance period?

5. What can we tell about the impacts on reliability? (1) The overall amount of affected capacity is smaller than it might first appear. Of the 310 MW of coal capacity in the U.S.: • Many of the affected plants are likely to retire due to market economics . • This is particularly true since many of the least-economically viable units are small, uncontrolled, old, relatively inefficient – and will face economic closure decisions from the air (and water) rules. • Many of the plants are already controlled or have proposed retrofits. • 65% (over 200 GW) has already installed or planned scrubbers. • ~50% is already or soon to be retrofitted with advanced NOx controls. • An estimated 25-75 GW is in a genuinely uncertain state.

6. What can we tell about the impacts on reliability? (2) EPA projects that the new CATR regulations would require: • 14 GW of additional capacity (beyond previously announced units) would need to be retrofitted with scrubbers. • Less than 1 GW retrofitted with advanced NOx controls by 2014. • This amount is significantly less than what the industry has added in the recent past: • Between 2008-2010, approximately 60 GW of coal capacity was installed with scrubbers, with the industry completing 50+ scrubber retrofits each year.

7. What can we tell about the impacts on reliability? (3) • At an aggregate level, the U.S. bulk power system has adequate spare generating capacity to absorb potential coal plant retirements. • Across all NERC regions, more than 100 GW of surplus generating capacity is available relative to target reserve margins in 2013 • This is significantly higher than the 25-75 GW of retirements projected by industry analysts.

8. All NERC reliability regions have excess capacity, totaling over 100 GW of excess capacity nationwide Estimated Reserve Margins in NERC Regions 1. Includes capacity defined by NERC as Adjusted Potential Reserve Margin, which is the sum of deliverable capacity resources, existing resources, confidence factor adjusted future resources and conceptual resources, and net provisional transactions minus all derates and net internal demand expressed as a percent of net internal demand. 2. Capacity in excess of what is required to maintain NERC Reference Margin or the regional target reserve levels. Source: NERC, 2009 Long-Term Reliability Assessment: 2009-2018, October 2009.

9. What can we tell about the impacts on reliability? (4) • The reliability impact of these proposed rules will depend on: • actions to address these issues in a timely manner – to replace capacity as needed. • The electric industry has a proven track record of adding additional generating capacity, transmission solutions and demand-side measures when and where needed, and of coordinating effectively to address reliability concerns. • In the three years between 2001 and 2003, the electric industry built over 160 GW of new generation—about four times what analysts project will retire over the next five years. • There are good examples of situations where the industry moved quickly and appropriately to address reliability issues when the need presented itself.

10. Industry track record of adding new generating capacity when and where needed Nameplate Capacity (MW) U.S. Power Plant Capacity Added By In-service Year Between 2001 and 2003, over 160 GW of NGCC generating capacity was brought online. Source: Ceres, et al., Benchmarking Air Emissions of the 100 Largest Electric Power Producers in the United States, June 2010.

11. What can we tell about the impacts on reliability? (5) The reliability issues associated with these proposed rules will vary by region: • Potential retirements (driven by the air rules first, and then potentially by the water rules over time) may occur particularly in the following areas between 2015 and 2018: • Midwest (Midwest ISO region and PJM) • the Southeast • the Southwest Power Pool • parts of the Northeast • More analysis needs to be done in these regions to identify the localities where issues could arise – and where market and planning responses could help mitigate reliability concerns.

12. Location of controlled and uncontrolled generating units(Not necessarily where the retirements will occur) Credit Suisse, “A Thought: CATR is First Step in Changing the Coal Fleet,” July 7, 2010

13. Small coal plant (by vintage and controls) (<300 MW)(Not necessarily where the retirements will occur) Credit Suisse, “A Thought: CATR is First Step in Changing the Coal Fleet,” July 7, 2010

14. The electric industry is well-positioned to respond: Many tools available to: Manage Retirements Schedule Outages

15. The electric industry is well-positioned to respond • Managing Retirements: • Adequate capacity and under-utilized existing capacity. • Market and/or IRP responses: new capacity will be added as a result of market and planning signals. • States’ supervision of utilities’ efforts in the face of uncertainty (e.g., retirements, equipment additions, off-system purchases, reserve sharing). • States can introduce more aggressive energy efficiency, demand response, load-management tools – including ratemaking incentives to accompany them. Consider demand-side opportunities exist in affected regions. • RTO markets: forward capacity markets, demand-response markets, planning and load-flow studies with “what if” analyses; Reliability-Must-Run agreements if needed. • All regions: rapid-response planning initiatives to address any apparent reliability issues.

16. The electric industry is well-positioned to respond • Scheduling Outages: • NOx, SO2, mercury, acid gas control technologies are commercially available. • Existing under-utilized capacity at gas-fired combined cycle plants can facilitate the scheduling of outages. • RTOs can help coordinate outages and provide for sharing reserves. • EPA can grant time extensions to complete pollution control installations on a case-by-case basis. • DOE can override compliance requirements in limited emergency circumstances. • EPA and the President can extend deadlines for utility MACT rules where necessary for electric system reliability.

17. What may be the biggest challenge to assuring reliability during compliance? Creating incentives for action in the face of regulatory uncertainty: • Deciding to proceed under the assumption that EPA will adopt, implement and enforce regulations – rather than deciding to fight the notion that EPA will do so. • Managing the transition using all available tools (including energy efficiency, demand response, maintenance/outage planning, reserve sharing, planning studies, market information) including coordinated responses in emergency circumstances. • Creating incentives for compliance strategies that simultaneously support early analyses and provision of various signals to the market, as well as prudent decision-making under conditions of uncertainty.

18. Conclusions: This is do-able (3) • Industry practice and pertinent system data indicate that the electric sector is well-positioned to respond to EPA’s mission to “help millions of Americans breathe easier and live healthier” without threatening electric reliability. With economic costs, there will also be economic benefits – related to health as well as investment/construction stimulus. • Industry studies that raise the spotlight on reliability issues do not typically incorporate assumptions about how the market will respond and therefore are not necessarily sound pictures of what will occur; they are positive for inducing market responses.

19. Conclusions: This is do-able (2) • Existing substantial excess capacity, the electric industry’s proven track record to timely construct new generation and to efficiently coordinate the scheduling of planned outages, together with transmission enhancements, “smart grid” investments, fuel conversions, relatively low gas prices, demand-side actions, should mitigate reliability (and cost) concerns. • As a final backstop, existing statutory, market and regulatory safeguards will facilitate the retirement of inefficient units, and an orderly transition to cleaner, more efficient generation.

20. Susan TierneyAnalysis Group111 Huntington Avenue, 10th FloorBoston, MA 20199617-425-8114stierney@analysisgroup.com