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TVA Restricted Information – Deliberative and Pre-Decisional Privileged. Five Year Capacity Outlook & Near-Term Market Actions. v23. TVA Restricted Information – Deliberative and Pre-Decisional Privileged. Executive Summary.

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Tva restricted information deliberative and pre decisional privileged

TVA Restricted Information –

Deliberative and Pre-Decisional Privileged

Five Year Capacity Outlook&Near-Term Market Actions

v23

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Executive summary

Executive Summary

  • Purpose: Review the five year capacity outlook and discuss recommended near-term market actions

  • Key Points:

  • Board’s Integrated Resource Plan (IRP) decision in Spring 2011 will set forth a renewed energy vision for TVA

  • Market actions are one of many decisions needed before the IRP is complete

  • With changing portfolios, the five year outlook projects a capacity deficit of more than 2,700 MW in 2014 (including roll off of existing PPAs), with significant risks

  • There are ~4,500 MW being actively marketed and current market conditions make this a favorable time to procure capacity

Recommendation:

Negotiate economically viable long-term PPA or acquisition for at least 800 MW with transaction recommendation by March 2010

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Interim project decisions

Interim Project Decisions

  • Project decisions made before TVA’s IRP update is complete will be accounted for in the IRP final product

  • These incremental decisions will define a path or maintain flexibility that is critical due to future requirements or uncertainty

  • Interim project recommendations will be based on:

    • Existing IRP (circa 1995)

    • TVA Strategic Plan

    • TVA Environmental Policy

    • TVA’s directional Vision framework

    • Sound financial principles

  • All actions will be consistent with the Board’s strategic direction to reduce the environmental footprint of the TVA system

Board’s Integrated Resource Plan (IRP) decision in Spring 2011 will set forth a renewed energy vision for TVA

TVA Restricted Information – Deliberative and Pre-Decisional Attorney-Client Privileged and Confidential


Actions and drivers

Actions and Drivers

Market actions are one of many decisions needed before the IRP is complete

TVA Restricted Information – Deliberative and Pre-Decisional Attorney-Client Privileged and Confidential

4


5 year capacity gap summary based on cleaner greener type approach

5 Year Capacity Gap – Summary(based on Cleaner & Greener type approach)

2010 Summer Peak:

+ Reserves:

2010 Full Requirements:

TVA Assets:

+ LT PPA’s:

LT TVA Assets:

Starting Shortfall :

+ 5 Yr Load Growth:

5 Yr Shortfall:

Board Approved Projects:

Adjusted 5 Yr Shortfall:

Retirements:

Total 5 Yr Shortfall:

EE&DR/Renewables:

+ New CT’s:

New Assets:

31,000 MW

+ 5,000 MW

36,000 MW

2010

Starting Point

32,500 MW

+ 1,200 MW

33,700 MW

(absent ST PPA’s)

2,300 MW

+ 4,300 MW

6,600 MW

GAP

- 1,900 MW

8,500 MW

5 Year Growth, Retirements & Additions

+ 2,800 MW

5,700 MW

Closing GAP

1,040 MW

+ 1,900 MW

2,940 MW

2015

Resulting Shortfall:

2,760 MW

5

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Five year capacity outlook near term market actions

5 Year Capacity Gap – Details(based on Cleaner & Greener type approach)

(MW)

Lagoon Creek CC (600MW)

John Sevier CC (900MW)

2,800 MW

WBN2 & BFN1 EPU (1,300MW)

PPA Termination Dates

Union Power – 08/2010

MEC – 12/2011

DEC – 08/2012

Suez – 12/2012

Caledonia – 02/2022

Red Hills – 03/2032

JSF 1-4 retire (700MW)

WCF 1-6 retire (600MW)

1,900 MW

COF 5 retire (600MW)

ShortStarting 2011

Key assumptions included in Appendix (Slide #20)

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Key considerations

Key Considerations

Over the next five years …

  • Load growth results in increased capacity needs of 800 MW per year

  • 2,000 MW of PPAs expire by 2013, leaving an implicit starting gap of 2,300 MW

  • Existing construction program for 2,800 MW has some inherent schedule risk

  • Clean-air / retirement decisions for 2,000 MW or more will impact the capacity gap

  • Retirements and roll off of PPAs result in a shortage of intermediate energy

  • EE&DR programs may fill some of the gap, but volume and timing is uncertain

  • Renewable portfolio additions will provide energy, without much capacity

  • New CT plant construction program is assumed to add 1,900 MW

With changing portfolios, the five year outlook projects a capacity deficit of more than 2,700 MW in 2014 (including roll off of existing PPAs), with significant risks

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Market outlook

Market Outlook

  • External counterparties appear eager to transact at prices and tenor favorable to TVA

  • Delay increases risk for capacity availability and pricing

    • Magnolia has applied for transmission access off system

    • The Batesville owner’s loan has been foreclosed on

    • The current low gas price environment provides downward pressure on market prices for capacity

  • IPPs are not investing in TVA’s footprint which limits the available capacity in the region

  • TVA’s creditworthiness makes us a very desirable counterparty in this capital-constrained market

Current market conditions make this a favorable time to procure capacity

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Five year capacity outlook near term market actions

Primary Market Alternatives

  • Price levels for acquisitions and PPAs are significantly below new build price levels

    • Current acquisition price range is $450 - $700/kW (New build NGCC $1,000/kW)

    • Indicative pricing for 15-20 year PPAs or leases range from:

      • $6.5 - $8.0/kW-mo for tolling deals

      • $4.5 - $6.0/kW-mo for leases

      • $7.15/kW-mo for overnight new CC

  • Strategic Options

    • New or extended PPAs

    • Lease

    • Acquire

    • Combination of above

Facility

Capacity

Counterparty

Magnolia

Ashland, MS

960 MW

3 – 1X1

Kelson Energy

Batesville

Batesville, MS

837 MW

3-1X1

Complete Energy

Decatur Energy Center

Decatur, AL

760 MW

3 X 1

Calpine

Choctaw

French Camp, MS

836 MW

3 X 1

Reliant Energy

KGen Murray

Dalton, GA

1,240 MW

2 – 2 X 1

KGen

  • There are ~4,500 MW being actively marketed and competing these alternatives now will provide greatest economic value

9

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Near term market actions

Near-Term Market Actions

Next Steps (Lead):

Identify potential funding sources for plant acquisition(s) (Financial Services)

Establish Business Case Framework with Key Stakeholders (PS&F/Financial Services)

Negotiate Term Sheets with Primary Counterparties (PS&F)

Obtain transaction approval (PS&F)

Set a timeline to discuss next level of market actions

  • In Summary:

  • The five year outlook projects a deficit of more than 2,700 MW in 2014, with significant risks

  • Market conditions and available capacity alternatives provide a near-term opportunity to capture significant economic value, reduce risks, and fill the gap

  • Any market action will be highly dependent on TVA’s financial condition

  • Recommendation:

  • Negotiate economically viable long-term PPA or acquisition for at least 800 MW with transaction recommendation by March 2010

10

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Five year capacity outlook near term market actions

Appendix

11

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Decisions needed

Decisions Needed

  • Near Term Project Decisions – required before IRP is finalized:

    • Definitive: “do” or “not do” - result is a formal decision and path forward

    • Positioning: buys time, maintains flexibility, and/or captures economic opportunities – consistent with TVA’s mission to provide reliable, low-cost power

    • In many situations, not considering the issue in a timely fashion may result in a decision evolving by default – no decision becomes a decision

TVA Restricted Information – Deliberative and Pre-Decisional Attorney-Client Privileged and Confidential


Decision criteria

Decision Criteria

Strategic Transition

Timing

Network location needs

NPV of projects/alternatives

Alignment with TVA Vision

13

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Current situation assumptions

Current Situation/Assumptions

  • USEC drops to 1,650 MW after 2015

  • Hemlock adds 150MW in FY13; Wacker adds 130MW in FY12

Load Forecast

Recession bottoms out Q1 FY10, full recovery in FY11

Peak grows at 2% for 5 years from 32k MW to 35k MW

Energy grows at 2.3% for 5 years from 164k GWh to 184k GWh

Power Supply Plan (Cleaner & Greener w/o CC acquisition)

Supply Assumptions (Board approved projects):

2010: Repower Lagoon Creek CC (560 MW)

2012: John Sevier CC online (860 MW)

2013: Watts Bar 2 Nuclear online (1,150 MW)

Mothball/Retire/Repower Assumptions:

2012: JSF 1-4 (700 MW)

2014: WCF 1-6 (640 MW)

2015: COF 5 (440 MW)

2022: JOF 1-10 (1,100 MW)

Likely to move to 2015/2016 timeframe

Other supply (Renewables/EE&DR):

~1,300 MW Renewables contracted by 2012 (12% count towards capacity)

EE&DR target of ~500 MW by 2012; ~900 MW by 2015

  • PPA’s/Acquisitions:

    • 3,300 MW under contract in 2010

      • Union Power (exp. 2010)

      • MEC (exp. 2011)

      • Suez (exp. 2012)

    • 1,200 MW under contract in 2015 (Red Hills & Caledonia)

  • Transmission assumptions:

    • Upgrade required to support WCF capacity loss by 2014

  • Other critical assumptions:

    • Natural Gas prices ~$5-$9/mmbtu through 2014

    • RES standards 3% in 2012 (similar to Bingaman)

    • CO2 prices $15/ton beginning in 2013

  • DEC (exp. 2012)

  • Caledonia (exp. 2021)

  • Red Hills (exp. 2031)

TVA Restricted Information – Deliberative and Pre-Decisional Privileged


Current market assessment

Current Market Assessment

  • Overall, the regional economy appears to have turned a corner, although returning growth is slow. As regional industrial production has improved month-to-month, the Philadelphia Fed index of economic activity is showing the region as becoming less negative. This compares with the index for the U.S. which has just flattened.

  • In terms of population weighted Cooling Degree Days (CDD’s), the nation had its coolest summer in more than five years. As a result, gas fired power generation was down this summer. Additionally, a more “wet” year has begun to return hydro levels to normal.

  • In 2008 and the beginning of 2009, natural gas production rose 2-4 Bcf per day thanks mostly to shale development. However, in response to lower prices, the natural gas rig count fell from 1,600 to 665. Since reaching the 665 rig count low, rigs counts have recovered to just over 700. Decreased drilling activity has led to flatter production levels and production should fall by the end of the year.

  • As anticipated, LNG imports increased this spring due to lower global demand and increased LNG production. However, over the summer the amount of LNG entering the US leveled off and has yet to meet expectations. More LNG may be on its way as additional LNG production projects are completed and international LNG tank storage levels become full.

  • In the past year, the contraction of the economy reduced demand and freed up gas for storage. This coupled with a mild summer and lower gas prices produced record storage levels.

    • Since early September, injection amounts have been smaller than what would have been expected given the mild weather. This indicates that either production is leaving the market or that injections are being reduced by the lack of available storage.

  • Since hitting a low of $1.85 on 09/05/09, Henry Hub spot natural gas prices have rebounded to just below $5. The market has responded to lower than expected injections along with some extra buying activity from traders covering their short positions.

    • It is worth noting that in the decline from $8 to under $3, there were several sharp rallies that ultimately failed to turn around the market.

The current environment has provided the impetus for increased storage injections resulting in record high inventory levels and the low natural gas prices have forced some producers to begin curtailing their drilling activity.

Source: Gelber & Associates and TVA

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