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Generation & Transmission Industry Trends. Douglas M. Logan, Principal Platts Research & Consulting / RDI Presented to: PES Policy Development Coordinating Committee IEEE Summer Power Meeting Chicago - July 24, 2002. Outline. North American generation outlook Global generation outlook

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Generation transmission industry trends l.jpg

Generation & Transmission Industry Trends

Douglas M. Logan, Principal

Platts Research & Consulting / RDI

Presented to:

PES Policy Development Coordinating Committee

IEEE Summer Power Meeting

Chicago - July 24, 2002

Outline l.jpg

  • North American generation outlook

  • Global generation outlook

  • Transmission trends

  • Regulatory trends

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North American Generation Development

NEWGen July 2002 database shows 715,000 MW of projects in the U.S. and Canada.

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Tabled and Canceled Projects

Tabled and canceled projects have surged since November 2001.

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What Is Getting Tabled or Canceled?

Status in April 2001

NEWGen March 2002 database shows 66,500 MW of projects in April 2001 database tabled or canceled since April 2001.

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What Is Getting Built?

Gas still rules.

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North American Generation Capacity Additions

After removing tabled or canceled projects there are 537,000 MW of “active” projects in the U.S. and Canada. But ...

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North American Additions in Historical Perspective

The current boom is modest relative to what happened in the 1970s.

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Projected U.S. Supply / Demand Balance

Surpluses may persist in some regions through 2008. But shortages may return if generation development fails to pick up again.

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Wholesale Power Market Price Trends

High prices in the West collapsed a year ago.

Midwest price spikes have not recently recurred.

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Projected Wholesale Power Market Prices

High prices last year in the West and moderate prices elsewhere have given way to low prices as surplus develops.

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RDI Baseline Gas PriceForecast

The long-term price outlook is between $2.75 and $3.50 per mmBtu.

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Sources of U.S. Incremental Supply

  • The Gulf-of-Mexico, the Rocky Mountains, Eastern Canada, and Arctic supply all will share a role with LNG in growing the U.S. gas supply base.

  • Several of these marginal sources – deep onshore gas, LNG, the Eastern Canadian offshore areas - and the Northern Frontier have surprisingly similar full-cycle development costs.

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Global Generating Capacity Additions

The global outlook is heavily dependent on what happens in Asia.

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Trend in Planned Transmission Additions

The declining trend in planned transmission additions has bottomed out.

Planned additions as % of existing miles

Source: NERC ES&D database, various years.

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Length Distribution of Planned Transmission Additions

Planned additions are still dominated by short projects.

Source: NERC ES&D database, 2001.

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Generation DevelopmentMid-Atlantic

The current pattern of generation development is dominated by gas-fired projects near load centers.

Source: NEWgen database; POWERmap.

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Financing Transmission Projects

  • Rolled in

    • ERCOT Transmission Expansion

  • Allocated between system & generation

    • PJM RTEP

  • Participant funded with firm rights

    • Path 15 Upgrade

  • Merchant

    • Neptune

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Path 15 Upgrade - Participants

  • Trans-Elect 72% $249.6M Line

  • PG&E 18% 55.1M Substations

  • Western, PM 10% 1.3M Land

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What Is a Merchant Project?

  • Assumes full market risk

  • Creates tradeable transmission rights

  • Makes initial capacity allocation by open season

  • Allows access by competitors

  • Is subject to market monitoring

  • Does not impair existing rights

  • Is subject to RTO coordination & reliability requirements

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  • Formed early 1999

  • First “truly independent” transmission company

  • First acquisition July 4, 2001

  • Goal: Two acquisitions per year

  • Owns 12,600 miles of line, acquired from:

    • TransAlta

    • Consumers Energy

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Business Plan

  • Roll-up of transmission assets in North America

  • Purchase from:

    • Investor-owned utilities

    • Municipals and cooperatives

  • Construction of additional transmission capacity

  • Privatization of government facilities

Source: Presentation by Fred Buckman, January 24, 2002.

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Business Plan

  • Premises

    • Transmission is not a growth asset.

    • Transmission divestiture is a growth strategy.

    • Transmission divestiture is a solution to the issue of marketplace independence.

Source: Presentation by Bernie Schroeder, March 25, 2002.

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Business Plan

  • The case for divestiture

    • Utility stock prices have under-performed most major averages.

    • Aggressive restructuring is rewarded in share price.

    • Regulators will reward divestiture.

    • Passive control devalues asset.

Source: Presentation by Bernie Schroeder, March 25, 2002.

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Business Plan

  • Benefits to the seller

    • No more FERC regulation

    • Opens up several options to improve shareholder value

    • Creates cash for seller

    • Regulatory incentives for independent acquisition to be shared with seller

    • Expansion and quality of service assured by “for-profit transmission utility with the single goal of maintaining high standards of reliability”

    • Seller controls reinvestment of sale proceeds

Source: Trans-Elect web site.

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Business Plan

  • Buyer’s expectations with divestiture

    • Higher ROE

    • Favorable capital gains treatment

    • Favorable capital structure treatment

    • Incentives to invest new capital

    • Long-term rate freezes.

Source: Presentation by Bernie Schroeder, March 25, 2002.

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How Trans-Elect Will Make Money -- The Risks

  • What is assured

    • Regulated rate of return

  • What is not assured

    • ROE premium on acquisition

    • Recovery of acquisition premium

    • ROE premium on new facilities

    • Performance-based regulation

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FERC’s Repeated Attempts to Create Open Power Markets

  • Attempt #1 - Orders No. 888 & 889

    • To establish non-discriminatory access

  • Attempt #2 - Order No. 2000

    • To promote independent control of systems

  • Attempt #3 - July 2001 Mediation Orders

    • To address recalcitrance and potential problems with small RTOs

  • Attempt #4 - Standard Market Design

    • To address unwillingness to form super-RTOs

FERC’s orders are multiple attempts to eliminate discrimination in transmission access and administration.