The Long View: 2013 Energy Outlook and Market Implications

1. The Long View:2013 Energy Outlook and Market Implications May 2013

2. Key Forces Shaping our Energy Future Load Growth Incentives Energy Future Variable Energy Cost Regulations Fixed Energy Cost Transmission

3. Load Growth is Slowing • Historically, growth rates for residential and commercial power demand have followed general economic and demographic trends. • In recent years, industrial demand has declined as a result of a reduced US manufacturing and industrial base. • Consumption per capita began to decline during past decade and is expected to continue to drop due to continued efficiency gains. • Consumption per unit of GDP is falling as economic productivity gains rely less on power consumption. • The decline in demand is apparent even after accounting for economic declines and weather related volatility. Ref: Scotiabank July 2013 – Technological Disruptions in the US Power Markets

4. Technological Causes of Demand Destruction • Energy Efficiency – energy efficient technologies, facilities, processes, and equipment has reduced the amount of energy required to deliver products and services; • Smart Grid – information is gathered and used to change behavior and increase system efficiency; • Distributed Generation – generating energy (electricity, steam, or heat) at or near the source of demand reduces transmission losses and increases consumer control over its energy supply source; • Demand Response / Management – End-user changes in energy use in response to changes in energy prices or the availability of incentive payments. Ref: Scotiabank July 2013 – Technological Disruptions in the US Power Markets, 2012 PJM Annual Report

5. Generation Cost – The Mix of Generating Resources is Changing: • % of Gen Mix Projections • Increasing: Natural Gas and Renewables • Decreasing: Coal, Nuclear, Petroleum • Cost and Performance Factors to Consider: • Nat Gas will continue to be the “fuel of choice” with pricing dictated by available markets (e.g. transport, LNG), pipeline infrastructure, and production costs; • Coal must establish a cost-effective means to compete with natural gas in a new EPA permitting paradigm; • Onshore wind has made significant gains but is limited in its ability to inject power into densely populated areas without significant transmission investment. • Offshore wind is scalable and can serve densely populated costal load; however, significant investment is required to develop a US supply chain and reduce cost. • PV Solar costs continue to fall – key trends included distributed solar (rooftop with net metering) and the coupling of solar with storage to address intermittency; • Continued uncertainty regarding nuclear given the long lead times, high upfront cost, and public/environmental considerations. Small Modular Reactors (SMRs) and no carbon emissions are positive developments to mitigate risk and increase relative cost competitiveness

6. Generation - Renewables Increase the Need for Dispatchable Gen • The need for flexible fast-response load-following capacity will increase as intermittent renewable resources come on line and energy efficiency measures take effect. • Market mechanisms will need to be put in place to promote the installation of generating capacity that can provide load following and frequency response services – is the price signal from forward capacity markets adequate? • Fixed (capacity) vs. variable (energy) pricing a will factor in selecting the optimal capacity resource mix. Source: CAISO Participating Intermittent Resources Program

7. Generation - Variable Cost vs. Capacity Cost Costs expected to decline as the technology develops Currently, the fuel of choice providing dispatchable fast-response, load following capacity Carbon-free alternative, but long lead-time, high capex, and public opinion issues Ability to scale to meet load growth is limited Dependent on wind regime and land availability Long lead-time, scalable, cost reduction required Cost reductions continue Requires “value for capacity” to be competitive Dispatchable, fast-response by dependent on location

8. Transmission • EEI’s 2013 Annual Report states that its members plan to invest at least $51.1 billion in transmission through 2023 of which 52% will be interstate projects and 76% of which will support the integration of renewable resources. • Given the large proportion interstate transmission projects, 57% of the planed transmission projects are being completed through partnership arrangements between utilities and between EEI members and non-EEI members. • Transmission projects meet multiple needs including the integration of renewable resources, relieving congestion, facilitating wholesale competition, and supporting a diverse generation portfolio. Source: EEI Transmission Projects: At A Glance, March 2013

9. Summary • Load growth is expected to be below the traditional year-over-year levels due to a shift in the composition of the US industrial base and continued technological advances; • Natural gas is the fuel of choice and will set the bar for other sources of generation. Coal continues to lose market share to natural gas and must establish a cost-competitive response in the face of more stringent environmental regulations. • Adding intermittent renewable generation increases the need for flexible, fast-response, capacity; • Wind has made significant inroads; however (i) the ability of onshore wind to serve densely populated areas requires significant investment in transmission infrastructure, (ii) offshore wind can serve coastal load at scale, but requires cost reductions and/or externalities to be valued in order to compete with natural gas. • PV solar costs continue to fall. Two growing trends: (i) rooftop installations (net metering), and (ii) combining PV solar with battery storage to address intermittency issues. • Nuclear and hydro face price competition from natural gas along with public opposition in the face of safety and environmental concerns. SMRs and no “carbon costs” are expected to increase the competitiveness of these generation options and mitigate perceived risk. • To important factors (not addressed): • Government incentives supporting the development of renewable resources; • State/Federal policies promoting or mandating one source of fuel or generation capacity over others;