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OVERVIEW OF THE 2013 ANNUAL LOOKING FORWARD REPORT Presented to

OVERVIEW OF THE 2013 ANNUAL LOOKING FORWARD REPORT Presented to The SPP Board of Directors – Members Committee By BOSTON PACIFIC COMPANY, INC. Craig R. Roach, Ph.D. Vincent Musco Andrew Gisselquist Sam Choi April 30, 2013. PURPOSE.

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OVERVIEW OF THE 2013 ANNUAL LOOKING FORWARD REPORT Presented to

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  1. OVERVIEW OF THE 2013 ANNUAL LOOKING FORWARD REPORT Presented to The SPP Board of Directors – Members Committee By BOSTON PACIFIC COMPANY, INC. Craig R. Roach, Ph.D. Vincent Musco Andrew Gisselquist Sam Choi April 30, 2013

  2. PURPOSE • Report contributes to longer-term strategic planning by the Board • Received Oversight Committee input in March • Nine issues in all, including four updates BOSTON PACIFIC COMPANY, INC.

  3. EXECUTIVE SUMMARY • The Shale Gas Revolution (An Update) • EPA’s Continuing Campaign on Coal (An Update) • Developments Driving the Future of Transmission Planning • The Future of U.S. Electricity Bills: Flat Demand, Rising Rates? • Electric Vehicles (Update) • Distributed Generation as a Component of Demand Response • Other Issues of Note: Dodd-Frank, Future of Nuclear Power (An Update), Drivers Toward a Less-Centralized Grid BOSTON PACIFIC COMPANY, INC.

  4. I. The SHALE GAS REVOLUTION (UPDATE) BOSTON PACIFIC COMPANY, INC.

  5. I. The SHALE GAS REVOLUTION (UPDATE) • Alive and Well: IHS Global Study • Today: American production is 65 Bcf/day, about 50% from shale and tight gas1 • Year 2035: American production will be 100 Bcf/day, 80% from shale and tight gas2 • Over period from 2012 to 2035, shale gas production up by a cumulative 127%3 • 1.IHS Global, America’s New Energy Future: The Unconventional Oil andGas Revolution and the US Economy-Volume 1: National Economic Contributions, October 2012. • 2. Ibid. • 3. Ibid., 19, Production Table. BOSTON PACIFIC COMPANY, INC.

  6. I. THE SHALE GAS REVOLUTION (UPDATE) • Price (Henry Hub in real terms): IHS Global • Rise in near term (to $4.37/MMBtu in 2015)4 • Stable thereafter ($5.07/MMBtu by 2035 in real terms)5 • 4. IHS Global,America’s New Energy Future, 19, Production Table. • 5. Ibid. BOSTON PACIFIC COMPANY, INC.

  7. I. THE SHALE GAS REVOLUTION (UPDATE) • It is Really An Economic Revolution: IHS Global • $3 trillion investment (2012 to 2035), unconventional gas6 • 2.1 million jobs (Direct, Indirect, Induced)7 • Federal taxes total $635 billion, state and local $700 billion over period from 2012 to 20358 • 6. IHS Global, America’s New Energy Future, 2. • 7. Ibid., 7, 25. • 8. Ibid., 35. BOSTON PACIFIC COMPANY, INC.

  8. I. THE SHALE GAS REVOLUTION (UPDATE) C. Assessing Environmental Concerns • Net Greenhouse Gas Emissions • NREL/JISEA Study: still less than half those of conventional coal-fired power9 • Water Quality Concerns • EPA: not enough data, but wait until 2014 • Water acquisition can be a local issue in drought states (TX, OK) • Comprehensive “water cycle” assessment (please see chart)10 • 9. JISEA, Natural Gas and the Transformation of the U.S. Energy Sector: Electricity, November 2012. • 10. U.S. Environmental Protection Agency, Study of the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources, December 2012. BOSTON PACIFIC COMPANY, INC.

  9. I. THE SHALE GAS REVOLUTION (UPDATE) Water Use in Hydraulic Fracturing Operations Hydraulic fracturing fluids are usually water-based, with approximately 90% of the injected fluid composed of water. Estimates of water needs per well have been reported to range from 65,000 gallons for coalbed methane (CBM) production up to 13 million gallons for shale gas production…Five million gallons of water are equivalent to the water used by approximately 50,000 people for one day. (U.S. Environmental Protection Agency, Study of the Potential Impacts of Hydraulic Fracturing, 14. Internal citation omitted.) Water Acquisition Chemical Mixing Once onsite, water is mixed with chemicals to create the hydraulic fracturing fluid that is pumped down the well…The fluid serves two purposes: to create pressure to propagate fractures and to carry the proppant into the fracture…Roughly 1% of water-based hydraulic fracturing fluids are composed of various chemicals… (U.S. Environmental Protection Agency, Study of the Potential Impacts of Hydraulic Fracturing, 15.) Well Injection The hydraulic fracturing fluid is pumped down the well at pressures great enough to fracture the oil- or gas-containing rock formation… (U.S. Environmental Protection Agency, Study of the Potential Impacts of Hydraulic Fracturing, 16.) BOSTON PACIFIC COMPANY, INC.

  10. I. THE SHALE GAS REVOLUTION (UPDATE) Water Use in Hydraulic Fracturing Operations (Continued) When the injection pressure is reduced, the direction of fluid flow reserves, leading to the recovery of flowback and produced water. For this study, “flowback” is the fluid returned to the surface after hydraulic fracturing has occurred, but before the well has been placed into production… They are collectively referred to as “hydraulic fracturing wastewater”… (U.S. Environmental Protection Agency, Study of the Potential Impacts of Hydraulic Fracturing, 18.) Flowbackand Produced Water Wastewater Treatment and Waste Disposal Estimates of the fraction of hydraulic fracturing wastewater recovered vary by geologic formation and range from 10% to 70% of the injected hydraulic fracturing fluid. (U.S. Environmental Protection Agency, Study of the Potential Impacts of Hydraulic Fracturing, 19. Internal citation omitted.) BOSTON PACIFIC COMPANY, INC.

  11. I. THE SHALE GAS REVOLUTION (UPDATE) • To Export or Not to Export: NERA Study • Resource availability has larger price effect than exports Selected Scenario Results For 203511 • 11.NERAEconomic Consulting, Macroeconomic Impacts of LNG Exports from the United States, 2012, 11, fig. 6. BOSTON PACIFIC COMPANY, INC.

  12. I. THE SHALE GAS REVOLUTION (UPDATE) • Net economic impact of exports: NERA study12 Change in Income and Total GDP (Billions of 2010$) • 12.NERA Economic Consulting, Macroeconomic Impacts of LNG Exports from the United States, 2012,8, fig. 3. BOSTON PACIFIC COMPANY, INC.

  13. II. EPA’S CONTINUING CAMPAIGN ON COAL BOSTON PACIFIC COMPANY, INC.

  14. II. EPA’S CONTINUING CAMPAIGN ON COAL • Truly, a Campaign • Mercury and Air Toxics Standards and Regional Haze Rule • See multi-page list of regulations • Air (new) – Greenhouse Gas Emissions • Air (new) – Interstate NOX / SO2 • Air (revised) – NAAQS • Solid Waste and Water (new) BOSTON PACIFIC COMPANY, INC.

  15. II. EPA’S CONTINUING CAMPAIGN ON COAL Environmental Regulations Impacting the Electric Power Sector BOSTON PACIFIC COMPANY, INC.

  16. II. EPA’S CONTINUING CAMPAIGN ON COAL BOSTON PACIFIC COMPANY, INC.

  17. II. EPA’S CONTINUING CAMPAIGN ON COAL BOSTON PACIFIC COMPANY, INC.

  18. II. EPA’S CONTINUING CAMPAIGN ON COAL BOSTON PACIFIC COMPANY, INC.

  19. II. EPA’S CONTINUING CAMPAIGN ON COAL BOSTON PACIFIC COMPANY, INC.

  20. II. EPA’S CONTINUING CAMPAIGN ON COAL • U.S. Greenhouse Gas Emission Profile • A Powerful Patchwork Policy • Federal – Proposed EPA greenhouse gas New Source Performance Standards and joint rules for vehicle Corporate Average Fuel Economy and greenhouse gas emissions • State – Renewable portfolio standards and energy efficiency standards • State – Regional Greenhouse Gas Initiative’s cap-and-trade program • State – California’s cap-and-trade program • Local – New York City’s “plaNYC” and Boulder, CO exploring municipal power to combat and/or adapt to climate change BOSTON PACIFIC COMPANY, INC.

  21. II. EPA’S CONTINUING CAMPAIGN ON COAL • On Track With President’s Promise • RFF: 16.3% cut in GHG by 2020 as compared to 2005 Sources of Emissions Reductions13 • EPA • Regulations: 10.5% Fuel Price and Efficiency: 3.3% State Cap-and-Trade, RPS: 2.5% BOSTON PACIFIC COMPANY, INC. • 13.Resources for the Future, U.S. Statuson Climate Change Mitigation, October 2012, 10, fig. 4.

  22. II. EPA’S CONTINUING CAMPAIGN ON COAL • Case Study – Public Service Company of Oklahoma • Regulation: Regional Haze Rule & Mercury and Air Toxics Standards • Settlement on two coal units at Northeastern Station • Retire one coal unit by 2016 • Replace first unit with natural gas-fired combined cycle – 15-year PPA with Calpine Oneta • Retrofit the second coal unit with DSI/ACI/FF in 2016 • Retire second, retrofitted unit in 2026 • Oklahoma Commission stayed case on cost recovery until EPA approves State Implementation Plan BOSTON PACIFIC COMPANY, INC.

  23. III. DEVELOPMENTS DRIVING THE FUTURE OF TRANSMISSION PLANNING BOSTON PACIFIC COMPANY, INC.

  24. III. DEVELOPMENTS DRIVING THE FUTURE OF TRANSMISSION PLANNING A. FERC Order No. 1000 (two parts selected for discussion) • End of “right of first refusal” • Is this PURPA for transmission? • States may determine impact through state-ROFR (ND, SD, MN, NE, NM) • Interregional Planning • Midwest ISO, Entergy, and loop flow BOSTON PACIFIC COMPANY, INC.

  25. III. DEVELOPMENTS DRIVING THE FUTURE OF TRANSMISSION PLANNING • Cost-Benefit Scrutiny • The IPL Case at FERC – $170.5 million cost, no “commensurate” benefits14 • HVDC Breakthrough • Cybersecurity • Distributed Generation • 14.Interstate Power and Light Company, Complaint to FERC against ITC Midwest, LLC, Docket No. EL12-104-000 (September 14, 2012), 9. BOSTON PACIFIC COMPANY, INC.

  26. IV. THE FUTURE OF MONTHLY ELECTRICITY BILLS: FLAT DEMAND, RISING RATES? BOSTON PACIFIC COMPANY, INC.

  27. IV. THE FUTURE OF MONTHLY ELECTRICITY BILLS: FLAT DEMAND, RISING RATES? • Residential Bills Have Flatlined Average U.S. Residential Monthly Bill (2011$)15 BOSTON PACIFIC COMPANY, INC. • 15. U.S. Energy Information Administration, “Electric Sales, Revenue, and Average Price,” U.S. EIA website, last modified September 27, 2012, http://www.eia.gov/electricity/sales_revenue_price/.

  28. IV. THE FUTURE OF MONTHLY ELECTRICITY BILLS: FLAT DEMAND, RISING RATES? • Stars Aligned Now, But Just Wait For Cost Increases • Natural gas prices reach equilibrium • Interest rates rise to reality • Public subsidies end due to budget crisis • Investments in just about everything are costly • Underfunded pension obligations • Demand: Mixed Future • EE, smart grid, younger generation reducing demand • More electronics, computer servers, U.S. manufacturing increasing demand BOSTON PACIFIC COMPANY, INC.

  29. V. ELECTRIC VEHICLES (UPDATE) BOSTON PACIFIC COMPANY, INC.

  30. V. ELECTRIC VEHICLES (UPDATE) • Demand Shock Unlikely • Obama administration backing away from goal of one million electric vehicles by 201516 • Only 80,000 sold since 201017 • Range anxiety remains (New York Times controversy)18 • Electric vehicles must compete with hybrids and increasingly efficient traditional gas-powered vehicles • 16. Ayesha Rascoe and Deepa Seetharaman, “U.S. Backs Off Goal Of One Million Electric Cars by 2015,” Reuters, January 31, 2013, http://www.reuters.com/. • 17. Electric Drive Transportation Association, “Electric drive vehicle sales figures (U.S. Market)-EV Sales,” EDTA website, accessed April 19, 2013, http://www.electricdrive.org/index.php?ht=d/sp/i/20952/pid/20952. • 18. John M. Broder, “Stalled on Tesla’s Electric Highway,” The New York Times, February 8, 2013, http://www.nytimes.com/. BOSTON PACIFIC COMPANY, INC.

  31. V. ELECTRIC VEHICLES (UPDATE) B. Supply Shock Unlikely Now, But China May Change That • Much more motivation: environmental, economic, geopolitical • U.S. acquisitions show its interest • Still, little progress: China produced just 6,000 electric vehicles in 201119 BOSTON PACIFIC COMPANY, INC. • 19. McKinsey & Company, Recharging China’s Electric Vehicle Aspirations, China Auto Hub, April 2012.

  32. VI. DISTRIBUTED GENERATION BOSTON PACIFIC COMPANY, INC.

  33. VI. DISTRIBUTED GENERATION • Distributed Generation in General • Considered part of demand response • For SPP, NERC expects 59% increase in demand response by 2022 – 2,408MW, 4% of demand • For SPP today, 98% of demand response is distributed generation BOSTON PACIFIC COMPANY, INC.

  34. VI. DISTRIBUTED GENERATION • Not All Distributed Generation is Created Equal • Reliability vs. environmental performance • For The Board • Granular depiction of distributed generation • Does it meet the need, mitigate strategic risks? BOSTON PACIFIC COMPANY, INC.

  35. VII. THREE OTHER ISSUES OF NOTE: DODD-FRANK, MODULAR NUKES (UPDATE), A LESS-CENTRALIZED GRID BOSTON PACIFIC COMPANY, INC.

  36. VII. THREE OTHER ISSUES OF NOTE: DODD-FRANK, MODULAR NUKES (UPDATE), A LESS-CENTRALIZED GRID • Dodd-Frank • RTO products drawn into derivatives: day-ahead and real-time energy, FTRs, ancillary services • Nuclear • Small Modular Reactor (SMR) funded for TVA, built by Babcock & Wilcox and Bechtel20 • Look elsewhere for growth of large-scale nuclear (China, South Korea, Russia)21 • And same for its decline (Germany, Japan)22,23 • 20.“Small Modular Nuclear Reactors,” Energy.gov, accessed April 24, 2013, http://energy.gov/ne/nuclear-reactor-technologies/small-modular-nuclear-reactors. • 21. World Nuclear Association, “Plans for New Reactors Worldwide,” World Nuclear Association website, last modified March 2013, http://www.world-nuclear.org/info/Current-and-Future-Generation/Plans-For-New-Reactors-Worldwide/. http://www.electricdrive.org/index.php?ht=d/sp/i/20952/pid/20952. • World Nuclear Association, “Nuclear Power in Germany,” World Nuclear Association website, last modified April 2013, http://www.world-nuclear.org/info/Country-Profiles/Countries-G-N/Germany/#.UT3ThNbkvlc. • World Nuclear Association, “Nuclear Power in Japan,” World Nuclear Association website, last modified April 2013, http://www.world-nuclear.org/info/Country-Profiles/Countries-G-N/Japan/#.UXf7PcpXrwo. BOSTON PACIFIC COMPANY, INC.

  37. VII. THREE OTHER ISSUES OF NOTE: DODD-FRANK, MODULAR NUKES (UPDATE), A LESS-CENTRALIZED GRID • Drivers Toward a Less-Centralized Grid • Cybersecurity • Severe weather • Rising retail rates BOSTON PACIFIC COMPANY, INC.

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