John Moura Technical Analyst, Reliability Assessment & Performance Analysis

1. 2010 Special Reliability Scenario Assessment: Resource Adequacy Impacts of Potential U.S. Environmental Regulations John MouraTechnical Analyst, Reliability Assessment & Performance Analysis

2. Overview • About NERC • About Future EPA Regulations • Scenario Design • Assessment & Conclusions • Recommendations

3. About NERC: Mission • Develop & enforce reliability standards • Assess current and future reliability • Analyze system events & recommend improved practices • Encourage active participation by all stakeholders • Pursue mandatory standards in all areas of the interconnection To ensure the reliability of the North American bulk power system

4. NERC Reliability Assessments • Peak Demand Forecasts • Resource Adequacy • Transmission Adequacy • Key Issues & Emerging Trends Impacting Reliability • Regional Self-Assessment • Ad-hoc Special Assessments

5. Emerging & Standing Issues Higher • Greenhouse Gas Regulations • Transmission Siting • Cyber Security Economy Issues Variable Generation Issues Workforce Issues Likelihood • Smart Grid & AMI Reactive Power 1-5 Years 6-10 Years Energy Storage Consequence Lower Higher

6. About this Report • Purpose • Identify potential outcomes of future EPA Regulations • Quantify potential impacts to Planning Reserve Margins • Examine unit retirement triggered by financial constraints • Provide the results to NERC’s stakeholders, industry leaders, policymakers, regulators, and the public • Highlights the affected Regions/Subregions

7. Background • The EPA is promulgating new environmental regulations in addition to sulfur dioxide (SO2) and nitrogen oxide (NOx) emission controls • Clean Water Act – Section 316(b), Cooling water Intake Structures • Title I of the Clean Air Act – National Emission Standards for Hazardous Air Pollutants (NESHAP), or Maximum Achievable Control Technology (MACT) Standards • Clean Air Transport Rule (CATR) • Coal Combustion Residuals (CCR)

8. Clean Water Act – Section 316(b), Cooling Water Intake Structures • Regulates intake structures for surface waters in the U.S. and calls for best available control technology (BACT) to minimize adverse environmental impact (AEI) • Steam generating units employing once-through cooling systems could be required to replace their cooling water systems with closed-loop cooling systems • Planning Reserve margins in two ways: • 1) the cost of such retrofits may result in accelerated unit retirements • 2) closed-loop cooling retrofitting results in derating a unit’s net output capacity, due to additional ancillary or station load requirements to serve generator equipment

9. Title I of the Clean Air Act – National Emission Standards for Hazardous Air Pollutants (NESHAP), or Maximum Achievable Control Technology (MACT) Standards • EPA is now obligated under a consent decree to propose a MACT rule by March 16, 2011 and to finalize the rule by November 16, 2011 • MACT requires coal-fired plants to reduce their emissions of air toxics, including mercury • Under the Clean Air Act, EPA is obligated to implement stricter standards within three years after the regulation becomes final

10. Clean Air Transport Rule (CATR) • CATR would sharply reduce emissions of sulfur dioxide and nitrogen oxide from power plants in 31 states and the District of Columbia • EPA proposed three program options for public comment: • the EPA preferred option which sets state emission budget caps and allows intrastate trading and limited interstate trading among power plants; • the EPA Alternative 1 option which sets state emission budget caps and allows intrastate trading among power plants within a state; and • the EPA Alternative 2 option which sets a pollution limit for each state and specifies the allowable unit-specific emission limit

11. Coal Combustion Residuals (CCR) • In May 2010, EPA proposed two options to regulate coal combustion residual disposal • Regulate the coal fly ash as a special waste under subtitle C (hazardous waste) of the Resource Conservation and Recovery Act (RCRA) • Regulate ash disposal as a non-hazardous waste under subtitle D of RCRA

12. Timeline for EPA Regulations Impacting the Energy and Utility Industry Cooling Water Intake316 (b) Clean Air Transport Rule Coal Ash Air Toxics - MACT CATR Draft Rule July 2010 Final CATR Program New CATR Budget Limits Mar 2011, Starts 1/1/2012 2014 - 2018 EPA MACT Draft EPA MACT EPA MACT Implementation March 16,2011 Final Rule late 2011 late 2015 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EPA 316 (b) EPA 316 (b) Final Rule 2012 316 (b) Implementation Draft Rule June 2010 2014 - 2018 Coal Residuals Coal Residuals Implementation EPA Coal Residual Impoundment 316(b), MACT, CCR, and more strict CATR standards begin implementation within a close timeframe, creating the need for organized, nationwide construction effort towards compliance to maintain short-term grid reliability. Final Rule 2011 2014-2018 Draft Rule April 2010

13. Scenario Model • Unit Definitions • “Economically Vulnerable” for Retirement • Retrofit results in unit derating • Depicts a “Snapshot” of U.S. Effected Generation Units and Potential Impacts to Planning Reserve Margins for three Modeled Years • Highlighted Assumptions • Excludes committed or announced Plant Retirements (13GW) and Generation Units not included in the NERC 2009 Long Term Reliability Assessment • Excludes the Ability to permit, engineer, finance, and build the required environmental controls within timeframe • Includes Capital O&M Costs; excludes Replacement Power Costs and effects of demand increase

14. Explanation of Calculations • A unit is assumed to retire if : (CC+FC+VC) / (1-DR) > RC • CC = Compliance Cost • FC = Current Fixed O&M • VC = Variable O&M • RC = Replacement Cost $/MWh • DR = Derate Factor (incremental energy loss)

15. Two Cases Assessed • MACT • Moderate Case • Conversion cost curve for emission controls • 60% of upgraded units will receive waivers • Strict Case • 25% increased cost • No waivers-all units must comply by 2015 • CATR • Moderate Case • EPA preferred option • Limited interstate trading until 2014 • No rate limitations • Strict Case • No trading  • Strict rate limitations • CCR • Moderate Case • $30 M per unit • Disposal costs - $15/ton • Strict Case • Disposal costs increased to $37.50/ton • 316(b) • Moderate Case Conversion cost curve for retrofit • Ranges from $170-440 gpm • Strict Case • 25% increased cost Combined Case - Moderate and Strict of Aggregate Regulations

16. 316(b) • Greatest Potential Impacts of All Regulations • Greatest Portion of Capacity Retired by 2018 • Mostly Affects Older Oil/Gas-Steam Units • Smaller Units More Likely to Retire 316(b) Impacts - 2018 Moderate Case Strict Case Derated Retired Derated Retired (MW) (MW) Total (MW) (MW) Total ERCOT 322 5,055 5,377 316 5,295 5, 611 FRCC 177 862 1,039 164 1,367 1,531 MRO 400 1,259 1,659 400 1,264 1,664 NPCC - NE 194 2,504 2,698 180 2,904 3,084 NPCC - NY 347 3,011 3,357 327 3,618 3,946 RFC 1,532 5,503 7,035 1,526 5,661 7,187 9 SERC - Central 388 71 45 388 71 459 SERC - Delta 282 5,524 5,806 282 5,524 5,806 SERC - Gateway 296 526 822 295 543 838 SERC - Southeastern 209 469 678 209 469 678 SERC - VACAR 378 664 1,042 377 689 1,066 SPP 143 933 1,076 141 994 1,135 WECC - CA 227 5 ,055 5,283 182 6,881 7,063 WECC - AZ - NM - SNV 5 773 778 5 773 778 WECC - NWPP 40 129 169 40 129 169 WECC - RMPA 16 184 200 16 184 200 TOTAL 4,954 32,522 37,476 4,848 36,366 41,214

17. MACT • Moderate Case and Strict Case impact estimates show a high degree of disparity, due to the implementation rules assumed to be enforced by the EPA • Resulting impacts highly dependent on waivers extensions past the 2015 "hard stop" compliance deadline • Will mainly affect coal-fired generation MACT Impacts - 2015 Moderate Case Strict Case Derated Retired Derated Retired (MW) (MW) Total (MW) (MW) Total ERCOT 73 0 73 73 0 73 FRCC 0 0 0 78 121 199 MRO 125 202 327 144 764 908 NPCC-NE 0 0 0 32 616 647 NPCC-NY 0 11 11 16 694 710 RFC 103 1,061 1,164 1,060 5,493 6,553 SERC-Central 61 71 132 305 1,000 1,305 SERC-Delta 69 18 87 69 95 164 SERC-Gateway 84 35 119 110 365 475 SERC-Southeastern 33 140 173 337 1,208 1,545 SERC-VACAR 0 465 465 255 2,649 2,905 SPP 127 0 127 130 52 181 WECC-CA 0 15 15 3 15 17 WECC-AZ-NM-SNV 49 0 49 49 1,580 1,629 WECC-NWPP 72 39 111 73 129 202 WECC-RMPA 10 4 13 10 100 110 TOTAL 806 2,061 2,867 2,746 14,879 17,625

18. Combined Regulations • Potential loss of approximately 40-76 GW (retrofit plus retired) capacity by 2018 • Potential coordination issues to acquire and install the necessary environmental controls in the short-run may create significant future impacts • Aggregate effects of multiple regulations increases unit retirement • Estimates predict the majority of retirements occur by 2018 • More units predicted to be retired rather than retrofit

19. Scenario Results 2015 Reserve Margin Levels 2018 Reserve Margin Levels 2013 Reserve Margin Levels 60.00% 50.00% 40.00% 30.00% Reserve Margin (%) 20.00% 10.00% 0.00% 0.00% (APCR) Reserve Margin - Reference Case (APCR) Reserve Margin - Moderate Case (APCR) Reserve Margin - Strict Case NERC Reference Level

20. Impending Hurdles • Potential EPA regulation timing • Environmental control retrofit constraints • Skilled construction labor • Financing • Materials • Capacity replacement • Demand Response\Energy Efficiency • Construction and Siting\Permitting new generation • Other potential EPA regulations\CO2 Legislation

21. Tools and Actions for Mitigating Resource Adequacy Issues Advancing In-service Dates of Future or Conceptual Resources • Generation resources may be able to advance their in-service dates where sufficient lead time is given. • Accelerated construction may be possible. • Existing market tools, such as forward capacity markets and reserve sharing mechanisms, can assist in signaling resource needs. Addition of New Resources Not yet Proposed • Smaller, combustion turbines or mobile generation units can be added to maintain local reliability where additional capacity is needed. • Additional distributed generation may also mitigate local reliability issues. Increased Demand-Side Management and Conservation • Increased Energy Efficiency may offset future demand growth. • Increasing available Demand Response resources can provide planning and operating flexibility by reducing peak demand. Early Action to Mitigate Severe Losses • Planning and constructing retrofits immediately will aid in preventing the potential for construction delays and overflows, mitigating the risk of additional unit loss. • Managing retrofit timing on a unit basis will keep capacity supply by region stable. • Combating the regulations early demonstrates industry's willingness to comply, potentially dampening the EPA severity of promulgated regulations.

22. Tools and Actions for Mitigating Resource Adequacy Issues Cont. Increase in Transfers • Regions\subregions that have access to a larger pool of generation may be able to increase the amount of import capacity from areas with available capacity, transfer capability is sufficient. and deliverability is confirmed. • Additional transmission or upgrades may enable additional transactions to provide additional resources across operating boundaries. Developing or Exploring Newer Technologies • Other technologies exist, such as trona injection, that will allow companies to comply with EPA air regulations without installing more scrubbers. Use of More Gas-Fired Generation • Existing gas units may have additional power production potential, which can be expanded during off peak periods. This capacity can assist in managing plant outages during the installation of emission control systems. Repowering of Coal-Fired Generation • Some coal-fired generation have the potential to repower their units with combined-cycle gas turbines and reducing emmisions.

23. Recommendations • Regulators • Consider pace and aggressiveness of regulation timing and impacts to the bulk power system • Industry • Employ tools to mitigate potential issues • NERC • Further assess the implications of regulations as greater certainty emerges around industry obligations, technologies, timelines, and targets

24. Questions?