deloitte dbriefs
Post on 16-Apr-2015
31 Views
Preview:
DESCRIPTION
TRANSCRIPT
The Dbriefs Energy & Resources series presents:
The Math Does Not Lie: Factoring the Future of the U.S. Electric Power Industry Greg Aliff, Deloitte LLP Marlene Motyka, Deloitte Financial Advisory Services LLP Branko Terzic, Deloitte Services LP January 16, 2013
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Objectives of Paper
Planning for the Near Term
The Math
The Numerator
The Denominator
The Math at Work
Electricity Sector’s Response
Agenda
Objectives of Paper
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Objective
4
To explore what is changing in the electric industry and introduce a straightforward approach to examine the future through a simple framework using a mathematical equation. Two emerging trends
Moderating electricity consumption
Steeply rising costs
Copyright © 2013 Deloitte Development LLC. All rights reserved.
How do you think U.S. electricity consumption will change between 2012 and 2020? It will:
• Increase at an average annual rate of 2% or more • Increase at an average annual rate of less than 2% • Remain essentially the same • Decrease at an average annual rate of less than 2% • Decrease at an average annual rate of 2% or more
Poll question #1
Planning for the Near Term
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Planning for the Near Term - 2020
7
• Longview Power’s 695 MW (net) supercritical pulverized coal-fired power plant in Maidsville, W.V., completed recently, took 5 years to come online • Georgia Power’s Vogtle and SCANA’s V.C. Summer nuclear
plants are expected to take 9 to 10 years to complete
Eight years is not far away:
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Planning for the Near Term
8
During eight short years, many unknown factors will impact the U.S. electric power industry, such as:
• The global and U.S. economy
• Coal, natural gas and nuclear fuel prices
• Federal and state policy and regulation
• Technological advances
• Changing customer behaviors and demands
Despite uncertainty, if constituents use a simple mathematical equation as the framework, they can focus on the variables and analyze them in relation to each other − The math does not lie.
The Math
Copyright © 2013 Deloitte Development LLC. All rights reserved.
The future can be evaluated with a simple mathematical equation
10
Cost per kWh sold
($/kWh)
Cost of electricity sold
($)
Number of kilowatt hours
(kWh) consumed
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Variables to Include in the Equation
11
The Numerator: Cost of Electricity Sold
The Denominator: kWh Consumed
Capital and Operations Costs Consumption Capital costs
• Generation, transmission and
distribution additions • Environmental regulation compliance • Renewable portfolio standards • Nuclear safety regulations • Cost of capital/interest rates Operations costs • Cost of fuel • Incremental operations costs of
environmental compliance retrofits • New operating technologies
• Changes in weather • Changes in the economy • New sources of electricity
demand • Technological advances in
energy efficiency • Customer attitudes and
behaviors
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Which of the following variables do you think will have the greatest impact on the electricity sector’s costs from 2012-2020? • Investment in generation, transmission, and distribution
(associated depreciation and interest costs) • Environmental compliance costs (associated
depreciation, interest, and operating costs) • Compliance with Renewable Portfolio Standards (RPS),
(associated depreciation and interest costs) • Smart Grid Deployment (associated depreciation and
interest costs)
Poll question #2
The Numerator
Copyright © 2013 Deloitte Development LLC. All rights reserved.
The Numerator − Capital Costs
14
Transmission Investment
Grid reliability and renewables integration • From $100-$120 billion in new
transmission assets between 2012 and 2020.2
Aging fleet and early retirements • Over $150 billion in new generation
capacity from 2012-2020.1
Generation Investment
Changing infrastructure and smart meter installations • $4.4 to $11.6 billion investment in new
smart meters alone through 2015.3
Distribution Investment 1 Estimate based on U.S. Energy Information Administration’s (EIA) forecasts for new additional capacity, overnight capital costs, and lead time for various technologies. 2 Based on The Brattle Group, Employment and Economic Benefits of Transmission Infrastructure Investment in the U.S. and Canada. Johannes P. Pfeifenberger and Delphine Hou, prepared for WIRES - Working Group for Investment in Reliable and Economic Electric Systems, May 2011. 3 Based on $150-$400 per meter deployment cost, MIT, The Future of the Electric Grid. Dec 2011 and estimated 29 million smart meters to be deployed from mid 2012 through 2015 (IEE – Utility-Scale Smart Meter Deployments, Plans& Proposals, May 2012).
Copyright © 2013 Deloitte Development LLC. All rights reserved.
The Numerator − Capital Costs
15
Renewables Capacity Investment
Twenty-nine states have set mandatory Renewable Portfolio Standards (RPS) and eight states set voluntary goals • U.S. needs to add 3.62 GW of renewable capacity
annually between 2012 and 2020 to meet RPS2
Evolving federal, state and local environmental regulations • EPA’s Mercury and Air Toxics Standards
(MATS) - estimated incremental compliance cost of nearly $55 billion through 20201 Environmental Compliance
Investment
New safety regulations required by the Nuclear Regulatory Commission (NRC) post-Fukushima will result in new compliance-related investment at nuclear plants
Nuclear Safety Investment
1 U.S. Environmental Protection Agency, Regulatory Impact Analysis for the Final Mercury and Air Toxics Standards, December 2011, p 3-14 2 U.S. Partnership for Renewable Energy Finance “Ramping Up Renewables: Leveraging State RPS Programs and Uncertain Federal Support” 2012.
Copyright © 2013 Deloitte Development LLC. All rights reserved.
16
The Numerator − Capital Costs Future interest rates remain uncertain but are likely to increase from the current record low
0
1
2
3
4
5
6
Inte
rest
Rat
e (%
)
Interest rate on a 10-year T- Note, 2004-2012 (through August) Average: 4.3 %
Average: 3.1 % Average: 1.8%
Source: U.S. Department of the Treasury
Copyright © 2013 Deloitte Development LLC. All rights reserved.
The Numerator − Operations Costs
17
1Tim Roberts, Ethylene – Good Today, Better Tomorrow – A Year Later, Goldman Sachs Chemical Intensity Day, Lyondellbasell, March 2012 2 Based on a sample 300 MW coal fired power plant and investment costs converted to $/kWh using a 15 percent fixed charge rate and 60 percent capacity factor. Source: Jim Lazar and David Farnsworth, “Incorporating Environmental Costs in Electric Rates,” Regulatory Assistance Project (RAP), October 2011, p.15
Recent technological advancements such as smart grid and electricity storage could decrease operations costs
New Technologies
Natural gas price needs to rise to ~$4.50/MMBtu1 to make much of U.S. shale production economical
Fuel for Electric Generation
Emissions retrofits’ can increase electric plant operating costs other than fuel by over 50 percent2
Emissions Retrofits
The Denominator
Copyright © 2013 Deloitte Development LLC. All rights reserved. 19
Decreases kWh consumed
Increases kWh consumed
Uncertain Impact on kWh consumed
The Denominator - Kilowatt hours consumed
• Advances in energy efficiency
• Customers will be able to “do the same with less”
• Increased electronics • Computer server
farms • Electric vehicles (EV) • Water management • Resurgence of U.S.
manufacturing
U.S. Economy
Energy Efficiency
Technology
New sources of
demand
Customer Behavior
kWh consumed
• Changing electricity consumption trends by businesses and consumers
• “Permanent demand destruction”?
• Recovery uncertain?
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Consumer Resourcefulness Extends to Electricity Findings of Deloitte reSources 2012 Study* of over 2,200 demographically-balanced household decision makers
20
• 83 percent of consumers reported they took steps to reduce their electricity consumption – up from 68 percent in the 2011 Study.
• The primary steps taken were behavioral in nature – turning off lights (78 percent), shutting down electronics when not in use (65 percent), adjusting the thermostat in the summer and winter (61 percent), and changing over to compact fluorescent lights (60 percent).
• While interest in purchasing smart energy technologies is relatively low, it is noticeably growing, with younger adults clearly more receptive to making the investment
* Deloitte Development LLC. Deloitte reSources 2012 Studies: Insights into Corporate Energy Management Trends and Insights into Emerging Trends of Energy Customers. May 2012
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Businesses’ commitment to energy management practices intensifies Findings of Deloitte’s reSources 2012 Study* of business activities of over 600 companies with greater than 250 employees:
21
• 90 percent of U.S. businesses have set goals for managing electricity usage with 49 percent having reported formal goals vs. 45 percent in 2011.
• Of these companies, 85 percent cite reducing electricity costs as essential to staying competitive – up from 76 percent in 2011.
• The average target for reduction in electricity consumption is 23 percent over approximately a 3.5 year period.
• 35 percent of businesses report some level of self-generation of electricity with another 17 percent planning to do so in the future.
* Deloitte Development LLC. Deloitte reSources 2012 Studies: Insights into Corporate Energy Management Trends and Insights into Emerging Trends of Energy Customers. May 2012
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Federal Government Impacts on Consumption
22
Federal Facilities Energy Reduction Targets: • Annual energy intensity decrease by 2015 using 2003 as a baseline year - 3 percent , i.e. a total of 30% by the end of fiscal year 2015 The Department of Defense (DOD) Energy Reduction Targets Even Greater: • Annual energy intensity decrease in DOD facilities using a baseline year
of 2003 - 21 percent by 2012 - 37.5 percent by 2020 • Renewables as a percentage of energy consumption- - 12 percent in 2012 - 20 percent by 2020
Source: Department of Energy and Department of Defense
Copyright © 2013 Deloitte Development LLC. All rights reserved.
As a consumer, have you taken steps to reduce your energy consumption? If so, which one have you taken? • Turning off lights • Shutting down electronics when not in use • Adjusting the thermostat in the summer and winter • Changing over to compact fluorescent lights • More than one of the above
Poll question #3
The Math at Work
Copyright © 2013 Deloitte Development LLC. All rights reserved.
The Math in Action:
25
The numerator is going up and the denominator may well be going down over time for the first time in the history of the U.S. electric industry
Copyright © 2013 Deloitte Development LLC. All rights reserved.
The New Math Suggests a Dilemma
26
• Will rising electricity costs and prices lead to further decreases in the denominator and even higher costs per kWh?
• Will the price to individual consumers invoke even greater end-user investment in energy efficiency?
• Will there be a wave of new, economically priced technologies designed to enable greater consumer and business control over their electricity consumption?
Since variables affecting results will vary from company to company, every company must do its own math
The Electricity Sector’s Response
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Avenues to Evaluate
Increase electricity demand • Electric vehicles (EV) • Computer servers/data centers Identify new regulated revenue streams • Utility’s value proposition to on-site generation • Opportunities in residential and business
electricity generation or storage • Incremental value for EV beyond electricity? • Opportunities in related areas such a water
scarcity
• Identify and reduce/defer controllable costs
• Consider mergers, acquisitions, or strategic dispositions where significant synergy savings can be achieved
28
Reduce numerator
Grow denominator
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Poll question #4
Which potential new revenue stream holds the most promise for the electricity sector? • On-site generation • Residential and business electricity generation
or storage • Electric vehicles • Water scarcity (e.g. desalination)
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Another Avenue: Change the regulatory paradigm
Evaluate changes to the current regulatory paradigm with policy makers and regulators against the backdrop of the New Math to arrive at mutually acceptable solutions. Examples of recent changes from the traditional model include: • Deregulation of generation • Decoupling of electric rates • Renewable portfolio standards • Demand response programs
30
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Explore Alternative Business Models
31
Invest in new unregulated revenue streams • Diversify the company’s
overall marketplace risk
Evaluate opportunities for new products and services • Bundle electricity services with
other services, regulated or unregulated
Ride the technology wave
• Customer acceptance of new technologies creates new electricity demand, e.g. Best Buy’s Geek Squad Expansion
Re-consider business structures:
• Consider joint ventures and
public-private partnerships
Changing global marketplace and energy landscape suggests a re-evaluation of future business strategies
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Navigating the Future
The U.S. electric power industry has weathered previous storms, but it could be navigating uncharted waters in the form of significantly rising costs to produce and deliver a unit of product in the face of consistently flat or declining electricity consumption.
32
The time for true innovation in the electricity sector may have arrived
Question and Answer
Join us February 20 at 2 PM ET as our Energy & Resources series presents: ERM Governance – Board Oversight of Risk Management Programs at Energy Companies
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Eligible viewers may now download CPE certificates.
Click the CPE icon in the dock at the bottom of your screen.
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Branko Terzic bterzic@deloitte.com Greg Aliff galiff@deloitte.com Marlene Motyka mmotyka@deloitte.com
Contact info
Copyright © 2013 Deloitte Development LLC. All rights reserved.
This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.
About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Copyright © 2013 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu
top related