Climate Change: Current Impacts on Utility Decision Making آ© Energy Insights, an IDC company Page 6

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  • Climate Change: Current Impacts on Utility Decision Making March 31, 2008

  • © Energy Insights, an IDC company Page 2

    Webcast Logistics

    Audio lines are muted until Q&A session

    Submit your questions via the Live Meeting “Questions” chat window at any time (or audio at end)

    To see the slides larger, choose in menu: View, Full Screen Mode – To go back to the view with the chat box, hit “Esc” key

    Slides will be available on website; e-mail will be sent with the URL

    Connection issues ? – Email scollins@idc.com

  • © Energy Insights, an IDC company Page 3

    About Our Speakers

    Rick Nicholson: Vice President of Research and Lead Analyst, Energy Executive Council – Leads Energy Insights and has more than 20 years of

    experience in IT in the energy industry.

    Jill Feblowitz: Practice Director, Business /Technology Alignment and Lead Analyst, Energy Wholesale Strategies – Leads the Business Technology Practice – focused on

    the application of IT in the Oil & Gas and Utilities industries. She also manages Energy Wholesale Strategies and Energy Downstream Strategies.

    more….

  • © Energy Insights, an IDC company Page 4

    About Our Speakers

    Nick Lenssen: Practice Director, Renewable and Distributed Energy – Directs Distributed Energy and Renewable Energy

    Strategies programs. He has served as senior director at EPRI Solutions' Market Intelligence business unit.

    Craig Williamson: Practice Director, Consumer and End-Use Research – Directs the Load Analysis Strategies practice area

    and also contributes to custom consulting projects related to energy use and load shape estimation, pricing and profitability.

  • © Energy Insights, an IDC company Page 5

    Today’s agenda

    Revisiting our top predictions for 2008

    Utility adoption of renewable energy resources

    Tackling utility carbon emissions

    Customer perspectives and utility programs

    Announcing the Green Energy Quick-Start Kit

    Upcoming events

    Q&A

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    #1 – Climate change issues will drive increased investment in energy and information technologies

    Drivers Climate-focused energy policies and regulations

    Consumer and business awareness and concern with climate change issues

    Increased venture capital investment in clean/green technologies

    Climate change/sustainability attention by investors and credit rating agencies

    Predictions Utility companies will increase their investments in IT systems to measure and manage their carbon footprint – especially emissions/compliance reporting and verification Climate change benefits will increasingly be used to help justify investments in other pre-existing programs (smart metering, intelligent grid) Carbon trading will emerge in North America and companies will invest in systems required for success in these markets Wind will continue to lead the way for no-carbon generation with U.S. capacity nearly doubling by 2011 - solar, nuclear and clean coal (IGCC) will not make a major impact until later Utilities will ramp up development of programs and/or partnerships to promote energy efficient consumer technologies such as smart building controls and smart appliances Oil & gas companies will speed up investment in research, development and commercialization of renewables

  • © Energy Insights, an IDC company Page 7

    Utility Adoption of Renewable Energy Resources

    Nick Lenssen

  • © Energy Insights, an IDC company Page 8

    Utility adoption of renewable energy to address greenhouse gas emissions

    Renewable Portfolio Standard compliance efforts

    – Nevada Power, WeEnergies, et al

    Renewable energy business – FPL, wind and solar businesses

    Carbon adder in resource planning – PGN, PCorp, Idaho Power, et al

    Carbon trading – AEP and Manitoba Hydro, founding

    members of CCX

    Climate-neutral products – PG&E’s ClimateSmart

    Direct GHG reduction efforts – Austin Energy, Seattle City Light

    Investing in RE as a hedge – MidAmerican Energy

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    Hedging: A definition (or two)

    Merriam-Webster Dictionary: – “A means of protection or defense (as against financial loss)” – “A securities transaction that reduces the risk of an existing

    investment position” – “To take compensatory measures so as to counterbalance

    possible loss”

    Webtrading.com – “Taking a position in a futures market opposite to a position held

    in the cash market to minimize the risk of financial loss from an adverse price change”

    Hedge Funds, though, not hedging, but speculating – Leveraging borrowed funds with minimal capital

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    Why hedge in electric utility industry?

    Volatility of fossil fuels are the highest of any commodities – Buyers hedge natural gas costs

    through direct contracting measures

    But recent events creating more risk than traditional approaches can handle – Winter storms – Geopolitical concerns (e.g. Russia,

    Middle East) – LNG risks not to be ignored

    Global climate change threat – physical, financial, and regulatory – offers great rationale for hedging

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    Prior work on hedging largely ignored

    For roughly 15 years, Shimon Awerbuch (www.awerbuch.com) pioneered the concept of reducing portfolio risk through the use of RE – “Investors hold efficient, diversified, balanced portfolios – best

    hedge against uncertain future.” – “Risk affects value and economic expectations

    Gas variable rate mortgage” – “Engineering kWh cost estimates ignore risk” – “Renewables question not if – but only how much

    Every optimal portfolio requires some fixed-cost technology”

    Ryan Wiser (et al) @ Lawrence Berkeley National Laboratory have produced a series of detailed analyses on value of hedging

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    MidAmerican Energy’s experience

    Signed first wind deal in 1999 with Enron Wind (Zond) for a power purchase agreement from 112.5 MW

    MidAmerican Holdings taken private in 2000 by Berkshire Hathaway

    In 2003, MidAmerican Energy Company (MEC), moved to diversify its company-owned generation portfolio – ~16% renewables by end of 2008 – MidAmerican Holdings will have 20%

    renewables by end of 2008

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    $/Mmbtu Historic spot price

    June 2003 futures price

    The context for MidAmerican Energy’s initial wind investment

    Source: NYMEX

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    The details on MEC’s wind splurge

    In 2003, MEC decides to develop and own a 310-MW wind project in Iowa – Along with a 790-MW coal project and a 540-MW CCGT

    Expanded wind project by 50 MW in 2004

    Requested additional 545 MW buildout in April 2006; more in 2007

    All told: MEC owns, is developing, or contracts for 1,244.3 MW of wind power

    MEC now ranks #1 in U.S. list of regulated utilities in wind ownership – FPL’s unregulated subsidiary owns more; sells output under PPAs

    How does the company’s investment look now? – Pretty smart . . .

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    The Benefits of MidAmerican’s Wind Hedge

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    $/Mmbtu Final monthly settled price

    May 9, 2007 futures price

    June 2003 futures price

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    The details on MEC’s wind splurge

    In 2003, MEC decides to develop and own a 310-MW wind project in Iowa – Along with a 790-MW coal project and a 540-MW CCGT

    Expanded wind project by 50 MW in 2004

    Requested additional 545 MW buildout in April 2006; more in 2007

    All told: MEC owns, is developing, or contracts for 1,244.3 MW of wind power

    MEC now ranks #1 in U.S. list of regulated utilities in wind ownership – FPL’s unregulated subsidiary owns more; sells output under PPAs

    How does the company’s investment look now? – Pretty smart . . .

    MEC can calculate financial benefits today, though future GHG hedging benefits still unclear

  • © Energy Insights, an IDC company Page 17

    Tackling Utility Carbon Emissions

    Jill Feblowitz

  • © Energy Insights, an IDC company Page 18

    Tackling Carbon Emissions

    A Number One Priority for Generation

    Primary Fuel

    Tons of Carbon

    Dioxide Per MWh

    Coal 1.10 Gas