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Climate Change:Current Impacts on Utility Decision MakingMarch 31, 2008

© Energy Insights, an IDC company Page 2

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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….


About Our Speakers

Nick Lenssen: Practice Director, Renewableand 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.


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


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

DriversClimate-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

PredictionsUtility companies will increase their investments in IT systems to measure and manage their carbon footprint – especially emissions/compliance reporting and verificationClimate 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 marketsWind 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 laterUtilities will ramp up development of programs and/or partnerships to promote energy efficient consumer technologies such as smart building controls and smart appliancesOil & gas companies will speed up investment in research, development and commercialization of renewables


Utility Adoption of Renewable Energy Resources

Nick Lenssen


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


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


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


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


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


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 . . .


The Benefits of MidAmerican’s Wind Hedge

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$/MmbtuFinal monthly settled price

May 9, 2007 futures price

June 2003 futures price


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


Tackling Utility Carbon Emissions

Jill Feblowitz


Tackling Carbon Emissions

A Number One Priority for Generation

Primary Fuel

Tons of Carbon

Dioxide Per MWh

Coal 1.10Gas 0.78Oil 1.84

Source: The Emissions & Generation Resource Integrated Database (eGRID), 2004, Energy Insights, 2007.

eGrid is a comprehensive inventory of environmental attributes of electric power systems and is based on available plant-specific data for all U.S. electricity generating plants that provide power to the electric grid and report data to the U.S. government.eGRID contains air emissions data for nitrogen oxides, sulfur dioxide, carbon dioxide, and mercury.

Electric generation accounts for 1/3 of GHG emitted in the United States each year – DOE.

Percent of Capacity

Natural gas18.7%

Coal49.7%

Nuclear19.3%

Hydro6.5%

Petroleum3.0%

Other gases0.4%

Other renewables2.3%

Source: Energy Information Agency, 2007


Regional Greenhouse Gas Initiative (RGGI) in the Northeast U.S. (10 states)California Global Warming Solutions Act of 2006

Western Climate Initiative (6 states + 2 provinces)

Midwestern Regional Greenhouse Gas Reduction Reduction Accord (6 states + 1 province)

Lieberman-Warner bill in U.S. Senate

U.S. States with Carbon Cap-and-Trade Programs

Cap and Trade Coming Soon

CompanyAt $10/Ton

($MM)At $7/Ton

(&MM)At $10/Ton

($MM)At $7/Ton

(&MM)American Electric Power 410 207 1609 1146Southern Company 372 200 1489 1041Duke Energy 264 199 1113 795TVA 259 181 1006 725Xcel 175 122 696 469Ameren 173 121 690 483Dominion Resources 158 109 621 436Edison International 155 108 618 430Progress Energy 147 105 589 413TXU 137 96 549 365

At 25% Auction At 100% Auction

Cost of Compliance - High


Emissions – The Cost of Carbon

Source: Denise Furey, Fitch Ratings, 2007



Reporting to the Shareholder

229

197

11,297

11,067

48.8

62.3

16,376

58.7

16,077

65.3

C02 emissions over the period (gr. CO2 /KWh): Total 250

C02 emissions over the period (gr. CO2 /KWh): Spain 227

Emission-free production: total (GWh) 10,586

Emission-free production: Spain (GWh) 10,370

Ratio of emission-free production to total production (%) 49.5

Ratio of emission-free production in Spain to total production (%) 61.7

Total emission-free installed capacity: (MW) 15,679

Total emission-free installed capacity: (%) 60.6

Emission-free installed capacity: Spain (MW) 15,372

Emission-free installed capacity: Spain (%) 68.0

Iberdrola’s Emissions Indicators, 2005–2006

Global Reporting Initiative (GRI) Sustainability Guidelines

Performance IndicatorsEN3 Direct energy consumption by primary energy sourceEN6 Initiatives to provide energy-efficient or renewable

products and servicesEU37 Demand-side management programsEU38 MWh saved through demand-side management programsEN16 Total direct and indirect GHG emissions by weightEN18 Initiatives to reduce GHG emissions and reductions

achievedEN19 GHG emissionsEN20 NOx, SOx, and other significant air emissionsEN26 Initiatives to mitigate environmental impacts of products

and servicesEN28 Fines for non-compliance with environmental regulationsEN30 Total environmental protection expenditures and

investments by type

… companies bolster their corporate image through sustainability measures …

A new section of quarterly guidance reporting……..

Source: Iberdrola’s Guidance, 2007


Inventory = Σ [direct + indirect emissions] – sequestration

Summed over the year covered

Metric tons of CO2 equivalent

Mobile and stationary

Calibration of measurement instruments is

important.

1605 b – Department of Energy

GHG — carbon dioxide, nitrous oxide, methane, HPC

Carbon or carbon dioxide or carbon equivalent


It’s all about measurement



Measure, report, manage, trade, optimize

Presentation Layer

Integration Layer

Building Efficiency

Energy Trading &

Risk Management

Portfolio Planning

Environmental Safety and

Health

External Data

Services

Production Meter

Emissions Monitors/

CEM

Condition Sensors

Distributed Controls

(DCS)/PLC

Common Historian Interface

Analytics/Collaboration

CXO

VP Risk

Trader

Scheduler

Plant Manager

VP Operations VP Environ

Affairs

Plant Operator

Development & Planning VP Supply

Chain

Plant Maintenance

Performance Engineering

Plant efficiency Carbon tradingMonitor, measure Portfolio planning

Enterprise Resource

Management(ERP, EAM)

Fuels/Supply Chain

Management

Building efficiency

Software as Service



Early adopter of innovative approach…

In 1997, set voluntary green house gas emissions to be reduced to 10% below 1990 levels by 2010Corporate image of Beyond Petroleum Use of environmental health and safety

applicationsInternet-based electronic market to aggregate decentralized knowledge and trade emission rights

Internal cap and trade system across 150 business units in 100 countriesInvestment in renewables

– Solar– Biofuels– Hydrogen-powered bus fleets

Carbon capture and storage

Achieved emission reduction goals by 2001Savings of $650M USD

Role of Technology

Approach

Results

Challenge “Beyond Petroleum”



AEP- Innovative Approach

Coal-fired generation with large carbon footprintLarge exposure with cap and tradeCommitment to sustainability

Use of software as a service, plus internal software for compliance and voluntary tracking, reporting, and managementSensors for managing plant efficiencyRecognize need for broader corporate initiative to track and manage sustainability and risk

Waste management & recyclingWater and land managementEnergy efficiency for customersEmissions

–Investment in new clean technology & carbon sequestration

–Committed to voluntary efforts to report and reduce GHG

–Participation in voluntary carbon trading markets–Improving efficiency of power plants–Addition of renewables and nuclear power–Purchase of GHG offsets through forestry projects

Role of Technology

Approach

Challenge

Source: AEP web site, 2008


Customer Perspectives and Utility Programs

Craig Williamson


Utility customer concerns about climate change

Primary research– To learn about residential utility

customer concern about climate change, we surveyed 498 members of the Energy Insights National Residential Online Panel.

Data was collected using an online survey in June 2007

Utility programs– PG&E’s ClimateSmart program– SMUD’s Green Web portal


Important energy-related issues

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Other

Nuclear Energy

Electricty and Natural Gas Shortages

Electricity and Natural Gas Prices

Alternative fuels/renewable/green energy

Climate change

Dependency on Foreign Oil

Gasoline Prices

(Percent of respondents)

Question: Thinking specifically about energy issues, what do you think is the single mostimportant energy-related issue facing the United States today?


Level of consumer concern

Question: How concerned are you about the effects of climate change?

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Not Concerned at All

Not Too Concerned

Somewhat concerned

Very concerned


Over 80% are either very or somewhat concerned about the effects of climate change


Who should lead?

Question: Who do you think should take the lead on combating climate change?

Most believe responsibility for leadership is shared, or that the government should lead

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Other

State Governments

Environmental groups

Car Manufacturers

Electric and natural gas utility companies

Oil and Gas Companies

Individuals

Federal Government

No one should take the lead, everyoneshould contribute


Utilities are not seen as leaders on combating climate change


Utility roles and responsibility

Question: How much responsibility do electric and natural gas utilities have for combating climate change in the US?

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10 A major Responsibility

7,8,9

5,6

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1 No Responsibility


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Don't know

Not enough

Just enough

More than enough


Question: Overall, do you think that your local electric and natural gas utilities are doing more than enough, just enough, or not enough to protect the environment and reduce the effects of climate change?

Customers believe utilities are responsible for climate change but are not doing enough now


Consumer actions

Question: What actions have you taken in the last 12 months to limit your carbon dioxide emissions, helping to reduce climate change?

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Replaced Standard Light Bulbswith Compact Fluorescents?

Washed Clothes in ColderTemperatures

Used Less Heat and AirConditioning


Multiple responses were allowed, but this figure includes only actions take by a majority of respondents


Utility actions – PG&E ClimateSmart

Voluntary program launched June 28, 2007 that allows PG&E customers to fund projects that reduce GHG or avoid emissions

– Allows customers to offset carbon emissions from their own energy use – to be carbon neutral.

– PG&E is credible player, since they closely monitor their own emissions and know customers’ energy use

– Participants tend to be environmentally conscious and socially responsible– Available to residential and business customers through the PG&E website– Typical residential customer would pay an additional $4.31 on their monthly bill to

participate– PG&E opened a process to solicit California-based projects, which will be

selected through a formal, competitive process. Projects must be certified under the protocols developed by the California Climate Action Registry

– Designed to complement PG&E’s existing EE and renewable energy programs– Results

Pre-launch early enrollment of 700 customers Enrollment as of July was 1,643 customers


Utility actions – SMUD Carbon Offset Calculator

Sacramento Municipal Utility District (SMUD) website allows customers to calculate their carbon footprint, and gives suggestions for reducing or offsetting emissions– Launched on October 24, 2007– Allows purchase of carbon credits to offset calculated carbon impacts– Credits will be used for projects in the Sacramento area, not only

providing more local environmental impact, but also stimulating the local economy

– A part of larger website, OurGreenCommunity.org, which will allow SMUD customers and others to

Learn about green topics, particularly those concerning energyFind out about local green organizations and activitiesCalculate their carbon footprint using local data Enroll in steps to offset their carbon usage through offset purchasesShare topical information with other users - website includes interactive features such as Blogs and discussions

– Costs will appear on participants’ monthly bills


Green Energy Quick-Start Kit

Accelerate your knowledge of climate change-related developments in the energy industry– Your choice of 12 research reports on climate change-related topics from

the Energy Insights libraryRenewable energy technologiesDistributed energy resourcesEnergy trading and risk management software for carbon trading marketsIT systems to help companies measure and manage their carbon footprintSmart metering technologiesIntelligent grid initiativesIn-home energy displaysEnergy efficiency and demand response programsGreen IT

– Half-day briefing with an Energy Insights analyst– For more information contact Ben Tucker at btucker@energy-

insights.com or your Energy Insights or IDC sales representative


Energy & Utilities Summit

April 16, 2008

Brown Palace Hotel

Denver, CO

The role of intelligent technologies in addressing climate change

Details on the ‘events’ tab at www.energy-insights.com


Distributed and Renewable Energy Outlook

April 17-18, 2008

Brown Palace Hotel

Denver, CO

Latest developments in distributed energy and renewable energy markets, technologies and policies

Details on the ‘events’ tab at www.energy-insights.com


Questions? Use Chat Area or Phone

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Our Analysts

Rick Nicholson: Vice President of Research and Lead Analyst, Energy Executive Council– [email protected]

Jill Feblowitz: Practice Director, Business /Technology Alignment and Lead Analyst, Energy Wholesale Strategies– [email protected]

Nick Lenssen: Practice Director, Renewable and Distributed Energy– [email protected]

Craig Williamson: Practice Director, Consumer and End-Use Research– [email protected]


Thank You!

For information about Energy Insights, please contact your sales representative or:

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