The Importance of Baseload Power Renewal October 7, 2014 The Importance of Baseload Power Renewal Peter C. Balash, Ph.D., on behalf of Strategic Energy Analysis and Planning

Disclaimer The analysis presented and conclusions drawn are solely those of the author(s), and do not represent the views of the United States Department of Energy

Outline – Importance of Basleoad Electricity Trends and Projections Growth and capacity needs may be under-projected Issues in Focus – “GHG concern” Obscures otherwise economic coal plant additions Issues in Focus – “Ageless Baseload” Is high utilization of aging capacity realistic? Impact of Retirements Infrastructure and reliability concerns

Growth in electricity use slows, but still increases by 29% from 2012 to 2040 percent growth (3-year compounded annual growth rate) Period Annual Growth Electricity use GDP 1950s 9.8 4.1 1960s 7.3 4.4 1970s 4.7 3.2 1980s 2.9 3.0 1990s 2.4 3.2 2000-2012 0.7 1.8 2013-2040 0.9 2.5 2012 History Structural Change in Economy - Higher prices - Standards - Improved efficiency electricity use Projections GDP Source: EIA, Annual Energy Outlook 2014 Early Release Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

Electricity and GDP Growth ~30 Year Avg. Year-over-Year Growth Rates, 1982Q1-2014Q1 For a medium-term comparison, IHS projects kWh growth of 1.8%/year and GDP growth of 3.0%/year from 2015-20. Annual Growth Rate Electricity End Use Real GDP All Periods 1.89% 2.77% Non-recession 2.25% 3.21% Recession -1.04% -0.87% 1- 4 quarters after recession 0.66% 1.17% 1- 8 quarters after recession 1.97% 2.60% 5- 8 quarters after recession 3.29% 4.03% Long-term relation of kWhgr/GDPgr = 0.683 Implicit AEO 2014 relation = 0.381 (2012 to 2040); 56% of long-term relationship Sources: Electricity, EIA, Monthly Energy Review, Table 7.6, Electric Power Month, STEO; GDP, Bureau of Economic Analysis, NIPA Table 1.1.6 Real GDP Chained 2005 Dollars; Rates, AEO2014 Tables 8 and 20; and NETL analysis; IHS, North American Power Quarterly Briefing, May 5, 2014; “gr” stands for growth rate.

kWh Growth Rate*: AEO’14 vs. SEAP Forecast SEAP AEO’14 Sources: BEA – NIPA Table 1.1.6; EIA – Monthly Energy Review; Annual Energy Outlook 2014; *kWh end use (consumption); dashed lines represent 6th order polynomial fit

Growth of U.S. GDP vs. Generation Historic and Forecast 3.0% CAGR AEO’14 Forecast What If, in addition, GDP grew at AEO’05 rate? What if historic trend in kWh and GDP growth is applied to forecasted GDP? 2.46% CAGR Generation (BkWh) GDP Gap 70 GW Real GDP Billions (2010$) GDP Generation Gap 124 GW Bubble Divergence Generation 672 BkWh* missing in 2040; Equivalent to 491 baseload BkWh ≈ 70 GW Baseload 1,187 BkWh* missing in 2040; Equivalent to 866 baseload BkWh ≈ 124 GW baseload “Structural Change in The Economy”, Anticipates Less Energy Required Per Unit of GDP; “Higher Prices” Also Assumed to Suppress Demand Sources: BEA – NIPA Table 1.1.6; EIA – Annual Energy Review; Annual Energy Outlook 2014

Outline – Importance of Basleoad Electricity Trends and Projections Growth and capacity needs may be under-projected Issues in Focus – “GHG concern” Obscures otherwise economic coal plant additions Issues in Focus – “Ageless Baseload” Is high utilization of aging capacity realistic? Impact of Retirements Infrastructure and reliability concerns

55% Capacity Increase - to 17% Decrease within 8 Years of Forecasts AEO Coal Capacity Addition Forecasts A Wide Variation in Outlooks Over a Brief Period of Forecasts AEO’06 AEO’07 55% Capacity Increase - to 17% Decrease within 8 Years of Forecasts AEO’08 AEO’09 AEO’10 AEO’11 AEO’12 AEO’13 AEO’14 Additions less Retirements AEO’13 AEO’14 Beginning with AEO ‘09, EIA applies financing cost adder to coal plants Sources: EIA - Annual Energy Outlook 2006 through 2014; AEO’ 06 included 19 GW equivalent of CTL

AEO’14 Assumptions Increasing Coal Cost of Capital Nearly 50% “GHG Concern” “The LCOE values shown for each utility - scale generation technology in Table 1 and Table 2 in this discussion are calculated based on a 30 - year cost recovery period, using a real after tax weighted average cost of capital (WACC) of 6.5 % . In reality, the cost recovery period and cost of capital can vary by technology and project type. In the AEO2014 reference case, 3 percentage points are added to the cost of capital when evaluating investments in greenhouse gas (GHG) intensive technologies like coal fired power and coal - to - liquids (CTL) plants without carbon control and sequestration (CCS). In LCOE terms , the impact of the cost of capital adder is similar to that of an emissions fee of $15 per metric ton of carbon dioxide (CO 2 ) when investing in a new coal plant without CCS, which is representative of the costs used by utilities and regulators in their resource planning . 5 The adjustment should not be seen as an increase in the actual cost of financing, but rather as representing the implicit hurdle being added to GHG - intensive projects to account for the possibility that they may eventually have to purchase allowances or invest in other GHG - emission - reducing projects to offset their emissions. As a result, the LCOE values for coal - fired plants without CCS are higher than would otherwise be expected. ” Source: EIA, "Levelized Cost and Levelized Avoided Cost of New Generation Resources in the Annual Energy Outlook 2014" http://www.eia.gov/forecasts/aeo/pdf/electricity_generation.pdf

Alternate NEMS Scenarios* High Gas Prices No cost penalty *Performed by NETL

Outline – Importance of Basleoad Electricity Trends and Projections Growth and capacity needs may be under-projected Issues in Focus – “GHG concern” Obscures otherwise economic coal plant additions Issues in Focus – “Ageless Baseload” Is high utilization of aging capacity realistic? Impact of Retirements Infrastructure and reliability concerns

AEO’13 Issues in Focus (page 42) The “Ageless Baseload” Assumption Generation by fuel “In the Reference case, coal-fired generation increases by an average of 0.2 percent per year from 2011 through 2040. Even though less capacity is available in 2040 than in 2011, the average capacity utilization of coal-fired generators increases over time. In recent years, as natural gas prices have fallen and natural gas-fired generators have displaced coal in the dispatch order, the average capacity factor for coal-fired plants has declined substantially. The coal fleet maintained an average annual capacity factor above 70 percent from 2002 through 2008, but the capacity factor has declined since then, falling to about 57 percent in 2012. As natural gas prices increase in the AEO2013 Reference case, the utilization rate of coal-fired generators returns to previous historical levels and continues to rise, to an average of around 74 percent in 2025 and 78 percent in 2040. Across the alternative cases, coal-fired generation varies slightly in 2025 (Figure 30) and 2040 (Figure 31) as a result of differences in plant retirements and slight differences in utilization rates. The capacity factor for coal-fired power plants in 2040 ranges from 69 percent in the High Oil and Gas Resource case to 81 percent in the Low Oil and Gas Resource case.”

Gas-fueled units account for most projected capacity additions in the AEO2014 Reference case U.S. electricity generation capacity additions gigawatts Source: Form EIA-860 & EIA Annual Energy Outlook 2014, Early Release Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

Electricity Generation by Fuel, 1980-2040 billion kilowatthours History 2012 Projections Note: Includes generation from plants in both the electric power and end-use sectors. Source: History: U.S. Energy Information Administration (EIA), Annual Energy Review; Projections: AEO2014 Early Release (December 2013). Overview of AEO2014 Accelerated Power Plant Retirement Side Cases May 20, 2014

Aging Baseload Coal-fired Fleet in 2040 Capacity-weighted Average Age 62 New AEO Capacity Operating at Highest Capacity Factors Ever at 62 Years Average Age? Existing Capacity in 2040 Virtually no new Coal Capacity to make up for aging and retired units Includes AEO ‘14 additions after 2014 Accounts for announced retirements And EIA forecasted retirements Reference – Ventyx Velocity Suite (existing units and announced retirements - EIA AEO 2014 (forecasted additions and Retirements)

Coal & Nuclear Baseload Capacity by 2040 2014 2040 60 years or older by 2040 Coal: 168 GW (66%) Nuclear: 43GW (42%) Virtually no new Coal Capacity and very little Nuclear Capacity to make up for aging and retired units New Coal Capacity New Nuclear Capacity Existing Coal Capacity Existing Nuclear Capacity Reference – Ventyx Velocity Suite (existing units and announced retirements - EIA AEO 2014 (forecasted additions and Retirements)

Age Distribution of Existing Coal Units by 2040 (AEO 2014 Reference Case) ~75% Capacity Factor in 2040? Will these units credibly support a 75% average capacity factor in 2040? Identity of Projected Retirement units using NETL methodology

Unit Capacity Factor by Age range(10-year ranges) (Kernel density plots) Kernel density plots exclude units with heat rates equal to 0 or greater than 35,000 and exclude units with capacity factors greater than 100; note: kernel density estimates approximate the density f(x) from observations on x

Coal unit capacity factors drop off as they age 80% Approximation of actual industry capacity factor experience based on unit age 60% 14% Data source and notes: Data from Ventyx's Energy Velocity. Unit age in each year was calculated then averaged; black line is 3rd order polynomial of the entire data set.

Potential Coal GWs - Reference 80% 60% 14% Development needed today? EIA AEO’14 Generation 79 GW 31 GW 109 GW 144 GW 1,007 BkWh 56 GW Generation from current fleet, plus additions, less announced & AEO 2013 retirements, based on historic age/capacity factor operating data (above) Reference – Ventyx Velocity Suite; - EIA AEO’13 remaining coal unit identities; AEO 2014er reference case generation; missing generation estimate 144 GW @80% average C.F. for new units to meet 2040 demand; includes AEO’13 estimate of retiring units beyond public announcements

Outline – Importance of Basleoad Electricity Trends and Projections Growth and capacity needs may be under-projected Issues in Focus – “GHG concern” Obscures otherwise economic coal plant additions Issues in Focus – “Ageless Baseload” Is high utilization of aging capacity realistic? Impact of Retirements Infrastructure and reliability concerns

Coal capacity retirements will dominate in the Eastern Interconnection through 2020 New generation mix 2010-2020 (56.84 GW) Retired generation mix 2010-2020 (93.08 GW) Other: hydro, nuclear, oil, renewable, solar, other Other: hydro, oil, renewable, other Cumulative change (GW) of the generation mix for 2010-2020 period Coal NG Wind Other Other: Retirements of hydro (0.1 GW), oil (13.6 GW), nuclear (2.6 GW), and non-wind renewables (1.2 GW), and addition of hydro (0.6 GW), oil (0.6 GW), nuclear (5.6 GW), and non-wind renewable (5.2 GW) Note: Graph illustrates announced to date (Sept 2014) retirements in the Eastern Interconnection Source: Ventyx Velocity Suite Generating Unit Capacity Query

Coal Generation Fleet per Regulatory Impact Analysis, 2020 Notes: Announced coal unit retirements from Ventyx’s Energy Velocity, Projected retirements identified at the unit level using NETL’s “Best Estimate” methodology and data from IPM Option 1 model results summing coal retirements by state.

Coal Retirements by 2020 Actual, Announced, and EPA IPM 105% at 3,208.48 miles 306 GW operating Coal as of 2014 Coal Retirements View Layer Retirements 2010-2013 -20 GW (210 units) Off On Announced Retirements 2014 - 2020 -36.7 GW (211 units) Operating and Standby Units Actual Retirements (2010-2013) Announced Retirements IPM Retirements IPM Missed Announcements Operating Units as of 2014 /Remaining units in 2020 after applied retirements Off On Estimated IPM Case Coal Retirements* -97 GW by 2020 X Summer Capacities *Best Estimate based on unit size , capacity factor, age, and competitiveness Off On

New NGCC Builds by 2020 Actual Announcements 105% at 3,208.48 miles 306 GW operating Coal as of 2014 View Layer NGCC Builds in 2010 – 2013 +23 GW Off On Proposed NGCC Builds 83 GW New NGCC Builds Under Construction +16 GW Off On Built in 2010-2013 Under Construction Permitted Proposed Permitted +18 GW Off On Proposed +49 GW Off On

Generation from Announced Retiring Units, January 2014 Notes: Announced coal unit retirements from Ventyx’s Energy Velocity

Generation from Projected Retiring Units, January 2014 Notes: Announced coal unit retirements from Ventyx’s Energy Velocity, Projected retirements identified at the unit level using NETL’s “Best Estimate” methodology and data from IPM Option 1 model results summing coal retirements by state.

Conclusions Historic relationship between electricity demand and economic growth suggests current under-projection of required power generation ~100-200 GWeq. EIA modeling assumptions limit coal plant additions Reliance on high utilization of aging coal (and nuclear) baseload assets risky Uncertain historical basis for continued high utilization Considerable potential for new baseload assets due to aging of the current fleet ~100-150 GW Far more coal retirements than gas additions raises reliability concerns

Additional Slides

From 2010 to 2020, coal retirements will be the primary driver behind RFC capacity losses New generation mix 2010-2020 (13.14 GW) Retired generation mix 2010-2020 (35.9 GW) Other: hydro, nuclear, oil, renewable, solar, other Other: hydro, nuclear, oil, renewable, solar, other Cumulative change (GW) of the generation mix for 2010-2020 period Coal NG Wind Other Other: Retirements of hydro (0.01 GW), oil (3.2 GW), nuclear (0.6 GW), biomass (0.1 GW) and non-wind renewables (0.6 GW) and addition of hydro (0.4 GW), oil (0.02 GW), non-wind renewable (0.3 GW), biomass (0.6 GW) and solar (0.3 GW) Note: Graph illustrates announced to date (Sept 2014) retirements in RFC Source: Ventyx Velocity Suite Generating Unit Capacity Query

Coal capacity retirements will dominate in former ECAR areas through 2020 New generation mix 2010-2020 (5.5 GW) Retired generation mix 2010-2020 (22.6 GW) RFC-ECAR Other: hydro, nuclear, oil, renewable, solar, other Other: hydro, oil, renewable, other Cumulative change (GW) of the generation mix for 2010-2020 period Coal NG Wind Other Other: Retirements of hydro (0.0 GW), oil (0.8 GW) and non-wind renewables (0.3 GW) and addition of hydro (0.1 GW), oil (0.0 GW), and non-wind renewable (0.7 GW) Note: Graph illustrates announced to date (Sept 2014) retirements in ECAR Source: Ventyx Velocity Suite Generating Unit Capacity Query

Eastern Interconnection reserve margin levels consistently decrease through 2023 (units in queue only) Notes: 1. Planning Reserve Margins are calculated using the formula : Reserve = (Total Capacity – Net Internal Demand)/Net Internal Demand, where Net Internal Demand = Total Internal Demand – Dispatchable, Controllable Demand Resources 2. Historical values (2010-2013) are from NERC’s annual Summer Reliability Assessment for that year. 3. The 2012 NERC LTRA only included forecasts for the period 2014 through 2022. 4. The 2013 NERC LTRA only included forecasts for 2014, 2018, and 2023. 5. NETL simulations include only existing and certain generation through 2023 and an assumed annual peak demand growth of 0.8% Data Source: NERC Summer Reliability Assessments (2010 – 2013), NERC Long-Term Reliability Assessment (2012 & 2013) and NETL Simulations using PROMOD IV 11.1