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

2. 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 3

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

5. Emerging & Standing Issues 5 Greenhouse Gas Regulations Cyber Security Transmission Siting Variable Generation Issues Reactive Power Energy Storage Economy Issues 1-5 Years 6-10 Years Workforce Issues Smart Grid & AMI Likelihood Consequence Lower Higher 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 (SO 2 ) and nitrogen oxide (NO x ) 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. EPA MACT Final Rule late 2011 2009201020112012201320142015201620172018 Cooling Water Intake316 (b)Coal AshClean Air Transport RuleAir Toxics-MACT Final CATR Program Mar 2011, Starts 1/1/2012 New CATR Budget Limits 2014 - 2018 EPA MACT Draft March 16,2011 EPA MACT Implementation late 2015 CATR Draft Rule July2010 EPA 316 (b) Draft Rule June 2010 EPA 316 (b) Final Rule 2012 316 (b) Implementation 2014 - 2018 EPA Coal Residual Impoundment Draft Rule April 2010 Coal Residuals Final Rule 2011 Coal Residuals Implementation 2014-2018 Timeline for EPA Regulations Impacting the Energy and Utility Industry 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.

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. Combined Case - Moderate and Strict of Aggregate Regulations Combined Case - Moderate and Strict of Aggregate Regulations 316(b ) Moderate Case Conversion cost curve for retrofit Ranges from $170-440 gpm Strict Case 25% increased cost 316(b ) Moderate Case Conversion cost curve for retrofit Ranges from $170-440 gpm Strict Case 25% increased cost CATR Moderate Case EPA preferred option Limited interstate trading until 2014 No rate limitations Strict Case No trading Strict rate limitations CATR Moderate Case EPA preferred option Limited interstate trading until 2014 No rate limitations Strict Case No trading Strict rate limitations 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 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 CCR Moderate Case $30 M per unit Disposal costs - $15/ton Strict Case Disposal costs increased to $37.50/ton CCR Moderate Case $30 M per unit Disposal costs - $15/ton Strict Case Disposal costs increased to $37.50/ton Two Cases Assessed

16. WECC--NM-SNV316(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 (MW) Retired (MW) Total Derated (MW) Retired (MW) Total ERCOT 322 5,055 5,377 316 5,295 5,611 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-Delta 282 5,524 5,806 282 5,524 5,806 FRCC MRO SERC-Central SERC-Gateway SERC-Southeastern SERC-VACAR SPP WECC-CA 227 5,055 5,283 182 6,881 7,063 AZ WECC-NWPP WECC-RMPA TOTAL 4,954 32,522 37,476 4,848 36,366 41,214 1778621,0391641,3671,531 4001,2591,6594001,2641,664 388714538871459 296526822295543838 209469678209469678 3786641,0423776891,066 1439331,0761419941,135 57737785773778 4012916940129169 1618420016184200

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 Derated (MW) Retired (MW)Total Derated (MW) Retired (MW)Total MRO125202327144764908 RFC1031,0611,1641,0605,4936,553 SERC-Central61711323051,0001,305 SERC-Southeastern331401733371,2081,545 SERC-VACAR0465 2552,6492,905 WECC-AZ-NM-SNV490 1,5801,629 ERCOT730 0 FRCC00078121199 NPCC-NE00032616647 NPCC-NY011 16694710 SERC-Delta6918876995164 SERC-Gateway8435119110365475 SPP1270 13052181 WECC-CA015 3 17 WECC-NWPP723911173129202 WECC-RMPA1041310100110 TOTAL8062,0612,8672,74614,87917,625 MACT Impacts - 2015 Moderate CaseStrict Case

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 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Reserve Margin (%) (APCR) Reserve Margin-Reference Case (APCR) Reserve Margin-Moderate Case (APCR) Reserve Margin-Strict Case 0.00% 2013 Reserve Margin Levels 2015 Reserve Margin Levels 2018 Reserve Margin Levels 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 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. 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. Advancing In-service Dates of Future or Conceptual Resources 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. 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. Addition of New Resources Not yet Proposed Increased Energy Efficiency may offset future demand growth. Increasing available Demand Response resources can provide planning and operating flexibility by reducing peak demand. Increased Energy Efficiency may offset future demand growth. Increasing available Demand Response resources can provide planning and operating flexibility by reducing peak demand. Increased Demand-Side Management and Conservation 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. 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. Early Action to Mitigate Severe Losses

22. Tools and Actions for Mitigating Resource Adequacy Issues Cont. 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. 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. Increase in Transfers Other technologies exist, such as trona injection, that will allow companies to comply with EPA air regulations without installing more scrubbers. Developing or Exploring Newer Technologies 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. Use of More Gas-Fired Generation Some coal-fired generation have the potential to repower their units with combined-cycle gas turbines and reducing emmisions. Repowering of Coal-Fired Generation

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?