SEPA/SCOTTMADDEN MISSION TO GERMANY:   FACTS FOUND AND LESSONS LEARNED A TRIP TO GERMANY LOOKS AT FACTS ON THE GROUND BEHIND GERMANY’S AMBITIOUS ENERGIEWENDE

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GERMANY HAS SET AGGRESSIVE RENEWABLES, EFFICIENCY, AND CLIMATE GOALS

• The Solar Electric Power Association (SEPA) and ScottMadden co-sponsored a fact-finding mission to Germany to explore the impact of its energy transition (or “Energiewende”) and how lessons learned could be transferred to the United States
• Thirty U.S. executives from various types of organizations attended: investor-owned utilities, public power companies, vertically integrated utilities, public service commissions, solar industry participants, the Edison Electric Institute, and the Electric Power Research Institute
• Mission participants spent three days in Dusseldorf meeting with German energy participants: government policymakers, utilities, and industry organizations (such as the European Photovoltaic Association and Eurelectric)

UNDERSTANDING THE ENERGIEWENDE: THE GERMAN MARKET IN CONTEXT

• Deregulation: A dis-integrated market with generators (utility scale and individuals), retailers, distribution system operators (~800), and transmission system operators (4)
• Nuclear Shutdown: All nuclear to be retired by 2022, with incumbent generators investing heavily in gas-fired generation
• High Natural Gas Prices: For midsize businesses, for example, natural gas prices have risen from €6.96/gigajoule (2003- 05 avg.) to €10.93 (2012-14 avg.) (or from $8.80 to $13.82 per MMBtu)
• Increase in Renewables: Targeting 35% of electricity consumption from renewables by 2020; 80% by 2050
• Not an Island: Interconnected with its neighbors and subject to European Union policies and carbon trading scheme
• Long-Range Policy: Germany’s policies are driven by a long-term strategy of “invest now” for later reward
• Other Factors: Other issues are driving energy policy, such as energy security and anti-nuclear sentiment

LESSONS LEARNED FOR THE UNITED STATES Successful Integration of Renewables Germany has, to date, successfully integrated high levels of renewables while maintaining high reliability with more active management of the grid Significant Investment in Transmission and Distribution is Needed

• Investment in distribution is estimated to be as high as €42.5 billion through 2030 to support the new mix of renewables
• Imports/exports with neighboring countries are currently relieving some bottlenecks

Greenhouse Gas Reductions Stalled

• With continued dependence on coal for backstopping renewables, greenhouse gas (GHG) reductions have stalled
• Continued nuclear shutdowns will further challenge GHG reductions

Slow Reaction by Incumbents

• Incumbents did not anticipate such a large, rapid decrease in the cost of solar (equipment and installation) and resulting expansion of the distributed photovoltaic (PV) market—through government support, solar costs have fallen 80% in five years
• The conventional generation business was impacted the most: renewables disrupted the merit order of the conventional pricing structure and dropped the overall wholesale price of electricity, severely impacting the revenues of all the large incumbents (€300 billion loss of market capitalization since 2007)
• Utilities mistakenly held to the view that they were still setting the agenda and that the government would step in and make them whole
• Incumbents invested in traditional generation while the market was collapsing around them
• Nuclear shutdowns were forced on them with no compensation

German Utilities Missed Opportunities to Lead the Transition

• Utilities failed to invest in renewables, which would have diversified their risk
• Incumbent utilities couldn’t, or wouldn’t, invest in solar PV since those investments did not ft their business model or investment hurdle rates
• German utilities are now looking outside of Germany to grow their renewable portfolios

Increased Cost Has Not Dampened Enthusiasm

• Residential rates have increased significantly, but have remained stable as a percentage of household spending and help encourage conservation
• Rates for large industrials have been spared to protect jobs
• Germany has a relatively cohesive energy public policy environment as compared with the United States where public policy interests are more divergent

CLEAN POWER PLAN:   LATEST DEVELOPMENTS THE EPA IS FINALIZING ITS EXISTING SOURCE GREENHOUSE GAS REGULATIONS (THE CPP*), AND STAKEHOLDERS ARE REACTING What It Regulates

• Regulates existing power generation sources, but states may use portfolio approach regulating “outside the fence,” e.g., renewables and efficiency providers
• Targets reduction of 17% from 2013

How It Works

• EPA gives states state-specific emissions goals based on “building blocks”
• States submit compliance plans for EPA approval using best system of emissions reduction...adequately demonstrated
• States may submit multi-state plans
• States have choice of mass (total lbs.) or rate (lbs./MWh) emissions limits
• Use of “building blocks” not required

A Growing List of Issues

• Whether EPA has authority to regulate CO2, under section 111(d) of the Clean Air Act
• Whether EPA can extend obligations beyond plant fence line—“by” rather than “at” facility
• How existing and under-construction nuclear assets will be treated
• What are rule’s true costs and feasibility
• How to account for efficiency-based emissions reductions (i.e., what would have been)
• Whether CPP’s level of federal encroachment on state energy policy is permissible
• Given approaching interim compliance timeline (beginning 2020), whether plan can be delayed pending legal challenges to the proposed rule

COMPLIANCE “BUILDING BLOCKS” WERE USED TO SET STATE TARGETS. WHILE NOT REQUIRED TO BE USED BY STATES, THESE “BUILDING BLOCKS” ARE CONTROVERSIAL. EPA Proposed “Building Blocks” for Compliance BUILDING BLOCK 1 Heat rate improvement at existing coal-fired generating units

• Assumed 6%

BUILDING BLOCK 2 CO2 reduction from increased generation at NGCC** (vs. coal-fired)

• Assumed 70% minimum capacity factor
• New NGCC facilities

BUILDING BLOCK 3 Increase in cleaner generation

• Increased nuclear capacity (new units) or avoided retirements (6% at risk)
• Increased renewables (EPA assumed 13% renewable energy by 2030)

BUILDING BLOCK 4 Increased energy efficiency

• Reduced generation through energy efficiency improvements (EPA assumed 1.5% annual savings)

GROWING FOCUS ON POTENTIAL RELIABILITY IMPACTS OF THE CLEAN POWER PLAN. No Shortage of Opinions: EPA received more than two million comments by its Dec. 1 deadline EPA’s proposed regulations are unlawful at the most fundamental level....[T]he Administration has decided to bypass Congress in implementing far-reaching Executive Branch energy and environmental policy goals. –National Mining Association While EPA has made much of the supposed flexibility its ‘building blocks’ approach would provide, it in fact provides no flexibility for Texas as each of these blocks is likely unachievable, particularly in the timeframes required... Commission of Texas –Public Utilities EPA should require full compliance by 2025 because the vast majority of emission reductions can be achieved early on in the compliance period. –Sierra Club RELIABILITY CONCERNS EMERGE

• Combined with MATS*, CPP** could prompt retirement of 10% to 20% of all U.S. generation (1/3 to 2/3 of coal)
• An initial NERC reliability review found that coal retirements may accelerate a reserve margin decline while compliance schedules may not provide sufficient time for transmission planning; NERC recommended more detailed analysis

RTOs AND ISOs ARE STUDYING POTENTIAL IMPACTS

• SPP notes risk of cascading outages as 9 GW of coal and gas retire (vs. 3 GW without rule)
• ERCOT estimates 3.3 GW to 8.7 GW of coal retirements, possible reliability issues near urban centers, and up to 20% increase in energy costs
• PJM fnds high levels of renewable and efficiency could reduce retirements as low CO2 prices allow plants to operate economically for more hours

RELIABILITY SAFETY VALVE IS PROPOSED AS A SOLUTION

• ISOs and RTOs are calling for (i) a reliability safety valve, designed to provide compliance relief, when necessary, to preserve grid reliability and (ii) a reliability study once state plans are fled
• NERC notes a possible model is the one-year compliance extension from MATS deadlines to avoid retirement-related reliability issues
• To date, however, FERC and EPA have had limited formal collaboration regarding reliability

Key Dates in 2015-2016 Start of 2015 Feb.-Mar. 2015: FERC will hold technical conferences on impacts on reliability, infrastructure needs, and markets Mar. 2015: Final briefs are due in two legal challenges to the proposed rule; both cases will be heard on same date by the same panel Mid-summer 2015: EPA will release final CO2 rules for existing, new, and modified power plants Early fall 2015: Legal challenges must be fled within 60 days of publication in the Federal Register End of 2015 June 2016: State initial compliance plans due and federal implementation plan expected June 2016