ENERGY STORAGE:   INSTALLATIONS ON THE RISE CALIFORNIA SETS THE STAGE

• In October 2013, the California Public Utilities Commission (CPUC) ordered state investor-owned utilities to procure 1,325 MW of storage capacity by 2020
• The CPUC decision mandates specific, biennial storage procurement targets beginning in 2014 and increasing over time
• Energy storage systems can be deployed in three “grid domains”—transmission interconnected, distribution interconnected, and behind the meter

LARGEST BATTERY STORAGE FACILITY GOES INTO SERVICE

• In September 2014, Southern California Edison unveiled the Tehachapi Energy Storage Project, the largest battery energy storage system (BESS) in North America
• The 32-MWh (8 MW x 4 hours) demonstration project uses lithium-ion batteries to evaluate the ability of BESSs to improve grid performance and assist in integrating large-scale variable renewable energy resources like wind and solar power

PJM GETS SOME GRID-SCALE UNITS

• In July 2014, Beacon Power brought online 20 MW of fast-response flywheel energy storage in PJM’s footprint
• AES has had a 32-MW battery storage facility in West Virginia since 2011, related to a 98-MW wind farm
• Storage opportunities are more attractive in the wake of FERC Order 755 (2011), which mandated higher rates for fast-responding frequency regulation sources

TEXAS GETTING INTO THE ACT

• Texas is home to the largest operating battery storage power plant facility in the United States, the 36-MW battery at Notrees Windpower
• Companies Apex and Chamisa are planning 904 MW of compressed air energy storage (CAES) in Texas

ELECTRIC VEHICLES   SALES TRENDS AND BUSINESS MODELS   MARKET PENETRATION STILL GROWING BUT LOW GASOLINE PRICES MAY IMPACT 2015 OUTLOOK

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ELECTRIC VEHICLE SALES ARE GROWING

• U.S. electric vehicle (EV) sales continued to increase in 2014 but not as rapidly as in the prior two years
• 2014 sales growth at a glance:
  • Overall auto sales up 5.8%
  • Battery electrics up 33%
  • Plug-in hybrids up 13%

INCENTIVES MATTER

• A number of states with high EV penetration (e.g., California and Georgia) have attractive state tax incentives to reduce upfront costs of EVs
• However, it is unclear how U.S. plug-in electric vehicle sales will respond to recent significant reductions in gasoline prices. Softness in winter EV sales is not unusual, so the industry will have to see whether low gasoline prices hold and whether spring 2015 EV sales are negatively affected

SEEKING A PROFITABLE PUBLIC CHARGING MODEL Utilities are increasingly looking at public charging as a way to:

• Promote transportation electrification (and concomitant power sales)
• Reduce range anxiety*
• Support EV ownership by residents of multi-unit dwellings that don’t have residential charging infrastructure (particularly in metropolitan areas with high concentrations of early adopters and multi-unit developments)

Public Charging Models Are Varied and the Industry Is Seeking a Profitable Model Type: Network Operator Model

• Prepaid: Allows access to in-network charging stations with a prepaid fee
• Club Membership: Users pay a small monthly fee for access and discounted electricity costs
• Cell Phone: Bundles residential plans with high monthly fees and electricity costs

Type: Site Owner Revenue Models

• Green: Free; used by retailers and others to attract clientele
• Gas Station: Fee for service; per session fee

Type: Specialty Pricing

• Specialty: Charging station owner sets up unique pricing constructs

Follow the Money: An Illustration of Cash Flows in One Network Operating Model

• Customer engages charging station, authorizing payment
• Payment processer processes payment (if balance does not already exist)
• Network operator receives payment, data on usage
• Network operator submits monthly statement to station(s) owner
• Network operator remits monthly payment to owner
• Owner (e.g., utility) receives usage statement
• Owner receives monthly payments

CHARGING INFRASTRUCTURE MUST BE MATCHED TO SEGMENT NEEDS. What Different Charging Levels Mean

• 1: 8 to 14 hours: 110 volts (AC)/12-16 amps
  • Special cord
  • Residential and workplace
• 2: 3 to 5 hours: 240 volts (AC)/40 amps
  • Standalone box that can be wall-mounted, wired to electrical panel
  • Residential, workplace, and public charging
• 3: 80% in 30 mins: 480 volts (DC)/60 amps
  • Dedicated breaker with special grounding equipment
  • Public charging

TIMING IS EVERYTHING: TIME OF DAY (TOD) PRICING FOR EVs SHIFTS CHARGING TO OFF-PEAK HOURS. Public Max % of Vehicles Charging : <15% Optimal Charging Levels : Levels 2 and 3 Possible Utility Approach to Market Segment :

• Deploy public (non-household) charging to develop EV ecosystem, relieve range anxiety
• Establish a pricing construct that fits utility needs, based on time, event, or kWh pricing

Workplace Max % of Vehicles Charging : <28% Optimal Charging Levels : Levels 1 and 2 (mostly) Possible Utility Approach to Market Segment :

• Determine need for workplace EV time of use (TOU) rate
• Establish/deploy workplace rebate program

Residential Max % of Vehicles Charging : Balance Optimal Charging Levels : Levels 1 and 2 Possible Utility Approach to Market Segment :

• Establish need for residential EV TOU rate
• Establish/deploy residential rebate program

DECENTRALIZED GENERATION:   SOLAR IN A NARROW LEAD DISTRIBUTED SOLAR CONTINUES TO GROW, AND NEW GOVERNMENT ESTIMATES OF DECENTRALIZED RESOURCES ARE EXPECTED IN EARLY 2015

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DECENTRALIZED RESOURCES ARE DOMINATED BY A FEW STATES

• Decentralized generation continues to make inroads into the U.S. power supply mix, but still remains a small fraction compared with installed central station power generation—around one percent
• Based upon EIA’s most recent data, photovoltaic solar installations lead the decentralized generation mix, followed by traditional internal combustion generation
• Soon-to-be-released EIA 2015 longitudinal data (for 2013) will be telling as this is a rapidly evolving sector
• One question: how much dispersed generation exists but is not seen by utilities?

NATURAL GAS MARKETS:   LATEST DEVELOPMENTS HOW LOW CAN YOU GO…OR STAY?

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NATURAL GAS PRICES REMAIN LOW If one compares the band of forward price expectations with past years’ price bands, expected prices are “miraculously” narrower for a sustained period LOCATION MATTERS: SOME PRICES ARE UP WITH 2014 STORAGE DRAWDOWNS

• Low natural gas prices continue in North America, and industry observers peg it anywhere from $3.55 to $4.50 per MMBtu in 2015
• Price basis in Marcellus, Utica, and nearby market areas remains negative, pending additional takeaway capacity
• Some regions see fat to negative basis versus Henry Hub

WHAT ABOUT CHEAP OIL?

• Generally, natural gas is relatively price inelastic in the short run, both on supply and demand sides. But unusually low petroleum prices could have an impact on natural gas markets in two ways:
  • Affecting the economics of natural gas liquids (NGLs). NGL prices are correlated with oil prices, which could reduce the attraction of liquids-rich shale gas plays like Marcellus and Utica, which have been moneymakers because of NGLs
  • Possibly reducing associated gas from “oily” shale plays as producers ramp down production

HOW IT’S PLAYING OUT

• Despite these dynamics, production has continued to be strong in key shale gas plays
• One bright spot: New gas power generation benefits from lower gas prices as would increased coal-to-gas switching, which is called for in EPA’s proposed Clean Power Plan
• The key question: How low can natural gas prices go and still support continued production? It depends upon the play

POSSIBLE LONG-TERM IMPACTS OF LOW GAS PRICES

• Longer term, investment in LNG export capability may be impacted as lower oil prices may dampen oil-linked global LNG prices
• So far, however, Asian prices remain in the $12/MMBtu range as of late 2014 and only one facility (Excelerate Energy’s Port Lavaca) has been tabled for now due to LNG market dynamics. But one analyst notes that at $10/MMBtu, there is no market for gas export. Liquefaction, transportation, landing, and regasification alone costs $6/MMBtu
• Capital expenditures, or at least the pace of cash burn, is being re-evaluated by producers
  • Capital expenditures are forecast to increase in many plays, but some companies are trimming those values (e.g., Linn Energy cutting oil and gas capex by 53% in 2015)
  • One question: whether the industry will see consolidation of smaller, less capitalized players