Executive Summary

Strange Brew: Adapting to Changing Fundamentals

The electric industry seems to be on the cusp of great change. Regulators are rethinking the hundred-year-old rate-of-return paradigm, renewables costs are falling (especially for solar photovoltaic technology), and the final rule is out on power sector greenhouse gas emissions. Grid transformation is breaking down traditional boundaries between customers and producers, supply and demand, and roles of the center and the edge of the electric grid. It is unclear what industry environment this "strange brew" will yield.

Strange Brew

Strange (adj): not previously visited, seen, or encountered; unfamiliar or alien. Brew (n): any concoction produced by a mixture of unusual ingredients.

Some Highlights of This ScottMadden Energy Industry Update
EPA Tightens Its Regulations	EPA has released its long-awaited Clean Power Plan, and utilities, state regulators, and other stakeholders are sifting through it to assess implications. While EPA has provided some flexibility, all agree that the rule will dramatically alter the North American energy mix Separately, EPA’s final rule governing coal combustion residuals (CCRs) provides a pragmatic approach to use of CCRs, but generators have much work ahead to create compliance programs
Energy Technologies: Moving Down the Experience Curve?	Solar power—both distributed and utility-scale—continues to gain rapidly in installed capacity, albeit from a small base, as it decreases significantly in price. But there remains some question about the continuing pace of installed cost reduction and its ability to compete with combined-cycle units fueled by cheap natural gas In part due to declining installed costs, community solar is gaining in popularity and may offer an alternative to rooftop solar for the electric customers Meanwhile, Elon Musk’s Tesla continues to grab headlines in energy with the introduction of its end-user Powerwall energy storage device, but the cost is too steep for widespread adoption, at least for now
Utility Regulatory Compacts "Re-Imagined"	Jurisdictions like New York and California are shaking up their energy industries, seeking lower- or non-emitting energy resources like energy efficiency and renewables Seeking to alter perceived disincentives to such low-emission resources, New York is taking a bold step: changing the role of utility distribution company to that of a platform provider that will enable innovative and “clean” third-party asset development and services. This could alter the long-standing cost-of-service model that has dominated utility regulation for more than a century and upend the current utility paradigm and ecosystem

STRAIGHT FROM THE CEOs: SELECTED COMMENTS FROM ENERGY AND UTILITY COMPANY ANNUAL REPORTS

Wires, Vertically Integrated, and Multi-Utilities

Integrated Electric Utilities

Seeking Earnings Growth

• Modernizing the distribution system into an advanced and flexible system capable of two-way electrical flows to better integrate distributed energy resources
• Growing earnings due to acquisitions of regulated businesses
• Increasing industrial sales to offset decrease in residential/commercial sales
• Increasing investment in transmission
• Entering into regulated solar, including rooftop solar

Energy Delivery Companies

Hardening the Grid

• Providing resiliency against major storm events
• Increasing investment in transmission infrastructure
• Attempting to standardize operational processes
• Increasing reliability

Combination Utilities

Adapting to Natural Gas Prevalence

• Constructing and acquiring midstream assets and, in some cases, upstream assets
• Adding natural gas customers
• Installing environmental controls at generating plants
• Moving forward with coal-to-gas switching
• Investing discretionary capital in transmission portfolio
• Completing cast iron pipes/mains replacement initiatives
• Benefiting from increased electric and natural gas demand, primarily resulting from colder winter temperatures in early 2014

Public Power

Upgrading Supply- and Demand-Based Technology

• Deploying demand-side management and energy efficiency/conservation
• Attempting to make the generation fleet more clean and renewable
• Pursuing operational efficiency and optimizing assets
• Supporting environmental stewardship initiatives
• Continuing community involvement and education
• Deploying distributed generation and smart grid technologies

Power Generation

Independent Power Producers/Merchants

Seeking Revenue Growth and Diversity

• Growing presence in core markets with an emphasis on acquisition, expansion, or modernization of existing power plants
• Focusing on operational efficiency improvement
• Positioning to capitalize on the tighter capacity and higher power prices in market regions
• Diversifying away from gas price-dependent wholesale business into solar, storage, and other distributed technologies

Nuclear Power (Including Suppliers)

Battling Margin Squeeze

• Grappling with varying revenue due to low wholesale power prices
• Attempting to reduce exposure to risk and pursuing higher margin sales
• Experiencing lower overall sales (suppliers)
• Aiming to improve profitability based on maintenance services and fuel business for existing plants (suppliers)
• Lobbying regulators and RTOs for greater performance incentives and carbon-free initiatives

Solar Energy

Integrating the Value Chain

• Attempting to position product/service as differentiated to avoid price competition
• Acquiring strategic software and storage to offer a more holistic home energy management to customers
• Acquiring panel manufacturers and EPC* contractors to become more vertically integrated
• Forming yieldcos
• Increasing direct power purchase agreements with commercial customers (e.g., Apple and Google)
• Investing in community solar projects
• Augmenting menu of financing options for consumers, especially with loans, to broaden the customer base

Wind Energy

Developing New Projects

• Continuing investment in new product development, such as larger wind turbines
• Increasing revenue from services business (e.g., O&M, construction services)
• Renewing orders from large independent power producers and utilities
• Increasing onshore wind turbine orders because of economic recovery and from a low basis of comparison due to expiration of the federal production tax credit in 2013
• Investing in the higher-margin offshore wind segment
• Working with customers to deliver tailored solutions

Natural Gas

Gas Distribution

Investing in Infrastructure

• Executing infrastructure replacement programs with cost recovery via non-rate case recovery mechanisms
• Encountering unprofitable conditions in the storage market
• Investing in major transmission pipelines
• Growing customer base fueled by new residential construction activity
• Investing in compressed natural gas fueling infrastructure

Gas Pipelines

Expanding Lines from Resources to Markets

• Linking growing oil-producing regions to the best markets and providing refineries with reliable feedstock
• Positioning to capitalize on growth in gas-fired generation in select regions
• Investing in carbon capture technology
• Investing in crude oil pipelines
• Focusing on business segment charging fees for use of the capacity of its pipelines, terminals, and other assets to weather the commodity price downturn

Natural Gas

Managing Capital Spending

• Drastically reducing capital budgets as a result of persistent low gas prices, though production levels still forecast to remain level or increase
• Transitioning to become an oil- and liquids-focused domestic producer
• Spinning off natural gas distribution business
• Increasing gathered and processed natural gas volumes significantly
• Suspending capital spending on natural gas and natural gas liquids growth projects
• Softening of earnings due largely to declining natural gas liquids prices