Walshe the outlook for new generation additions 2-25-13 final

Contact:
Brian Walshe
321 Gaylord Street
Denver Colorado 80209
(303) 355-1030
www.ionconsulting.com
The Outlook for New Generation Additions
RMEL
Power Supply Planning and Projects Conference
Denver Marriott South
Denver Colorado
March 7-8, 2013

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Presentation to RMEL Power Supply Planning and Projects Conference March 7, 2013
I. Recent Generation Market Trends
II. Update on RPS Requirements
III. A Look at Other Historical Generation Boom-Bust Cycles
IV. Recent Renewable Transaction Trends
V. Outlook for Future
Agenda

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Wind and solar generation have contributed an increasing
share of annual capacity additions in recent years
Source: EIA, ION Analysis

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But the huge shift to gas earlier this decade is still what
dominates the market for new additions

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The relative contribution from each generation technology has
changed significantly in the past decade

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Capacity factors of thermal and renewable resources reflect
the impact of new additions and recent shift from coal to gas

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Significant annual fluctuations in generation technologies
added during past decade

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Flat load growth will have a huge impact on new capacity
additions, particularly renewables
Period Annual Growth
1950s 9.8%
1960s 7.3%
1970s 4.7%
1980s 2.9%
1990s 2.4%
2000-2009 0.5%

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Most value drivers for renewable (and other) generation are
near 20-year lows
REC PricesSolar and Wind ETF Prices
PJM WEST Wholesale PricesUS Natural Gas Prices Summer Forward Prices
Decline from 2008 Peak
65% 70% 64% 56% 76% 70% 73%
Source: EIA, FERC Summer market assessments 2007-2012, NREL
Load Growth
1950 1970 1990 2010 2030
Period Annual Growth
1950s 9.8%
1960s 7.3%
1970s 4.7%
1980s 2.9%
1990s 2.4%
2000-2009 0.5%
2009-2035 1.0%
AEO2012 assumptions

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Agenda

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79.7 GW
on-line
EOY 2012
1) Only ~40 GW are needed by 2020 to satisfy the 115
total GW required by under existing RPS legislation
After 8 years and almost $200 billion expenditures, the
renewable growth era is at an inflection point
Source: EIA, www.dsireusa.org , ION . analysis, LBNL
• Efficiency improvements in wind or solar performance
• Inter-state transmission projects opening up higher
wind regimes to development
• Decreased load growth due to slow economic
recovery
• Any benefits seen from smart grid, energy efficiency,
or Demand Response
• “Bonus credit” included in many state RPS legislation
giving preference for in-state generation
3) Most forecast drivers will further decrease the number
of total MWs required to meet RPS targets
• Transmission queues historically represent
far more capacity than will actually be built
• It would take > 30 years to build out all
renewables holding queue positions at recent
historically high rates of capacity additions
4) And yet 300 GW of renewables are in the transmission
queue to meet this ~40 GW of remaining demand
Capacity Holding Transmission Queue Positions
(LBNL sampling of 41 queues)
2) After 2020, RPS annual requirements fall to less than
1/5 of this past year’s additions

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Falling power prices once again create regulatory risk for
above-market Power Purchase Agreements (PPAs)
1) Over half of the installed renewable capacity in the
U.S. has come on-line since 2009……
2) ….. Which was also the time when most renewable
PPA prices peaked
3) States with “Excess PPA Premium” PPAs also tend to
have higher power prices and activist consumer s
4) In the past, similar market conditions created
opportunities to monetize above-market PPAs
Source: NREL data, ION analysis
• Many Qualifying Facilities (QF) contracts signed
in the early 1980s were priced when oil was
expected to shoot upwards to $100/barrel; when
prices later fell, utilities and regulators agreed to
allow utilities to buy out these above-market
contracts
• In early days of deregulation in the late 1990’s,
regulators again agreed to allow utilities to
monetize above market PPAs and stranded
assets

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Many wind operator/developer companies are now seeing a
fundamental shift in their development business model
1) The sector has seen an explosion of new entrants
developing new renewable projects….
2) … and has become highly fragmented with ~2/3 of
project owners owning a single facility
3) Pressure of development prospects is already forcing
hard choices on developers’ business models
4) Developers are selling operating or very late stage
development projects
• Slash development projects and staffing levels
and/or
• Rotate out of sector entirely
and/or
• Sell late-stage developments that qualify for PTC
or 1603 credits (with clear line-of-sight to
completion)
and/or
• Shed operating projects in portfolio to raise cash
• Many European developers selling assets to raise
cash
• Many solar manufacturer / developers sold off
projects as soon as Treasury grants were
announced
• Wind Capital Group forced by disgruntles
shareholders to hire advisor to sell company
Source: SNL data, ION . analysis

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3) The 215 GW of announced renewable development
projects represents about 35 years of annual growth
Renewables are following previous boom/bust
cycles, such as the gas-fired generation bubble 10 years ago
1) In 2001, 250 GW of CCCT projects were under
development, representing 20 years of annual growth
2) Over 130 GW were terminated over the next 3 years and
the pace of annual transactions increased 5-fold
4) Renewable transactions could exceed 10,000 MW per
year for the next 3-4 years
Actual Annual Additions
Potential increase in
transactions if gas
experience repeats
Actual Annual Additions
(CCCT +CT , Excludes Utility Mergers)
Increase in
transactions
Source: SNL data, ION . analysis

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Agenda

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The U.S. generation sector has a 100 year track record of
boom-bust cycles

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Focusing on pace of annual additions and the peak year of
installation illustrates the typical boom-bust pattern
MW additions were tabulated for each
generation technology, with a time
horizon of +/- 15 years from the
highest peak year installation for each
technology
Incremental annual additions were
calculated as a percent of peak year
installation to provide a consistent
assessment of how quickly a technology
booms to become a consensus favorite
until it busts and falls from favor
2
1

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Other generation cycles suggest how quickly a preferred
technology declines after the peak year of installation
• The pattern of most(1) U.S. generation
additions shows a gradually increasing
acceptance until a consensus culminates
in a peak of annual additions, immediately
followed by a sharp and rapid collapse
‒ New additions fall by average 60% of
the peak within 3 years of setting high
point
• All signs point to renewable developments
at a familiar inflection point
‒ Political/tax incentives pulled future
additions into 2009-2011, so the need
for new renewables is about ½ recent
trends
‒ Wall St and PE funding based on
aspirations instead of supply &
demand economics
(1) The only exceptions are nuclear, hydro, municipal waste, and LFG due to regulatory factors
55% 58% 72% 31% 100% 59% ~50% ?
Bituminous
Coal
Sub-bituminous
Coal
WindKeroseneJet
Fuel
Residual
Fuel Oil
Natural
Gas
1955-1985 1965-1995 1981-2011 1959-1989 1955-1985 1955-1985 1993-2012
Change in Annual Additions For Different Technologies
+/- 15 Years from Their Peak
Annual additions 3
years after peaking

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The remaining technologies that did not swiftly collapse show
the impact of regulatory/political intervention
• Hydro
‒ Numerous projects throughout the
1960’s peaking in 1973 as utilities
scrambled to meet load growth
• Nuclear
‒ Construction was headed for
increasing additions until 1978
‒ After many delays following TMI-
mods and prolonged excess
capacity, a “double peak” occurred
at the end of the 1980’s
• Municipal Solid Waste / Landfill Gas /
Geothermal
‒ Highly dependent on Municipalities
‒ Annual additions in the 100-200
MW size fluctuated mostly due to
schedules of a single project

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Agenda

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The number and total MW of transactions closed has grown
consistently since the Lehman collapse in 2008
Extrapolated Full
12 Months
Extrapolated Full
12 Months
• The number of transactions for wind plus solar
combined has grown at a 94% CAGR since 2008
• The number of wind plus solar MW transactions
has grown at a 32% CAGR, reflecting the increased
prevalence of smaller sized solar projects in the
past three years
• Many new participants have entered the sector and
developer-owners have used the opportunity to sell
operating or nearly completed development assets
2008-2012
CAGR
94%
2008-2012
CAGR
32%
8
114
44
30
11
Source: PF&R, ION Analysis

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Extrapolated Full
12 Months
• The number of transactions closed has increased
at a 62% CAGR since 2008
• The total MW transacted has increased at a lower
CAGR of 8% reflecting smaller project sizes as
well as the effect of some larger portfolio
transactions in 2008
• Wind transactions have recently focused on
operations and development pipelines are
essentially deemed worthless by buyers
Wind transactions have shown steady growth, although
sellers outnumber buyers by almost 2:1
2008-2012
CAGR
62%
Extrapolated Full
12 Months
2008-2012
CAGR
8%
7
48
29
22
11

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Extrapolated Full
12 Months
Extrapolated Full
12 Months
2010-2012
CAGR
84%
1
66
15
8
-0-
2010-2012
CAGR
187%
Solar transactions have spiked sharply in the past three years
• Solar transactions have surged in the past three
years while the average size has fallen by about
1/2,
‒ The number of transactions closed has
increased at a 187% CAGR since 2010
‒ The total MW transacted has increased at a
CAGR of 84%
• Solar’s strong CAGR reflects the small starting point
and the impact of a few larger utility-scale projects
approved before PV prices plunged
• Wind still represents >85% of installed renewables
but solar appears poised to capture an increasing
share of incremental additions, particularly due to
impact of PTC expiration

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6 Utilities purchased 15 projects
7 Financials purchased 17 projects
18 Developer/Owners
purchased 40 projects
Recent wind buyers have opportunistically stepped up to
increase their exposure to wind
• Developer/owners are now much more likely to by
sellers rather than buyers in wind transactions
• Utilities have taken the opportunity to add wind farms
to their rate base
• Financials have increased their ownership,
particularly pension-oriented funds
Note: 37 of the 109 wind projects purchased over the past
3 years were by unspecified buyers in the PF&R database

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Recent wind sellers are dominated by developer/owners and
foreign-owners rotating out of the US market
• Developer/owners have sold many projects in
response to market trends
‒ Lehman collapse ended most of their IPO
strategies; many moved aggressively to finish
projects under 1603 grant program
• Foreign-owners are increasingly active sellers
(many of these are also developer-owners)
42 Developer/Owners sold 86 projects
8 Foreign owners sold 27 projects
4 Financials sold 5 projects

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Segmentation overview – looking separately at operating and
total portfolios (operating plus development)
TotalProjectCountTotalMW
Note: Does not include 584 projects owned by 276 “other” fragmented owners

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Agenda

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Renewables could continue to defy gravity, but the potential for
a collapse increases with each new layer of political incentive
1) RPS legislation only requires 5 GW/year to reach
2020 targets
3) Most uncertainties are likely to reduce the total RPS
requirement and few would increase requirements
4) Renewable outlook over next 10 years2) The outlook for new renewable additions is almost
entirely driven by federal and state politicians
40
GW
Potential
Requirement
18
Wind C.F.
Increases 3%
4
7
0.5% Less
Load Growth
RPS
Requirement
EE Potential
Impact
11
Potential Reduction in RPS Requirements
• Political intervention could defer a correction in the
pace of renewable additions, but can’t prevent it
indefinitely
• Developers are increasing their exposure to market
risks, and are likely to continue in the near-term,
adding to the over-build
• While a potential federal RES, or increased state RPS
targets could create new demand for renewables, it is
not considered likely to be of sufficient magnitude to
change outlook

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Coal retirements will create opportunities for new gas, but
many will be location-specific
1) 25-30 GW of coal retirements expected over next 5
years….
2) …with up to a total 50-60 GW of retirements likely due
to recent EPA initiatives
4) Coal outlook over next 10 years
3) A range of factors are incenting utilities to accelerate
coal plant retirements announcements
• Existing sentiment gives utilities a choice of retiring
coal now with reasonable cost recovery, vs. delaying a
decision with future recovery more uncertain
• Many utilities able to extract further concessions from
regulators in return for early retirement
• Federal policy against coal unlikely to change during
Obama administration (at least)
• Current price expectations for natural gas offer
compelling economic argument over coal in long term

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Gas additions would expect strong growth, BUT economic
returns will be challenged by increasing variable generation
1) Most load growth will be met by RPS-required
renewables over next decade
3) Gas energy production will fall by up to 50% in some
regions as new variable generation comes on-line
4) Gas outlook over next 10 years2) O&M and life-cycle costs will increase as variable
generation levels change dispatch paradigms

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High level view across all technologies
1) With exception of ERCOT, capacity margins are still
fairly high for next 5 years
2) Most economic forecasts continue to be revised
downward, suggesting continued flat load growth
4) Wind+Solar will continue to comprise a significant
portion of new additions
1990 2016E 1990 2016E 1990 2016E 1990 2016E
16.4%
17.9%
20.1%
17.3%
3) Some uncertainties could help, and others hurt thermal
developments
• Many pre-Lehman PPAs are unwinding, freeing up
capacity that needs to find a off-taker
• Economic model for new gas developments face
increased O&M and revenue uncertainties
• Low interest rates and investor appetite available to
fund new projects
• “Optionality value” of new thermal plants if conditions
improve could entice merchant developers

Walshe the outlook for new generation additions 2-25-13 final

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