Transcript Slide 1

The Scale and Scope of the Electricity System:
The Need for Baseload Generation
EPRI 2008 Summer Seminar
August 4, 2008
David Ratcliffe
Chairman, President and CEO
Southern Company
Cautionary Statement Regarding Forward-Looking Information
NOTE: Much of the information contained in this presentation is forward-looking information based on current expectations and plans that involve risks and
uncertainties. Forward-looking information includes, among other things, statements concerning customer growth, earnings per share growth, environmental
regulations and expenditures, dividend payout ratios, estimated construction and other expenditures, sales growth, fuel cost recovery, renewable energy capability,
and completion of construction and other projects. Southern Company cautions that there are certain factors that can cause actual results to differ materially from the
forward-looking information that has been provided. The reader is cautioned not to put undue reliance on this forward-looking information, which is not a guarantee of
future performance and is subject to a number of uncertainties and other factors, many of which are outside of the control of Southern Company; accordingly, there
can be no assurance that such suggested results will be realized.
The following factors, in addition to those discussed in Southern Company’s Annual Report on Form 10-Q for the year ended March 31, 2008, and
subsequent securities filings, could cause actual results to differ materially from management expectations as suggested by such forward-looking information: the
impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric
utility industry, and implementation of the Energy Policy Act of 2005, environmental laws including regulation of emissions of sulfur, nitrogen, mercury, carbon, soot or
particulate matter and other substances, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well
as changes in application of existing laws and regulations; current and future litigation, regulatory investigations, proceedings or inquiries, including the pending EPA
civil actions against certain Southern Company subsidiaries, FERC matters, IRS audits and Mirant matters; the effects, extent and timing of the entry of additional
competition in the markets in which Southern Company’s subsidiaries operate; variations in demand for electricity, including those relating to weather, the general
economy, population and business growth (and declines), and the effects of energy conservation measures; available sources and costs of fuels; effects of inflation;
ability to control costs; investment performance of Southern Company’s employee benefit plans; advances in technology; state and federal rate regulations and the
impact of pending and future rate cases and negotiations, including rate actions relating to fuel and storm restoration cost recovery; the performance of projects
undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities; internal restructuring or other restructuring options that
may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to
Southern Company or its subsidiaries; the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due; the ability to obtain
new short- and long-term contracts with neighboring utilities; the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the
threat of terrorist incidents; interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its
subsidiaries’ credit ratings; the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices; catastrophic events such
as fires, earthquakes, explosions, floods, hurricanes ,droughts, pandemic health events such as an avian influenza, or other similar occurrences; the direct or indirect
effects on Southern Company’s business resulting from incidents similar to the August 2003 power outage in the Northeast; and the effect of accounting
pronouncements issued periodically by standard-setting bodies. Southern Company and its subsidiaries expressly disclaim any obligation to update any forwardlooking information.
2
The Scale of Southern Company
Generation
Transmission
• 42,000 MW
• 79 power plants
• 27,000 line miles
• 3,400 substations
Financial
• $27.0 B market
capitalization
• $15.4 B revenues
3
Distribution
• 154,000 line miles
• 3.6 million poles
Regional
People
• $539 B gross product in
the region we operate
• 120,000 square mile
territory
• 4.4 million customers
• 26,000 employees
The scale of the Electric Utility Industry in the U.S.
• There are more than 3,000 electric
utilities with combined assets of more
than $800 billion
• The industry is a mixture of large and
small companies where the top 10
companies, by total assets, serve 1/3
of the customers
• Regardless of size, we are all facing
common challenges of meeting future
growth and reliability needs in a very
capital intensive industry
Total Assets ($ Billions)
49.7
Duke
Southern Co
45.8
Exelon
45.4
AEP
40.3
FPL
40.1
39.1
Dominion
Edison Intl
37.5
PG&E
36.6
AES
34.5
Entergy
33.6
Capital Intensity for select U.S. sectors
Utilities
1.6
0.9
Airlines
Metals
0.4
Package & Freight
0.4
Specialty Retailers
Auto Manufacture
Computer Software
4
2.1
Railroads
0.2
0.2
0.1
For example, Southern Company is planning to invest
$14.4 B over the next 3 years
Total = $14.4 B
Transmission &
Distribution
$4.1 B
Environmental
$3.9 B
New Generation
$2.5 B
Existing Generation,
Nuclear Fuel, and Other
$3.9 B
5
Significant resources
will be required
• 30 million man-hours, equivalent to 5,500
craft labor persons per year
• 125,000 tons of steel
• 5,000 miles of cable
• 150,000 cubic yards of concrete
The industry will face financial strain due to the
significant scale of capital expenditures
•
•
The Philadelphia Utility Index (UTY) companies are projecting $197 billion in capital
expenditures over the next 3 years, representing more than half their total equity value
Credit ratings have declined since the last wave of significant baseload construction
Utility Credit Ratings
3-Year Capital Expenditures as Percent of
Market Capitalization for UTY Companies1
1970
85%
70%
$15 B
2007
A
53%
28%
33%
16%
$10 B
AAA,
AA
80%
BBB or
Lower
$5 B
71%
A
3-year Capital Expenditures
3-year Capital Expenditures / Market Capitalization (%)
Sources:
6
1
2
17%
Bloomberg (2008-07-15) and individual company filings and Investor Relations presentations
Standard & Poor’s Industry Report Card, America's Electric Utilities: Past, Present & Future, 8th Edition, by Hyman, Robert C.; Andrew S.; and Leonard S.
2
New generation capacity is a primary driver of new
capital requirements
• Demand for electricity will increase 30 percent by 2030 according to the
U.S. EIA – which requires 213,000 MW of new capacity
•
The scale of this need requires baseload generation
• “Fuel diversity is key to affordable and reliable electricity. A diverse fuel
mix protects electric companies and consumers...” -- EEI
•
Fuel markets have become increasingly volatile
Price increases since July 20041
Oil
Gas
Coal
247%
116%
112%
The ability to build baseload generation is a critical
component for the future of the electric utility industry
7
1
Price increases are illustrated using the following commodities: Oil: West Texas Intermediate Crude (WTI), Gas: Historical Henry Hub, Coal: Central Appalachian.
New baseload generation technology is also critical to
the success of reducing CO2 emissions
• We must be able to develop and
deploy technologies that reduce
greenhouse gases while making sure
that electricity remains reliable and
affordable
• “The availability of carbon capture and
storage and nuclear generation in the
full portfolio provide large-scale
supply-side emissions reductions,
protecting the electricity market and
limiting the rise in wholesale electricity
prices.” -- EPRI1
8
1
2
Technical potential for reducing
CO2 emissions by 1.3 billion
metric tons by 20302
Advanced
Coal
13%
CCS
Nuclear
18%
Renewables
18%
27%
PHEV/DER
11%
Efficiency
13%
The Full Portfolio, by Revis James , Director of the EPRI Energy Technology Assessment Center, in EEI’s Electric Perspectives, January/February 2008 edition.
EPRI 2008 Analysis
Companies must be proactive in aggressively pursuing
these options now
• Generation plants have long lead times requiring
coordinated long term planning
Nuclear
10-12 years
8-10 years
Pulverized Coal
IGCC
Transmission Line1
6-7 years
8-10 years
Engineering & Permitting
Construction
• CCS requires significant lead time before the technology
will be commercially viable
9
1
Construction and interconnectivity requirements for a 100 mile transmission line
Keys to successful deployment of advanced baseload
technology
Technology Investment
•
•
•
•
Nuclear
CCS
IGCC
Renewables and energy efficiency
New
Baseload
Generation
Regulatory
•
•
•
•
10
Clear public policy
Collaborative relationships
Cost recovery, including R&D
CWIP
Financial
•
•
•
•
•
Investment tax credits
Production tax credits
DOE loan guarantees
Returns commensurate with risk
Access to capital
EPRI demonstration projects are critical to advanced
baseload generation
Demonstration Projects
Demonstrations Needed
Size
Estimated
Cost
1.7 MW
$15 M
Lower-cost O2 production
AEP –Chilled Ammonia, initial project
20 MW
will be scaled upon successful
200 MW
completion
$100 M
$300 M
Hyper-efficient electric
end-use technologies
Southern Company – Advanced
Amine with CO2 sequestration / EOR
25 MW
$150 M
Smart grids
Scaled-up IGCC CCS demos
600 MW
$1.8 –
2.5 B
Compressed air energy
storage
Air Products demo at 150 tons/day oxygen
PC with partial CCS
IGCC with partial CCS
11
Description
We Energies –Pilot Scale
Chilled Ammonia
Technology
Maturity
CCS Technology Development Path
Pilot
Large Demos
Full-Scale Demos
Performance & Cost
Reduction
Engineering &
Operation
Reliability
Commercial
2020 goal
Coal = NGCC
• Daniel Phase II
• Regional
Partnerships Ph II
• WE Energies CAP
• J Power KS1
• Burger ECO2
• CRC @ PSDF
• Only 1 announced
project – AEP
Northeastern CAP
• SCS 25 MW Advanced
Amine
• AEP Mountaineer CAP
• Basin Electric ECO2
2008
2010
$$$$$
2012
2014
$$$$$$
2016
2018
2020
2030
$$$$$$$
R&D requirements of approximately $2 billion per year for 10 years
12
Industry actions necessary for success
• Educate
– Continue to educate stakeholders about the reality of the
challenge, what is required, and the cost
• Collaborate
– Continue to collaborate to obtain funding, address permitting and
liability uncertainties, and incent investment
• Deliver
– Commit to a prompt execution of step wise technology scale up
leading to commercial availability
13
The Scale and Scope of the Electricity System:
The Need for Baseload Generation
EPRI 2008 Summer Seminar
August 4, 2008
David Ratcliffe
Chairman, President and CEO
Southern Company