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LighteningStrikesTwice:CaliforniaFacesaRealRiskofASecondPowerCrisisLakeTahoeEnergyConferenceJuly30,2004CONFIDENTIALThisreportissolelyfortheuseofclientpersonnel.Nopartofitmaybecirculated,quoted,orreproducedfordistributionoutsidetheclientorganizationwithoutpriorwrittenapprovalfromMcKinsey&Company.ThismaterialwasusedbyMcKinsey&Companyduringanoralpresentation;itisnotacompleterecordofthediscussion.TakingTheRightStepsToEnsureAPowerfulFuture15stepsthatwillensurealong-termsustainablemarketforpowerTHESTATEISATRISKOFANOTHERPOWERCRISIS,BUT5KEYSTEPSWILLHELPTOENSUREASUSTAINABLEPOWERMARKETActionneedstobetakentodaytopreventanotherenergycrisis1.Newgenerationneedstobebuilttoday,giventhelongleadtime,andamechanismformarket-basedcontractswithutilitiesneedstobeintroduced2.Californiashouldintroducemandatorytime-of-usemeteringforallclassesofcustomers3.NewtransmissionneedstobebuiltandfacilitatedthroughaexpeditedandcoordinatedapprovalprocessbythePUC,ISO,CEC,andFERC4.Aformalcapacitymarketcombinedwithamandatoryplanningreservetarget(e.g.,15-20%)needstobeinplaceby20065.TheStateshouldre-introduceelementsofretailchoice,providinganopportunityforlargeconsumerstoshopforpower•CECestimatesindicatethatoperatingreservescoulddropbelowtypical“emergency”levelsifwehaveahotsummer•Unfortunately,theCEC’sdemandestimatesappearlowrelativetotrendanda“highdemandcase”(i.e.,hotsummer)maybeaslikelyasa1-in-5occurrence•Takingintoaccountrealisticlevelsoffuturedemand,operatingreservescouldbeextremelytightby2006–aslowas5.8%(ina1-in-5yeardemandcase)2THESTATE’SENERGYAGENCIESPROJECTANEAR-TERMRISKOFLOWRESERVEMARGINSINAHOTYEAR*Operatingreservemargincalculatedas(AvailableSupply–PeakDemand)/(PeakDemand)Source:CaliforniaEnergyCommission(July8,2004updatetoJune24,2004report)1-in-10year(hot)1-in-2year(average)CECESTIMATESAugust2005August2006August2007August2008ProjectedCaliforniastateoperatingreservemargin*Percent11.613.212.711.611.16.75.24.76.25.1August20047%target=StageOneemergencylevel5%target=StageTwoemergencylevelReservemarginsconsistentlydropbeginningin2006Demand3ENERGYAGENCYFORECASTSOFFUTUREDEMANDAREOPTIMISTICCOMPAREDTOALTERNATIVEPROJECTIONSESTIMATESOF1-IN-2YEARPEAKDEMAND3035404550556065198219851988199119941997200020032006Peakdemand(averageweather),afterconservationGW*Regressionprojectionbasedonhistoricweather,historicGSP,currentGSPprojections(5.6%),andaverageweather**BasedonhistoricCAGRforpeakdemandgrowthbeforeincludingconservation(underlyinggrowthof1.88%for1983-2003)andadjustedforexpected2004-2008conservationinCalifornia(providedbyCEC)Source:CaliforniaEnergyCommission;BureauofEconomicAnalysis;Economy.comRegressionmodel*CEC-July2004Trend**DifferentmodelsofdemandCEC-May2003For2006,theCEC’sestimateis~1,000MWbelowtrend-lineestimatesand~2,100MWbelowaregressionmodelestimate41344615761193-9494-9595-9696-9797-9898-9999-100100-101101-102102-103103-104THEPOTENTIALFORA“HIGHDEMANDCASE”ISASHIGHASA1-IN-5EVENT,RATHERTHANJUSTA1-IN-10EVENT1in2demand1in5demand1in10demand57,54159,12159,501DistributionofaveragestatewidepeaktemperatureNumberofyearsobservedoverpast40years*BasedonBAEFregression-modelestimatesof2006peakdemandSource:CaliforniaEnergyCommissionTemperaturerangeDegreesFahrenheit•8outofthelast40years(or20%),peaktemperatureshavebeen101degreesorhigher•Thereislittledemanddifference,though,between101degreesand101.5degrees1in10101.5°1in5101°Potential2006peakdemand*GWBASEDONHISTORICDATA+3.4%+2.7%59.98.76.55.45.83.82.76.9TAKINGINTOACCOUNTADIFFERENTVIEWOFFUTUREDEMAND,THERISKOFSHORTAGESISEVENSTARKER*Operatingreservemargincalculatedas(AvailableSupply–PeakDemand)/(PeakDemand)**Asmuchas2,000MWwouldberequiredtomaintainaplanningreservemarginof15%forthe1-in-5case,whichwouldequatetoa1-in-2operatingreserveof12.1%anda1-in-5operatingreserveof9.1%Source:CaliforniaEnergyCommission(July8,2004updatetoJune24,2004report);McKinseyanalysis1in5year1in2yearBAEFESTIMATE7%target=StageOneemergencylevel•750MWofnewcapacitywillbeneededbefore2006tomaintaina7%operatingreserveundera1-in-5case**•Giventheleadtimefornewconstruction,permittinganddemandsidemanagementneedstobegintodayAugust2005August2006August2007August2008ProjectedCaliforniastateoperatingreservemargin*Percent5%target=StageTwoemergencylevelDemand6THESTATEISATRISKOFANOTHERPOWERCRISIS,BUT5KEYSTEPSWILLHELPTOENSUREASUSTAINABLEPOWERMARKET5stepsthatwillensurealong-termsustainablemarketforpowerActionneedstobetakentodaytopreventanotherenergycrisis1.Newgenerationneedstobebuilttoday,giventhelongleadtime,andamechanismformarket-basedcontractswithutilitiesneedstobeintroduced2.Californiashouldintroducemandatorytime-of-usemeteringforallclassesofcustomers3.NewtransmissionneedstobebuiltandfacilitatedthroughaexpeditedandcoordinatedapprovalprocessbythePUC,ISO,CEC,andFERC4.Aformalcapacitymarketcombinedwithamandatoryplanningreservetarget(e.g.,15-20%)needstobeinplaceby20065.TheStateshouldre-introduceelementsofretailchoice,providinganopportunityforlargeconsumerstoshopforpower•CECestimatesindicatethatoperatingreservescoulddropbelowtypical“emergency”levelsifwehaveahotsummer•Unfor