SPEAKERS
Donald L. Evans Chairman Energy Future Holdings Corp. Executive Interview	Deryk I. King Chairman and Chief Executive Officer, Direct Energy Centrica North America.
James E. Rogers Chairman, President and CEO Duke Energy Corporation	Jone-Lin Wang CERA Managing Director and Group Head
Lawrence J. Makovich CERA Vice President and Senior Advisor (Chair)

After describing the challenges likely to alter the power business landscape in Thursday’s Welcome and Opening Address, CERA Vice President and Senior Advisor Lawrence J. Makovich chaired a plenary panel that explored the changes occurring in the North American power sector.

The Hon. Donald L. Evans, Chairman of Energy Future Holdings Corp., with extensive experience in the oil and gas industry and in government, asserted that “the ability to provide affordable, available, clean-burning energy to the world is the number one challenge of our time, and it is a daunting challenge.” Mr. Evans expects the industry to change to address the global rise in demand, prices, and concerns about climate change. “One of the most important changes is renewed emphasis on energy efficiency, which is not only good for the environment but it’s essential for business and the long-term growth of our economy.” He described how the companies of Energy Future Holdings—TXU Energy, Oncor, and Luminant—are taking steps to produce cleaner power and promote conservation. “We want more Texans to use less electricity,” he said. By providing tools and partnering with consumers to lower energy use, consumers save money on their power bills, and the companies gain consumer trust. He gave examples of how the company is spending $400 million over five years at TXU and Oncor to develop and implement technological tools that will empower customers to manage their power use. These innovative programs are enabled in part by the competitive, deregulated Texas power market. “Competition works,” he said, and he would like to see deregulation spread further in the United States and allow more innovation to take place.

Deryk I. King, Chairman and Chief Executive Officer of Direct Energy, also favors competition in power markets. “Flourishing competition” should be driving customer behavior in the energy market, within a legislative framework that supports social and environmental goals. Competition, he said, works well in providing customer choice, improving conservation, driving innovation, and making decisions on new generation capacity. He examined regulated and deregulated markets to illustrate his argument. Consumers want choice, he said, citing the examples of the United Kingdom, Sweden, Australia, and Texas, where great numbers of customers have changed suppliers or contract type. He also said that in regulated markets price caps and other mechanisms discourage conservation; consumers, he said, need to pay the true economic cost of energy. In addition, “innovation is essential to support conservation initiatives.” Direct Energy is undertaking several technology-based programs to help consumers decrease their consumption and bills but maintain their standard of living. Regarding new generation, Mr. King noted that although the pace of demand will moderate owing to these innovations and higher prices, demand will most likely continue to increase. Since 2000 most investment in new US capacity has been in competitive markets. In conclusion, he reiterated that customer behavior should be driven by full economic pricing of energy that reflects the cost of carbon and the massive investment in generation and infrastructure, which stimulates conservation. To offset some of this price pressure, generation and supply need to be open to competition. North American should take the lead in these initiatives, he said.

James E. Rogers, Chairman, President, and CEO of Duke Energy Corporation, began by giving Duke’s ranking among carbon dioxide (CO₂) emitters: third largest emitter in the United States, twelfth in the world, and forty-first when compared with the 92 countries in the United Nations. These facts are his “burning platform”: Duke, the country, and the world need to solve the climate change problem. Mr. Rogers has three aspirations for his customers and the world: to decarbonize the energy supply over the next decades, to become optimally energy efficient, and to provide reliable, affordable energy. Technology and increased investment in research and development are critical to achieving these goals—for removing carbon, providing tools for energy saving, and “keeping the power on” while population, demand, and costs continue to grow. The industry also needs to shape public policy toward carbon pricing, a cap-and-trade that makes sense, and a trading regime. Mr. Rogers asked the audience to imagine with him “a new model for the power business” for the future, in which the network is optimized and redefined. Mr. Rogers envisions a per–kilowatt-hour fee on all generation to fund technology development needed for all generation fuels. His new model also included new supply sources (for instance, a company like Duke owning, installing, operating, and dispatching 300,000–400,000 solar panels per year on customers’ roofs), the conversion of the grid to digital, the elimination of line losses, meters for optimization and two-way communication between the company and customers, modernizing power plants, and plug-in hybrids. This vision, he estimates, could reduce carbon emissions by 60–80 percent by 2050.

Jone-Lin Wang, CERA Senior Director, Global Power Group, described three “defining features of the North American power business [that] are beginning to take shape.” Power price escalation will continue and will have serious consequences. Price drivers include the need to build infrastructure to maintain reliability; substantially increased capital costs; increased exchange rates for imports, such as nuclear components; and the need to price carbon high enough to induce fuel switching. The vast majority of no- and low-carbon supply options are in electricity; therefore the burden of reducing the carbon footprint will weigh heavily on the power sector. The US power section accounts for about 40 percent of the country’s total carbon emissions but has the potential to help reduce the carbon intensity of the other 60 percent, including in transportation and space heating. Reductions can be made on the demand and supply sides, and most of the current low- or zero-carbon options on the supply side are in electricity (e.g., nuclear, solar, wind), although supply-side reductions will take longer and be more costly. To provide reliable power and simultaneously reduce carbon content, power companies will need to make huge capital investments in the coming decades. The power business is the most capital intensive of all the major industries: on average, an investment of $3 returns $1 in revenue. Access to capital will be crucial and the ability to obtain even slightly lower capital costs will be a great advantage. CERA’s research shows that stable earnings are critical to lowering a company’s cost of capital, and that a balanced fuel mix, a hybrid company structure, and involvement in multiple links of the power value chain are keys to stable earnings.

The panel answered questions about the adoption of conservation and energy efficiency, the outlook for deregulation, and the political threshold for price increases.