Developing Nevada's Clean Energy Resources-3

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DEVELOPING NEVADAS CLEAN ENERGY RESOURCES


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FORWARD

This analysis was prepared by Clean Energy Project using McKinseys US Low Carbon Economics Tool, which is a neutral, analytic set

of interlinked models that estimates potential economic implications of various policies using assumptions defined by Clean EnergyProject. The policy scenarios, input assumptions, conclusions, recommendations and opinions are the sole responsibility of Clean EnergyProject and are not validated or endorsed by McKinsey. McKinsey takes no position on the merits of these assumptions and scenarios oron associated policy recommendations.

More background about McKinsey's US Low Carbon Economics Tool is available here:

http://www.mckinsey.com/clientservice/sustainability/low_carbon_economics_tool.asp


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Developing Nevadas Clean Energy Resources

October 2010

1. Executive summary

Nevada currently imports nearly all of its fuel for energy, whether in the form ofnatural gas, coal, petroleum or electricity. However, the state has vast domestic energyresources in the form of renewables and energy efficiency. Nevada has an opportunity

to save over $300 million dollars per year by 2025 due to decreased energy importsand increased electricity exports if the state aggressively pursues the development ofits clean energy resources. In this scenario of clean energy export plan, Nevada couldincrease its GDP by $540 million and create over 9,000 clean energy jobs directlysupporting the new clean energy infrastructure by 20251.This report explores the path we are currently on for clean energy development inNevada and the opportunity in Nevada to build a stronger clean energy economy inmore detail. It presents plausible pathways to capturing the value at stake, quantifiesthe impact of these pathways on Nevada ratepayers, jobs, and GDP, describes likelybarriers to achieving the opportunity, and discusses potential policy and other measuresthat could help overcome these barriers.

2. The opportunity for developing clean energy in Nevada

Nevada imports nearly all of the fuel required to generate electricity for the statesconsumers and businesses. In 2008, almost 90% of the electricity generated in Nevadawas from out-of-state fuel sources (Figure 1). This power was produced using $1.7billion of imported fossil fuel: $1.3 billion of natural gas and $400 million of coal. Inaddition, Nevada imported 1.2 million MWh of electricity (3.4% of its electricity,worth approximately $60 million) from out-of-state generators.

1 This accounts for green jobs associated with building and operating renewable energy facilities and transmission lines, and retrofitting buildings. Does not account for job losses in other industries


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Hydro*

Coal

Gas

Renewables*

Imports

2008

36.3

7.8

24.0

1.81.5

1.2

* Small hydro is included in total hydro, not renewables

SOURCE: Energy Information Administration; SNL Financial Database; SEC Form 10-K

Nevada generation mix in 2008

TWhAssociated Fuel Costs

$Millions

Coal

1,300

400

Gas

All gas importedfrom other states

Figure 1: 2008 generation mix and costs

However, Nevada has large and high-quality renewable energy resources and significant energy efficiency potential. The combination ofenergy efficiency and renewable power could reduce Nevadas energy imports, increase its exports of electrical power and stimulate alocal clean energy industry.

Renewables

Nevada has among the best geothermal resources in the country. Geothermal energy could theoretically supply between 1,500 and 3,000MW of baseload generation capacity (10 20 million MWh of energy per year, or 30-60% of Nevadas total demand), a potential secondonly to California. Much of the state, particularly the north, contains known or potential geothermal resources (Figure 2). In addition,geothermal power generation has an established track record and a potential that will continue to grow as exploration technologies arerefined and costs drop.

In 2008 almost 90% of theelectricity generated in Nevada

was from out-of-state fuel sources(Figure 1). This power was

produced using $1.7 billion ofimported fossil fuel: $1.3 billion of

natural gas and $400 million ofcoal. In addition, Nevada

imported 1.2 million MWh ofelectricity (3.4% of its electricity,worth approximately $60 million)

from out-of-state generators.


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Figure 2: Nevada has among the best geothermal resources in the US

SOURCE: National Renewable Energy Lab

Nevada also contains world-class solar resources (Figures 3 and 4). Solar energy, including both solar thermal and utility-scalephotovoltaic generating plants, could theoretically provide orders-of-magnitude more electricity than needed to meet Nevadas peakdemand. The limiting factors for solar generation are therefore not the size of the renewable resource, but siting, transmission andeconomic constraints.


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Figure 3: Nevada has among the best solar PV resources in the US



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Figure 4: Nevada has among the best solar thermal resources in the US


Other renewable resources in Nevada include wind, distributed generation (mostly solar photovoltaic) and solar hot water heaters. Nevadahas between 15,000 and 20,000 MW of wind energy potential. There is several hundred MW of distributed solar PV potential on homesand commercial buildings, which could provide hundreds of thousands of MWh of energy per year (a few percent of total demand).Finally, solar hot water heaters could reduce electricity demand by displacing electric water heaters, potentially saving 1.2 1.5 millionMWh (3-4% of total demand) per year (and removing the need for ~350 MW of generating capacity).2

Energy efficiency

A report published in 2009 by McKinsey & Company examined in detail the potential for greater efficiency in non-transportation uses ofenergy, including the effect of measures such as retrofitting homes, installing more efficient appliances and lighting and constructingmore energy-efficient new buildings.3 It found that the U.S. could save up to 23 percent of projected energy demand in the residential,commercial and industrial sectors. These measures, if put in place, would cost $520 million but save a total of $1.2 trillion in energy costs.

2 Department of Energy (EnergyStar)3 Unlocking Energy Efficiency in the U.S. Economy, McKinsey, 2009

It found that the U.S. couldsave up to 23 percent of

projected energy demandin the residential,

commercial and industrialsectors. These measures, if

put in place, would cost$520 million but save atotal of $1.2 trillion in

energy costs.


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This large net savings could be obtainedbecause the cost of energy efficiencymeasures is usually significantly lowerthan the cost of energy. For example, gas

generation costs 5-7 cents/KWh, whereassaving a KWh of energy through efficiencycosts on average about 3 cents/KWh.4

In Nevada, the total economic (NPV-positive) energy efficiency potential inbuildings and industry using knowntechnologies is 153 trillion BTUs in 2025,

or 26% of Nevadas estimated energyusage in those sectors (Figure 5). Althoughthis potential savings opportunity is large,capturing it in practice could be verydifficult, given multiple barriers thatimpede the deployment of energyefficiency measures. Most energy efficiency programs are expected to capture less

than a third of the total economic potential. The barriers to capturing energyefficiency, and ways to overcome them, will be discussed in Section 5.

The largest energy efficiency opportunity is in residential and commercial buildings,where measures such as retrofitting homes (improving insulation, sealing ducts,replacing windows, etc.), using more efficient appliances and lights and adhering tostrict building codes could save about 30% of energy use in these sectors.

Electricity savings specifically are of interest for this report. Energy efficiencymeasures could save up to 13 million MWh of electricity (33% of total electricity

demand in 2025), removing the need for about 3,000 MW of generating capacity, or 30% of todays capacity.

4 K. Gillingham, et. al., Energy Efficiency Policies: A Retrospective Examination, Annual Review of Environmental Resources, 2006.

Electricity savingsspecifically are of interest

for this report. Energyefficiency measures couldsave up to 13 million

MWh of electricity (33%of total electricity demand

in 2025), removing the

need for about 3,000 MWof generating capacity, or30% of todays capacity.


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Figure 5: Nevadas economic energy efficiency potential in 2025 is 26% ofstationary energy consumptionNevada stationary end-use energy demand, 2025Trillion BTU

132

175

120

178

440

148

No action 2025

491

181

208

No action 2010 With full potential 2025

172

593

209

-26%

SOURCE: Energy Information Administration

-29%

-31%

-18%

Industrial

Commercial

Residential

Typically, energy efficiency refers to demand-side savings, but there may also be a significant opportunity on the supply side. Variousestimates suggest 2% to 6% savings from such measures as transmission loss reduction and voltage variation reduction,5 resulting in 0.88-2.4 million MWh of energy savings.

5 Energy Efficiency in the Power Grid, ABB 2007; IEEE article


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3. The economics of renewables and efficiency

Renewables.

There are multiple economic impacts from building renewable generation. Primary effects include the following.

Figure 6: Jobs created by typical clean energy projectsEstimated job creation by clean technology investmentsNumber of jobs

900

600

390410

200

520

230

830

240

610

130

1,140

Direct

Indirect/induced

5

20

90

15

500 KV, 200 miletransmission line(600 MW capacity)

100 MW Wind100 MW Geothermal100 MW Solar PV

Initial jobs per year during construction*

* Assuming 2-year project l ength

Ongoing permanent jobs

1. Job creation from construction and operations.

Figure 6 shows job creation numbers for typical projects in a two year time period: a 100 MW solar PV installation, a 100 MWgeothermal plant, a 100 MW wind farm, and a 200-mile long 500 kV transmission project. The total job impact is due to directconstruction, engineering, and other project jobs; indirect jobs from demand along the renewables supply chain; and induced jobs createdas the income earned in direct and indirect sectors is spent on additional products and services (e.g., restaurant meals purchased byrenewables construction workers). These job gains will be accompanied by a small number of job loss in sectors where demand isreduced (e.g., coal and gas generation). However, because Nevada has no significant coal mining or natural gas production, these losses

are found primarily in other states.


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Energy efficiency

The economic impacts of energy efficiency are broadly similar to those of renewables, in that that both types of measures require upfrontcapital expenditures and result in reductions in fossil fuel expenditures. In addition to the above benefits, cost effective energy efficiencyprograms will: (1) significantly reduce electricity bills, stimulating the local economy and making business more competitive, and (2)

have a positive impact on jobs, as they tend to shift spending away from capital intensive energy industries and toward labor intensiveservice industries (e.g., duct sealing, home retrofitting, etc).

Figure 7 illustrates the level of short-term job creation expected from a 1-year home retrofit program with $60 million in subsidies, whichcould potentially enable 5% of Nevadas homes to have energy efficiency retrofits, could create 1,680 jobs of various types during theprogram. Longer term effects not captured in this figure include the impact of accompanying tax increases and energy bill reductions.

Figure 7: During a 1-year retrofit program addressing 5% of Nevadashousing stock, 1,680 jobs are created in a variety of categories

Jobs created during program, by job type

100% = 1,680

1118

32

Other

18

Transportation, material moving 6

Installation, maintenance, repair 6

Management, business, financial10

ManufacturingSales, office, administrative

Construction

Savings from energy efficiency measures can be large. For example, a 10% reduction8 in energy use in residential and commercialbuildings in Nevada due to energy efficiency would save $350 million per year in energy costs (electricity, gas and other fuels). Anoptimized energy efficiency program could obtain this level of savings for $1.6 billion in upfront investment, paying for itself in less than5 years.

8 This level of reduction would be equivalent to 27% capture of the economic potential identified in the 2009 McKinsey report Unlocking Energy Efficiency in the U.S. Economy, which is towardthe top end of the range (10-30%) of EE program historical performance and of expert estimates


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4. Exporting plan for Nevada

Figure 8: Clean energy scenarios

Scenario 1: BAU

Scenario 2: Export

25% renewables / EE by 2025 Of which, 6% solar (1.5% solar generation by 2025) Of which, up to 25% EE (6.25% EE by 2025)

Renewables

6.25% by 2025 (assumes EE carve-out in RPS is maximized)EnergyEfficiency

Add 600 MW from Northern to Southern Nevada in 2012 (ONLine) Add ~700 miles of 750 MW transmission from 2015-2025 for renewables

connection to grid and transmission to load centers

Transmission

25% of Nevada demand is from renewables by 2025 No EE carve-out Goal of 3,000 GWh

Renewables

Separate EERS (Energy Efficiency Resource Standard) requiring 10%

EE by 2025

Energy

Efficiency

In addition, add ~400 miles of 350 MW transmission from 2015-2025 forrenewables connection to grid, transmission to load centers, and export

Transmission

To understand the overall economic implications for Nevada, we modeled two clean energy and EE development scenarios (Figure 8). Inthe first scenario (BAU), Nevada develops renewable resources and achieves energy efficiency sufficient to meet its RPS target. In the

second scenario (Export), Nevada achieves additional demand reduction through energy efficiency, develops slightly more renewableenergy for domestic consumption, and develops a significant amount of renewable resources for export. Figure 9 shows the electricalenergy produced from various sources in Nevada with the corresponding generation capacities installed, and Figure 10 breaks down thesame information for renewable energy.9 Energy efficiency measures could significantly reduce electricity consumption, with savingscoming from residential and commercial buildings and industry (Figure 11).

9 Different proportions of energy and capacity are due to differences in the capacity factors of different technologies


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3

943

2025

45

7

24

3

3

2015

41

9

23

3

3

2010

37

9

23

37

4

43

7

27

3

20152010

37 39

9

23

3

23

3

2025

9

Figure 9: Export scenario has lower demand,

more renewables, and less gas

Generation mixTWh

BAU Export

* Small hydro is included in total hydro, not renewables

Demand

Coal

Gas

Hydro

Renewables

Renewables for export

0.8

0.80.8

0.6

2010

9.6

2015

10.6

1.3

7.0

1.0

7.0

1.3

7.0

0.80.4

0.81.8

2025

11.4

2015

10.0

1.3

7.0

1.0

7.9

0.80.8

2025

11.0

2010

9.6

0.81.2

1.3

7.0

0.80.4

CapacityGW

In order to deploy

the renewableresources for eachof the scenarios,

additionaltransmission linesand upgrades to

existing lines willhave to becompleted.


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Figure 11: Growth rate of electricity demand can be reduced, with greatestsavings in commercial sector

0

5

10

15

20

25

30

35

40

45

202020152010 2025

Export scenario10% EERS

BAU - No action

BAU - Nevada RPS

0.3

0.3

2015 2025

Industrial

Commercial

Residential0.6

0.4

1.3

1.4

2.5

4.3

Total electricity demandTWh

Electricity savings due to energy efficiencyTWh

In order to deploy the renewable resources for each of the scenarios, additional transmission lines and upgrades to existing lines will haveto be completed. In addition to the assumed completion of the initial portion of the ONLine transmission project (A 600 MW, 500 kV lineconnecting the northern and southern transmission grids for the first time), we modeled a deployment of 750 miles of average 500 MW

capacity, at a cost of $1.3 billion (for BAU) and an additional 400 miles of average 350 MW capacity, at an additional cost of $0.7 billion(for the export scenario). The transmission construction requirements were based on a recent study examining potential renewableresource zones and transmission requirements throughout Nevada (Figure 12).10 The bulk of the new transmission would be along thewestern border, connecting solar (in the south) and geothermal resources both to Nevadas grid and to California, and in the east centralportion of the state, connecting geothermal and wind resources to the Nevada grid.

10 2009 Status of Energy in Nevada Report to Governor Gibbons and Legislature


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Figure 12: Proposed transmission to enable renewables deployment

SOURCE: 2009 Status of Energy in Nevada Report to Governor Gibbons and Legislature

Implementing these scenarios would have the following impacts:

Electricity bills

Including the cost of investment in infrastructure for a robust cleanenergy economy, Nevada household electricity bills would decrease

because of the reduction in energy use due to energy efficiency(Figure 13). Bills could be kept even lower if Nevada focused moreon energy efficiency and less on renewables in the early years. Forexample, by loosening the intermediate RPS target (from 20% to15% by 2015) but also imposing an intermediate EERS target (5%by 2015), the electricity bill savings would roughly double, from$1.50 per month per household to $3.00 per month per household.

Impact on household electricityBILLS relative to no action

$/month

-1.33-1.03

-3.46

-1.56

Export

BAU

Figure 13: Impact on household electricity bills

Including the cost ofinvestment in infrastructurefor a robust clean energy

economy, Nevadahousehold electricity billswould decrease because of

the reduction in energy usedue to energy efficiency(Figure 13).


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Jobs and GDP

The total impact on Nevadas economy in terms of jobs and GDP is positive in both scenarios in most years (Figure 14). This is becausethe negative impact of higher prices is more than offset by the positive impact of clean energy investment and the savings due to energyefficiency, including increased electricity exports and reduced natural gas imports (Figure 15). The export scenario has significantly better

outcomes than BAU, especially in 2025 when there is more clean technology investment and exported power.

Figure 13: Macroeconomic outcomes are more positive inexport scenario

228266

677

461

2012 2025

Export

BAU

-150

1,800

1,150

2,700

20252012

Impact on GDP relative to no action

2008$ Millions

Impact on employment relative to no action

Number of jobs

SOURCE: US Low Carbon Economics Tool

PRELIMINARY

Additional effects

Manufacturing (only from the export scenario)

If half of the energy exported in the export scenario in 2025 were produced from solar PV, and Nevada were to establish the localmanufacturing capacity to supply those PV installations, an additional 1,200 to 1,300 jobs could be created.

Local taxes

Renewable installations contribute significant taxes and other revenue (e.g., land leases) to local communities. Since most renewable

power plants would be located in rural areas, these taxes could have a significant positive impact on rural communities. In the export

The export scenario hassignificantly better

outcomes than BAU,especially in 2025 when

there is more cleantechnology investment and

exported power.


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scenario, roughly $25 million in local taxes and assessments would be collected from renewable power installations. This would enhancethe services provided by local governments and create 300-400 rural jobs. Taxes on transmission lines would be significant too.

Figure 15: Export scenario delivers significant additional value to

Nevadas economy

3.4

2.3

20252015

Renewable electricity exports inexport scenario relative to BAUTWh/year

* At CA wholesale price

173

99

20252015

Dollar value of exports*$M/year

Natural gas generation in exportscenario relative to BAUTWh/year

Avoided cost of natural gas imports$M/year

-3.5

-0.6

20252015

147

25

2015 2025

34% lowernatural gasimportsrelative tono action

6. What will it take to capture the opportunity?

In order to capture the clean energy opportunity in Nevada, three critical issues must be addressed. First, there must be a significant andsustained investment in transmission both new lines, and upgrades to existing lines. Second, several key barriers to renewable energy

development must be addressed and removed or reduced. Finally, multiple and persistent barriers to capturing the energy efficiencyopportunity must be addressed.

Transmission

The key challenge in developing renewable resources is transmission. Many resources are located far from load centers, and developing arenewable industry for export will require additional long-distance transmission capacity and upgrades of existing transmission lines. Theplanned 600 MW ONLine project connecting the northern and southern grids will help to deliver geothermal resources from Northern

Nevada to Southern Nevada, but additional high-capacity lines will be needed to connect individual installations to the grid and to exportrenewable energy to California.

In the export scenario,roughly $25 million in

local taxes andassessments would be

collected from renewable

power installations.


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21

10

13

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Figure 16: Energy efficiency opportunity in the residential sectorEnergy savings from energy efficiency, 2025

TBTUMeasures to enable capture ofopportunity

Subsidies and/or financing Require retrofit at point of sale or

upgrade

Retrofit

New

buildings

Enforce and update building

codes PACE, on-bill, or similar financing Building labeling (E.g.,

EnergyStar)

Heavyappliances

Appliance standards Appliance labeling Consumer rebates

Consumerelectronics

Standby power standards Device labeling Consumer rebates

Lighting Lighting standards Lighting labeling Consumer rebates


Heavy appliances

New buildingsRetrofit

Lighting

Consumer electronicsBAU100%=13

Fullpotential*100%=60

Export100%=20

* For comparison only; not modeled here


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17

1215

34

Figure 17: Energy efficiency opportunity in the commercial sectorEnergy savings from energy efficiency, 2025

TBTU

Measures to enable capture of

opportunity

Subsidies and/or financing Require retrofit at point of sale or

upgrade

Retrofit

New

buildings

Enforce and update buildingcodes

PACE, on-bill, or similar financing

Building labeling (E.g.,EnergyStar)

Heavy

appliances Appliance standards Appliance labeling

Consumer

electronics Standby power standards Device labeling

Lighting Lighting standards Lighting labeling


Lighting

Consumer electronics

Heavy appliances

New buildings

Retrofit

BAU

100%=12

Full

potential*100%=55

Export100%=19

* For comparison only; not modeled here

Despite the difficulty in capturing the full potential, many policy, market and other mechanisms exist and can be deployed to address thebarriers (Figures 16 and 17) and capture part of the potential. Effective measures include an overall energy efficiency target coupled withremoving disincentives (rate decoupling) or adding incentives (rate of return on EE investment, sharing benefit of EE with customers) forthe utility, information and education, incentives and financing, codes and standards and third-party involvement (in which a third party,


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