TODAY’S STUDY: HOW A COAL BURNER CAN CLEAN UP

Charting the Correction Course; A Clean Energy Pathway for Duke Energy

July 2012 (Greenpeace)

Introduction to the Greenpeace Clean Energy Pathway for Duke Energy

On July 2, Duke Energy and Progress Energy merged and became the nation’s largest investor-owned utility with 7.1 million customers across North Carolina, South Carolina, Florida, Indiana, Ohio, and Kentucky. The newly combined company, Duke Energy, now controls 82% of North Carolina’s electricity generating capacity.

Despite its self-professed leadership, Duke’s North Carolina power plants generate more greenhouse gas emissions per megawatt-hour than its peers do, when accounting for efficiency1. Duke Energy has looked to North Carolina ratepayers for rate increases to sustain antiquated power generation, above-average pollution rates, and more high-hazard ash impoundments (12 of 45 nationwide) than any other utility in the country.

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Rooted in the belief that Carolinians deserve better, Greenpeace offers this research to:

• Set the record straight about Duke’s performance relative to competitors,

• Highlight shortcomings in Duke Energy’s current investment plans and

• Propose specific solutions that reap benefits for ratepayers, the environment and investors.

Above all else, this work demonstrates that aggressive adoption of renewable energy and energy efficiency reduces consumer bills, emissions and the long-term debt Duke Energy carries. The assertions made to support these claims are derived by Greenpeace from an analysis performed by Ventyx, an ABB Company (Ventyx)3 under the direction of Greenpeace, along with data from Ventyx’s Velocity Suite database. The final results of the Greenpeace Custom Scenarios, by study, are included as appendices to this report…

The main focus of the research is North Carolina. No other state will be as profoundly impacted by the Duke-Progress merger or plans to turn over such a large share of its existing power generation infrastructure. That said, considerable impacts will also be felt in South Carolina, Ohio, Indiana, Florida and Kentucky…

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Shifting generation and investments: The Greenpeace Clean Energy Pathway…

Driving change

Duke Energy’s current plans call for tens of billions of dollars in investment in risky and unproven nuclear technology, life extensions for coal plants, and natural gas plants prone to price spikes. Duke’s 7.2% rate increase in 2012 and plans to request another rate increase this year demonstrate that Carolinians cannot afford Duke’s business-as-usual model, let alone tens of billions of dollars on top of that. As coal prices converge with far more expensive exports for steelmaking and natural gas prices hold near historically low levels, investments in coal show little promise for being viable in the short term—let alone the long term…

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Resource requirements

For ‘high renewables’ scenarios (Scenario 2&5), Greenpeace provided Ventyx with resources to model 33% renewable energy sourced entirely from wind and solar energy by 2020. This reflects an increase over the 12.5% by 2021 portfolio proposed by Duke Energy to meet the North Carolina Renewable Energy Portfolio Standard. Duke Energy projects electricity use of 190.4 billion kilowatt-hours (GWh) for the Carolinas in 2020. Based on that forecast, a 33% renewable energy target would require 62.8 GWh by 2020. Of that total, 37.7GWh would come from solar and wind energy and 25.1 GWh would come from energy efficiency. The energy efficiency assumption comes from the 2006 modeling used to assess the feasibility of a renewable energy and efficiency standard. Cost-effective energy efficiency measures can help to reduce the amount of energy required to power Carolina homes and businesses at a cost savings relative to coal plants. In so doing, not only can Carolinians reduce their kilowatt-hour use, but they can avoid the need to build costly new plants, especially those designed to serve peak loads.

Discussion of key results

By modeling different mixes of generation and price environment, the tradeoffs between affordability and emissions became readily apparent, as did the impacts of fuel choices. Not surprisingly, an aggressive implementation of renewable energy resources sharply reduced emissions. Of the five scenarios modeled, only two reduced both cost and emissions relative to the IRP scenario and both involved a significant increase in renewable energy over current plants. Of those two scenarios, the high renewables scenario delivered reduced emissions at the lowest cost and is presented as the Greenpeace Clean Energy Pathway. The Clean Energy Pathway presented could withstand even quadrupling of construction costs and remain more affordable than the Duke-Progress IRP plans in the Business-as Usual (BAU) scenario.

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Clean Energy Pathway vs. Least Cost Scenario

In contrast to the Base Scenario that trades cost savings off emissions reductions for maximum cost savings, the Greenpeace Clean Energy Pathway offers both across-the-board emissions and cost-savings relative the Business-as-Usual (IRP) Scenario. On a per megawatt-hour basis, the deployment of 15,150MW of solar photovoltaic capacity, 1,917 MW of wind resources and 25.1 GWh of energy efficiency by 2020 reduced 20-year average emissions of carbon dioxide by 29%, sulfur dioxide by 61% and nitrogen oxides by 47% at $108 billion discounted savings in revenue requirements over the next 20 years. Implementing the high renewables scenario reduced Duke-Progress emissions by 141 million tons of carbon dioxide, nearly 143,000 tons of sulfur dioxide and over 114,000 tons of nitrogen oxides. From a policy perspective, implementing the Clean Energy Pathway increases Duke Energy’s share of renewable energy and efficiency to 33%, eliminates coal consumption by the end of 2020 and transitions from nuclear power by 2026, while achieving massive savings to Carolina ratepayers.

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Proposed Clean Energy Pathway Annual Renewable Energy Capacity Additions.

• By shifting natural gas investments to exclusively combined cycle investments, increased plant fuel efficiency enables sharply reduce gas-fired emissions and reduces overall fuel costs. While the scenario costs more than the Base Scenario, much of the difference in cost comes from renewable energy development that can be financed with short-term debt.

• Avoiding nuclear energy construction sharply reduces both construction and long-term debt costs. At the same time, the construction of renewables yields far greater employment benefits per megawatt in a way that delivers jobs in the short term, while nuclear energy does not.

• By trading off higher construction costs for lower fuel costs relative to the Base Scenario, this limits Duke’s fuel commodity exposure and keeps more energy dollars in the Carolinas.

• Solar PV is the most job intensive of any form of energy development at an estimated 0.87 job-years per GWh59. For this reason and due the potential for rapid and modular deloyment, solar energy emerged as the leading candidate for large-scale deployment. An anticipated 33,178GWhof solar energy generation by 2020 would create an estimated 28,865 jobs in the Carolinas…

Gas and default (low) renewables

By building predominantly on natural gas-fired generation to replace coal and nuclear generation, absolute carbon dioxide emissions increase by 39% over the BAU/IRP Scenario. Sulfur dioxide emissions rates increased by 100% over BAU while nitrogen oxide emissions rates increased by 41%. Largely driven by sharp increases in fuel costs, this scenario also costs $4 billion more than the Greenpeace Clean Energy Pathway while resulting in 88% more carbon dioxide emissions.

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Summary of findings

Duke Energy could source 33% of its electricity from renewable sources by 2020 from a combination of solar, wind, and energy efficiency at a savings of $108 billion through 2032, as detailed below.

• Adopting the Greenpeace Clean Energy Pathway instead of the Duke Energy Carolinas and Progress Energy Carolinas IRPs would generate across the board cost savings including: an 82% reduction in construction costs, 75% reduction in long-term debt, 9% reduction in operation & maintenance costs and 3% reduction fuel and power purchase costs.

• Based on 2020 Duke-Progress combined load forecasts of 190.4 gigagwatt-hours (GWh) for the Carolinas, a 33% renewable target would require 62.8 GWh by 2020.

• Of that total, 25.1 GWh of energy efficiency can help to reduce the amount of energy required to power Carolina homes and businesses at a cost lower than power produced by Duke Energy Carolinas coal plants, which represents a substantial savings to Duke’s customers.

The remaining goal of 37.7 GWh by 2020 could be met with a portfolio of 15,150MW solar and 1,917 MW of wind energy (800MW of onshore wind capacity and 1,117MW of offshore wind capacity).

• Had Duke shifted the $4.8 billion invested in Cliffside and life extensions for other coal plants to investments in wind and solar, it could have fully harnessed the State’s 800MW of onshore wind potential.

• With more than $3 billion left over, Duke could have amassed a solar portfolio equal in capacity to the new coal-fired 800MW Cliffside Unit 6. A solar fleet of 800MW would have catapulted North Carolina to second behind California in installed solar capacity in the US, and solidified the state’s presence as a destination for solar investment, supply chain development, and job creation.

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Aggressive adoption of renewable energy and energy efficiency resources can accelerate coal plant retirements, reduce greenhouse gas emissions by 50%, and get Duke Energy off MTR coal.

• The expected generation from Greenpeace’s proposed Clean Energy Pathway portfolio (37.7GWh) is greater than the combined generation of all of Duke’s coal plants in 2011, which makes their retirement feasible by 2020. In the short term, Duke should exercise its leadership by not renewing any mountaintop removal (MTR) coal contracts and reviewing open contracts.

• The recommended 15,150MW of installed solar capacity would require just 2% (61.5 square miles) of the urban built-up area in North Carolina. The 800MW of onshore wind matches the State’s technical potential and the 1,117MW of proposed offshore represents a fraction of the State’s potential. This proves that North Carolina has adequate resources to support large-scale development.

Over the next 20 years, Greenpeace’s Solution Pathway would reduce carbon dioxide emissions by 26% (141 million tons), sulfur dioxide emissions (142,918 tons) by 60% and nitrogen oxide emissions by 47% (114,780 tons) relative to Duke Energy Carolinas and Progress Energy Carolinas Integrated Resource Plans.

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• The carbon dioxide savings alone would generation emissions reductions equivalent to 700,000 railcars of coal or two years of North Carolina statewide electricity sector emissions.

• Avoided nitrogen oxide emissions are equal to more than one-and-a-half times the combined 2011 emissions of North and South Carolina.

• Reductions of sulfur dioxide emissions achieved by the Greenpeace Clean Energy Pathway relative to the Duke Energy Carolinas and Progress Energy Carolinas IRPs nearly equal the 2011 combined emissions of North Carolina and South Carolina. The North Carolina Sustainable Energy Association recently found that the gap in the levelized cost of renewable energy and fossil energy has already disappeared in some cases.

• The North Carolina Sustainable Energy Association forecasts that solar energy installations of 500kW or larger will cost less than grid energy for all of the State’s 464,754 commercial customers by 2014.

• If only one in ten of those customers installed a 500kW array, the amount of solar installed capacity would exceed Duke’s projected 2020 peak summer demand of 22,955MW.

Using pumped storage to smooth out peaks in renewable energy generation could help make the most of intermittent solar, wind, and hydro resources and leverage the value of renewable energy on-peak.

• While not modeled, Greenpeace expects that existing pumped storage facilities, such as Bad Creek and Jocassee, could be leveraged to help even out the intermittence of solar and wind resources. Similarly, gains in efficiency from avoided line losses are expected, but were not explicitly modeled. As a result, pumped storage and avoided line losses would likely lead Greenpeace’s recommended portfolio to over-perform and exceed the generation requirements cited in this report. The National Renewable Energy Laboratory also identified North Carolina’s offshore wind resource as the best of any Atlantic Coast state. Across North Carolina, 1,000 companies and 12,500 jobs in the renewable energy and energy efficiency value chain touch every one of North Carolina’s counties.

• Growth in employment (22% in 2009) and installed solar energy capacity (75% during the first three quarters of 2010) has been impressive and can expand further with support from Duke Energy.66 Much of this development can be attributed to North Carolina’s leadership as the only Southeastern State to pass a binding Renewable Portfolio Standard. Cross-state competitors could beat both to the punch and win a race to export power into the PJM interconnection to fulfill a demand for renewable energy credits.

• Solar PV is the most job intensive of any form of energy development, creating employment at an estimated 0.87 job-years per GWh. Solar energy emerged as the leading candidate for large-scale deployment with an anticipated 33,178GWh generation by 2020 creating an estimated 28,865 job-years.

• As the next most job intensive solution after renewable energy, developing all cost effective efficiency opportunities could contribute 25,132GWh by 2020 and create 9,550 job-years of employment in the process. Such efficiency improvement could also delay or avoid the need to build new generation and transmission, which helps to keep the transition affordable relative to Duke Energy’s current plans.

• Assuming solar and renewable energy employment gains of 38,415, an average salary of $40,000 per job and existing State income marginal tax rates, the resulting employment would generate over $100 million in tax revenue annually. In the meantime, state payrolls would expand by over $1.5 billion annually.

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Recommended policy changes

Renewable Energy Portfolio Standard (REPS)

North Carolina is the only Southeastern state to have enacted a renewable energy requirement of its utilities, which merits recognition. From a national perspective, however, North Carolina’s REPS target of 12.5% by 2021 for IOUs and 10% by 2018 for municipal and co-op utilities is the least ambitious of any state except Ohio67. Ohio led the nation in sulfur dioxide pollution in 2011 with levels 35% higher than second-worst Texas, which has installed over 10,000MW of renewable energy generating capacity.

Advocating for more ambitious REPS in North Carolina can help Duke Energy Carolinas gain certainty in cost recovery and risks of construction cost overruns. As demonstrated by the Greenpeace Custom Scenarios, ratepayers benefitfrom reduced long-term debt and fuel costs that justify a higher standard. Greenpeace’s Scenarios suggest that customer bills will decrease overall because solar energy is less expensive to build than nuclear energy, as it is financed over a shorter timeframe, which reduces interest payments.

Outside North Carolina, of all the states Duke operates in, only Ohio has a binding renewable energy standard, which is the weakest in the nation. In contrast, 10 states (Colorado, Minnesota, Oregon, Illinois, New York, California, Connecticut and Delaware, Nevada and Hawaii) all require at least 25% renewable energy (twice the North Carolina standard) by no later than 2025. Nationwide, the majority of State Renewable Portfolio Standards requires at least 20% renewables.

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Greenpeace Recommendations:

• Increase to 33% RPS by 2020 and continue to allow 40% of RPS to come from efficiency in 2020.

• Repeal allowance of whole-tree biomass as an eligible technology under the REPS and drop the requirement for poultry litter and swine waste-to-energy. Instead, encourage businesses to handle such wastes through their effluent and solid waste permits.

• Reinstate a declining multiplier for offshore wind with a sunset date of 2020 to provide incentive for near-term development of resources, while anticipating cost decreases associated with achieving economies of scale that will reduce the need for incentives.

• As an enforcement mechanism, introduce a progressive Alternative Compliance Payment (ACP) equal to the greater of the actual 20-year levelized cost of the renewable energy resource required or 200% of the wholesale price of energy. Stipulate that ACP payments cannot be passed through to North Carolina customers.

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True ratepayer impacts of NCUC fuel “savings”

Under the North Carolina Utilities Commission (NCUC)’s Order approving the merger between Duke Energy and Progress Energy, dated June 29, 2012, Duke Energy is required to deliver $330.7 million in fuel savings by 201670. Of that $330.7 million, NCUC anticipates $183.9 million (55.6%) in savings from coal blending, $115 million (34.8%) from procurement best practices and $31.8 (9.6%) million from combining natural gas pipeline capacity. Unfortunately, this will likely not result in any net savings to ratepayers since Duke is widely expected to request another 7.2% rate increase later in 2012. Should Duke opt to request the difference between its initial rate hike request of 15.4% and 7.2%, Duke Energy’s North Carolina customers would see a $341 million charge more than offset five years of fuel savings. Even worse, a stipulation that allows an additional 18 months for compliance if natural gas prices remain low, which is widely expected, would also spread the savings out over 78 months instead of 60 months. In order to make sure that North Carolinians truly see bill savings, stopping rate recovery for Duke Energy’s new coal-fired Cliffside 6 unit and pollution controls emerge as priorities.

• Much of Duke Energy’s anticipated rate increase request is attributed to the construction of its Cliffside 6 coal-fired boiler in Cleveland County. Cliffside is scheduled to come online later this year as a bituminous (high tar) coal plant at a time when bituminous coal plants are retiring en masse due to rising prices and decreasing supply. NCUC should reject that request for rate recovery out-of-hand, especially given that most of Duke Energy Carolina’s coal plants now dispatch in deference to renewable, nuclear and gas plants and that adequate reserve margins already exist. Just as in Indiana at its Edwardsport plant, Duke Energy overpromised the role that Cliffside 6 would play in age of declining coal generation, flat wholesale prices and demand. For perspective, existing Cliffside Unit 5 ran at just over 11% capacity from January to March 2012.71 At over $70/MWh, the plant ran at a higher marginal cost than some of Duke Energy’s renewable energy contracts.

• The prudence of constructing a new coal plant in 2012, let alone a bituminous plant, can and should be called into question. Additionally, Duke Energy promised a so-called ‘clean coal’ plant that would sequester carbon dioxide emissions by gasifying coal and piping it underground. Such technology is known as Integrated Gasification Combined Cycle with Carbon Capture and Sequestration or IGCC with CCS for short. No such modifications have been made to date, which means that another large investment will be required to realize this vision. At the same time, the Edwardsport plant has proven that IGCC plants, as new technology, show ample risk of construction cost overruns. From a technical perspective, achieving permanent sequestration of carbon dioxide has similarly proven difficult and costly to the extent that most projects worldwide have been abandoned.

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Limiting savings to the coal sector, far from encouraging Duke Energy to quit coal, actually guarantees a place for coal-fired generation in Duke Energy’s portfolio, despite the better economics of natural gas, renewable energy and energy efficiency. NCUC provisions provide a perverse incentive to Duke Energy Carolinas to burn a minimum amount of coal in order to achieve savings relative to business as usual. Doing so stands to short-change both ratepayers and the environment given that coal blending could sharply increase sulfur dioxide emissions by using cheaper, high sulfur coal from Northern Appalachia and the Illinois Basin along with mountaintop removal coal. The operating history of Duke Energy Ohio’s Walter C. Beckjord plant offers a particularly troubling precedent, as sulfur dioxide emissions between 2009 and 2011 more than doubled due to changes in coal sources. From January to March of 2012, the plant emitted the second most sulfur dioxide emissions of any plant in the country and more than the entire State of North Carolina.

• Along with the North Carolina Department of Environment and Natural Resources, NCUC should ensure that compliance with fuel savings conditions and stipulations of the Duke-Progress merger do not increase absolute emissions or emissions rates of sulfur dioxide, nitrogen oxides, carbon dioxide, mercury or acid gases.

• NCUC should reflect environmental, health and construction risks in the return of equity for new power generation and institute a moratorium on construction of coal-fired generation in North Carolina.

• NCUC should also investigate on-bill financing for renewable energy systems and energy efficiency improvements by using Duke Energy’s credit to support fuel saving improvements that simultaneously reduce Duke Energy’s commodity risk and ratepayer bills.

• By supporting a Time of Use (ToU) billing option for North Carolina customers, NCUC can codify a viable option to reduce peak demand and avert the need for costly new simple cycle gas turbines for peaking capacity.

Such turbines will likely cease to be viable options if Federal New Source Performance Standards continue to withstand legal challenges as they have so far. Encouraging Duke Energy to instead expand its pumped storage facilities and deploy flow batteries and other means of buffering the intermittence of renewable energy supplies can also help reduce costs and emissions.

• Partnering with NC Green Power to give Duke Energy customers direct access to renewable energy supplies can catalyze Duke Energy’s compliance with the North Carolina REPS.

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