Integrated Resource Planning Overview Mike Sheehan, Director Resource Planning

November 2011

Website and Contact Info TEP Website  http://www.tep.com/Company/News/index.asp

• Presentations will be posted after each workshop

TEP Contact [email protected] • Questions and Comments

2

Workshop Agenda Resource Planning Overview TEP History Load Forecast Loads and Resources Energy Efficiency Renewables and Distributed Generation Environmental Planning Strategies Portfolio Strategies

3

Integrated Resource Planning • A detailed evaluation of Loads and Resources • Based on current “best view” of the future • Run market sensitivities around possible future outcomes • The basis for a set of near-term actionable items •

A continuous process Contingency Plan 3

Contingency Plan 1

Contingency Plan 5

Preferred Plan Contingency Plan 2

2010 4

2012 2014

2016

2018

Contingency Plan 4

2020

2022

2024

2026

2028 2030

Why do an IRP? • New Resource Planning Rules • Ensure system reliability • Develop strategic long-term business plans • Take advantage of resource opportunities • Minimize future costs and risks

5

Input Assumptions • Future Resource Assumptions – – – – – – – – –

PACE Global Wood MacKenzie Electric Power Research Institute (EPRI) Black & Veatch National Renewable Energy Laboratory (NREL) Navigant Consulting ICF International National Energy Technology Laboratory (NETL) Request for Proposals (RFPs)

• Independent Third-Party Data Sources – Avoid internal biases – In-depth analysis behind data – Forward thinking outcomes

Minimum Planning Requirements • • • •

Demand/Reserve Margin – 15% Planning Reserve REST Compliance – 15% by 2025 Energy Efficiency Targets – 22% by 2020 Load Serving Capability

Evaluation Criteria Environmental Impacts  CO2 SO2 NOx PM10 Hg Coal Ash  Water Usage

Financial Requirements  Capital Requirements  Rate Impacts

Economic Development  Support Local Economy  Support Arizona “Green” Industry

8

Managing Portfolio Risk • Load Forecast & Energy Efficiency Risk – Short lead times – Scalable resources – Wholesale Market flexibility

• Performance Risk – Proven technologies – Counterparty diversity – Intermittent resources

• Fuel & Environmental Risk – Portfolio diversity – Target cost effective “zero-emission” resources

9

An Historic Look at Tucson Electric Power Kevin Battaglia – Resource Planning

November 2011

First Power Plant downtown on N. Church Street

1904 Power Plant moves to 220 W. Sixth Street

Changes in the 60’s

4

Until 1942 TEP was an electrical island, disconnected from other utilities NEVADA

Davis Dam

PHOENIX

Tucson

1950 Demoss Petrie 100 MW

Irvington Station first unit 1958

• Eventually, there would be four units producing 422 MW • Tucson’s population in 1958 was 230,000

1964 Interconnection to Arizona Public Service at Saguaro

PHOENIX

Tucson’s population was 309,000 Saguaro (APS)

TUCSON

Being connected to other utilities allows sales of excess power and it provides outside support in emergencies.

1969 Four Corners Units 4 & 5 – 110MW

Tucson’s population was 345,000

Participation:

Southern California Edison: 48 % Arizona Public Service: 15 % Public Service Co. of New Mexico: 13 % Salt River Project: 10 % Tucson Electric Power: 7%

1972 Palo Verde – 521 MW

By 1975, management saw that slower than expected load growth and higher than forecast costs did not merit the risk of such a large project. In 1975 TEP’s interest in Palo Verde was sold.

Future Expansion requires more Transmission

Tucson’s population was 416,000

The 345 KV San Juan to Vail line is completed in 1973 at a cost of $89 million

Transmission Resources San Juan

McKinley

PHOENIX

Greenlee Saguaro Tortolita

Tucson Irvington

South

November 2011

Vail

12

1973 - San Juan Units 1 & 2 - 340 MW

Participation:

Public Service Company of NM Tucson Electric Power

50% 50%

1974 - Navajo - 112 MW

By 1985 Tucson’s population was 612,000 Participation:

United States Bureau of Reclamation Salt River Project: Los Angeles Dept. of Water & Power: Arizona Public Service: Nevada Energy Tucson Electric Power:

24.3% 21.7 % 21.2 % 14 % 11.3% 7.5 %

Navajo Southern Transmission 500 KV Addition Navajo Four Corners San Juan

McKinley

Moenkopi

Cholla

PHOENIX West Wing

Greenlee Saguaro Tortolita

Tucson Sundt

South

Vail

15

Springerville Generating Station 1985 – 780MW

Participation:

Tucson Electric Power Tri- State Generation & Transmission Salt River Project:

100% of Units 1 & 2 100% of Unit 3 100% of Unit 4

16

Springerville Transmission Navajo Four Corners San Juan

NEVADA Mead Kingman

McKinley

Moenkopi

Cholla

Springerville

PHOENIX West Wing

Greenlee Saguaro

Tucson Irvington South

November 2011

Vail

17

Luna Station – 2006- 190MW

Participation:

Tucson Electric Power Public Service Company of New Mexico Freeport – McMoRan Copper & Gold

33.33% 33.33% 33.33% 18

Population Growth vs. Generation Growth Generation Capacity KW

Population 3,000,000

1,800,000.00 1,600,000.00

2,500,000

2,000,000

1,200,000.00 1,000,000.00

1,500,000 800,000.00 600,000.00

1,000,000

400,000.00 500,000 200,000.00 0.00

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

2030

Capacity, kW

Population

1,400,000.00

Where we are now? Today TEP has over 2,245 MWs of owned Capacity from Coal, Natural Gas and Solar. We have contracted to purchase additional capacity from Wind and Solar. Navajo

Four Corners San Juan

NEVADA

Kingman

McKinley

Moenkopi

Cholla

Yavapai Springerville

PHOENIX

Palo Verde Hassayampa

West Wing Pinal Central

Pinal West

Greenlee Saguaro Tortolita

Tucson Sundt

South

Luna

Vail

Tucson Population in 2011 is approximately 1 million

UNS-Electric Black Mountain (Kingman) - 2008 – 90 MW

21

UNS-Electric Valencia (Nogales) – Four Combustion Turbines - 1989 – 61 MW

2012 IRP Reference Case Load Forecast Jon M. Bowman Sr. Supply Side Planner

November 2011

Objectives • Provide an overview of recent energy, demand, and customer growth trends at TEP and UNSE • Outline the energy and peak demand assumptions in the IRP Base (Reference) Case • Discuss major risks to the load forecast and the methods used to address uncertainty

2

TEP and UNSE Service Territories UTAH

COLORADO Ship Rock

N avajo

San Juan

F our Corners

NEVADA Kayenta

Navajo San Juan Mine

Mead Moenkopi

Black Mountain Davis

McKinley Mine

Kingman Griffith

Flagstaff

Peacock

McKinley

Lee Ranch

Cholla

Service Areas

Prescott

Yavapai

N. Havasu

Lake Havasu City Parker

TEP

Coronado

NEW MEXICO

UNS Gas & Electric

Springerville

Pinnacle Peak

UNS Gas

UNS Electric

West Wing

Palo Verde Pinal West Liberty

Phoenix

High Voltage Transmission Lines

Greenlee

Saguaro

Generating Station

Tucson Sundt Vail South

Coal Mine

Hidalgo

Interconnection With Other Utility Luna

Substation Solar Station

Valencia

Nogales MEXICO

3

TEP 2010 Sales by Rate Class OPA 2%

Mining 12% Residential 42%

Industrial 23%

Commercial 21%

4

TEP Residential Customer Growth 400,000

3.00%

2.50%

380,000 370,000

2.00%

360,000 350,000

1.50%

340,000

% Growth

Year End Residential Customers

390,000

1.00%

330,000 320,000

0.50%

310,000 0.00%

300,000 2005

2006

2007

2008

2009

2010

Residential Customers

2011

2012

2013

2014

2015

% Growth

5

TEP Commercial Customer Growth 2.50%

39,000

2.00%

37,000 36,000

1.50% 35,000 34,000 1.00%

% Growth

Year End Commercial Customers

38,000

33,000 32,000

0.50%

31,000 30,000

0.00% 2005

2006

2007

2008

2009

2010

Commercial Customers

2011

2012

2013

2014

2015

% Growth

6

TEP Reference Case Energy 17,000

15,000

TEP Retail GWh

Baseline Annual Growth (no EE or DG) Averages ~2.4% 2012-2025 13,000

11,000

9,000

7,000

Reference Case Annual Growth (Including EE and DG) Averages ~0.8% 2012-2025

5,000 2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

TEP Baseline Energy

TEP Energy (Less Reference Case EE and DG)

7

TEP Baseline Energy by Rate Class 8,000

7,000

TEP Retail GWh

6,000

5,000

4,000

3,000

2,000

1,000

0 2030

2029

2028

2027

2026

2025

2024

2023

Mining

2022

2021

2020

Industrial

2019

2018

2017

2016

Commercial

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

Residential

OPA

8

TEP Reference Case Peak Demand 4,000

Baseline Annual Growth (no EE or DG) Averages ~2.2% 2012-2025

TEP Retail Peak Demand (MW)

3,500

3,000

2,500

2,000

1,500

Reference Case Annual Growth (Including EE and DG) Averages ~0.9% 2012-2025 1,000

500

0 2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

TEP Baseline Peak Demand

TEP Demand (Less Reference Case EE and DG)

9

UNSE 2010 Sales by Rate Class Mining 11% Industrial 12% Residential 44%

Commercial 33%

10

UNSE Residential Customer Growth 90,000

6.00%

5.00%

80,000 4.00%

75,000 3.00%

70,000 2.00%

65,000

% Growth

Year End Residential Customers

85,000

1.00%

60,000 55,000

0.00%

50,000

-1.00%

2005

2006

2007

2008

2009

2010

Residential Customers

2011

2012

2013

2014

2015

% Growth

11

UNSE Commercial Customer Growth 12,000

4.50%

11,000

3.50%

3.00%

10,000

2.50%

9,000

2.00%

1.50%

8,000

% Growth

Year End Commercial Customers

4.00%

1.00%

0.50%

7,000

0.00%

6,000

-0.50%

2005

2006

2007

2008

2009

2010

Commercial Customers

2011

2012

2013

2014

2015

% Growth

12

UNSE Reference Case Energy 3,500

Baseline Annual Growth (no EE or DG) Averages ~2.5% 2012-2025

UNSE Retail GWh

3,000

2,500

2,000

1,500

Reference Case Annual Growth (Including EE and DG) Averages ~0.7% 2012-2025

1,000

500 2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

UNSE Sales (Baseline)

UNSE Energy (Less Reference Case EE and DG)

13

UNSE Baseline Energy by Rate Class 1,800

1,600

UNSE Retail GWh

1,400

1,200

1,000

800

600

400

200

0 2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

Industrial

2020

2019

2018

Commercial

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

Residential

Mining

14

UNSE Reference Case Demand 800

Baseline Annual Growth (no EE or DG) Averages ~2.5% 2012-2025

UNSE Retail Peak Demand (MW)

700

600

500

400

Reference Case Annual Growth (Including EE and DG) Averages ~1.1% 2012-2025

300

200

100

0 2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

UNSE Demand (Baseline)

UNSE Demand (Less Reference Case EE and DG)

15

Risks to Forecast • As with all key IRP inputs, load growth assumptions are currently subject to a large (even unprecedented) amount of uncertainty • Key risks include (but are not limited to) – – – –

Economic growth Energy efficiency impact Structural changes to customer usage behavior Emerging technologies (electric cars, etc.)

16

Addressing Forecast Uncertainty • High degree of forecast risk requires examination of load growth conditions that differ from the reference case • In the IRP process, this will be done in two ways: – Scenario Analysis: Manually changing load assumptions to match a chosen set of conditions (e.g. higher or lower EE impact, slow economic growth, etc.) – Monte Carlo Simulation: Uses random draws to simulate a large number of load growth scenarios against which the performance of various candidate portfolios can be measured

17

TEP and UES Resource Planning Workshop

Energy Efficiency and Demand Response UNS 2012 Resource Planning Workshop November 4th, 2011 Demand Side Resource Group

Agenda 1. Overview and Trends: 20 minutes – Denise Smith, Director (Demand Side Resources)

2. Your Home and Our Partnerships: 20 minutes – Dan Hogan, Supervisor (Residential Programs)

3. Your Business: 20 minutes – Jeff Hunter, Supervisor (Commercial Programs)

Cents/ kWh

The Cost of Energy

SOURCE: Navigant Consulting, U.S. Levelized Cost of Electricity (cents per kWh, 2011 $)

States with EE Standards

Source: ACEEE “EE Standards”

2009 Cost of Energy Savings, $/kWh, First Year $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00

Source: Navigant Benchmarking

2009 Energy Saving as a percent of Sales 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Level of EERS Standards

2011 / 2012 Implementation Plan TEP Portfolio RESIDENTIAL New Construction (GHP)

Low Income Weatherization

Shade Trees

Direct Load Control (Power Partners)

Existing Homes & Audit Direct Install

Efficient Products (CFL)

Multi-Family

Appliance Recycling

BEHAVIORAL Education & Outreach

Home Energy Reports

In-Home Energy Displays (Pilot)

K-12 Energy Education

Direct Canvassing

Community Education

COMMERCIAL C&I Comprehensive

Small Business Direct Install

Prescriptive

Design Assistance

Custom

Building Performance Rebates

Community CFL New Construction

Direct Load Control

RetroCommissioning

School Facilities

Combined Heat and Power (CHP)

Bid for Efficiency Pilot

Cumulative Savings (MWh) 9 2,500,000

2,000,000

Direct Load Control Pre-Rule Credit

1,500,000

Residential Load 1,000,000

Commercial Load

500,000

0

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Energy Efficiency Cost Recovery

Program Cost

Performance Incentives

Lost Revenue

DSM Adjustor 10

Benefits and Costs (2011 & 2012) Benefits = $185M

Avoided Costs

Costs = $83M

Resource Plan Model •Fuel •Purchased Power •Capacity •Losses •Externalities

11

New Construction/Energy-Star Chases Access Panels Ceiling fixtures

Dropped Ceilings

Sill Plates

Window Openings

Vents

Plumbing Penetrations

Door Openings Ducts

Existing Homes/Audit Direct Install

Needs some work

Low Income Weatherization Arizona Energy Office + U.S. Department of Energy + TEP  Weatherization Assistance Program

For homes at 150% of Federal Poverty Line Over 200 homes weatherized each year!

Conserves energy and lowers utility bills.

Includes duct repair, pressure management, attic insulation, and repair/replacement of non-functional or hazardous appliances.

Shade Trees

64,000 x

Efficient Products (CFL Buydown)

Home Energy Reports

Power Partners Project - DLC

76 F 80 F Direct Load Control

K-12 Energy Education

First web-interactive tool for Tucson students to learn about solar and photovoltaic technology.

Community Energy Workshops

Train-the-Community energy presentations at: • HOAs • Churches • Wards • At your place of business

Multi-Family

Appliance Recycling

Get rid of this!

Your Business Agenda Lighting Mechanical Refrigeration Custom

Small Business YTD 2011 Other Industrial Manufacturing Storage 1% 5% 1% Warehouse 1% Process Industrial 1% Grocery 5%

Miscellaneous 1% Office

Office 11%

K-12 School College/University Retail Gas Station

Medical 8%

Hotel/Motel 1%

K-12 School 18%

Fast-Food 2%

Restaurant Fast-Food Hotel/Motel Medical

Restaurant 8%

Grocery Warehouse Process Industrial

Gas Station 2%

Other Industrial Storage Retail 37%

Manufacturing Miscellaneous

Small Business YTD 2011 • • • •

5,227,995 annual kWh savings $671,061 incentives paid 192 locations 72% of goals through September

Large Business Prescriptive YTD 2011 Office K-12 School Office 19%

Miscellaneous 16%

College/University Retail Gas Station Restaurant Fast-Food

Other Industrial 13%

K-12 School 12%

Hotel/Motel Medical Grocery

Process Industrial 7% Grocery 1% Medical 3% Hotel/Motel Restaurant 3% 3%

Warehouse College/University 6% Retail 17%

Process Industrial Other Industrial Storage Manufacturing Miscellaneous

Custom Projects YTD 2011 Office Office 6% Miscellaneous 15%

Process Industrial 3%

K-12 School K-12 School 6%

College/University Retail Gas Station

Other Industrial 6%

Restaurant Fast-Food Hotel/Motel

Warehouse 3%

Medical Retail 33%

Grocery 6%

Grocery Warehouse Process Industrial Other Industrial

Restaurant 21%

Storage Manufacturing Miscellaneous

Large Business YTD 2011 • • • •

16,810,257 annual kWh savings $1,289,808 incentives paid 264 different customers 102% of goal through September

New Construction YTD 2011 • 8 participants • $63,777 incentives paid out • 529,292 kWH in savings

Commercial Direct Load Control Agenda

Direct Load Control YTD 2011 • 26 participants • 11.7 Mw – goal is 40 Mw • Across industries-schools, govt., manufacturing; retail

New Commercial Programs • • • •

Schools Program Retro-Commissioning Bid for Efficiency Combined Heat and Power

33

Renewable Resources David Jacobs Manager, Resource Planning and Procurement

November 4, 2011

IRP and Renewable Resources 

ACC Mandate: 15% of Retail Sales by 2025



Utility Scale (70% of Mandate) – Directly Connected to TEP Grid – Utility owned and/or PPA



Distributed Generation (DG) – Residential –

–

Customer-sited PV, Water Heating, Wind

Non-residential – –

Customer-sited Commercial/Industrial Wholesale DG connected to less than 69 kV lines 2

Distributed Generation Residential Number of Systems Installed Cumulative 25,000

20,000

15,000 PV Systems H20 Systems 10,000

5,000

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

3

Distributed Generation Programs PV & Water Heating – ~30 MW PV installed total 2011 – 1000 Residential Systems per Year – Reducing incentives – Reducing installation costs – New business models – ~2,000 water heating systems installed 2011 Compliance – Residential 104% – Commercial 118% – Total 111% 4

IRP and Utility Scale Renewables    

No longer “Least Cost” but “Reasonable Cost” plan Resource plan balances desire for clean, renewable energy with the need to deliver low cost and reliable power State and Federal Regulatory Considerations Customer Desires – Customers Want Solar – Local Project Emphasis – Low Water Portfolio

5

TEP Utility REST Compliance 2009 700 New Resources REC Purchase

600

Biodiesel 500

Solar LFG

400 GWh

Wind

300

200

100

0 2010

2011

2012

2013

2014

2015

2016

2017

6

TEP Utility REST Compliance 2011 Carryover Credits 1,400

Short Term Purchase Solar Wind Biogas & Credits

1,200

Utility Scale Target 1,000

GWh

800

600

400

200

2011

2013

2015

2017

2019

2021

2023

2025

7

Wind Power      

Mature technology Short development time Southern AZ has marginal to poor wind resource Northern AZ has better potential Transmission needed in most cases Intermittent, “wrong time”

8

Solar Photovoltaic (PV) 

    

Several technologies – Fixed panels – Single axis tracker – Double axis tracker – Concentrating Intermittent - significant variance with clouds Comes up quickly – drops off just as quickly Good AZ resource potential Land requirements - good news/bad news Maturing technology 9

Solar Thermal 

   

Several technologies – Parabolic trough – Power tower – Dish-Stirling Engine High water consumption unless dry cooled Thermal inertia dampens cloud effects, extends capacity later into the afternoon Good AZ resource potential Thermal Storage or Gas-Hybridization firms output 10

Biomass/Biogas/Biodiesel 

Biomass: – – –



 

Diversity of solid fuels available, but limited Relatively low cost resource Direct fired, co-fired or gasified

Biogas – Landfill or Anaerobic Digestion –

Relatively low landfill gas production due to dry climate, but widespread

–

Animal manure based projects are feasible

Biodiesel - Competes with transportation use Base load and firm resources

11

Geothermal     

Mature technology Base load and firm resource Transmission needed in most cases Minimal resource potential in AZ High and uncertain exploration costs

12

Renewable Resource Capacity Profile Typical Summer Load Profile versus Renewable Availability 12

2,500

System Peak Summer Load Profile AZ Wind NM Wind

10

Solar PV

2,000

Solar 1-Axis

Solar CSP

8

Solar CSP 6 Hour

1,500

6

System Peak, MW

Renewable Resource, MW

Solar 2-Axis

1,000 4

500 2

0

0 1

2

3

4

5

6

7

8

9

10

11

12

13

Hours

14

15

16

17

18

19

20

21

22

23

24

13

Renewable Resources 2011 Levelized Cost of Delivered Electricity ($/MWh) Generation

Delivery

Backup Capacity

$166 $154 $137 $120

$144

$125

$102

$154 $95

$111

$115

$133

$79

$81

Biomass

NM Wind

AZ Wind

1-axis PV

PV

Capacity Factor %

83%

38%

30%

24%

30%

38%

17%

System Peak %

100%

9%

9%

51%

70%

87%

24%

Low

Low

Water Usage

Low

Solar Thermal Solar Thermal - 6 hr.

Low

14

Renewable Resource Strategy Summary         

First – Meet RES Available, Proven Technologies Small New Technologies (R&D) Competitive, Viable, Cost-Effective Projects Portfolio Balance, No Big Bets Maximize Community Benefits Environmental Benefits Flexible Portfolio Appropriately Sized, Scalable, Low Water

15

Resource Mix and Assumptions Victor Aguirre – Resource Planning

November 2011

IRP Assumptions/Process • • • • •

2

Loads & Resources Current Resource Mix Market Assumptions Expansion Options Resource Mix 2027?

Loads and 2012 Resources 3500 Retail Including EE/DG

Total Requirement (w/ Reserves)

3000

2500

PPA

2000 MW

Gas Resources

Renewable Resources (net coincident peak contribution)

1500

1000

Coal Resources 500

0 2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

3

2012 Resource Mix

Energy

Capacity Gas 24%

Coal 85%

Renewables 4% Gas Renewables 6% 4% PPA 5%

4

Coal 54% PPA 15%

Forward Gas Market Permian Gas, $/mmBtu

$12.00

$10.00

$/MMBtu

$8.00

$6.00

$4.00

$2.00

$2011

5

2013

2015

2017

2019

2021

2023

2025

2027

Forward Energy Market $120.00

Palo Verde Forward Market ($/MWh)

$100.00

$/MWh

$80.00

$60.00

$40.00 On-Peak. $/MWh

Off-Peak. $/MWh

$20.00

$2011

6

2013

2015

2017

2019

2021

2023

2025

2027

IRP Expansion Options • Coal Resources – Required/Optional Upgrades

• Gas Resources – Combined Cycle – Combustion Turbines

• Renewable Resources – Solar – Wind

• Other Resources

7

Expansion Options – Coal Plants • Coal Emissions Upgrades  Four Corners  San Juan  Navajo

8

- environmental upgrades prior to Aug. 2018 - environmental upgrades prior to 2016 - BART (Best Available Retrofit Technology) Ruling in 2012

Expansion Options – Gas Plants • Combined Cycle      

Efficiency Intermediate Fuel Volatility Capital Costs Carbon Emission Carbon Cost

~ 7200 Btu/kWh Heat Rate ~ 40-60% Capacity Factor - Market Gas (5 to 10 $/MMBtu) ~ $1,100/kW - 119 lbs/MMBtu - 40% of Coal

• Combustion Turbines       9

Efficiency Peaking Fuel Volatility Capital Costs Carbon Emission Carbon Cost

~ 9,000 – 10,500 Btu/kWh Heat Rate ~ 15% Capacity Factor - Market Gas (5 to 9 $/MMBtu) ~ $700 - $1,000/kW - 119 lbs/MMBtu - 60 % of Coal

Expansion Options – Renewable Resources • Solar    

On-Peak Production Peaking Fuel Volatility Viability

- 50% Peak Coincidence ~ 25% Capacity Factor - Diurnal and intermittent - Abundant in AZ

• Wind    

10

Off-Peak Production Intermediate Fuel Volatility Viability

- 13% Peak Coincidence ~ 35% Capacity Factor - Intermittent - Limited Sites/Wind in AZ

Expansion Options – Other Resources • CAES (Compressed Air Energy Storage)  Charges from grid during off-peak hours  Discharges/generates during on-peak

• Biomass  Fueled by biological material (wood, landfill gas, biodiesel etc.)  Scaled to fuel source (base load operated)

• IGCC (Integrated Gasification Combined-Cycle)  Gasification of coal  With CCS (Carbon Capture and Storage)

11

Loads and 2027 Resources ? 3500 Retail Including EE/DG

Total Requirement (w/ Reserves)

3000

2500

PPA

2000

Coal Uncertainty

1500

Gas Resources

1000

Renewable Resources (net coincident peak contribution) Coal Resources

500

0 2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

12

2027 Resource Mix

Energy

Capacity Gas 22% Gas 7%

Coal 52%

Renewables 4%

Renewables 4%

New Renewables 5%

Coal 33%

New Renewables 10%

New Resources 8% New Resources 13% Coal Uncertainty 25%

13

Coal Uncertainty 16%

Environmental Planning Jeffrey G. Yockey, PE Director, Corporate Environmental Services

November 2011

Environmental Performance UNS SO2 Emissions (tons/year) 35,000

30,000

25,000

UNS NOx Emissions (tons/year) 30,000

25,000

20,000

20,000 15,000 15,000

10,000

5,000

-

10,000

5,000

-

2

Current and Future Environmental Regulations • Regional Haze Rule – Best Available Retrofit Technology (BART) – Improve visibility in national parks, monuments, etc. – Target pollutants are SO2, NOx, particulate matter (PM) – Could require selective catalytic reduction (SCR) • San Juan - $150M to $202M • Four Corners - $35M • Navajo - $42M

• Utility MACT – Control emissions of Hazardous Air Pollutants (HAPs) from coal- and oilfired power plants – Mercury, non-mercury metals, organic compounds, acid gases – Proposal issued March 2011; Final rule due December 2011 – Primary impact at Springerville and Navajo; up to $49M 3

Current and Future Environmental Regulations • Coal Combustion Residuals (CCR) “Coal Ash” – Requirements for disposal of CCR – EPA considering regulation as “hazardous waste” or “non-hazardous solid waste” – Proposal issued June 2010; final rule expected late 2012 or early 2013

• National Ambient Air Quality Standards (NAAQSs) – Ozone – review scheduled for 2013 – SO2 and NOx – revised standards issued in 2010

• Cooling water intake structures – “316(b) rule” – Intended to reduce fish mortality from impingement and entrainment – Proposal issued April 2011; final rule due July 2012 – Primary exposure is at participant plants

4

Significant Upgrades BART Capital Costs

0.6

$250

0.5

$200

0.4 ($millions)

Emission Rate (lbs/MMBtu)

BART NOx Emission Reductions

0.3

$202

$150

$100

0.2 $50

0.1

$6

$2

$-

0 San Juan Baseline

$17

Utility BART

Four Corners EPA BART

State BART

San Juan Utility BART

$35

Four Corners EPA BART

State BART

5

CO2 Cost Assumptions 40 35

$11M to $21M /year

(2011 $/ton)

30 25 20

2009 Assumption

15 10

2011 Assumption 5 0

6

Externalities • Arizona Corporation Commission (ACC) Decision 72028 – Societal cost of SO2, NOx, PM, water – Energy Efficiency Implementation Plan – Open, stakeholder process

• National Academy of Sciences Report – – – –

Transparent External review Familiar methodology Data on individual power plants

• 406 Individual Power Plants – Average of highest quartile: $107/MWh – Average of lowest quartile: $9/MWh – TEP System: $5-$6/MWh 7

Water Use Water Use in Arizona (acre-feet)

TEP Water Use

8,000,000 7,000,000 6,000,000

Effluent 0%

25,640 154,349

5,000,000

Well 10,161 af 40%

4,000,000 3,000,000

6,660,011

2,000,000

Surface

1,000,000

15,479 af 60%

-

Rest of Arizona

Other Arizona Power Plants

TEP

8

Water Resource Planning Water Use by Technology 1,200 1,000

(Gal/MWh)

800 600 400 200 0

Solar PV

Wind

NG NG Combined Pulverized Combustion Cycle Coal Turbine

IGCC

Concentrated Solar Power

Nuclear

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Portfolio Strategy Mike Sheehan, Director Resource Planning

November 2011

2012 Current Portfolios (Energy) 7.4%

2.5%

2012 UniSource Portfolio

6.9%

2012 TEP Generation Portfolio

2.5% 19.8%

83.2% 2.5%

4.0%

6.5%

71.2%

2012 UNSE Generation Portfolio

19.8%2.5% 6.5% 71.2% 93.6%

2

Coal Generation

Natural Gas Generation

Purchase Power

Utility Scale Renewables

Transmission & Renewable Portfolio Navajo

Four Corners San Juan

Mead Kingman

McKinley

Moenkopi Davis

Peacock Cholla

Griffith Griffi N. Havasu

Yavapai

Springerville Palo Verde

PHOENIX

Hassayampa

Proposed Sunzia EHV

West Wing Pinal Central

Solar Projects

Greenlee

Pinal West

Wind Projects Saguaro Tortolita

Tucson Sundt

Luna South

Vail

3

IRP Risk Factors Retail Demand, MW 4,500 3,500 3,000

Peak Demand

• Demand estimates (load growth, energy efficiency, etc.)

4,000

2,500 2,000

2011 IRP Assumptions

1,000

• Natural gas and purchased power volatility

500 2003

• Carbon regulations

2006

2009

2012

2015

2018

2021

2024

Forward Natural Gas Price

$12.00 $10.00 $8.00 $/mmBtu

• Renewable resource cost and system integration

2007 IRP Assumptions

1,500

$6.00 $4.00 2009 Permain Gas, $/mmBtu 2011 Permian Gas, $/mmBtu

$2.00

• Coal ownership risk

$2009

2011

2013

2015

2017

2019

CO2 Emission Prices

$/Tonme

60 50

2009 IRP CO2, $Tonne

40

2011 CO2, $/Tonne

30 20 10 0 2011

2013

2015

2017

2019

2021

2023

2025

2027

Issues Related to Coal Ownership Staying in Coal • Significant capital investments related to environmental issues – – – –

Hazardous air pollutants (PM, mercury, SO2) Regional Haze/Ozone – Best Available Retrofit Technology (NOx) Water, Coal Combustion Residuals (Ash) California entities inability to extend life of coal plants

• End of term for a number land lease and fuel supply contracts Divesting Coal • Take or Pay Provisions in Coal Contracts • Effects on Navajo Nation (Jobs and Royalties) • Cost impact on Arizona water supply • TEP is a minority partner in all its joint owned units 5

Potential Fate of Coal Capacity 1800 1600 110

1400

168

600 MW Outside TEP Control

1200 340

1000 800

400

Coal Capacity 600 MW 120

400 200

400

0 Four Corners

Navajo

San Juan

Springerville Unit 1

Sundt Unit 4

Springerville Unit 2

6

Quantifying Portfolio Risk • Part of the 2011 Integrated Resource Plan (“IRP”) process • Working with Pace Global to assist in a review of risks across a broad range of portfolios and variables • Provides an independent, third party review • The goal is to define low rate/low risk portfolios – What is the rate impact? – What are the biggest risks?

7

Range of Portfolios (2025 Energy Mix)

CC Nuclear

Peaker Wind

Coal Solar 8

2012 IRP Portfolio Plan • Develop long term portfolio strategy for both TEP and UNSE based on the PACE analysis • Longer term plan to transition current portfolio towards low cost / low risk portfolio • Due to complexities, address coal capacity on plant by plant basis • Look for near term opportunities to carry out longer term strategy

9