Electric Generation at a Crossroads: The Fuels Dilemma THE GEE STRATEGIES GROUP Robert W. Gee...

Electric Generation at a Electric Generation at a Crossroads: The Fuels Crossroads: The Fuels

Dilemma Dilemma

THE GEE STRATEGIES GROUPTHE GEE STRATEGIES GROUP

Robert W. GeeRobert W. Gee

PresidentPresident

Exnet/The Generation Business 2001Exnet/The Generation Business 2001WASHINGTONWASHINGTON

MAY 21-22, 2001MAY 21-22, 2001

2 THE GEE STRATEGIES GROUPTHE GEE STRATEGIES GROUP

How are fossil fuel variables How are fossil fuel variables affecting competitive prospects for affecting competitive prospects for

the generation market ?the generation market ?

Near-term fuel supply and price trendsLong-term market forecast The significance of policy decisionsThe political variables


The Roller Coaster: Recent The Roller Coaster: Recent Natural Gas Spot PricesNatural Gas Spot Prices


Recent Coal Spot Prices: An Recent Coal Spot Prices: An Upward ShiftUpward Shift

Central Appalachia Coal Prices, F.O.B. Mining District Central Appalachia Coal Prices, F.O.B. Mining District (12,500 Btu, 0.6 lbs S/MBtu)(12,500 Btu, 0.6 lbs S/MBtu)

Source: Coal Outlook.Source: Coal Outlook.


What’s In Store Through Next What’s In Store Through Next Year?Year?


The Conventional WisdomThe Conventional Wisdom

In the 1970’s: running out of natural gas/ the solution was coal

In the 1980’s and 1990’s: plenty of natural gas/coal was a growing environmental threat

In 2001: gas prices and deliverability a growing problem /perhaps coal is the solution again


Important Lesson: Don’t Important Lesson: Don’t overreactoverreact

We are bumblers at accurately forecasting long-term (and sometime short-term) trends

But we need to correctly identify risks and find ways to hedge


What is true:What is true:

Both coal and natural gas have advantages and disadvantages

The role of each are evolving in an increasingly deregulated market


Natural gasNatural gas

Advantages: cleanest of fossil fuels, short lead and deployment times for gas-fired generation, low up-front capital costs, easier to site, more favorable public image (among fossil fuels)

Disadvantages: lack of adequate transmission infrastructure, lack of access to producible areas (onshore and offshore), increasing price volatility attributable to external factors (i.e., OPEC action)


CoalCoal

Advantages: low cost, low price volatility, ample volume of indigenous supply

Disadvantages: uncertain but increasing environmental compliance requirements (including carbon) , poor public image, some recent capacity shortages, recent labor infrastructure shortages


Source: EIA Annual Energy Review 1999Source: EIA Annual Energy Review 1999

Who gets which fuel: Electricity Flow, Who gets which fuel: Electricity Flow, 1999 (Quadrillion Btu)1999 (Quadrillion Btu)


Source: EIA Annual Energy Review 1999Source: EIA Annual Energy Review 1999

Generation Shares by Source (1999)


The Department of The Department of Energy’s 20-Year Energy’s 20-Year Long-term Energy Long-term Energy Market Outlook Market Outlook

Demand for electricity increases per year by 1.8 percent ( to 393 gigawatts)

Demand for gas increases per year by 2.3 % (from 21.4 to 34.7 Tcf )

Demand for coal increases per year by 1.1% (from 1.035 to 1.297 million tons)

Source: EIA Annual Energy OutlookSource: EIA Annual Energy Outlook 20012001


The Department of Energy’s The Department of Energy’s 20-Year Long-term Energy 20-Year Long-term Energy

Market OutlookMarket OutlookU.S. natural gas production increases

annually by 2.1 percent (from 18.7 to 29.0 Tcf)/ Imports make up 5.8 Tcf shortfall

Coal production increases annually by 0.9 percent (from 1,105 to 1,331 million tons)

1,300 new power plants possibly needed


Source: National Energy Policy Report of the National Energy Policy Development Group, Page X

Administration’s Administration’s 2020 Gas 2020 Gas

Supply Supply Projection: Projection:

Short by 13 TcfShort by 13 Tcf



1,300 New Power Plants Projected1,300 New Power Plants ProjectedProjected New Generating Capacity and Retirements, 2000-Projected New Generating Capacity and Retirements, 2000-

2020 (gigawatts)2020 (gigawatts)

17 THE GEE STRATEGIES GROUPTHE GEE STRATEGIES GROUPSource: EIA Annual Energy OutlookSource: EIA Annual Energy Outlook 20012001

For New Generation, the “Dash for For New Generation, the “Dash for Gas” ContinuesGas” Continues

Projected Electricity Generation Capacity Additions by Fuel Type, Projected Electricity Generation Capacity Additions by Fuel Type,

Including Cogeneration, 2000-2020 (gigawatts)Including Cogeneration, 2000-2020 (gigawatts)



But By Volume, Coal Retains the Edge But By Volume, Coal Retains the Edge Electricity generation by fuel, 1970-2020Electricity generation by fuel, 1970-2020

(billion kilowatthours)(billion kilowatthours)



And Coal Also Retains the Price And Coal Also Retains the Price AdvantageAdvantage

Fuel prices to electricity generators,1990-2020 Fuel prices to electricity generators,1990-2020(1999 dollars per million Btu)(1999 dollars per million Btu)



As nuclear plants are retired, coal and As nuclear plants are retired, coal and gas market share growgas market share growProjected electricity generation by fuel,Projected electricity generation by fuel,1999 and 2020 (billion kilowatthours)1999 and 2020 (billion kilowatthours)


Market Share Forecast by Market Share Forecast by 2020 2020

Coal-fired generation increases from 1,880 billion kwh in 1999 to 2,350 billion kwh by 2020, but market share declines from 51 percent to 44 percent

Gas-fired generation market share increases from 16 percent to 36 percent by 2020. (By 2004, gas displaces nuclear as second largest source of electricity)


What could change this What could change this forecast?forecast?


Increased environmental Increased environmental burdens on coalburdens on coal

Nox “SIP” (State Implementation Plans) Call/ EPA Regional Smog Limits

Impending Mercury controlsU.S. agreement and decision to mitigate

carbon emissions (other than through Kyoto protocol)

A “multi-pollutant” control strategy


A Multi-pollutant Control A Multi-pollutant Control StrategyStrategy

EIA Study includes carbon dioxide with sulfur dioxide, and nitrogen oxide controls (mercury later)

Price of coal would quadruple, making plant costs uneconomic/ causing “dramatic shift” to gas

Coal’s market share would drop to 16 percent while gas’ would leap to 55 percent

Source: “Analysis of Strategies for Reducing Multiple Emissions from Power Plants:Sulfur Dioxide, Nitrogen Oxides,and Carbon Dioxide” , EIA, December 2000


A Multi-pollutant Control A Multi-pollutant Control Strategy (con’t.)Strategy (con’t.)

Electricity prices would climb by 26 to 32 percent

Strategy recently rejected by President in letter to Congress, citing country’s energy needs

Source: “Analysis of Strategies for Reducing Multiple Emissions from Power Plants:Sulfur Dioxide, Nitrogen Oxides,and Carbon Dioxide” , EIA, December 2000


Likelihood of carbon controls Likelihood of carbon controls or a multi-pollutant strategy? or a multi-pollutant strategy?

Senator Robert Byrd statement on floor of U.S. Senate, May 4, 2001: advocates binding emission limits on all countries

Rumored support for some type of multi-pollutant strategy by American Electric Power and Cinergy

Announcement by Entergy to voluntarily limit or reduce carbon emissions


Nuclear Power: A Nuclear Power: A Changing Future?Changing Future?

Forecast: retirement of 27 percent of existing nuclear capacity, with some license renewals

But if waste issue resolved and improved operating characteristics, need for 14 gigawatts of fossil-fired generation negated

Assumes no new nuclear capacity through 2020 Different if new capacity realized per

Administration’s energy policy recommendation


Future Natural Gas Supply: Future Natural Gas Supply: How Much?How Much?

Forecast: generally accounts only for supplies from accessible areas

Excludes Rocky Mountain and certain offshore reserves currently inaccessible per federal restrictions (National Petroleum Council 1999 Gas Study)

Excludes North Slope reserves. Nothing included from Alaska National Wildlife

Reserve


Lower 48 Natural Gas Reserves Lower 48 Natural Gas Reserves Excluded from ForecastExcluded from ForecastNatural Gas Resource Estimates - Restricted Areas

Estimated Percentage RestrictedNatural Gas Resource Estimates - Restricted Areas

Estimated Percentage Restricted

31 TC F

346

43 TC F

TC F

TC F21

R estric ted P ercentage

40%

100%100%

56%

Source: National Petroleum CouncilSource: National Petroleum Council


Future Natural Gas Supply: Future Natural Gas Supply: How Much?(con’t.)How Much?(con’t.)

EIA’s supply projection more optimistic than National Energy Policy Development Group’s

Will U.S. production be short by 13 Tcf or 5.8 Tcf (projected imports)?


Gas Delivery Infrastructure: Gas Delivery Infrastructure: Can it be built?Can it be built?

National Petroleum Council: $1.5 trillion in needed capital investment by 2015 to meet gas demand, half for infrastructure

38,000 miles for transmission lines263,000 for distribution linesEIA Forecast: assumes this will be built,

without elaborationImpact of Bush National Energy Policy: ??


Natural Gas: A Political Natural Gas: A Political Whipping BoyWhipping Boy

Politicians and Gas: A Deadly Combination. The Good News: Gas-fired generation available

for peaking needs The Bad News: Gas-fired generation available for

peaking needs Allegations of market power abuse in California

power market Investigation of affiliate collusion in gas delivery

at FERC


Will political forces inadvertently Will political forces inadvertently discourage gas-fired generation?discourage gas-fired generation?

Irony of being as closely scrutinized as “regulated” companies (after the fact)

The escalating cost of business uncertaintyClosing the deal in the Hearing Room


Gee’s Crystal BallGee’s Crystal Ball

For now, even with high environmental risks, coal generation may carry less political risk

But because majority of coal-fired generation is utility-owned for now, competitive opportunity for others still centers on gas generation


Crystal Ball (con’t.)Crystal Ball (con’t.)

Sufficient wholesale and retail transmission capacity and access becomes key for all competitive generation (gas or coal) if market is to grow

Power generators will have to develop superior coalition-building skills

You can still make money (to keep), but it’s going to take more time and headaches


The Gee Strategies GroupThe Gee Strategies Group

Robert W. Gee,Robert W. Gee,

PrincipalPrincipal

1954 N. Cleveland St.1954 N. Cleveland St.

Arlington, VA 22201Arlington, VA 22201

(703) 465-9181 (voice and fax)(703) 465-9181 (voice and fax)

(703) 593-0116 (mobile)(703) 593-0116 (mobile)

Email: [email protected]: [email protected]

For More Information Contact:For More Information Contact:

Electric Generation at a Crossroads: The Fuels Dilemma THE GEE STRATEGIES GROUP Robert W. Gee...

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