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Trends in US Energy Markets: Challenges and Opportunities PowerPoint Presentation
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Trends in US Energy Markets: Challenges and Opportunities

Trends in US Energy Markets: Challenges and Opportunities

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Trends in US Energy Markets: Challenges and Opportunities

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  1. Trends in US Energy Markets: Challenges and Opportunities Presentation to Combined Heat and Power/Distributed Generation and Emerging Fuels Conference Sean Casten,President & CEORecycled Energy Development, LLCJune 26, 2007Little Rock, AR RED | the new green

  2. The era of cheap purchased electricity is over. 2009 projection RED | the new green

  3. But higher prices have not led to a higher level of service. RED | the new green

  4. Underlying cause #1: 100 year collapse in electric-sector productivity. Implication: we are paying too much for electricity so that we can emit too much CO2. RED | the new green

  5. Underlying cause #2 is inadequate T&D growth, but can be misleading… U.S. Transmission Infrastructure: 20 year History RED | the new green

  6. …because our current grid architecture puts the generation in the wrong place. US Average Capex ($/kW installed) Generation T&D Line Loss & Redundancy Total $ per new kW load Central Approach $800 - $2,700 $1,400 1.44 $3,160 - $3,900 Local Generation $1,000 - $3,000 $140 1.07 $1,140 - $3,140 Local Gen. Capital Comparison Adds $200 to $2400 Saves $1260 Saves .37 Saves $760 to $2,020 per KW RED | the new green

  7. Silver linings • 100 years of building generation that is too expensive and too inefficient is a hard onion to unpeel to a sufficient degree to affect retail rates. • Scale of industry requires massive investment to make modest change • “Stranded cost” logic stands in the way of rapid reform • But the rate of change need not be set by regulated utilities. • Industrials in many industries can take control of their own destiny to deliver locally lower costs • Keeping industrials competitive maintains local jobs & economy • Encouraging clean on-site generation (or simply removing existing barriers thereto) leads to lower GHG emissions and lower costs. • CHP, DG and opportunity fuels represent an enormous opportunity for industrials and policy makers, but only if they are willing to think beyond the current paradigm. RED | the new green

  8. How is this possible in a market economy? • Economic theory teaches that in competitive markets, the quest for profits will drive benefits (in the form of lower prices and better service) to consumers. • So how can the electric sector have been so deficient over the last century? • Profit seeking behavior AND competition are prerequisites for the invisible hand to act. • A market dominated by regulated monopolies satisfies only the first condition. • In a regulated monopoly, shareholder and consumer interest are in direct conflict. • Result: “cost-plus” processes that are supposed to align interest though commission oversight, but create incentives to increase costs, rather than lower price as occurs in markets RED | the new green

  9. But wait – didn’t we try deregulation? And didn’t it fail? Three part answer: • It did start to work. • What did get deregulated wasn’t deregulated very well. • We deregulated the wrong part of the grid. RED | the new green

  10. Deregulation did start to work. Rising coal & nuke capacity factors hedged most of the natural gas price increase over the past decade. RED | the new green

  11. …but this game is effectively over. RED | the new green

  12. “Deregulation shifts the major burden of consumer protection to the competitive market, and therefore, in important measure, to the enforcement of antitrust laws.” Kahn, Alfred, Lessons from Deregulation: Telecommunications and Airlines after the Crunch, AEI-Brookings Joint Center for Regulatory Studies, Washington DC, 2004. What did get deregulated hasn’t been deregulated very well. • California power crisis caused in part by the removal of consumer protection structures without a concomitant replacement of antitrust enforcement. • Other restructured markets have some of the same characteristics, esp. where ISO/RTO sets price and creates a “dark spread” RED | the new green

  13. We deregulated the wrong part of the grid. • Current paradigm locates generation in the wrong place. • Easy to move electricity across country; not practical to move thermal energy or opportunity fuels more than a few miles. • Most significant cost savings accrue when you can use zero/low cost fuels and/or recover the ~2/3rds of fuel otherwise lost as heat. • Without allowing market access at “end of wire”, the only thing deregulation can achieve is second-order benefits from fuel switching and generator dispatch. • No deregulatory processes to date have removed barriers to market entry at the most beneficial end of the wire. • Standby rates still allowed that charge discriminatory rates to those who purchase from competitive power sources. • All 50 states impose felony penalties on anyone who runs a private wire across a public thoroughfare. • 13 states (including Arkansas) ban third-party sales of electric power at retail level, effectively preventing arrival of energy outsourcers. RED | the new green

  14. Prediction: the next big wave of price increases will be in the non-restructured (coal) states. • CAIR, CAMR and recent Supreme Court rulings combine to impose significant pollution controls on pre-Clean Air Act coal plants that have formed much of the low-cost power on the grid. • Capex now going through rate cases in most cases exceeds the initial (amortized) plant capital • And going up – price for scrubbers has doubled in the last 12 months. • Approx. 2/3rds of the coal fleet is out of CAIR/CAMR compliance (% upgraded depends on SIP). • Parasitic loads alone will withhold ~2.5 GW of power from markets. • Several utilities indicating they will shut down small (<400 MW) coal plants; will drive up clearing price as we lose baseload power from grid. • Next wave of price increases will be concentrated in the coal-intensive, unrestructured parts of the country. RED | the new green

  15. Solar PV New Combined Cycle Gas Turbine Remote Wind Coal gasification + CO2 sequestration New Coal New Coal Gasification CCGT Balanced CHP Recycled Industrial Energy Existing Coal – no new T&D The really good news: we have good choices… 20 Central Generation Options Renewable Energy Options 15 Generation Cost (Cents / kWh) 10 Recycled Energy Options Average Retail Power Price 8.1 c/kWh Average Industrial Power Price 5.5 c/kWh 5 0 3 (33% h) 2 (50% h) 1 (100% h) 0 -1 Average Fossil Heat Rate (Units of fossil fuel per unit of delivered electricity) RED | the new green

  16. …that are big enough to impact Arkansas energy prices/emissions. • Traditional CHP: 1,537 MW (3,273 sites) • Recycled Energy: 169 MW (20 sites) • Total Clean Energy Potential: 1,706 MW (3,293 sites) • Compare 1: Total generation in AR: 14,966 MW (48 sites) • CHP+RE could serve 11% of Arkansas peak load, substantially ease peak pricing for electric and gas on margin with power that is cleaner & cheaper than current base (or proposed capacity additions) • Potential to vastly increase the number of generating “nodes”, boosting system reliability & reducing system vulnerability • Compare 2: Current AR CHP: 479 MW (12 sites) • Identified potential to quadruple this base RED | the new green

  17. So what can you do? • Industrials: Take control of your energy future • On-site generation is a natural hedge: retail rates are going up, and on-site generation innately avoids the underlying structural causes • Significant IRRs possible due to low utility productivity • Economic arguments much stronger with rising real electric rates • Policy Makers: Remove the barriers that unwittingly prevent cheaper, cleaner technologies from coming on line. • Re-craft rates (e.g., decoupling) to remove conflict between utility shareholders and consumers. • Remove bans on private wires • Remove ban on third-party electric sales (without this removal, industrials ability to affect change is limited to the strength of their balance sheet and owners willingness to deploy capital on non-core assets) • Actively seek ways to level playing field; deregulation is one path, but not the only one (monetizing externalities, provision of balancing loan guarantees, etc. all head in right direction) RED | the new green

  18. Thank you for your time. RED | the new green