Western States State Energy Program (SEP) 15 April 2009 Santa Fe, NM

1. Western States State Energy Program (SEP)15 April 2009Santa Fe, NM The Rapidly Changing Energy Landscape Fernando Martinez, Director Energy Conservation and Management Division Energy, Minerals and Natural Resources Department

2. Presentation Outline – A “big picture,” forward-looking view • Update on major trends in the energy arena • Energy resource prices, outlook and availability • Electric power generation • Energy usage and efficiency in the building sector • Vehicle efficiency and transportation sectors • Don’t shoot the messenger! Summary of trends and outlook is shared by many energy professionals, but others reach different conclusions. • The challenges: Impacts on and opportunities for New Mexico to respond to these trends • Keep consumers’ energy expenditures manageable • Economic diversification and job creation • Protection and conservation of natural resources and environment • Update on actions the Governor and Legislature have taken to get out in front of this “structural change” in our energy economy.

3. NM is blessed with substantial energy resources under our feet and above our heads!! • Fossil Energy Resources • Coal: 12th in the nation in production, 3rd in reserves • Coal bed methane: 1st in production and reserves (San Juan Basin) • Oil: 4th in crude oil production and reserves • Natural Gas: 4th in production and 3rd in reserves • Renewable Energy Resources • Solar: 2nd in potential (AZ is 1st) • Wind: #3 in the Nation in wind power as a % of electricity usage!! “World Class” wind on NM’s Eastern Plains • Geothermal: 7th in potential (amt. of electric grade geothermal is not known) • Biomass (forest material and dairy/feedlot wastes): promising at specific locations • NM has in excess of 10,000 MW of Renewable Energy generation resources – representing nearly $20 billion in in-state capital investment potential!!

4. Major Energy Management Policy Issues • Cost impacts: on citizens and businesses • Hardships caused by high gas prices and high energy utility bills, particularly on low income populations. • Homeowners’ energy bills will sky rocket if aggressive state-of-the art energy efficiency measures aren’t embraced soon. • NM businesses’ competitiveness vis-à-vis energy costs in other states and countries. • Impacts on the Economy: positive and negative • Public Health Impacts: • Need to account for “life cycle” impacts (resource extraction, processing, waste disposal) in addition to direct impacts from power generation. • Global Environmental Impacts: e.g., climate change • Burning of fossil fuels for vehicles and power production generates CO2and drives climate change • National energy policy is increasingly linked to addressing climate change. Energy decisions that increase CO2 are essentially no longer an option.

5. The Global Energy World: We’ve never been here before • Globalization rules the day; energy resource availability and prices are driven by global factors. • Huge increase in global energy demands (China, India, etc.) as energy supplies remain essentially static and are likely to decrease over time, putting intense upward pressure on prices. • All bets are off: behavior of energy markets in the past century give limited insight into how they will behave in the future. • Huge uncertainty in cost projections beyond a couple of days.

6. Global competition for all “Input Resources” has never been greater for water, arable land, minerals, energy, etc.

7. Global Trends - Money Talks: Investors and venture capitalists want to fund the “new” energy economy - not the old. Concerned about carbon risk exposure • “…heavyweight investors around the world have made clear that they want policies favouring a shift to fossil fuel alternatives, and they want them now.” • “Last week, 53 investors wrote to leaders of the U.S. Senate asking it to push clean energy investment and to make companies disclose the risks they face from climate change.” • “Growing ranks of Exxon investors complain that …the company is losing ground to competitors with more aggressive renewable energy strategies.” 26 May 2008

8. Trends in Electric Power Generation • U.S. – new coal-fired baseload electric generating plants are essentially on hold due to cost risks associated with future carbon regulation • CO2 emissions costs of $40-$70/ton would increase coal generation costs by 4-6¢/kwh • Advanced coal with carbon capture and sequestration • Federally-assisted demonstration projects are years away from coming on-line • Operational risks make financing entities hesitant to fund. • New nuclear baseload plants considered at least 15 years out. • This leaves primarily only two main options to generate new baseload power in the next decade • Natural gas power plants generate 40% less CO2 than coal plants • Solar thermal power plants, with thermal storage, dispatchable quasi-baseload.

9. Trends in Electric Power Generation • Fuel input costs have and are likely to increase significantly • Coal: Average price of U.S. coal exports and imports has nearly doubled in past 7 years • 2001: $37/ton 2007: $70/ton • Heavy reliance on natural gas power plants for new generation is likely to increase prices significantly (as it did during the past decade) • Upward pressure on electric rates, increases in home heating costs • Developing countries’ rapidly expanding energy usage is creating intense global competition for energy resources and construction materials (steel, concrete, etc.) • China has been known to build a new coal-fired power plant each week.

10. Energy prices: Natural gas prices are up over 400% in the past decade

11. Nuclear Power: Uranium prices shot up in the past decade.If nuclear power makes a resurgence in the next decade, what will that mean for uranium prices?

12. Transportation Sector: Oil Price Trends 2000-2008 Was oil over-valued due to speculation or was it the beginning of a long-term upward trend as “peak oil” approaches? Perceptions of scarcity can drive prices as much as actual scarcity. Concern is that exporting countries will begin to hoard for themselves as scarcity concerns heighten. U.S. produces less than 7 million barrels/day of its 21 million barrel per day habit. May 2008: $135/barrel

13. “Peak Oil” – What is it? When is it? • The date when half of the world’s oil has been consumed. First asserted by Shell petroleum geologist M. King Hubbert, in the 1950s, to (accurately) predict U.S. peak oil production in the early 1970s. At the time, Hubbert was ridiculed by the oil industry. • The U.S. reached peak oil production in the 1970s in spite of an increase in producing drill rigs and incredible advances in exploration and production technology. • When will global peak oil happen? Projections vary from: we’ve already reached peak oil, to a few decades away. Energy economists predict a rapid rise In world oil prices on the “falling limb” of peak oil graph.

14. Oil & Gas Production Trends Start of coal bed methane production Oil production has declined despite an increasing number of producing wells 14

15. Consumer response to gasoline prices • “MPG is the new horsepower.” • Resale value of used SUVs has dropped substantially in the past few months. SUVs are sitting on dealers lots. • Resale value of high MPG used sedans has increased significantly. • Automakers are scrambling to offer and market fuel efficient vehicles. • Vehicle miles travelled (VMTs) – early evidence suggests that New Mexicans are taking measures to reduce number of miles travelled (combining trips, Park n’ Ride, RailRunner, etc.)

16. We can’t drill our way to oil production sustainability • New oil drilling/production buys some time, but does not create new oil. • Arctic National Wildlife Refuge: approximately 1 year supply of U.S. oil consumption • Trade-offs: The sooner we extract the world’s finite oil supplies, the sooner oil will be fully depleted. A barrel of oil produced and consumed today is a barrel not available to future generations. • Starting a gradual oil-weaning strategy will avoid a huge economic hardship of losing the majority of oil production in as little as a decade. • New oil field discoveries are a fraction of the size of the colossal fields discovered in the 1950s-1970s. • Brazil’s new 8 billion barrel oil field amounts to less than 4 months of world oil demand. • As the colossal fields play out, there are no new colossal fields to replace them.

17. Renewable Fuels – Where will they fit in? • Strong international interest in and R&D work on biofuels to help offset reliance on fossil fuels. • Corn-based and cellulosic ethanol: initial euphoria is being tempered by food crop displacement issues. • Is there enough arable land and fresh water to both feed and fuel the world? In NM soy and corn crops would require 1,500 to 2,000 gal of fresh water to produce 1 gal of biofuel from soy or corn crops • Biodiesel from canola, soy beans, algae • NM “Energy Innovation Fund” (est’d by Leg. in 2007) funding algae to biodiesel pilot projects • Algae has the promise of producing 100+ times the amount of biodiesel per acre as traditional crops, using non-potable saline waters. It is estimated that NM has 15 billion acre feet of brackish water. Our current freshwater usage in NM is about 4.4 million acre feet.

18. Electric Fuels – The Wave of the Future? • Automakers are coming out with and committed to offering more gas-electric hybrids. • Likely transition to plug-in electric hybrid vehicles (PHEVs) • PHEVs could run 30-50 miles on just their charged batteries and electric motor. Gas engine would kick-in for longer hauls or serve as generator for batteries. • No need for development of new extensive fueling infrastructure (like for biofuels, hydrogen, etc.) • Transportation fuel of the future could be electricity as much as liquid fuels, creating a HUGE increase in electric power generation needs from carbon friendly power sources such as renewables, advanced coal with carbon sequestration. • Long-term trend may be to all-electric vehicles • Chevy Volt – 2010 • 1915 - Ford and Edison were aggressively cooperating on all electric vehicles, when WW I hit. • Will need to be “carbon-friendly-powered.”

19. Global Energy Trends: Implications for New Mexico • Transportation Challenge: • New Mexicans have faced crippling fuel expenditures in the recent past. • Conversion to more fuel efficient vehicles. Not easy for many in the near term who are stuck with gas guzzling SUV payments, with low resale value. • To what extent will high fuel prices decrease individual vehicle travel and create a market demand for convenient, affordable public transit? • Urban and Inter-city: public transit, car and van pooling. Must be convenient (frequent and nearby) and link to where people need to get. • Rural: New Mexico’s large land area translates to long travel distances. What can be done to assist rural transportation needs? • Building Sector Challenge: • Electricity costs are likely to increase significantly in the next decade as carbon regulation takes hold. • Without aggressive energy efficiency measures, monthly energy utility bills will look more like mortgage payments. • As in the rest of the U.S., existing NM housing and commercial building stock is very energy intensive. The need to make energy efficiency renovations to NM’s existing 400,000+ homes is a daunting task. • Critical for all new homes and buildings to incorporate state-of-the-art energy efficiency measures. Otherwise, they’ll all have to be retrofitted in the future as well.

20. Trends in Energy Usage in Buildings(The forgotten – or at least way underutilized – resource) • High natural gas prices have in the recent past significantly increased winter heating bills with a disproportionate impact on low income populations. • Major trend in NM (like the rest of arid southwest) away from energy-conserving evaporative cooling to energy intensive (3-4x the energy usage) refrigerated A/C. • Projected increases in summer electric load growth due to this trend. • Doubling of size of newly built American home (1960-1995) and increase in energy-using appliances/computers have dramatically increased per household energy usage. • Federal and state adoption of EE standards for appliances has helped offset electric and natural gas demand growth. • Energy efficient Green Building certification standards for residential and commercial buildings have been established and accepted • States and other governments are adopting aggressive sustainable building standards for public buildings • States are adopting green building incentives for the public • Some states are requiring EE measures in code that go beyond the standard building code.

21. Low Income Families Challenge: • Rising energy costs disproportionately affect NM’s low income families. Average NM family spends approximately 3% of income on energy utility bills. Low income families: 15-18% • 80,000+ low income NM homes need moderate to extensive energy efficiency weatherization improvements. NMMFA’s Weatherization Assistance Program weatherizes about 1,750 homes per year. • State Budget Challenge: • In the near term (next decade), high natural gas and oil prices should be a boon to state coffers. • In the longer term, an accelerated decline in oil and natural gas production will create a large drop in severance tax revenues. • What can/should the state do to stabilize its longer term revenue outlook? How can the early revenue boon years be used to strengthen and diversify the longer-term revenue picture?

22. Statewide Economy Challenge: • NM’s economy has relied significantly on the oil and gas industry during the past 100 years. • Economic Conversion: To what extent can the promise of the “clean tech and clean energy economy” help supplement and then eventually replace the enormous contribution the oil and gas industry has made to the state’s economy? • What can NM do to best position itself to attract and retain clean tech industries and jobs? What should NM do to develop a “green collar jobs” workforce in K-12, vocational community colleges and four-year universities?

23. Responding to the Challenges:NM Actions Taken and Future Actions to Consider • Transportation Challenge • Hybrid vehicle excise tax exemption. • 5% biodiesel (B5) content in all diesel by 2012. • Tax incentives for renewable fuels infrastructure. • Park n’ Ride and RailRunner: the beginnings of an inter-city public transit system. • Future: • NM’s transportation infrastructure needs may be significantly different than they have been historically; more roads and road and highway widenings vis-à-vis intra- and inter-city mass transit. • Land use and “urban form” decisions will need to be made with energy intensity considerations in mind.

24. Building Sector Challenge: Energy Efficiency andOn-site Renewable Power Generation • Efficient Use of Energy Act: requires utilities to have aggressive energy efficiency programs. Will primarily target existing buildings and plug loads (appliances). • Directs PRC to create profit-making incentive for NM utilities to deliver cost-effective EE measures that are less expensive than building and operating new power plants. • Sustainable Building Tax Credit (2007): for new construction that’s at least 40% more energy efficient than the building code. • Energy Efficient Building Codes • Construction Industries Commission updated code to 2006 and adopted a few additional EE measures. • Construction Industries Division established a Green Building Bureau to place greater emphasis on energy efficiency in building construction. • In the near term, additional green building measures will cause a slight increase (2%-4%) in residential and commercial building costs. Key: the slight increase to the monthly mortgage payment will be more than offset by the reduction in monthly energy utility bills. “Life cycle cost analyses.” • Albuquerque adopted an aggressive mandatory energy efficient building code. Santa Fe is considering the same.

25. Building Sector Challenge – cont’d • Solar: water and space heating, photovoltaics to generate electricity. • 10% state income tax credit in addition to the 30% federal tax credit • PRC “net metering” rule: pay customers the same rate the utility charges customers to generate electricity on-site. • Pay customers for the “renewable energy credits” their systems generate as part of utilities’ complying with the Renewable Portfolio Standard (13 cents/kwh, PNM pilot program, expansion likely). • Future:Consider gradually, but aggressively, increasing the energy efficiency performance standard for new residential and commercial buildings. Some states are considering requiring “energy self-sufficient” homes by 2020. • The question is not “How much more does energy efficient building cost?” but, rather, “How much more will BAU building construction cost over the 40+ year life of the building?” We are making building decisions for future building owners that aren’t even born yet!

26. Energy Efficiency: The key to keeping energy costs manageable • EE is way underutilized. Lots of cost-effective “low hanging fruit” measures with quick pay-backs. • Electric EE costs 2-5 ¢/kwh. New power plants are likely to be 8+ ¢/kwh. • EE helps keep New Mexicans’ energy dollars in-state. • EE can’t help but be a positive contribution to the overall economy, household budgets, etc. • EE can make NM businesses more cost competitive nationally and internationally • International Economic Competitiveness: 2x the amount of energy required to produce $1 GDP in U.S. vs. Japan

27. Why Buildings?

28. Average Savings ofGreenBuildings WASTE COST SAVINGS 50-90% WATER USE SAVINGS 30-50% CARBON SAVINGS 35% ENERGY SAVINGS 30%

29. Low Income Families Challenge • Low Income Home Energy Assistance Program (LIHEAP) – state has periodically supplemented federal funds (HSD-administered) • Note: LIHEAP is an energy utility bill assistance program. It does not address reducing low income families’ energy usage and, therefore, utility bills. • Weatherization Assistance Program (WAP) - state has periodically supplemented federal funds (NMMFA-administered) • Approximately 1,750 homes/year. • MFA’s Energy $avers Program - funding energy efficiency improvements for low- to moderate-income households around the state. • Future: • How/where can funds be identified to achieve/incentivize energy efficiency renovations on 80,000+ low income households in the next decade?

30. State Government Revenue and State-wide Economy Challenge (The two are intimately linked) • Development of NM’s renewable energy for export to out-of-state markets • Renewable Energy Production Tax Credit (2002, subsequently amended) • Stimulated 500+ megawatts of wind farm development in NM • Significant interest in developing hundreds of MWs of NM’s solar resource by utility-scale solar developers . The solar PTC is one of the best solar incentive s in the country. • SkyFuel, a start-up utility-scale solar developer located in ABQ, in response to NM’s strong solar incentives. • NM Renewable Energy Transmission Authority – mission is to address transmission infrastructure needs associated with developing 1,000s of MWs of renewable power for export to out-of-state markets. • Energy Innovation Fund and Clean Energy Grants Program – $3.5 million FY09 • EIF: Facilitate bringing promising technologies from R&D phase to commercialization • CE Grants: Local governments, public schools, tribal governments. Over 60 proposals submitted under competitive selection process.

31. NM was blessed with world class energy resources below our feet (coal, oil and gas, geothermal) and above our heads (solar and wind) 2nd in Nation Solar Resource 1,000s of MWs of Wind

32. Statewide Economy Challenge – cont’d • Alternative Energy Manufacturers’ Tax Credit: 5% tax credit was instrumental in landing Schott Solar in ABQ – a large German solar company that will manufacture both PV modules and large-scale solar receiver tubes at Mesa del Sol site. • Advanced Energy Tax Credit: 6% tax credit for advanced coal and large-scale solar and geothermal power plants. • Future: • Solar PTC will stimulate 180 MWs of utility-scale solar projects before cap is reached. Increase the cap to attract more out-of-state investment? • New technologies suggest that NM may have substantial geothermal resources for electric power generation. Existing oil and gas wells could be used to extract the resource saving 1/3 or more of project development costs. Currently, NM has 2 geothermal tax incentives. • Carbon sequestration – NM’s depleted oil and gas basins are promising sites for large-scale carbon sequestration. What regulations and incentives are necessary to stimulate? Opportunities for enhanced oil recovery (EOR) in conjunction with sequestration are possible.

33. Carbon Friendly Power GenerationConcentrating Solar Power (CSP)Using the sun to boil water and make steam 350 MW of “Parabolic Trough” Operating 15 Years Mojave Desert, CA Advanced " Power Tower” Design New Demo Projects in Spain

34. Utility-scale solar projects are a huge economic development export potential for the state Nevada Solar One “Parabolic Trough” 64 MW Power Plant On-line 2007 Developer: Acciona from Spain

35. What’s at Stake?Competing for the 21st Century Energy Economy • NM is competing with other countries and states (CA,TX, PA, NY, NJ, AZ) for this emerging economic “pie.” All are jockeying for position right now. • Clean energy projects and related manufacturing offer significant economic stimulus and job creation. • Year 2100: the nation’s energy-based economy won’t look much like today’s energy economy. • Renewables with energy storage, state-of-the-art efficiency, fuel cells, plug-in hybrid vehicles, nanotechnology, etc. • As this transition unfolds there will be winners and losers: • States, countries, multi-national companies, small start-ups. • Not unlike transition in transportation-related economy in first decade of 1900s (horse and buggy to automobile). • 20th Century: NM was a national leader in energy development. • Will we maintain our leadership position in the 21st century? Time to begin transition is NOW!

36. Questions, Comments? Thank you!