Transcript Energy Security: Creating a Competitive Advantage for Industry

Energy Security:
Creating a Competitive
Advantage for Industry
Hugh Baker
President, Hunt Power
AHC Group
Corporate Affiliates Workshops
June 21, 2005
Energy Security

National Energy Security
Energy is the lifeline of our economy
 We require affordable energy
 We require a continuous supply of energy


“Local” Energy Security
Energy is the lifeline of your business
 Energy must be cost effective
 Energy must be in an “on” state
 Energy must have a quality component

2
Factor 1: Energy Prices

The price of energy “has been substantial
enough and persistent enough to bias
business-investment decisions in favor of
energy-cost reduction.”
– Alan Greenspan (4/5/05)

There has been a fundamental reset in the
market price of energy.

The increased volatility in energy prices adds
significant risk to business operations.
3
Rising Natural Gas Prices
1
Commercial Gas Prices
12
11
California
$/ 1000 cu. ft.
10
Delaware
9
Maryland
8
New Jersey
7
Pennsylvania
6
Texas
5
4
2000
2001
2002
2003
2004
Years
4
Rising Electric Prices
2
Commercial Electric Price Trends
14.00
Avg. Cents/KWH
13.00
California
12.00
Delaware
11.00
Maryland
10.00
New Jersey
9.00
8.00
Pennsylvania
7.00
Texas
6.00
5.00
2000
2001
2002
2003
2004
Years
5
Regional Disparities in Generation
Renewables
and Other
18%
Coal
1%
Hydro
1%
Nuclear
39%
Hydro
13%
Nuclear
17%
3
PJM Electric Power Sector Consumption
Estimates (2001)
WSCC Electric Power Sector Consumption
Estimates (2001)
Natural Gas
49%
Petroleum
3%
Petroleum
2%
Renewables
and Other
2%
Coal
49%
Natural Gas
6%
ERCOT Electric Power Sector Consumption
Estimates (2001)
Nuclear
Petroleum 12%
1%
Hydro
0%
Renewables
and Other
0%
Coal
41%
Natural Gas
46%
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Factor 2: Grid Issues
“Between 1984 [official start of recording
blackouts in North America] and 2000, utilities
logged 11 outages affecting more than 4,000
megawatts – making the probability of any one
outage 325 times greater than mathematicians
would have expected.”
– IEEE Spectrum, Aug. 2004
7
Bottlenecks in U.S. Transmission
4
8
Utility Outages

Documentation of utility outage
data is a relatively new concept
 SAIDI – records the yearly
average outage duration for
each customer sampled
 SAIFI – records the average
yearly frequency of outages
per customer

The data to accurately measure
these indices is not readily
available

The limited available data
suggests, on average, a utility
customer in the U.S. will
experience:
 1.2 outages per year
 106 minutes per outage
5
9
Peak Demand Outpaces
Transmission Capacity
6
Annual transmission investments
decrease despite increasing load demand
10
U.S. Outages Costs
Input Variable
Average cost of outages to
user
($ / kWh lost):
Residential
2
Commercial
25
Industrial
15
8
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Factor 3: Changing Nature of
Electric Loads
Utility customers “expect a different
product today than they did twenty years
ago. What’s more, utilities and regulators
haven’t caught up to that fact.”
– Allison Silverstein, formerly FERC Chairman Pat Wood’s Chief of Staff
and Chair U.S. - Canada Power System Outage Task Force (August
2003 Blackout); Hunt Power private interview 5/9/05
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The Service Based Economy
U.S. Energy Use Per Capita
9
Energy-to-GDP Ratio Falling
Index,
1982= 100
10
140
130
120
110
100
90
80
70
13
60
49
54
59
64
69
74
79
84
89
94
99
04
year
Growth of Microprocessors
11
Microprocessor Market
40
The microprocessor
market was $27.4 billion
in 2003, and it will
increase by 28.5% to
$35.2 billion by 2007.
35
30
Market
($ billions)
25
20
15
10
5
0
2003
2004
2005
2006
2007
Year
"The average middle-class American household has about 40 microprocessors /
microcontrollers in it. The average new car has about 12 microprocessors /
microcontrollers in it."
- Jim Turley, editor in chief of Embedded Systems Programming
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Trends Driving Electric Loads

Global competition drives industries toward
greater automation

Microprocessor growth will continue to expand,
driven by new rules and new technologies
 Voice over IP
 Sarbanes – Oxley
 HIPPA

Nanotechnology – In spite of “Flat World” the US
remains competitive because we are the world’s
innovators. Can we power our innovation?
15
Power Quality
12

Refers to subtle deviations
in the quality of delivered
electricity that causes some
customer equipment to fail
or damage

98% of fatal power quality
events last < 15 seconds

Outages lasting < 1 sec
cycles can cause hours of
downtime
16
Momentary and Sustained
Interruptions Costs
13
• U.S. utility customers
lose an estimated $80
billion dollars annually
due to outages.
• Roughly 2/3 of costs
and lost revenue was
due to momentary
downtimes.
17
The Energy Environment
Awareness
Control
18
A Solutions Framework

Cost of Energy vs. Value of Energy
“Which means more to you?”

Cost of Energy




Operations: Absolute Price significantly affects bottom line
Marketing and Sales: Relative Price influences competitive
position
Financial: Volatile expense items reduce the firm’s value
through greater risk profile
Value of Energy



Operations: Spoilage, lost production, data loss, damaged
equipment
Marketing and Sales: Loss of customer goodwill due to
disruptions or inability to provide goods and services
Financial: Lost wages, downtime, insurance premiums
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Cost Based Energy Security

The key issue is Price of Energy


Anything that reduces volatility and
uncertainty in energy prices creates value for
the firm
Simple payback evaluation approach may
not be appropriate if the “base case” has
greater uncertainty than the “alternate
case”
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Cost Based Solutions

Hedging activities




Energy efficiency



Negotiated utility rates
Over the counter forwards and options
Exchange traded futures and options
Low hanging fruit
Many times the most cost effective “technology”
Self Generation

Combined Heat and Power (CHP)
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Value Based Energy Security

The key issue is Value of Energy



Sensitivity of operations energy disruptions
Financial effects of outages on your bottom line and
customer retention
Does not take a “blackout” to affect a firm’s
competitiveness

Example – Upon a momentary power disruption, it
takes an average of 16 hours for certain data
centers to resume normal operation
22
Value Based Solutions

Energy Auditing


Infrared Scans, Power Quality Assessment
Standby Power Systems

UPS, On-site Generator, Fuel Storage,
Transfer Switch Scheme
23
Power Failure Protection After the
2003 Blackout
14
Emergency generator providing power to your facility
Uninterruptible power system (UPS) providing power to your facility
UPS for the individual load
Self-generator utilized for everyday power needs
Equipment designed to cover momentary voltage dips
Insurance to compensate for damage caused by power failure
Sample size = 604 commercial/industrial customers
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Thank you
Discussion
25
References
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14.
EIA/DOE, 2004. Historical Natural Gas Data (Average Price Sold to Commercial
Consumers, by State).
EIA/DOE, 2004. Historical Electricity Data (Annual Retail Price, State by Sector).
EIA/DOE, 2001. Electric Power Sector Consumption Estimates, 2001.
FERC, 2001. Electric Transmission Constraint Study.
Lawrence Berkeley National Laboratory/DOE, 2004. The Economic Cost of Power
Interruptions to U.S. Electricity Consumers.
Hirst/Edison Electric Institute/DOE, 2004. U.S. Transmission Capacity: Present
Status and Future Prospects.
Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical
Utility Industry, Paroma Sanyal, Brandeis University and Linda Cohen, USC.
Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997;
EPRI, 2001a, 2002
EIA/DOE, 2003. Annual Energy Review 2003.
Brown/Federal Reserve Bank of Dallas, 2005. Energy Prices and the Economy.
LaPedus, 2004.
Souder/DOE, 2005. DOE’s Role Regarding Grid Modernization and Electric
Reliability.
DOE, 2004. The Economic Cost of Power Interruptions to U.S. Electricity
Consumers.
Ariu/CRIEPI/SERC, 2003. Impact of the 2003 North America Blackout on
Commercial/Industrial Customers of Electric Power Companies.
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