Transcript Document

Trends in US Energy Markets:
Challenges and Opportunities
Presentation to Combined Heat and
Power/Distributed Generation and
Emerging Fuels Conference
Sean Casten,
President & CEO
Recycled Energy Development, LLC
June 26, 2007
Little Rock, AR
1
RED | the new green
www.recycled-energy.com
The era of cheap purchased
electricity is over.
Average Inflation-Adjusted US Electricity Price
(2006 $)
12.0
c/kWh
11.0
10.0
2009
projection
9.0
8.0
7.0
6.0
1970
1980
1990
2000
2
RED | the new green
www.recycled-energy.com
But higher prices have not led to a
higher level of service.
3
RED | the new green
www.recycled-energy.com
Underlying cause #1: 100 year
collapse in electric-sector
productivity.
US Electric Industry Fuel-Conversion Efficiency
70%
Recovered Energy
60%
U.S. Average Electric Only
50%
40%
30%
20%
10%
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
0%
Implication: we are paying too much for electricity so that we
can emit too much CO2.
4
RED | the new green
www.recycled-energy.com
Underlying cause #2 is inadequate
T&D growth, but can be misleading…
310
290
(miles/GW demand)
U.S. Transmission Capacity
U.S. Transmission Infrastructure: 20 year History
270
250
Actual
230
Trend
210
190
1978
1983
1988
1993
1998
5
RED | the new green
www.recycled-energy.com
…because our current grid
architecture puts the generation in
the wrong place.
US Average Capex ($/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
6
RED | the new green
www.recycled-energy.com
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.
7
RED | the new green
www.recycled-energy.com
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
8
RED | the new green
www.recycled-energy.com
But wait – didn’t we try
deregulation? And didn’t it fail?
Three part answer:
1. It did start to work.
2. What did get deregulated wasn’t deregulated very well.
3. We deregulated the wrong part of the grid.
9
RED | the new green
www.recycled-energy.com
Deregulation did start to work.
Coal and Nuclear Capacity and Generation
Gigawatts of Capacity
TWH of generation
600
2,700
Gigawatt capacity
500
2,600
400
2,500
300
2,400
2,300
200
2,200
100
2,100
-
Terawatt-hour generation
2,800
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
19
90
2,000
Year
Rising coal & nuke capacity factors hedged most of the natural
gas price increase over the past decade.
10
RED | the new green
www.recycled-energy.com
…but this game is effectively over.
US Electric Grid Load factors
by Fuel
Coal
Natural Gas
Nuclear
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
years
*EIA; Electricity Power Annual 2003
11
RED | the new green
www.recycled-energy.com
What did get deregulated hasn’t
been deregulated very well.
• “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.
• 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”
12
RED | the new green
www.recycled-energy.com
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.
13
RED | the new green
www.recycled-energy.com
Prediction: the next big wave of
price increases will be in the nonrestructured (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. 60% of the coal fleet will is presently out-ofcompliance, needs to modernize by 1/1/09.
• Parasitic loads alone will add ~2% to US power consumption.
• Several utilities indicating they will shut down small (<400 MW) coal
plants; will drive up clearing price as we lose baseload power from grid.
• Conservative estimate: retail power prices will go to 9
c/kWh by 2009, with the dominant increases coming in the
“coal belt”
14
RED | the new green
www.recycled-energy.com
The really good news: we have good
choices…
Generation Cost (Cents / kWh)
20
Central Generation
Options
Renewable
Energy Options
Solar PV
Coal gasification +
CO2 sequestration
15
New Combined
Cycle Gas Turbine
10
Remote Wind
New Coal
New Coal
Gasification CCGT
5
Balanced
CHP
Existing Coal – no
new T&D
0
Average Retail Power
Price 8.1 c/kWh
Average Industrial
Power Price 5.5 c/kWh
Recycled
Industrial
Energy
Recycled Energy Options
3
(33% h)
2
(50% h)
1
(100% h)
0
Average Fossil Heat Rate
(Units of fossil fuel per unit of delivered electricity)
RED | the new green
-1
15
www.recycled-energy.com
…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
16
RED | the new green
www.recycled-energy.com
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 onsite 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)
17
RED | the new green
www.recycled-energy.com
Thank you for your time.
18
RED | the new green
www.recycled-energy.com