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

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.
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Rising Natural Gas Prices

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Commercial Gas Prices

12 11

California
10

$/ 1000 cu. ft.

Delaware
9 8 7 6 5 4 2000 2001 2002 2003 2004

Maryland New Jersey Pennsylvania Texas

Years
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Rising Electric Prices

2

Commercial Electric Price Trends

14.00 13.00

Avg. Cents/KWH

12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 2000 2001 2002 2003 2004

California Delaware Maryland New Jersey Pennsylvania Texas

Years
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Regional Disparities in Generation

WSCC Electric Power Sector Consumption Estimates (2001)
Renewables and Other 18% Hydro 13% Natural Gas 49% Petroleum 2% Coal 1%
Nuclear 39%

PJM Electric Power Sector Consumption Estimates (2001)

Renewables and Other 2%

Hydro 1%

Coal 49%

Nuclear 17%

Petroleum 3%

Natural Gas 6%

ERCOT Electric Power Sector Consumption Estimates (2001)

Hydro 0% Renewables and Other 0% Coal 41%

Nuclear Petroleum 12% 1%

Natural Gas 46%

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

Bottlenecks in U.S. Transmission

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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
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Peak Demand Outpaces Transmission Capacity

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Annual transmission investments decrease despite increasing load demand

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U.S. Outages Costs

Input Variable Residential Commercial Industrial Average cost of outages to user ($ / kWh lost): 2 25 15
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Factor 3: Changing Nature of Electric Loads

Utility customers expect a different product today than they did twenty years ago. Whats more, utilities and regulators havent caught up to that fact.
Allison Silverstein, formerly FERC Chairman Pat Woods 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= 100 140 130 120 110 100 90 80 70

10

13
60 49 54 59 64 69 74 79 84 89 94 99 04

year

Growth of Microprocessors
Microprocessor Market
40 35 30 Market ($ billions) 25 20 15 10 5 0 2003 2004 2005 Year 2006 2007
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The microprocessor market was $27.4 billion in 2003, and it will increase by 28.5% to $35.2 billion by 2007.

"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 worlds innovators. Can we power our innovation?
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Power Quality
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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

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Momentary and Sustained Interruptions Costs

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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.

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The Energy Environment

Awareness Control

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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 firms value through greater risk profile 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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Value of Energy

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

Negotiated utility rates Over the counter forwards and options Exchange traded futures and options

Energy efficiency

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 firms competitiveness

Example Upon a momentary power disruption, it

takes an average of 16 hours for certain data centers to resume normal operation
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Value Based Solutions

Energy Auditing

Infrared Scans, Power Quality Assessment

Standby Power Systems

UPS, On-site Generator, Fuel Storage, Transfer Switch Scheme

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Power Failure Protection After the 2003 Blackout

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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

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References
1. 2. 3. 4.

5.
6. 7. 8. 9. 10. 11. 12.

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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. DOEs 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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