David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University America’s Natural...

David E. Dismukes, Ph.D.Center for Energy StudiesLouisiana State University

America’s Natural Gas Advantage: Securing Benefits for Ratepayers Through Paradigm Shifts in Policy

SEARUC 2011 Annual ConferenceNashville, TennesseeJune 14, 2011

Center for Energy Studies


The Golden Age of Natural Gas

2© LSU Center for Energy Studies

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

20052007

20090

50

100

150

200

250

300

0

5

10

15

20

25

30

Reserves Production

U.S. Natural Gas Production and Proved Reserves, January 2007 to Present

Center for Energy StudiesR

eser

ves

(Tcf

)

Source: Energy Information Administration, U.S. Department of Energy. 3© LSU Center for Energy Studies

2006-2007 reserves growth is the largest in over 30 years. On average, natural gas reserves have been increasing by 5 percent per year since 2000

(except 2004-2005 tropical season, 2 percent).

Prod

uction (Tcf)

Proved gas reserves at 272.5 Tcf, their

highest level.

Proved gas reserves at 272.5 Tcf, their

highest level.

Supply Implications


Annual Percent Change in Base Rate versus Fuel Rate – Natural Gas


Inde

xed

Rat

e (

199

5=1)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Base Rate

Fuel Rate

Source: Federal Energy Regulatory Commission.

Gas price decreases have been translated into direct bill reductions for many ratepayers.

Base rates = 28.3%Fuel rates = 88.0%

Base rates = 36.5%Fuel rates = - 25%

Crude Oil and Natural Gas Prices

Center for Energy Studies Pricing Trends

Ratepayers have also seen considerable benefits from reduced natural gas pricing volatility.

5© LSU Center for Energy StudiesSource: Intercontinental Exchange.

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

5-year average through 2000: $2.89

(standard deviation: $1.46)

$/M

cf

average for period2000-2001 heating season

through 2008: $6.25(standard deviation: $2.40)

since 2009: $4.17(standard deviation: $0.72)

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20100%

10%

20%

30%

40%

50%

60%

70%

80%

Fuel

Non-Fuel

Per

cen

t of

Tot

al (

%)

Source: Energy Information Administration, U.S. Department of Energy.

Gas and Non-Gas Costs in U.S. Distribution Rates

Center for Energy Studies Pricing Trends

Natural gas price decreases have help reduce the overall share of ratepayers’ bills from fuel (PGA) purchases. This has important implications for future regulatory decisions.

Basin Competition



Natural Gas Uses

ShaleResources

(Tcf)

Asia Pacific 6,155 North America 3,842 Middle East 2,548 South America 2,117 Asia 627 Europe 549 Africa 274

Worldwide 16,112

Shale production is not a domestic, “flash in the pan” supply opportunity. The opportunity spans the globe

regardless of what we do in North America.

Source: Energy Information Administration, U.S. Department of Energy


New Gas Uses: Threat or Opportunity?


Natural Gas Consumption by Sector



Natural Gas Uses

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Residential Commercial Industrial Electric Power NGV

Nat

ura

l Gas

Con

sum

ptio

n (T

cf)

NG

V C

onsu

mption

(Bcf)


Currently, NGVs account for less than 0.18 percent of U.S. natural gas consumption, but the rate of growth in consumption (158 percent) over the past

decade has surpassed all other end-uses.

Potential Natural Gas Consumption – NGV



Natural Gas Uses

20082010

20122014

20162018

20202022

20242026

20282030

20322034

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

Consumption Percent of Total

Nat

ura

l Gas

Con

sum

ptio

n (T

cf)

NGV consumption of natural gas is estimated to increase at an average annual rate of 7 percent through 2035. At best, this usage will be considerably less than 1 Tcf

and slightly over one-half of one percent of total natural gas market.


NG

V C

onsu

mption

(% of Total)

NGV use of natural gas will stay below

one percent of total U.S. natural gas consumption.

NGV use of natural gas will stay below

one percent of total U.S. natural gas consumption.


Considerable Underutilized LNG Regasification Capacity along GOM

A

B

C

D

E

Existing

JF

ExistingA. Everett, MA: 1.035 BcfdB. Cove Point, MD: 1.8 BcfdC. Elba Island, GA: 1.6 Bcfd (+0.5 Expansion)D. Lake Charles, LA: 2.1 BcfdE. Energy Bridge, GOM: 0.5 BcfdF. Northeast Gateway, Offshore MA: 0.8 BcfdG. Freeport, TX: 1.5 Bcfd (+2.5 Expansion)H. Sabine, LA: 4.0 BcfdI. Hackberry, LA: 1.8 Bcfd (+0.85 Expansion)J. Neptune, Offshore MA: 0.4 BcfdK. Sabine Pass, TX: 1.0 Bcfd (+ 1.0 Expansion)Under ConstructionL. Pascagoula, MS: 1.0 BcfdApprovedM. Corpus Christi, TX: 1.0 BcfdN. Corpus Christi, TX: 2.6 BcfdO. Fall River, MA: 0.8 BcfdP. Port Arthur, TX: 3.0 BcfdQ. Logan, NJ: 1.2 BcfdR. Port Lavaca, TX: 1.0 BcfdS. Baltimore, MD: 1.5 BcfdT. LI Sound, NY: 1.0 Bcfd

HIK

Regasification

Under ConstructionApproved

ExistingLiquefaction

Under Construction

Approved

G

L

MN

OT

P

Q

R

S


Policy Conflicts


Policy Arguments and Debate



Natural Gas Producers’ Viewpoint:

• Industry has stepped up to the plate and applied significant cash into sub-surface mineral rights and advanced drilling techniques to deliver a historic record level of natural gas reserves that has the strong potential to provide over a century’s worth of lower cost, environmentally friendly resources.

• However, producers need some price growth to ensure continued drilling profitability, otherwise, markets will revert to their traditional “boom-bust” cycles leading to increased costs and price volatility for consumers.

• New markets in the transportation sector and abroad, through natural gas exports, could be important tools.

Natural Gas Uses




Natural Gas Consumers’ Viewpoint:

• Consumers (and industries) have paid through the nose over the past decade for their energy resources.

• It is likely that high energy costs led to, or at least contributed to, the most significant economic recession in U.S. history.

• American consumers (and industries) need this period of low-cost energy resources (particularly natural gas) to facilitate a meaningful economic recovery.

• Subsidizing new end uses for natural gas, and facilitating the export of any low-cost energy resource, is likely to jeopardize the current economic recovery.

Natural Gas Uses




Who’s Right? – Does it Matter? – What is the Reality of the Situation:

• New uses for natural gas transportation may be inevitable, regardless of subsidies, given recent and projected crude oil and refine product prices. The relative economics already favor these applications and are moving more in that direction.

• The U.S. has a long history of exporting a variety of energy resources. Trade restrictions would set a slippery slope and, regardless, are unlikely given past and recent approvals.

• Becomes incumbent upon consumers and regulators to reassess current policies relative to these changes in order to avoid negative longer-run outcomes. Large number of current policies are based upon 2005-2006 energy market imperatives that have questionable bearing today.

Natural Gas Uses


RPS States (April 2011)

16

ME40% by

2017

VT Goal:25% by 2025

NH: 23.8%by 2025

WI: 10%by 2015

MT: 15%by 2015

IA: 105 MW

MN: 25%by 2025

WA: 15%by 2020

CA: 33%by 2020

NV: 25%by 2025

AZ: 15%by 2025

NM: 20%by 2020

UT: 20%by 2025

TX: 5,880 MWby 2015

MO:15%

by 2021

IL: 25%by 2025

NC: 12.5% by 2021

VA: 15%by 2025

PA*: 18%by 2020

NY: 30% by 2015

State RPS

State Goal

OR: 25%by 2025

CO: 30%by 2020

ND: 10%by 2015

SD: 10%by 2015

OH*: 25%by 2025

MA: 22% by 2020RI: 16% by 2020CT: 23% by 2020NJ: 22.5% by 2021MD: 20% by 2022DE: 25% by 2026DC: 20% by 2020

Note: As of April 2011; *Ohio and Pennsylvania include separate tier of non-renewable ‘alternative’ energy resources.Source: Database of State Incentives for Renewables and Efficiency; Pew Center on Global Climate Change

MI: 10%+1,100 MW

by 2015

AK Goal: 50% by 2025

HI: 40%by 2030

WV: 25% by 2025

Currently 37 states have RPS policies in place. Together these states account for over 60 percent of electricity sales in the U.S. This will likely displace a considerable amount of natural gas generation.

OK: 15%by 2015

KS: 20%by 2020


Policy Conflicts, RPS Adoption and Revisions

17

Major Revisions (below timeline)

( ) Year of First Requirement

Enactment (above timeline)

CO (2007)

HI (2005)

IL (2008)

MA (2003)

CT (2000)

MD (2006)

DC (2007)

NH (2008)

MI (2012)

ME (2000)

PA (2001)

NJ (2001)

NY (2006)

DE (2007)

NC (2010)

MO (2011)

MN (2002)

AZ (1999)

NV (2001)

WI (2000)

TX (2002)

NM (2002)

CA (2003)

RI (2007)

MT (2008)

WA (2012)

OR (2011)

OH (2009)

KS (2011)

•

1983 1991 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

IA MN AZ MN NM CT NJ CT AZ CA DC DC CO

WI NV MN NM CO CA CO DE HI DE

NV PA NV CT CT MA IL IL

TX HI DE MD ME MA

NJ MD NJ MN MD

WI ME NV NJ

MN OR NY

NJ RI

NM

PA

TX

XX

XX

Most state RPS revisions have been to increase overall requirements (or extend and expand over time). Works to displace natural

gas generation at the margin, and potential lead to less efficient operation of the gas

generation that does operate.Source: Ryan Wiser, State of the States: Update on RPS Policies (2010).

AD

OP

TIO

NR

EV

ISIO

N

Policy Conflicts, Energy Efficiency Mandates



Natural Gas Uses

CT: 1.5% annual utility savings, 10% peak

RI: reduce consumption 10% by 2022

NJ: BPU proceeding to reduce consumption, peak

DE: reduce consumption 15%; peak 10% by 2015

PA: reduce consumption 3%; peak 4.5% by 2013

MD: reduce electricity use and peak 15% by 2015

VA: reduce electric use 10% by 2022

WV: EE & DR earn credits in A&RES

AR: 0.75% electricity savings by 2013

NC: EE to meet up to 25% of RPS by 2011

FL: 3.5% energy savings and summer and winter peak reductions by 2019

OR: 1% annual savings by 2013

CA: save 1,500 MW, 7,000 GWh; reduce peak 1,537 MW: 2010-12

NV: 0.6% annual savings (~5%) to 2015; EE to 25% of RPS

UT: PUC examining 1% annual

CO: 11.5% energy savings by 2020

AZ: at least 22% cumulative savings by 2020; peak credits

NM: 10% retail electric sales savings by 2020 .

OK: EE up to 25% of renewable goal

TX: 25% annual savings in 2012; 30% in 2013 and beyond

HI: 30% electricity reduction by 2030

WA: pursue all cost effective conservation: ~10% by 2025

MN: 1.5% annual savings to 2015

IA: 1.5% annual; 5.4% cumulative savings by 2020

WI: 1.5% electric savings by 2014; 15% peak reductions

MI: 1% annual energy savings

IL: 2% energy reduction, 0.1% peak by 2015

IN: 2% energy savings by 2019

OH: 22% energy savings by 2025 ; 8% peak by 2018

Note: As of April 15, 2011.Source: Federal Energy Regulatory Commission.

ME: 1.4% annual energy savings by 2013

VT: 2% annual; 11% cumulative energy reductions by 2011

MA: 2.4% annual electricity savings by 2012

NY: reduce electric use 15% by 2015

EE in renewable goal

EERS by regulation or law (stand-alone)

EE in RPS (hybrid)

EE regulations pending

The economics of energy efficiency should be re-evaluated – difficult to argue that a standard based

upon natural gas prices in excess of $10/MMBtu can lead to large reductions in sales.

Policy Conflicts, Revenue Decoupling



Natural Gas Uses

Decoupling is pending (2 states)

Decoupling has been rejected (3 states)

Decoupling has been approved (26 states)

No decoupling in place (18 states)

Note: The Connecticut and Rhode Island legislatures have required decoupling, but all natural gas proposals have been rejected thus far. In Montana, decoupling was approved by the PSC, but the utility (NorthWestern Energy) has asked a court to void the rate structure.

Decoupling is mandated by legislature, but not yet approved by Commission. (1 state)

Adopted DecouplingNatural gas: 21 statesElectric: 12 states

Several states have adopted policies intentionally designed to encourage utilities to sell less gas

(throughput incentive) not consistent with pushing new cost-effective/efficient natural gas uses.

Policy Conflicts, Fuel Diversity



Natural Gas Uses

Note: Nuclear plants include companies that have announced the intent to submit applications to the U.S. Nuclear Regulatory Commission for new plant licenses.Source: Nuclear Energy Institute; and Sierra Club.

Nuclear plants under development (14)

IGCC plants under development (2)

Proposed IGCC plants, likely suspended/cancelled (7)

The economics of very high cost per kW generation for new solid fuel resources are moving

very quickly away from their development.


Conclusions


Conclusions: Gas Markets, Consumers, and Regulators



2010 natural gas consumption totaled 22.2 Tcf. Regulators still influence a big part of this market.

Natural Gas Uses

Residen-tial

22.3%

Com-mercial14.5%

Industrial29.8%

Vehicle Fuel0.1%

Electric Power33.3%


Conclusions


• Paradigm shifts require re-evaluation of prior goals and priorities, many of which were established in a period when natural gas prices were high, supplies were limited, and imports were likely to serve ever increasing shares of the market.

• Natural gas price points and supply availability need to be re-evaluated relative to energy efficiency goals, renewable rate impacts, new baseload generation technologies (IGCC and nuclear) and rate design.

• Not an argument to “stick” utilities with the costs for resources initiated under prior regulatory or legislative direction.

• But it is an argument to begin the process of evaluating changing market conditions and make necessary mid-course changes now in order to reduce ratepayer costs and the likely stakeholder conflicts that will arise if the current paths are pursued.

Conclusions

Policy Changes Already in the Wind?



Natural Gas Uses

Under the revised natural gas usage forecast, maintaining the goal set in the 2008 EMP would result in reducing natural gas consumption by 231 Bcf in 2020. This amount represents 32% of the revised baseline level. For reasons discussed below, the State does not believe that this goal is reasonable, realistic, or consistent with the environmental or energy security goals delineated elsewhere in this document. The natural gas reduction goal must be reviewed … the Christie Administration does not support the 231 Bcf target natural gas reduction set forth in the 2008 EMP. Economic and environmental goals will be served better by increasing rather than decreasing total natural gas use throughout New Jersey, while striving for more efficient use of natural gas for each application. [New Jersey Draft 2011 Energy Master Plan, emphasis added].


Questions, Comments and Discussion

25

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David E. Dismukes, Ph.D. Center for Energy Studies Louisiana State University America’s Natural...

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