Fuel for PowerAn overview of the U.S. power sectorfrom the perspective of fuel demand

Peter Maloney,Chief editor, Platts Global Power Report

Editorial AbroadSingapore

July 14, 2010

2

Fuel for Power

U.S. power plant fuels

0

5,000,000

10,000,00015,000,000

20,000,000

25,000,000

30,000,00035,000,000

40,000,000

45,000,000

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

bil

Btu

wind

solar

geothermal

biomass

natural gas

petrol

nuclear

hydro

coal

Source: Energy Information Administration

3

Fuel for Power

U.S. power plant fuels by %

0%

20%

40%

60%

80%

100%

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

bil

Btu

wind

solar

geothermal

biomass

natural gas

petrol

nuclear

hydro

coal

Source: Energy Information Administration

4

Fuel for Power

Source: BP

Country million tonnes Share

USA 246,643 27%

Russia 157,010 17%

China 114,500 13%

India 92,445 10%

Australia 78,500 9%

South Africa 48,750 5%

World Coal Reserves

5

Fuel for Power

Source: American Coal Foundation

6

Fuel for Power

1882

Thomas Edison’s Pearl Street station begins operation

7

Fuel for Power

Thomas Edison’s Pearl Street Power StationBegan operation: 1882Capacity: 100 kW

Why coal?Historically if you need to turn a turbine, there were two choices:

• coal • water

But• It is cheaper to build a coal plant (than a hydropower plant)• Coal is less location dependent

8

Fuel for Power

electric generator

Electricity 101

9

Fuel for Power

+ +

10

Fuel for Power

11

Fuel for Power

12

Fuel for Power

1882

Pearl Street station

The Great Depression

1936

Hoover Dam

13

Fuel for Power

• Hoover Dam• Came online: 1936• Capacity: 2,080 MW

Followed by Federal power authorities:• Tennessee Valley Authority • Bonneville Power Authority

14

Fuel for Power

1882

Pearl Street station

The Great Depression

1936

World War II

1957

Hoover Dam Shippingport

15

Fuel for Power

First nuclear power plants

1954 Obninsk, Russia1956 Calder Hall, England1957 Shippingport, Pa., US

Nuclear power as % of total US generation (MWh)

0

5

10

15

20

25

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Three Mile Island, March 1979Partial core meltdown

16

Fuel for Power

Three Mile Island power station, Londonderry, PA

from “… too cheap to meter …”

to

• stagflation

• 1979 – Three Mile Island,partial core meltdown

Fallout:

• 1983 – Washington Public Power Supply System (Whoops) defaults on

$2.25 billion of bonds

• 1988 – Public Service Co. of New Hampshire declares bankruptcy

Next COL application: 2006

Cost overruns! What happened?

17

Fuel for Power

England 1 CEB

France 1 EDF

Italy 1 ENEL

Saudi Arabia 1 SAE

Pakistan 2 WAPDA & KESC

India 26+ SEBs + 4 central agencies

Thailand 3 EGAT, MEA, PEA

Philippines 2 Napacor + Meralco

Indonesia 1 PLN

Australia 8 by state

Singapore 1 Tk

China 1+ State, Huaneng, Shandong

Japan 10 Regional utilities

US 3,273 !!!!!

Electric utility structure worldwide (circa pre-1985)

U.S. power sector regulation (Cliff notes version), part I

18

Fuel for Power

U.S. power sector regulation (Cliff notes version), part I

19

Fuel for Power

U.S. power sector regulation (Cliff notes version), footnote

Public/privatePrivate utilities in the U.S. are publicly traded, i.e., they are listed companies aka joint stock companiesBUT in federal law (Federal Power Act) they are called public utilities or public power companiesDo not confuse that with publicly owned utilities such as munisIt is safest to call U.S. private, i.e., publicly traded utilities IOUs

20

Fuel for Power

U.S. power sector regulation (Cliff notes version), part I

21

Fuel for Power

U.S. power sector regulation (Cliff notes version), part I

22

Fuel for Power

U.S. power sector regulation (Cliff notes version), part II

Ratebase regulation

“Normal” business• Cut costs• Beat the competition• Earn profits

Incentive: cost cutting, efficiency

I.O.U.s• Franchise = obligation to serve• Profits are capped, +/- 12% ROE• Costs increase the basis

Incentive: overbuilding, “Gold plating”

23

Fuel for Power

U.S. power sector regulation (Cliff notes version), part II

How are costs approved, i.e., put into rate base? regulatory process, a rate case, at the state level

regulation X

PUC, PSC, BPU, VCC, ARC, ACC, DPU, URC, DTE, TRA, VCC, RAS, WUTC, …

=

24

Fuel for Power

1882

Pearl Street Hoover Dam

1936

Shippingport

1957

TMI

1979

The Great Depression World War II The Atomic Age

OPEC oil embargo PURPA

1973 1978

Golden age for electric utilities• Growing efficiency• Declining prices for consumers

Oil shocks lead to passage of the National Energy Policy Act• Gas Act & Public Utility Regulatory Policies Act of 1978

25

Fuel for Power

PURPA’s innovations:• New market entrants: QFs, IPPs, merchant power players

IOUs decreased from 261 in 1992 to 239 in 1998

IPPs increased from 1,792 in 1992 to 1,954 in 1998

Between 1985 and 1991, the annual growth rate for utility capacity was 1%

Non-utility capacity grew by 13.9% annually, increasing by almost 120% in six years

Non-utilities accounted for only 6% of the total in 1991, but they added more net capacity during 1990 and 1991 than did utilities – EIA

26

Fuel for Power

PURPA’s innovations:

• New market entrants: QFs, IPPs, merchant power players

• Technology: grounding the jet engine

27

Fuel for Power

Capital costs, not fuel costs

28

Fuel for Power

PURPA’s innovations:• New market entrants: QFs, IPPs, merchant power players

• Technology: grounding the jet engine

• Regulatory: Energy Policy Act of 1992

FERC Order 888 (1996) Unbundling Wholesale power markets

29

Fuel for Power

North American ISOs and RTOs

Source: http:// www.iso-rto.org

30

Fuel for Power

31

Fuel for Power

Electric Power Load Curve

32

Fuel for Power

33

Fuel for Power

Uniform Clearing Price Auction

Source: NYISO

34

Fuel for Power

June 1998 - Midwest spot electricity prices spike to $7,000/MWh(compared with a more “normal” prices of $50 - 70/MWh)

200,000 MW of gas-fired power plants built, many on a merchant basis(about 20% of the U.S. installed capacity of 1,112,000 MWSingapore’s installed capacity is 10,600 MWIndia’s is 147,000 MWChina’s is 622,000 MW)

35

Fuel for Power

U.S. power sector fuels

0500,000

1,000,000

1,500,0002,000,0002,500,0003,000,000

3,500,0004,000,0004,500,000

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

windsolargeothermalgaspetronuclearhydrocoal

mil kWh

36

Fuel for Power

U.S. power sector fuels by %

0%

20%

40%

60%

80%

100%

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

windsolargeothermalgaspetronuclearhydrocoal

37

Fuel for Power

2000 - 2001

• Western (California) energy crisis

• Wash trade scandals

• Enron collapses (Oct. 2001)

End of an Era

• Wholesale power prices collapse

• Natural gas rises to $14/MMBtu

• Power marketers disappear

• Deregulation goes in reverse

38

Fuel for Power

1882

Pearl Street Hoover Dam

1936

Shippingport

1957

TMI

1979

The Great Depression World War IIThe Atomic Age

OPEC oil embargo PURPA

1973 1978

The PURPA Era

EPAct 1992

Enron falls

Midwest price spike

1992 1998 2001

39

Fuel for Power

Bankruptcies: • Calpine• Mirant• NRG Energy

Financial players enter the market,buying up distressed assets ($13 billion by 2004):

• American International Group• ArcLight Capital• Bear Stearns• Blackstone Group• Carlyle Group• Goldman Sachs• KKR

Back to Basics• No proprietary trading• Build baseload plants, i.e., coal plants

40

Fuel for Power

In 2006 there were almost 50 new coal project announcements representing 31,000 MW

Annual Net Coal Project Backlog Flow (MW)

(15,000)

(10,000)

(5,000)

-

5,000

10,000

15,000

20,000

25,000

30,000

2002 2003 2004 2005 2006 2007(thruSept)

Net

An

nu

al M

Ws

Ad

ded

to

Bac

klo

g

Source: GF Energy

Why? Gas was at the margin

41

Fuel for Power

Feb. 2007 - Kravis Roberts & Co. and Texas Pacific Group agree to acquire TXU for $45 billion (NRDC & ED sign off)

May 2006 – An Inconvenient Truth

Canceled coal-fired projects

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1Q 2Q 3Q 4Q

MW

2007

2008

2009 (9 mos.)

42

Fuel for Power

1882

Pearl Street Hoover Dam

1936

Shippingport

1957

TMI

1979

The Great Depression World War IIThe Atomic Age

oil embargo PURPA

1973 1978

The PURPA Era

EPAct 1992 Enron falls

Midwest price spike

1992 1998 2001

Back to Basics/Financial Players

2007

TXU buyout

43

Fuel for Power

What’s the price of Caron dioxide? Unknown

Everything is on the table:• Nuclear• Coal• Natural gas• Renewables (wind, solar, geothermal, biomass)

44

Fuel for Power

Bill Number Sponsor(s) Cap & trade Status Comment

American Clean Energy and Security Act H.B. 2454 Waxman-Markey yes

passed out of House June 26

Clean Energy Jobs and American Power Act S. 1733 Kerry-Boxer yes

passed out of Env. & Pub. Works Comit. Nov. 5

Dept. of Ag. Handles offsets

American Clean Energy Leadership S. 1462 Bingaman no

passed by Energy & Nat. Res. Comit. June 17 energy only

Clean Energy Partnerships Act S. 2729 Stabebnow no

referred to Sen. Env. & Pub. Works Comit. outline for offsets

Clean Energy Act S. 2776 Alexander-Webb nointroduced Nov. 1, 2009

nuclear power, loan guarantees

Carbon Limits and Energy for American's Renewal Act S. 2877 Cantwell-Collins no

introduced Dec.1, 2009; referred to finance committee cap and dividend

draft naKerry-Graham-

Liebermann unknown draft

US Climate change/energy bills

45

Fuel for Power

Nuclear power 2006 - NRG Energy applies for COL for 2,700-MW expansion project

NRC now has 26 COL applications (+/- 26,000 MW), 7 more expected

Federal loan guarantees: • $8.3 billion guar. to Southern Co. leaves $10 bil, enough for 1 project• $10 billion more to come?

Costs: $17 billion price tag shocks NRG’s partners ($4,800/kW)

46

Fuel for Power

Coal Not in my backyard (NIMBY, BANANA, NOPE)

IGCC: Duke Energy’s $2.8 bil, 630-MW Edwardsport ($4,570/kW)

CCS: AEP’s $668 mil, 235-MW Mountaineer CCS II ($2,840/kW)

47

Fuel for Power

Natural Gas Shale gas changes everything

Unconventional gas went from 28% of U.S. production in 1998 to 46% in 2007

Shale gas production is forecast to increase from 42% of total US gas

production in 2007 to 64% in 2020. –API

Production of shale gas is expected to increase from a 2007 US total of 1.4 Tcf

to 4.8 Tcf in 2020. At 2007 production rates of 19.3 Tcf, there are enough

recoverable resources of natural gas to supply the US for the next 90 years. –

U.S. DOE

The Marcellus shale alone could produce 27 Bcf/day, equal to half the total

U.S. lower 40 production – Navigant Consulting

Producer estimates indicate that shale plays could boost U.S. gas resources to

2,247 Tcf of 118 years supply at current production levels – Navigant Consulting

Median break-even price for shale gas extraction is $6.64/mcf with a range of

$4.20/mcf to $11.50/mcf – Bank of America/NYMEX

48

Fuel for Power

49

Fuel for Power

Renewables

Wind 8,358 MW installed in 2008

10,000 MW installed in 2009

State RPS

National RPS?

PTC?

Cash in lieu?

50

Fuel for Power

Electricity demandthree year rolling average % growth

-2

0

2

4

6

8

10

12

1950

1960

1970

1980

1990

2000

2010

2020

2030

Source: Energy Information Administration

Period Annual growth

1950s 9.8

1960s 7.3

1970s 4.7

1980s 2.9

1990s 2.4

2000-2008 0.9

2008-2035 1.0

• The stimulus effect?• Gas price volatility (power was 4.6 Tcf/yr in 1998, 6.9 Tcf in 2007)• Carbon price• CAIR replacement or Carper-Alexander (SO2, NOx)• Federal incentives• Patchwork regulation

51

Fuel for Power

DC

State renewable portfolio standard with solar / distributed generation (DG) provision

State renewable portfolio goal with solar / distributed generation provision

Source: DSIRE

State Renewable Portfolio Standards

52

Fuel for Power

Regulated and deregulated states

53

Fuel for Power

Power plants online in the last five years, by fuel

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2004 2005 2006 2007 2008 2009

MW

COAL

Natural Gas

SOLAR

Wind

54

Fuel for Power

Power plants under construction in the US, by fuel

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009 2010 2011 2012 2013

MW

COAL

Natural Gas

Nuclear

Solar

WIND

55

Fuel for Power

Power plants in development, by fuel

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

MW

COAL

Natural Gas

Nuclear

SOLAR

WIND

56

Fuel for Power

2008

38%

34%

8%

5%

11%

3%

Capacity mix by fuel

2020

39%

34%

8%

5%

9%

4%

natural gas

coal

hydro

oil

nuclear

wind

solar

geothermal

wood

pet coke

biomass

unkonwn

other

57

Fuel for Power

58

Fuel for Power

Conclusion Federal action/inaction aside

Industry will take the path of least resistance: natural gas