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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 - PowerPoint PPT Presentation
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Energy Security:Energy Security:Creating a Competitive Creating a Competitive Advantage for IndustryAdvantage for Industry
Hugh BakerHugh BakerPresident, Hunt PowerPresident, Hunt Power
AHC GroupAHC GroupCorporate Affiliates WorkshopsCorporate Affiliates Workshops
June 21, 2005June 21, 2005
22
Energy SecurityEnergy SecurityNational Energy SecurityNational Energy Security
Energy is the lifeline of our economyEnergy is the lifeline of our economyWe require affordable energyWe require affordable energyWe require a continuous supply of energyWe require a continuous supply of energy
““Local” Energy SecurityLocal” Energy SecurityEnergy is the lifeline of your businessEnergy is the lifeline of your businessEnergy must be cost effectiveEnergy must be cost effectiveEnergy must be in an “on” stateEnergy must be in an “on” stateEnergy must have a quality componentEnergy must have a quality component
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Factor 1: Energy PricesFactor 1: Energy Prices
The price of energy “has been substantial The price of energy “has been substantial enough and persistent enough to bias enough and persistent enough to bias business-investment decisions in favor of business-investment decisions in favor of energy-cost reduction.”energy-cost reduction.”
– – Alan Greenspan (4/5/05)Alan Greenspan (4/5/05)
There has been a fundamental reset in the There has been a fundamental reset in the market price of energy.market price of energy.
The increased volatility in energy prices adds The increased volatility in energy prices adds significant risk to business operations.significant risk to business operations.
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Rising Natural Gas PricesRising Natural Gas Prices
Commercial Gas Prices
4
5
6
7
8
9
10
11
12
2000 2001 2002 2003 2004
Years
$/ 1
00
0 c
u. f
t.
California
Delaware
Maryland
New Jersey
Pennsylvania
Texas
1
55
Rising Electric PricesRising Electric Prices
Commercial Electric Price Trends
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
2000 2001 2002 2003 2004
Years
Av
g. C
en
ts/K
WH
California
Delaware
Maryland
New Jersey
Pennsylvania
Texas
2
66
Regional Disparities in GenerationRegional Disparities in Generation3WSCC Electric Power Sector Consumption
Estimates (2001)
Natural Gas49%
Petroleum2%
Nuclear17%
Hydro13%
Renewables and Other
18%
Coal1%
PJM Electric Power Sector Consumption Estimates (2001)
Coal49%
Natural Gas6%
Petroleum3%
Nuclear39%
Hydro1%
Renewables and Other
2%
ERCOT Electric Power Sector Consumption Estimates (2001)
Nuclear12%
Natural Gas46%
Hydro0%
Renewables and Other
0%
Coal41%
Petroleum1%
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Factor 2: Grid IssuesFactor 2: Grid Issues
““Between 1984 [official start of recording Between 1984 [official start of recording blackouts in North America] and 2000, utilities blackouts in North America] and 2000, utilities logged 11 outages affecting more than 4,000 logged 11 outages affecting more than 4,000 megawatts – making the probability of any one megawatts – making the probability of any one outage 325 times greater than mathematicians outage 325 times greater than mathematicians would have expected.”would have expected.”
– – IEEE Spectrum, Aug. 2004IEEE Spectrum, Aug. 2004
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Bottlenecks in U.S. TransmissionBottlenecks in U.S. Transmission4
99
Utility OutagesUtility Outages Documentation of utility outage Documentation of utility outage
data is a relatively new conceptdata is a relatively new concept SAIDI – records the yearly SAIDI – records the yearly
average outage duration for average outage duration for each customer sampledeach customer sampled
SAIFI – records the average SAIFI – records the average yearly frequency of outages yearly frequency of outages per customerper customer
The data to accurately measure The data to accurately measure these indices is not readily these indices is not readily availableavailable
The limited available data The limited available data suggests, on average, a utility suggests, on average, a utility customer in the U.S. will customer in the U.S. will experience:experience: 1.2 outages per year1.2 outages per year 106 minutes per outage106 minutes per outage
5
1010
Peak Demand Outpaces Peak Demand Outpaces Transmission CapacityTransmission Capacity
Annual transmission investments Annual transmission investments decrease despite increasing load demanddecrease despite increasing load demand
6
1111
U.S. Outages CostsU.S. Outages Costs
Input VariableAverage cost of outages to
user($ / kWh lost):
Residential 2
Commercial 25
Industrial 15
8
1212
Factor 3: Changing Nature of Factor 3: Changing Nature of Electric LoadsElectric Loads
Utility customers “expect a different Utility customers “expect a different product today than they did twenty years product today than they did twenty years ago. What’s more, utilities and regulators ago. What’s more, utilities and regulators haven’t caught up to that fact.” haven’t caught up to that fact.”
–– Allison Silverstein, formerly FERC Chairman Pat Wood’s Chief of Staff Allison Silverstein, formerly FERC Chairman Pat Wood’s Chief of Staff and Chair U.S. - Canada Power System Outage Task Force (August and Chair U.S. - Canada Power System Outage Task Force (August 2003 Blackout); Hunt Power private interview 5/9/052003 Blackout); Hunt Power private interview 5/9/05
1313
The Service Based EconomyThe Service Based Economy
60
70
80
90
100
110
120
130
140
49 54 59 64 69 74 79 84 89 94 99 04
Index, 1982=100
year
Energy-to-GDP Ratio Falling
U.S. Energy Use Per Capita9
10
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Growth of MicroprocessorsGrowth of Microprocessors
0
5
10
15
20
25
30
35
40
Market($ billions)
2003 2004 2005 2006 2007
Year
Microprocessor Market
The microprocessor market was $27.4 billion in 2003, and it will increase by 28.5% to $35.2 billion by 2007.
11
"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 LoadsTrends Driving Electric Loads
Global competition drives industries toward Global competition drives industries toward greater automationgreater automation
Microprocessor growth will continue to expand, Microprocessor growth will continue to expand, driven by new rules and new technologiesdriven by new rules and new technologiesVoice over IPVoice over IPSarbanes – OxleySarbanes – OxleyHIPPAHIPPA
Nanotechnology – In spite of “Flat World” the US Nanotechnology – In spite of “Flat World” the US remains competitive because we are the world’s remains competitive because we are the world’s innovators. Can we power our innovation? innovators. Can we power our innovation?
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Power QualityPower Quality
Refers to subtle deviations Refers to subtle deviations in the quality of delivered in the quality of delivered electricity that causes some electricity that causes some customer equipment to fail customer equipment to fail or damageor damage
98% of fatal power quality 98% of fatal power quality events last events last < < 15 seconds15 seconds
Outages lasting Outages lasting < < 1 sec 1 sec cycles can cause hours of cycles can cause hours of downtimedowntime
12
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Momentary and Sustained Momentary and Sustained Interruptions CostsInterruptions Costs
• 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.
13
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The Energy EnvironmentThe Energy Environment
Awareness Control
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A Solutions FrameworkA Solutions Framework Cost of Energy vs. Value of EnergyCost of Energy vs. Value of Energy
““Which means more to you?”Which means more to you?” Cost of Energy Cost of Energy
Operations: Operations: Absolute PriceAbsolute Price significantly affects bottom line significantly affects bottom line Marketing and Sales: Marketing and Sales: Relative PriceRelative Price influences competitive influences competitive
positionposition Financial: Financial: Volatile Volatile expense items reduce the firm’s value expense items reduce the firm’s value
through greater risk profile through greater risk profile
Value of EnergyValue of Energy Operations: Spoilage, Operations: Spoilage, lost productionlost production, data loss, damaged , data loss, damaged
equipmentequipment Marketing and Sales: Marketing and Sales: Loss of customerLoss of customer goodwill due to goodwill due to
disruptions or inability to provide goods and servicesdisruptions or inability to provide goods and services Financial: Lost wages, Financial: Lost wages, downtimedowntime, insurance premiums, insurance premiums
2020
Cost Based Energy SecurityCost Based Energy Security
The key issue is Price of EnergyThe key issue is Price of EnergyAnything that reduces volatility and Anything that reduces volatility and
uncertainty in energy prices creates value for uncertainty in energy prices creates value for the firmthe firm
Simple payback evaluation approach may Simple payback evaluation approach may not be appropriate if the “base case” has not be appropriate if the “base case” has greater uncertainty than the “alternate greater uncertainty than the “alternate case” case”
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Cost Based SolutionsCost Based Solutions
Hedging activitiesHedging activities Negotiated utility ratesNegotiated utility rates Over the counter forwards and optionsOver the counter forwards and options Exchange traded futures and optionsExchange traded futures and options
Energy efficiencyEnergy efficiency Low hanging fruitLow hanging fruit Many times the most cost effective “technology”Many times the most cost effective “technology”
Self GenerationSelf Generation Combined Heat and Power (CHP)Combined Heat and Power (CHP)
2222
Value Based Energy SecurityValue Based Energy Security
The key issue is Value of EnergyThe key issue is Value of Energy Sensitivity of operations energy disruptionsSensitivity of operations energy disruptions Financial effects of outages on your bottom line and Financial effects of outages on your bottom line and
customer retentioncustomer retention
Does not take a “blackout” to affect a firm’s Does not take a “blackout” to affect a firm’s competitivenesscompetitiveness Example – Example – Upon a momentary power disruption, it Upon a momentary power disruption, it
takes an average of 16 hours for certain data takes an average of 16 hours for certain data centers to resume normal operationcenters to resume normal operation
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Value Based SolutionsValue Based Solutions
Energy AuditingEnergy Auditing Infrared Scans, Power Quality AssessmentInfrared Scans, Power Quality Assessment
Standby Power Systems Standby Power Systems UPS, On-site Generator, Fuel Storage, UPS, On-site Generator, Fuel Storage,
Transfer Switch SchemeTransfer Switch Scheme
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Power Failure Protection After the Power Failure Protection After the 2003 Blackout2003 Blackout
Emergency generator providing power to your facilityEmergency generator providing power to your facility
Uninterruptible power system (UPS) providing power to your facilityUninterruptible power system (UPS) providing power to your facility
UPS for the individual loadUPS for the individual load
Self-generator utilized for everyday power needsSelf-generator utilized for everyday power needs
Equipment designed to cover momentary voltage dipsEquipment designed to cover momentary voltage dips
Insurance to compensate for damage caused by power failureInsurance to compensate for damage caused by power failure
Sample size = 604 commercial/industrial customers
14
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Thank youThank you
DiscussionDiscussion
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ReferencesReferences1.1. EIA/DOE, 2004. EIA/DOE, 2004. Historical Natural Gas Data (Average Price Sold to Commercial Historical Natural Gas Data (Average Price Sold to Commercial
Consumers, by State).Consumers, by State).2.2. EIA/DOE, 2004. EIA/DOE, 2004. Historical Electricity Data (Annual Retail Price, State by Sector).Historical Electricity Data (Annual Retail Price, State by Sector).3.3. EIA/DOE, 2001. EIA/DOE, 2001. Electric Power Sector Consumption Estimates, 2001.Electric Power Sector Consumption Estimates, 2001.4.4. FERC, 2001. FERC, 2001. Electric Transmission Constraint Study.Electric Transmission Constraint Study.5.5. Lawrence Berkeley National Laboratory/DOE, 2004. Lawrence Berkeley National Laboratory/DOE, 2004. The Economic Cost of Power The Economic Cost of Power
Interruptions to U.S. Electricity Consumers.Interruptions to U.S. Electricity Consumers.6.6. Hirst/Edison Electric Institute/DOE, 2004. Hirst/Edison Electric Institute/DOE, 2004. U.S. Transmission Capacity: Present U.S. Transmission Capacity: Present
Status and Future Prospects.Status and Future Prospects.7.7. Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical
Utility Industry, Utility Industry, Paroma Sanyal, Brandeis University and Linda Cohen, USC.Paroma Sanyal, Brandeis University and Linda Cohen, USC.8.8. Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997; Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997;
EPRI, 2001a, 2002EPRI, 2001a, 20029.9. EIA/DOE, 2003. EIA/DOE, 2003. Annual Energy Review 2003.Annual Energy Review 2003.10.10. Brown/Federal Reserve Bank of Dallas, 2005. Brown/Federal Reserve Bank of Dallas, 2005. Energy Prices and the Economy.Energy Prices and the Economy.11.11. LaPedus, 2004.LaPedus, 2004.12.12. Souder/DOE, 2005. Souder/DOE, 2005. DOE’s Role Regarding Grid Modernization and Electric DOE’s Role Regarding Grid Modernization and Electric
Reliability.Reliability.13.13. DOE, 2004. DOE, 2004. The Economic Cost of Power Interruptions to U.S. Electricity The Economic Cost of Power Interruptions to U.S. Electricity
Consumers.Consumers.14.14. Ariu/CRIEPI/SERC, 2003. Ariu/CRIEPI/SERC, 2003. Impact of the 2003 North America Blackout on Impact of the 2003 North America Blackout on
Commercial/Industrial Customers of Electric Power Companies.Commercial/Industrial Customers of Electric Power Companies.