# Presentation: 544740

## The U.S. Power Industry2001 and BeyondDr. Arnold LeitnerConsultantRDI Consulting

***August 13, 2001***
***The Golden Hotel***

## Power Plant Construction Boom
Expected Levels of Capacity Additions
Technology Mix
Retirements
Demand Growth
The Threat of a U.S. Recession
Power Prices
The Digital Economy
Interruptible Load
Demand and Supply Balance 2001-2003 
Natural Gas – Panacea or Pandora
Price Forecast
Coal – The Black Work Horse
Gas-onCoal Competition
Renewables-on-Conventional Competition
The NEW Electricity Market

**Power Plant Construction Boom**
- Expected Levels of Capacity Additions
- Technology Mix
- Retirements
**Demand Growth**
- The Threat of a U.S. Recession
- Power Prices
- The Digital Economy
- Interruptible Load
**Demand and Supply Balance 2001-2003 **
**Natural Gas – Panacea or Pandora**
- Price Forecast
**Coal – The Black Work Horse**
**Gas-onCoal Competition**
**Renewables-on-Conventional Competition**
**The NEW Electricity Market**

**Current Drivers of US Electricity Markets **

## Construction Boom – The Numbers

***Independent power producers and utilities add unprecedented amounts of new generating capacity***

## Construction Boom – The Picture

***New power plants are being built everywhere in the nation***

## Electric Supply Outlook

***There are 400,000 MW of proposed projects nationally***

**7% of proposed projects are “officially” cancelled.**
**Since the construction boom began, more than 130,000 MW of capacity has begun operating or is under construction.**
**ECAR/MAIN and SERC have the greatest amounts of early development capacity**
**Of the 400,000 MW of proposed, how many projects will actually go forward?**
- Nationwide 26% of all proposed capacity is operating or under construction.
- Highest project completion rates are around 45%.
- In some regions only 15 to 20% of projects have moved forward thus far.

**Planned New Plant Additions To Meet Summer Peak Demand**

## Expected Level of Capacity Additions

**Expected Level of Capacity Additions**

***Expected level of new capacity additions is 180,000 MW***

**Of the total expected additions of 180,000 MW, 55% are already under construction or operating.**** **
**The Midwest and Southeast account for 44% of total additions and 50% of the additions not yet under construction.**

**Expected Level of New Capacity Additions (MW) To Meet Peak Dmd**

## More Capacity from Existing Power Plants

**According to NERC, more than 1,000 MW of new capacity will be added to the grid through up-rates between March and August of this year,**
**RDI estimates that an additional 2,000 to 3,000 MW of capacity is available at existing nuclear plants**
**Coal plant uprates are less likely due to New Source Review (NRS) requirements**
- Uprates still occurring at plants that are installing scrubbers.
- Uprates may be occurring without announcements.
- New plant owners are focused on asset productivity.
- Bush Administration has recommended that new source review standards would not apply to minor modifications at plants – could result in many more up-rates.

***Capacity creep from the existing system is one source of new capacity***

## The Technology Mix of New Power Plants

***Expected level of new capacity additions is 180,000 MW***

**RDI Consulting forecasts 128,735 MW of Combined Cycle plants to come online in the near future.  Many projects are still in early development.**
**Modern Combined Cycle plants use supplemental firing in the HRSG ducts to boost output by 10-30% during peak demand.**
**In high solar resource areas Parabolic Trough solar fields could provide steam augmentation, substituting for duct firing.**
**Tax credits, easier permitting of project, and fuel price hedge are advantages for the developer.**
**Potential market for Parabolic Trough, price to “beat” is $200-250/kW.**

## Electricity Demand Outlook

***RDI’s forecast demand is slightly lower, but close to historic levels ***** **

**Historical growth rate from 1995 to 2000.**
**Forecast growth rate from 2001 to 2005.**
**Forecast also includes one-time downward revision for 2001 in the West due to higher electricity prices.**

## Drivers of Demand – The Economy

**Since the recession of 1991, annual growth in real GDP has averaged about 4.0%.**** **
**During the same timeframe, annual growth in total electricity demand has averaged about 2.7%.**** **
**The consensus among economists and other analysts is that real GDP growth will slowed by an average of between 0.5-1.0% through 2005.**** **
**How would an economic slowdown affect electricity demand growth?**
- In the short-term, an economic slowdown does not have a substantial impact on electricity demand, although impacts vary by region.
- A prolonged economic slowdown can have a more substantial impact as structural shifts in the economy and population migration may occur.

***Will a slowdown in economic growth affect demand growth?***

## Drivers of Demand – Retail Prices

**Our analysis indicates that electricity demand is heavily influenced by price changes.**** **
**History however may not provide as much insight as required to determine the impact of retail price changes on demand.**
- Volatile prices have increased the value some consumers may achieve by curtailing consumption to resell power.
- Not since the 1970s have consumers experienced the rapid price increases of the magnitude experienced over the past year.
**There is clear anecdotal evidence of significant consumption drops in California.**
- Key question is how much of this drop reflects long-term structural change and how much is due to “crisis” mentality.
- Not enough data available yet to know.

***Retail rate increases could have a more substantial impact on demand growth***

## Drivers of Demand – The Digital Economy

**Mark Mills, in a study partially funded by a coal lobby group:**
**“****Somewhere in America, a lump of coal is burned every time a book is ordered online...”**
**“****In 1998, 13% of total U.S. electricity consumed went to powering Internet-related activities.”**
**“****Within 10-20 years, the total electricity consumed by the Internet could account for as much as **_**half**_** of all power consumed annually in the U.S.”**
**“****While total electricity demand growth averages 2-3% each year, as much of half of this growth can be attributed to the increased power consumed by the Internet.”**

***Digital economy and electricity demand – The Myth***

## Researchers, including leading authorities at Lawrence Berkeley National Lab (LBNL), refute Mills’ claims

Statistics don’t support claims of rampant power demand growth attributable to Internet popularity growth.
DOE EIA:  “From 1985 to 1995, retail electricity sales grew at a rate of 2.6% per year...Since 1995, the use of the Internet has increased dramatically, yet retail electricity sales have grown by 2.1% per year, 0.5% less than the previous 10 years...”

Ordinary desktop PC average power consumption
Mills (et al.) estimate = 1,000 watts.
LBNL (et al.) estimate = 65-215 watts.
Other numerous technical disputes over assumptions.

A trend to lower power consumption
Penetration of low-power flat panel displays.
In 2000, laptop sales increased 21%, desktop 1.6%.
Chip cooling technology not keeping up with increasing heat load.
Limited storage capability of batteries in portable electronic devices.

**Statistics don’t support claims of rampant power demand growth attributable to Internet popularity growth.**
- DOE EIA:  “From 1985 to 1995, retail electricity sales grew at a rate of 2.6% per year...Since 1995, the use of the Internet has increased dramatically, yet retail electricity sales have grown by 2.1% per year, 0.5% less than the previous 10 years...”
**Ordinary desktop PC average power consumption**
- Mills (et al.) estimate = 1,000 watts.
- LBNL (et al.) estimate = 65-215 watts.
- Other numerous technical disputes over assumptions.
**A trend to lower power consumption**
- Penetration of low-power flat panel displays.
- In 2000, laptop sales increased 21%, desktop 1.6%.
- Chip cooling technology not keeping up with increasing heat load.
- Limited storage capability of batteries in portable electronic devices.

***Digital economy and electricity demand – The Reality***

**Drivers of Demand –**** The Digital Economy**

## Drivers of Demand – High Density Loads

**HiDELs—also called Internet hotels, server farms, or data centers—run  24 hours a day, 365 days a year, and require a substantially more reliable power supply than other grid users (up to 99.9999% reliability).****This a Power Quality Issue.**
**These facilities draw loads much higher than homes, office buildings, and industrial facilities. Utilities are already having difficulty with their distribution systems serving these high-density loads.**
**	****This a Distribution Issue.**
**From 1999 to 2000, the amount of space occupied by server farms rose from 3 million to 9 million ft****2****.  Analysts predict that by 2003, this number will rise to 25 million ft****2**** (equivalent to 125 ten-story office buildings).**** **
**	****How will this affect the demand for megawatt-hours?**

***High-Density Electric Loads***

## Drivers of Demand – High Density Loads

***Overall impact on electricity demand, however, should not be substantial***

***Source:  Jennifer Mitchell-Jackson, Master’s Thesis, UC-Berkeley, May 2001***

**Total energy consumption of data centers**

**   ****Assumption:  average data center computer room power density is equal to 60 W/ft****2****.**

**   ****Note:  actual average data center computer room power density could range from 35 to 85 W/ft****2****.**

## Drivers of Demand – Interruptible Load

**According to NERC, almost 4% of current demand is interruptible (almost 30,000 MW of capacity).**
**At what price does this demand become interruptible?**
**How much of this demand is truly interruptible?**
- The regions with the greatest reliance on interruptible demand include SERC, Texas, Florida, and the Midwest (4 to 7% of total peak demand)
**Among energy managers for large companies, survey results indicate that if energy managers were offered $1000 per MWh, as much as 18% of their load could be shed.**
**Based on our survey results, as much as 50 GW of demand could ultimately become curtailable at a price of $1,000 per MWh.**

***Will price-responsive demand become the death of peak demand growth?***

## Drivers of Demand – Conclusions

**Overall GDP growth is still the driver of demand.**
**Power prices have a big impact on consumption.**
**Computers and the Internet do **_**not**_** spur demand growth.**
**High Density Load pose challenges to power quality and distribution networks but not power supply.**
**Interruptible (Dynamic) demand has the potential to result in significant reductions in peak demand through load shifting**

***Demand growth follows old trends, but may take new turns***

**For developer, demand growth forecast and load shapes  are the some of the key factor that determine the size and technology of new capacity.  This is true for renewables also.**
**Do not look at historical—or even worse—current  peak demand prices when performing an economic analysis of a generating technology.  Things are likely to change.**

## Demand and Supply Balance

***RDI Consulting’s Forecast***

## 2001 Forecast Reserve Margin

**2001 Forecast Reserve Margin**

**Green ****Range above Target RM**** ****Red ****Below Target RM**

## 2003 Forecast Reserve Margin

**Green ****Range above Target RM**** ****Red ****Below Target RM**

## Supply and Demand Balance - Conclusions

***The US power markets are likely to be characterized by 70,000 MW of excess capacity***

**The window of opportunity to capture some of the market of needed capacity is not only short, it is most likely already shut.**
**Renewable projects will have to find niches in a market that is likely to be characterized by rock-bottom energy prices.**

**Demand growth is not outpacing supply additions.  The industry has not had difficulties adding capacity.  Only 1/3 of current construction activity is need in the future to keep up with demand growth.**
**By the end of the forecast period, nearly every region will have much more generating capacity than it needs.  Nationwide we expect up to 70,000 MW of excess capacity.**
**Our forecast only calls for 180,000 MW to be built.  This is in contrast to the 400,000 MW proposed.**

## Overview Conventional Fuels

**Natural Gas**
- Future prices forecast at $3-4 mm/Btu continue to make natural gas economic.
- Negligible SO2 emissions.
- Modern emissions control technology provides excellent NOx reduction.
- Lowest CO2 emission of any fossil fuel in combined cycle combustion.
**Coal**
- Most abundant of all fossil fuels.
- Even at $3.5 mm/Btu natural gas prices, new coal plants are only competitive at low coal cost—mine mouth plants.
- Carbon emissions are big bootleg for coal addition.
- Clean coal technologies are not cost competitive and contain large technology risk
**Nuclear**
- Very high capital cost
- Substantial development cost and risk.  National and local opposition by citizens is the single most important reason for project failure in current environment.
- Uranium cost is likely to climb.
**Hydro**
- Large Hydro? Forget it!
- Small Hydro? Maybe, maybe.
**.  **

***Price and availability of fuels are a key driver for future power supply***

**Understanding what drives technology and fuel choice is key to determining what renewable technologies to pursue.**

## Coal – The Black Workhorse

**The potential exists for up to 20,000 MW of existing coal-fired capacity to be retired by 2010.**
**Most retirements will be smaller, older plants in the eastern U.S., where retrofitting new emission control equipment is likely to be prohibitively expensive.**
**New Source Review (NSR) could play a role.**
**Developers may view plant retirements as opportunities to build new coal plants with the latest technology, producing winners and losers among coal suppliers.**
**Offset examples**
- Wisconsin Energy plans to build a new coal plant at its Oak Creek site, while re-powering its older Port Washington plant with natural gas
- A proposed lignite-fired power plant in MAPP would include the construction of a wind-powered facility
**Developers are looking to take advantage of a window of opportunity to build new coal-fired generating capacity.  The duration of this window could be short**

***What does the future of coal look like?***

## The Promise of Natural Gas
Clean, lowest CO2 emissions per MWh.
Combined cycle and combustion turbines have low capital cost, are modular, and are fast to built.
Competitive fuel price $/mmBtu.

The year 2000 – A Promise Broken
May be remembered as the most volatile year ever for natural gas markets.
Gas prices to most end-users doubled or tripled.
Many western locations saw physical spot prices at $20/mmBtu for sustained periods and peak prices in excess of $61/mmBtu.
The clear role that natural gas was going to play as the “Fuel of the Future” is now mired in uncertainty. 
Industry claims of continuous growth in gas supply at moderate to declining prices now rings hollow in the face of tremendous volatility. 
2000 brought on in large measure by the convergence of gas and electric market.

Natural Gas Tomorrow
High prices have spurred drilling.  But can supply keep up with growth?
Pipeline Contracting and Siting: Expansions are planned but will they be certified, approved and built?
The year-round demand of natural gas fired combined cycle plants changes the dynamics of the gas market.

**The Promise of Natural Gas**
- Clean, lowest CO2 emissions per MWh.
- Combined cycle and combustion turbines have low capital cost, are modular, and are fast to built.
- Competitive fuel price $/mmBtu.
**The year 2000 – A Promise Broken**
- May be remembered as the most volatile year ever for natural gas markets.
- Gas prices to most end-users doubled or tripled.
- Many western locations saw physical spot prices at $20/mmBtu for sustained periods and peak prices in excess of $61/mmBtu.
- The clear role that natural gas was going to play as the “Fuel of the Future” is now mired in uncertainty.
- Industry claims of continuous growth in gas supply at moderate to declining prices now rings hollow in the face of tremendous volatility.
- 2000 brought on in large measure by the convergence of gas and electric market.
**Natural Gas Tomorrow**
- High prices have spurred drilling.  But can supply keep up with growth?
- Pipeline Contracting and Siting: Expansions are planned but will they be certified, approved and built?
- The year-round demand of natural gas fired combined cycle plants changes the dynamics of the gas market.

**Natural Gas - Panacea or Pandora**

## Natural Gas – Drilling

**Natural Gas –**** Drilling**

## Tight gas supplies and growing demand should support pricing in the $3.00 to $5.00/mmBtu range over the next three years.

Overall gas price levels are primarily responding to supply-based factors, while transmission congestion can produce regional price spikes.  

**Tight gas supplies and growing demand should support pricing in the $3.00 to $5.00/mmBtu range over the next three years.**
**Overall gas price levels are primarily responding to supply-based factors, while transmission congestion can produce regional price spikes.  **

**Natural Gas**** –  Short Term Forecast**

## In our Base Scenario, total annual gas demand is forecast to reach 29 trillion cubic feet (TCF) by 2010.  
This results in prices in the $3.00 to range after the gas market comes back into balance after 2003;
If demand follows a lower trajectory ( i.e.,27 Tcf in 2010 ), prices could be 20% lower.  Could cause demand destruction in the industrial sector. 
Long-term prices are not expected to stay at the current levels.  
Prices above $4.00/mmBtu erode demand and make a variety of marginal gas sources like coal-gas and new LNG projects viable.

**In our Base Scenario, total annual gas demand is forecast to reach 29 trillion cubic feet (TCF) by 2010.  **
- This results in prices in the $3.00 to range after the gas market comes back into balance after 2003;
- If demand follows a lower trajectory ( i.e.,27 Tcf in 2010 ), prices could be 20% lower.  Could cause demand destruction in the industrial sector.
**Long-term prices are not expected to stay at the current levels.  **
- Prices above $4.00/mmBtu erode demand and make a variety of marginal gas sources like coal-gas and new LNG projects viable.

**Natural Gas**** –  Long Term Forecast**

## Coal-on-Gas Competition

**We forecast delivered gas prices in NWP to decline in real terms over the next two years, then level off at around $3.00 per mmBtu through the end of the decade.**
**Coal projects appear to be attractive if coal costs remain below $1.20 and gas prices are above $3.50 per mmBtu.**
**However, at $3.00 per mmBtu gas prices and coal prices between $1.00 and $1.20 per mmBtu, a new coal plant competes with gas CC technology only at very high capacity factors.**
**Coal becomes increasingly competitive as delivered prices decline from $1.00 per mmBtu.**

**Delivered Gas Price Forecast ($2000/mmBtu)**

***Delivered price projections for Henry Hub and into the Northwest Power Pool***

## Renewables-on-Conventional Competition

***Competitiveness means more than low cost***

**Renewable energy research always seems to look at lowering cost.  However, the true goal should be to maximize profits.**
**	****Example: 10% lower fuel cost at Eastern power plants resulted in lower production cost, higher dispatch, AND LOWER PROFITS!**
**Know your “proven reserves” of wind, solar, geothermal, and biomass.**
**Don’t estimate, but calculate your resources using latest GIS technology.**
**State your results in numbers that the industry understands, e.g. summer and winter rating, availability, forced “outages”.  Develop new and intuitive terms if necessary.**
**Intermittency is o.k. , but being unpredictable is not.  How well can solar and wind be forecast?  Analyze historic data and develop methodologies.  Then prove that you can do it!  Example: Wind forecast in Denmark.**
**Intermittency as power supply problem is mitigated if generation is disperse.  What is the statistical availability of distributed wind or solar farms?  Analyze and then prove concept with actual projects.**
**Do not focus too much on performance.  Less may be more.  Example: H-class combustion turbines.**

## Renewables-on-Conventional (Continued)

***Competitiveness means more than low cost***

**Short-term energy storage increases value of renewable resource in energy markets.**
**Heat storage for thermal solar**
**Compressed air storage for wind?**
**	****But intermediate or long-term storage may not be profitable.  A pile of coal is long-term energy storage.  Is this really your business?  **
**	**
**Always remember that building conventional generating capacities is not a no-brainer either.  Advanced combustion turbines have plenty of problems.  Understanding where you are in relation to other generating technologies helps to understand your strengths and weaknesses.**
**88% of all new capacity is built by independent power producers that are—for the most part—exposed to market risk, need the public acceptance, and live and die with their investment choices.  Find out what these IPPs are looking for in a technology.  **
**Commodities are sold on price—and attributes.  Electricity from green energy can be sold at a premium.  Know that premium.**

## Renewables-on-Conventional (Continued)

***Competitiveness means more than low cost***

**Every new technology needs an incubation period.  Analyze the factors that resulted in the success of wind power in Europe and the dramatic cost reductions that accompanied it.**
**Be realistic.  Credibility is one of the biggest areas of improvement for renewable generating technologies.  No one expects miracles and neither does anyone believe them.**
**The Kyoto Protocol is real.  Planting trees won’t work and carbon sequestration may be as cost effective and realistic as shooting radioactive waste from nuclear power plants to the moon.  Renewable energies have a competitive advantage.  This is a window of opportunity that is open and widening every day.**

## The NEW Electricity Market

***Renewable generating technologies need to fit into the market***

**Energy trading is an emerging market**
**Accounting for the cost of ancillary services**
**Who pays for transmission services?**

**There is no need to come up with ways to “firm-up” intermittent renewables with technical solutions when replacement power is available for less money from a trader. **
**Buying replacement power from a 7,000 mmBtu/kWh combined cycle plant may not only be cheaper, but is probably more environmental, too.**

**Improve your output forecast abilities.  Work on ancillary service up to cost effectiveness.**
**Find some one who will provide ancillary services for you, because ancillary services is not your business.  Your business is zero marginal cost.**

**Renewable energies need transmission access, but so does coal.**
**Other states may follow the ERCOT system operator, which hooks up everyone and makes all members pay.**

## The NEW Electricity Market

***Renewable generating technologies need to fit into the market***

**Market structures can have significant impacts on economics of intermittent resources**
**Project Financing**

**Need to understand the market structures of system operators, such as NY ISO, Cal ISO, and ERCOT.**
**What are the bidding rules and penalties for failure to deliver or over-delivery.**
**Must participate in setting up market structures to avoid to be shut out.**

**Nothing guarantees project financing more than a PPA with a credit worthy buyer.**
**Need to develop financial tools that hedge intermittent generators from unsteady cash streams so that lenders are comfortable.  This may be cheaper than buying replacement power of employing technical solutions.**
**Technology risk is a problem for project financing.  Nothing assuages fears of banks more than demonstration projects under private ownership that play in the market.  Always seek industry partnerships.**

## Questions and Answers

## Power Plant Construction Boom

***Imperfect information is a key driver of current trend in power supply business***

**Lack of historical information from which to draw inferences regarding trends today**
- Demand elasticities
- Actual cost/value of interruptible demand
- Market driven “reserve equilibrium” levels
**Great uncertainty and often unreliable information associated with new capacity additions**
**Improper use of information – example of capacity margin calculations**

**2000 Capacity Additions**

**Capacity Margin vs. Reserve Margin**

## Ordered Turbines Will Need Homes

***Other factors could contribute to reaching total supply estimate***

**Between 1998 and 2000, approximately 190,000 MW of turbines were ordered for delivery to the U.S.**** **
**Siemens-Westinghouse estimates that worldwide turbine manufacturing capacity is approximately 80 GW per year.**** **
**Nearly 320 GW of turbines could be delivered between 2000 and 2004 worldwide.**** **

**U.S. Turbine Orders (MW)**

- Source:  McCoy Power Reports

## Outlook for Plant Retirements

***Excess capacity will lead to increased retirements***

**RDI believes most retirements will be concentrated in Texas, the Northeast, and the West**
- 6,000 to 8,000 MW of retirements in Texas.
- 1,000 to 2,200 MW of retirements in NEPOOL.
- 1,000 to 5,000 MW of retirements in the West.
**Key factors impacting the level of retirements**
- Regulations and cost of service ratemaking.
- Potential fixed cost reductions.
- Fragmentation of the market and willingness of one player to make the first move.
- Perceptions of market recovery.
- Environmental regulations.
- Future gas prices.
- Financial impacts of closing a plant.