Economic Costs

of Ultra-Low Sulfur Diesel

Fuel

Requirements

Presentation toAlaska Department

of Environmental Conservation NEI and MAFA2008 northe omics Presentation Agenda

• Study

objectives • EPA standards • Overview

of communities

in northern

and western Alaska • EPA transition

plan • Current

fuel consumption

and handling • Transition

process • Household

cost impacts norther•onomicsStudy Objectives

• Evaluate

economic

costs

to Alaska

for implementing the new federal

fuel requirements for ULSD. • Specific

deliverables: • Quantify

costs associated

with fuel storage

and distribution infrastructure

changes

in a typical hub community

and village. • Estimate

fuel volume

demand

for all regulated land and marine

based diesel sources.

norther•onomics Study Objectives

• Specific

deliverables

(continued): • Quantify

the refinery

based fuel cost premium

for ULSD, recognizing

the need for arctic grade specification fuel • Quantify

the marine shipping

cost premium

associated with various importation

scenarios • Quantify

and assess whether

the cost benefits

of aggregate fuel purchases

over multiple

rural communities will be lost under a two-grade

fuel system scenario norther•onomicsStudy Objectives

• Specific

deliverables

(continued): • Quantify

the potential

for a lower refinery

cost premium on ULSD if ULSD demand

volumes increase due to a one-grade

ULSD infrastructure in rural Alaska • Quantify

cost impacts

to heating

fuel in rural Alaska in the event of full conversion

to ULSD • Quantify

the power

generation

cost impacts

to rural Alaskans norther•conomics EPA Standards: Air Quality

• Health

Concerns

Related

to Diesel • New EPA standards • ULSD

Mandates • Diesel highway

mobile

sources • Reduce

emissions

by 90% or more • Off-highway

equipment

by 2010

norther•onomics

3EPA Standards:

Mobile

Engine

Fuel Rules for Urban

and Rural

Alaska 2007 to 2010 to 2006 2009

2011 Region Engine Type Parts per Million

2012 Rural Highway > 500 > 500

15 Non-road > 500 > 500

15 Locomotive and Marine

> 500 > 500

15

151515 Urban Highway 15

15

15

15 Non-road > 500

500

15

15 Locomotive and Marine

> 500

500

500

15 Source: Alaska Department of Environmental

Conservation

(ADEC).

norther•onomics EPA Transition Plan

for Alaska

• In May 2006, EPA finalized

an alternative transition plan for rural Alaska. • Rural areas can continue

to use uncontrolled sulfur

content

diesel

until 2010. • As of June I, 2010, all areas of rural Alaska will have to begin the transition

to 15 PPM ULSD. norther•onomicsEPA Transition Plan

for Alaska

• Implementation of EPA standards

in rural Alaska is expected

to be difficult

due to the area's unique

geography

and economic characteristics. • The transition

is likely to be more costly

in rural Alaska

due to logistics

of." • Distributing

multiple

petroleum

products • Storing multiple

petroleum

products • Both of the above in limited quantities

norther•onornics Northern and Western

Alaska

• The project

area consists

of communities in northern

and western Alaska not connected

to the road or ferry system. • The area has 151 communities characterized as regional

hubs,

subregional hubs,

towns,

and villages.

norther•onomicsNorthern and Western

Alaska

Northern and Western

Alaska Population • 61,000 people in 151 communities • Ranges from 2 to 6,000 people • 100 of these communities

have fewer than 400 residents Community Infrastructure • Most have no road or power grid connections • Depend on distillate fuels for heat and electricity • Most communities

have seasonal fuel deliveries

within the year • Some communities

have fuel storage facilities that can only accommodate a few fuel products • Pay some of the highest diesel prices nationwide,

recently over $7 per gallon norther•onomicsNorthern and Western

Alaska

% of Total % of Total Community, 2000

2006 2000-2006

Community

2000

2006 Type Population

Population

CAGR (%) Count

Population

Population Hubs 19,105

18,918

-0.16

5 31.42

31.04 Sub-regional 4,975

5,028

0.18

9 8.18

8.25 HubsTowns 20,620

21,642

0.81

37 33.91

35.51 Villages 16,105

15,357

-0.79

O0 26.49

25.20 Total 60,805

60,945

0.04

151 100.00

100.00norther•co•omics Current Fuel

Use

and

Handling Current Fuel Demand • Statewide

fuel demand

in 2006 was l.7 billion gallons I.I billion gallons are Jet A fuel 0.3 billion gallons are gasoline and associated

fuels 0.3 billion gallons are distillates

(including

kerosene

and diesel) Typical fuels consumed

in rural Alaska include: • Jet A (for heating and aircraft) • Diesel #1 and #2 (sometimes

with arctic additives) • Aviation

gas • Unleaded

gasoline norther•conomicsCurrent Fuel

Use

and

Handling Storage Use Sub-regional

Village and Hubs Hubs

Towns

Totals (Millions of Gallons) Total Petroleum Products

34.6

6.8

29.8

71.2 Motor Gasoline 6.6

1.3

5.7

13.6 Electricity 9.9

1.9

7.2

19.1 Residential Heating 4.9

1.1

8.2

14.1 Marine 3.4

0.7

0.0

4.1 Aviation 6.6

1.0

0.0

7.6 Off-Road 1.0

0.2

1.0

2.1 Other 3.3

0.8

6.5

10.5 All Distillates, excl. Jet

21.2

4.5

24.4

50.0 Regulated Distillates

13.8

2.8

11.3.•.._.,,•.•h r•rt•c•o'n mic Current Fuel

Use

and

Handling

• Fuel Storage

and Distribution • Communities

in rural Alaska have increased

their bulk fuel capacity through the Denali Commission

and Alaska Energy Authority's

rural bulk fuel program • Of 186 bulk projects statewide,

58 completed

or near-complete projects in the project area were available to provide current cost data for this study • Storage and distribution

costs vary with community

size and location • Fuel Sources • Six refineries

operate in Alaska and one, in Nikiski, produces

ULSD • Other fuel sources include some of the 35 refineries

in Washington and arctic grade ULSD is available from Canada

norther•conomicsCurrent Fuel

Use

and

Handling Cost differences

between

ULSD

and Jet A: • Jet A is the main fuel consumed

in the study area. • ULSD is more expensive

than Jet A by:

• 1.32% in Anchorage

(ranging from 0.6 to 13.2 cents/gallon) 3.3% in Fairbanks 1.4% in Anacortes,

Washington

(averaging

2.7 cents/gallon) (representative of northern

Puget Sound refineries) • Cost differences

are getting smaller as ULSD volumes increase, norther•conomics Transition Process Transition scenarios • Scenario

I: Warranty

scenario Just enough ULSD shipped to meet 2007 and newer engine requirements • Scenario

2: Compliance Increased consumption

of ULSD to meet EPA-mandated requirements Either a gradual transition

(2a) or blend-down

approach

(2b) • Scenario

3: Full Conversion ULSD shipped for all purposes

(heating, engines, and power plants) except aircraft requiring Jet A Uses the blend-down

approach norther•conornicsTransition Process Blend-down approach • By starting to use ULSD in 2008, villages could blend their existing

stored diesel fuel as it is used and refilled • With the blend-down

approach,

average

sulfur concentrations would decline over a three-year

period • The blending

process

would lead to the final tank filling achieving 15 parts per million sulfur content

(or less) • The blend-down

approach

appears

to be the lowest cost option for the transition,

compared

with the cost of purchasing new tanks, cleaning

and disposing

of waste from existing

tanks, or using drums for temporary storage norther•conornics Transition Process

Units Scenario 2A: Scenario 2B: Scenario 3: Gradual Rapid Transition

Rapid Transition Transition to (excluding

(including ULSD (excluding

heating oil) with heating oil) with heating oil)

blend down

blend down HouseholdCost2010Household Cost(2008-2030) Households $ per household

300

278

189 per year$ per household

2,902

2,361

2,091 (NPV 20065) Number of households in Study Area

14,700

14,700

14,700norther•onomics

10Household Cost

Impacts

• Electrical

cost increases

are projected

at $61 per year. • Additional

fuel transportation

and storage system costs are estimated at $99 per year. • ULSD costs more to refine than competing

fuels, increasing costs by $49 per year.Cost Category S/Year$61 Cost of modifications

to electric utility diesel generating systemsULSD refinery premium over Jet A $49 Cost of modifications

to fuel transportation

and storage

$99 systemsTotal $209 Percent29.223.447.4100.0norther•onomics Household Cost

Impacts Environmental Justice

issues • Environmental

justice factors are an issue in the study areaArea's population

is 84% minority 19.6% of the area's population

is low-income • Household

costs of the ULSD transition

are highest for areas of the state with the highest concentration

of minority and low-income

populations • Disproportionate

impacts are due to the study area's greater reliance

on diesel for heating and power generation in comparison

to the rest of the statenorther•onomics

11Questions? norther•onomics