Rising Electricity Prices: A National Perspective

1
Rising Electricity PricesA National Perspective

• Roger A. Kranenburg, CFA
• CSG - West
• Breckenridge, CO
• August 11, 2006

2
Energy and energy pricing are now seen as the
most important issue facing the US
What do you feel is the most important issue
facing the US today?
21
Percent
Source Market Strategies, May 2006
3
Perceived causes of increased electricity costs
13
11
Percent
Source Market Strategies, May 2006
4
Electricity Is A Great Value
5
Electricity Powers Our Nation

• Since 1940, the percentage of U.S. energy
  consumed in electric form has quadrupled
• Today electricity powers an ever-growing array of
  devices and technologies
• More than 175 million personal computers
• A national network of more than 200 million
  cellular phones

6
Electricity Is the Lifeblood of the U.S. Economy

• Electricity intensity in the U.S. economy is
  significantly related to the general level of
  economic activity
• Starting in the late 1990s, economic output grew
  faster than electricity use and much more rapidly
  than overall energy consumption

1985 represents the base year. Graph depicts
increases or decreases from the base year.
7
The U.S. Economy Is More Energy-Efficient

• Technological advances and increased efficiency
  are reducing energy use as electric power demand
  continues to rise
• The U.S. economys increase in energy efficiency
  coincides with a shift toward greater use of
  electric power
• 194010 percent of energy consumption used to
  produce electricity
• 197025 percent
• Today40 percent
• Near future50 percent

8
Electricity Price Trends

• The national average price for electricity today
  is less than what it was in 1980, when adjusted
  for inflation
• Even with recent price increases, the growth rate
  for electricity prices remains comparable to, and
  even lower than, other important consumer goods

Increase in cost of selected consumer goods1985
2005 (nominal dollars)
Sources U.S. Department of Labor, Bureau of
Labor Statistics, and U.S. Department of Energy,
Energy Information Administration (EIA)
9
U.S. Electric Rates by Class of CustomerReal
2005 Dollars
10
Key Drivers of Electricity Costs
11
Rising Fuel Costs
COST DRIVERS

• Fuel prices greatly affect the price of
  electricity
• On an industry-wide basis, fuel and purchase
  power costs account for roughly 95 percent of the
  22-percent increase in operation and maintenance
  (OM) expenses experienced by utilities

12
Electric Utilities Use A Diverse Fuel Mix to
Generate Electricity
National Fuel Mix
Other includes generation by agricultural
waste, batteries, chemicals, geothermal,
hydrogen, landfill gas recovery, municipal solid
waste, non-wood waste, pitch, purchased steam,
solar, sulfur, wind, and wood. Note Numbers
exceed 100 due to rounding Source U.S.
Department of Energy, Energy Information
Administration (EIA), 2005 preliminary data
13
There Are Regional Variations in the Fuel Mixes
Used to Generate Electricity
14
Rising Fuel Costs

• Natural Gas
• Natural gas prices, which generally set the
  prices in many short-term markets, have increased
  more than 300 percent since 1999
• Weather conditions, continued economic growth,
  and a dramatic expansion of gas-fired combined
  cycle generating capacity all contribute to
  pressures on the supply of natural gas
• Oil
• Oil, which makes up only 3 percent of the
  national fuel mix, is still a significant fuel
  source in parts of the country
• The prices of oil-based fuels delivered to
  electric generators rose about 50 percent between
  2003 and 2005
• Oil prices impact other fuel prices and have
  driven up the costs of mining and shipping coal

15
Rising Fuel Costs

• Coal
• Coal prices have risen 20 percent in the last two
  years alonesome increases have been much higher
• Coal delivery from the Powder River Basin faces
  rail congestion and delivery problems
• Nuclear
• The price of uranium, the primary component of
  nuclear fuel, has increased by about 40 percent
  since 2001

16
Rising Fuel CostsRenewables

• Electric utilities are using increasing amounts
  of renewable resources (wind, solar, geothermal,
  and biomass)
• Renewable technologies face high initial capital
  costs
• Wind and solar require more back-up capacity
  because their power output is intermittent

17
Growing Electricity Demand
COST DRIVERS

• Our countrys demand for electricity is at an
  all-time high
• Homes are larger and have more appliances and
  electronic equipment than ever before
• Despite continued efficiency improvements,
  electricity consumption is expected to grow 45
  percent by 2030

18
Electricity Use in the Typical U.S. Home
PAST
PRESENT
FUTURE
19
New Generating Capacity Is Needed to Meet Demand

• Electric utilities must invest in a new
  generation of baseload power plants
• According to EIA, 347 gigawatts (GW) of new
  capacityboth electric power sector capacity and
  customer-owned distributed generationwill be
  needed by 2030
• If all of this new capacity is built, costs would
  be in excess of 300 billion (2005)

20
Infrastructure Investment Costs Generation
COST DRIVERS

• Over the next 10-20 years, net generating
  additions are expected to shift to more expensive
  baseload capacity (mostly coal)
• More expensive renewable capacity will arise from
  state-level mandates over the next 10 years
• Cost of recent additions not yet fully reflected
  in rates

21
Infrastructure Investment CostsTransmission

• Significant increase in investment coinciding
  with surge in generating capacity
• 116-percent increase since 1999
• 18.5 billion planned through 2008 on
  transmission infrastructurea 25-percent increase
  over the previous three years
• Benefits include newer technologies, bigger
  markets, lower prices, reliability

22
Infrastructure Investment Costs Distribution

• The need to replace an aging distribution
  infrastructure, coupled with continued population
  and demand growth will require continued increase
  in distribution system investments
• If recent investment trends persist, distribution
  investment will average 14 billion per year over
  the next 10 years
• Likely to exceed generation and environmental
  capital spending in the next decade

23
Environmental Compliance Costs
COST DRIVERS

• From 2002-2005, the electric utility industry
  spent 24 billion on compliance with federal
  environmental laws state and local rules drive
  that total even higher
• Two recent EPA rulemakingsthe Clean Air
  Interstate Rule and the Clean Air Mercury
  Rulewill cost the electric utility industry
  47.8 billion in compliance costs between the
  years 2007 to 2025
• The costs of potential carbon mandates would fall
  heavily on electric utilitiesand their customers

24
Power Plants Reduce Emissions Despite Surging
Electricity Demand
1980 represents the base year. Graph depicts
increases or decreases from the base year.
25
Expiring Price Caps
COST DRIVERS

• Significant rate increases prior to initiation of
  restructuring efforts
• To make competition politically tenable,
  policymakers decreed rates would be frozen or
  reduced for a period ranging from 2-10 years
• Actual costs were increasing!

26
Controlling Rising Costs
27
What Are Utilities Doing?

• Many utilities try to hedge or enter into
  long-term, fixed contracts for fuel at set prices
• Not all companies have this option, and such
  forward contracts cannot cover all fuel needs
• Utilities have increased the productivity
  (capacity factors) of their power plants while at
  the same time decreasing their operations and
  maintenance costs
• Electric utilities have taken a leading role in
  developing energy efficiency and demand response
  programs for residential, commercial, and
  industrial customers
• Between 1989 and 2004, electric utility
  efficiency programs saved about 736 billion
  kilowatt-hours of electricityenough electricity
  to power nearly 68 million average U.S. homes for
  one year

28
Energy-Efficiency Programs

• Energy efficiency is emerging once again,
  supported by federal and state policies, to fill
  the roles of reducing the need for new investment
  and reducing emissions
• Efficiency and demand response programs can play
  a positive role in creating new shareholder and
  customer value by helping customers mitigate the
  impacts of fuel price increases and manage costs
• The Energy Policy Act of 2005 requires
  consideration of energy efficiency and demand
  response issues by states and regional
  organizations
• New technology creates new opportunities for
  two-way customer energy and information flow to
  manage energy use

29
What Can Customers Do?

• Tax Credits and Incentives
• EPAct 2005 contains several federal tax credits
  for improving the energy efficiency of your home
  in 2006 and 2007
• Many utilities offer incentives to buy
  energy-efficient appliances, such as Energy Star
  refrigerators, dishwashers, and clothes washers
• Bill Payment Assistance
• Utilities have created programs to help
  low-income customers with billing assistance and
  weatherization help
• Federal programs, such as LIHEAP and the
  Weatherization Assistance Program, provide
  assistance to low-income families

30
Looking Forward
31
Key Challenges

• Natural gas supply
• Fuel diversity
• Environmental policy
• Coal transportation
• Rising costs of doing business
• Need for increasing infrastructure investment

32
The Bottom Line

• If utilities are able to make investments in
  infrastructure improvements, benefits will
  include
• Long-run reductions in operating costs
• Enhancements of reliability and power quality
• Improvements in competitive power markets
• Cleaner generation
• Increased customer choice and control over energy
  use

33
Questions?
34
For More Information
Roger A. Kranenburg, CFA Director Edison
Electric Institute rkranenburg_at_eei.org (202)
508-5183