THE GEE STRATEGIES GROUP

1
The Role of Utility Fuel Diversity in Maintaining
U.S. Energy Security
MINISTRY OF ECONOMIC AFFAIRS ENERGY
COMMISSION TAIPEI, TAIWAN DECEMBER 13, 2001

• THE GEE STRATEGIES GROUP
• Robert W. Gee
• President

2
Fundamentals Affecting U.S. Energy Security in
the Utility Generation Sector

• Degree of Fuel Diversity
• Certainty and Source of Supply
• Stability or Manageability of Price
• Affordability of Price
• Sustainability and Cleanliness of Resources
• Proper balance between market decisions and
  government action

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Generation Shares by Source (1999)
Source EIA Annual Energy Review 1999
4
Who gets which fuel Electricity Flow, 1999
(Quadrillion Btu)
Source EIA Annual Energy Review 1999
5
What Factors Affect Prospects for the U.S.
Fossil-fired Generation Market?

• Near-term fuel supply and price trends
• Long-term market forecast
• Significant federal policy decisions
• Political variables influencing market decisions

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The Roller Coaster Recent Natural Gas Spot Prices
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Recent Coal Spot Prices An Upward Shift
Central Appalachia Coal Prices, F.O.B. Mining
District (12,500 Btu, 0.6 lbs S/MBtu)
Source Coal Outlook.
8
Whats In Store Through Next Year?
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The Conventional Wisdom

• In the 1970s running out of natural gas/ the
  solution was coal
• In the 1980s and 1990s plenty of natural
  gas/coal was a growing environmental threat
• In 2001 gas prices and deliverability a growing
  problem
• Perhaps coal is the solution again?

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An Important Lesson Dont overreact

• Experts have been incapable of accurately
  forecasting long-term (and sometime short-term)
  trends
• But still important to correctly identify risks
  and find ways to hedge

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What is true

• Both coal and natural gas have advantages and
  disadvantages
• The respective roles of each are evolving in an
  increasingly deregulated market

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Natural gas

• Advantages cleanest of fossil fuels, short lead
  and deployment times for gas-fired generation,
  low up-front capital costs, easier to site, more
  favorable public image (among fossil fuels)
• Disadvantages lack of adequate transmission
  infrastructure, lack of access to producible
  areas (onshore and offshore), increasing price
  volatility attributable to external factors
  (i.e., OPEC action)

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Coal

• Advantages low cost, low price volatility, ample
  volume of indigenous supply
• Disadvantages uncertain but increasing
  environmental compliance requirements (including
  carbon) , poor public image, some recent capacity
  shortages, recent labor infrastructure shortages

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The U.S. Department of Energys 20-Year Long-term
Energy Market Outlook

• Demand for electricity increases per year by 1.8
  percent ( to 393 gigawatts)
• Demand for gas increases per year by 2.3 (from
  21.4 to 34.7 Tcf )
• Demand for coal increases per year by 1.1 (from
  1.035 to 1.297 million tons)

Source EIA Annual Energy Outlook 2001
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The U.S. Department of Energys 20-Year Long-term
Energy Market Outlook

• U.S. natural gas production increases annually by
  2.1 percent (from 18.7 to 29.0 Tcf)/ Imports make
  up 5.8 Tcf shortfall
• Coal production increases annually by 0.9 percent
  (from 1,105 to 1,331 million tons)
• 1,300 new power plants possibly needed

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The Bush Administrations 2020 Gas Supply
Projection Short by 13 Tcf
Source National Energy Policy Report of the
National Energy Policy Development Group, Page X
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1,300 New Power Plants ProjectedProjected New
Generating Capacity and Retirements, 2000-2020
(gigawatts)
Source EIA Annual Energy Outlook 2001
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For New Generation, the Dash for Gas Continues
Projected Electricity Generation Capacity
Additions by Fuel Type, Including Cogeneration,
2000-2020 (gigawatts)
Source EIA Annual Energy Outlook 2001
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But By Volume, Coal Retains the Edge Electricity
generation by fuel, 1970-2020(billion
kilowatthours)
Source EIA Annual Energy Outlook 2001
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And Coal Also Retains the Price Advantage Fuel
prices to electricity generators,1990-2020(1999
dollars per million Btu)
Source EIA Annual Energy Outlook 2001
21
As nuclear plants are retired, coal and gas
market share growProjected electricity
generation by fuel,1999 and 2020 (billion
kilowatthours)
Source EIA Annual Energy Outlook 2001
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Market Share Forecast by 2020

• Coal-fired generation increases from 1,880
  billion kwh in 1999 to 2,350 billion kwh by 2020,
  but market share declines from 51 percent to 44
  percent
• Gas-fired generation market share increases from
  16 percent to 36 percent by 2020. (By 2004, gas
  displaces nuclear as second largest source of
  electricity)

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What could change this forecast?
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Increased environmental burdens on coal

• Nox SIP (State Implementation Plans) Call/ EPA
  Regional Smog Limits
• Impending Mercury controls
• Any U.S. action to mitigate carbon emissions
  (other than through Kyoto protocol)
• A multi-pollutant control strategy

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A Multi-pollutant Control Strategy

• EIA Study includes carbon dioxide with sulfur
  dioxide, and nitrogen oxide controls (mercury
  later)
• Price of coal would quadruple, making plant costs
  uneconomic/ causing dramatic shift to gas
• Coals market share would drop to 16 percent
  while gas would leap to 55 percent

Source Analysis of Strategies for Reducing
Multiple Emissions from Power PlantsSulfur
Dioxide, Nitrogen Oxides,and Carbon Dioxide ,
EIA, December 2000
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A Multi-pollutant Control Strategy (cont.)

• Electricity prices would climb by 26 to 32
  percent
• Strategy rejected by President Bush in letter to
  Congress, citing countrys energy needs

Source Analysis of Strategies for Reducing
Multiple Emissions from Power PlantsSulfur
Dioxide, Nitrogen Oxides,and Carbon Dioxide ,
EIA, December 2000
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Likelihood of carbon controls or a
multi-pollutant strategy?

• Senator Robert Byrd statement on floor of U.S.
  Senate, May 4, 2001 advocates binding emission
  limits on all countries
• Support for some type of multi-pollutant strategy
  by major U.S.coal- using utilities American
  Electric Power and Cinergy
• Announcement by Entergy to voluntarily limit or
  reduce carbon emissions

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Nuclear Power A Changing Future?

• Forecast retirement of 27 percent of existing
  nuclear capacity, with some license renewals
• But if waste issue resolved and improved
  operating characteristics, need for 14 gigawatts
  of fossil-fired generation negated
• Assumes no new nuclear capacity through 2020
• Different if new capacity realized per
  Administrations energy policy recommendation

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Future Natural Gas Supply How Much?

• Forecast generally accounts only for supplies
  from accessible areas
• Excludes Rocky Mountain and certain offshore
  reserves currently inaccessible per federal
  restrictions (National Petroleum Council 1999 Gas
  Study)
• Excludes North Slope reserves.
• Nothing included from Alaska National Wildlife
  Reserve

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Lower 48 Natural Gas Reserves Excluded from
Forecast
Source National Petroleum Council
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Future Natural Gas Supply How Much?(cont.)

• EIAs supply projection more optimistic than
  National Energy Policy Development Groups
• Will U.S. production be short by 13 Tcf or 5.8
  Tcf (projected imports)?

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Gas Delivery Infrastructure Can it be built?

• National Petroleum Council 1.5 trillion in
  needed capital investment by 2015 to meet gas
  demand, half for infrastructure
• 38,000 miles for transmission lines
• 263,000 for distribution lines
• EIA Forecast assumes this will be built, but
  without elaboration
• Impact of Bush National Energy Policy ??

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Natural Gas Generation Recent Political
Turbulence

• Temporary deliverability shortages of natural gas
  caused prices to escalate
• Surging demand for gas-fired generation has
  aggravated supply/demand balance, causing price
  volatility in certain markets
• Gas Market power abuse alleged in California
  market
• Investigation of affiliate collusion in gas
  delivery at Federal Energy Regulatory Commission
• Will political response heighten business risk
  for gas?

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Conclusions

• Even with high environmental risks, coal still
  viewed as a viable fuel source
• But because majority of coal-fired generation is
  utility-owned for now, competitive opportunity
  for independent power producers still centers on
  gas generation
• Ten year forecast U.S. demand for electric power
  to increase by 25 percent, but transmission
  capacity by only 4 percent

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Conclusions (cont.)

• Additional gas and electric transmission capacity
  and access becomes key for all competitive
  generation (coal or gas) if market is to grow
• New gas and electric infrastructure will face
  severe growth challenges
• Under any scenario, likely that U.S. will
  increase imports of natural gas

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For More Information Contact
The Gee Strategies Group Robert W.
Gee President 1954 N. Cleveland St. Arlington, VA
22201 [phone] (voice and fax) (703)
593-0116 (mobile) Email racbud_at_ix.netcom.com