CAEM – Competitive Energy Markets

Optimal Provision of New Electric Load

Thomas R. Casten

Chairman & CEOPrimary Energy, LLC

Scott Tinker, DirectorBureau of Economic GeologyAugust 4, 2003

SummarySummary Successful organizations agree on goals and mission, then Successful organizations agree on goals and mission, then

concentrate on tactics.concentrate on tactics.

Start by understanding the environment. Start by understanding the environment. Rising electric rates, rising fuel costs, concerns about excessive Rising electric rates, rising fuel costs, concerns about excessive

fossil fuel use and global warming, manufacturing job loss, and fossil fuel use and global warming, manufacturing job loss, and fear for our way of life.fear for our way of life.

Expect journalists and politicians to fix blame.Expect journalists and politicians to fix blame.

Figure out how to fix the problemFigure out how to fix the problem Determine consensus goalsDetermine consensus goals Identify opportunities to advance goalsIdentify opportunities to advance goals Quantify the problem and opportunityQuantify the problem and opportunity

Articulate a clear, elegant, missionArticulate a clear, elegant, mission

Three Key Power System GoalsThree Key Power System Goals

Availability of Energy ServicesAvailability of Energy Services

Availability of Energy ServicesAvailability of Energy Services

Availability of Energy ServicesAvailability of Energy Services

Subordinate Power System Subordinate Power System GoalsGoals

Limit capital expenditureLimit capital expenditure Reduce rates Reduce rates Reduce fossil fuel useReduce fossil fuel use Reduce pollutionReduce pollution Reduce global warmingReduce global warming Reduce system vulnerabilityReduce system vulnerability Reduce manufacturing job lossReduce manufacturing job loss

What is the Problem?What is the Problem?Is it the conventional wisdom?Is it the conventional wisdom?

Large generation has economies of Large generation has economies of scalescale

All power will flow through wiresAll power will flow through wires

(New) ‘Technology is the Ticket’ (New) ‘Technology is the Ticket’ President Bush, May 2005President Bush, May 2005

Free markets cannot provide the Free markets cannot provide the world’s most second most important world’s most second most important service (Beer is first)service (Beer is first)

Assess the Power SystemAssess the Power System Did power industry chose optimal Did power industry chose optimal

approaches in the past?approaches in the past?

What is best way to meet expected US and What is best way to meet expected US and world load growth?world load growth?

What are the effects of 100 years of What are the effects of 100 years of monopoly protection of electric monopoly protection of electric distribution?distribution?

Compare options for meeting expected load Compare options for meeting expected load growth growth

Conventional Central GenerationConventional Central Generation

Pollution

Fuel

100 units

Power Plant

=

67 units Waste Energy

33 units ElectricityEnd User

Waste Heat

Transmission Line Losses 3 units (9%)

Combined Heat and PowerCombined Heat and Power

Pollution

Waste Heat

Recovery

CHP Plant

End User Site

33 units Waste Energy

=66 units Useful Work 33 units

Electricity

33 units Thermal Energy

Fuel

100 units

Capital Costs per Kilowatt, Central Capital Costs per Kilowatt, Central versus Decentralized Generationversus Decentralized Generation

Transmission Transmission & &

DistributionDistribution

$1380$1380

$138$138

$1,242$1,242

90%90%

GenerationGeneration

Conventional Conventional Central Central

GenerationGeneration$890$890

Decentralized Decentralized GenerationGeneration

$1,200$1,200

Savings (Loss) Savings (Loss) of Local vs of Local vs

Central Central GenerationGeneration

($310)($310)

% of Central % of Central GenerationGeneration

(34%)(34%)

Total / kW Total / kW of of

GenerationGeneration

$2,270$2,270

$1,338$1,338

$1,068$1,068

47%47%

KW KW required/ required/ kW LoadkW Load

1.521.52

1.071.07

0.470.47

Total Total costs/ kW costs/ kW

New New LoadLoad

$3,450$3,450

$1,432$1,432

$2,018$2,018

59%59%

Central Generation Paradigm Central Generation Paradigm Blinds Society to Cheapest, Blinds Society to Cheapest,

Cleanest Option:Cleanest Option:

Recycling Industrial EnergyRecycling Industrial Energy

Defining Recycled EnergyDefining Recycled Energy Recycled energy is useful energy Recycled energy is useful energy

derived from derived from Exhaust heat from any industrial process; Exhaust heat from any industrial process; Industrial tail gas that would otherwise be Industrial tail gas that would otherwise be

flared, incinerated or vented; and flared, incinerated or vented; and Pressure drop in any gas Pressure drop in any gas

Conventional Industrial SiteConventional Industrial Site

Process Fuel

Electricity Finished Goods

End User Site

Waste Energy

Recycled EnergyRecycled Energy

ElectricitySteam

Hot Water

End User Site

Energy Recycling

Plant

Electricity

Process Fuel

Finished Goods

Waste Energy

SavedEnergy Input

US Industrial Recycling PotentialUS Industrial Recycling Potential Recycled energy could supply 45 to 92 Recycled energy could supply 45 to 92

Gigawatts of fuel-free capacity – 13% of US peakGigawatts of fuel-free capacity – 13% of US peak

Recycled energy is as clean as renewable Recycled energy is as clean as renewable energy – no incremental fuel or emissions, but:energy – no incremental fuel or emissions, but:

Capital costs are $500 to 1,500/kW, only 12% to 40% of Capital costs are $500 to 1,500/kW, only 12% to 40% of solar and wind generation, solar and wind generation,

90% load factors versus 14-40% for solar & wind90% load factors versus 14-40% for solar & wind Recycled energy is both clean and economic option Recycled energy is both clean and economic option

for new power generation.for new power generation.

EIA shows only 2.2 Gigawatts operatingEIA shows only 2.2 Gigawatts operating

Recycled Energy Case Study: Recycled Energy Case Study: Primary EnergyPrimary Energy

NiSource invested $300 million in six projects to NiSource invested $300 million in six projects to recycle blast furnace gas, coke oven exhaust in recycle blast furnace gas, coke oven exhaust in four steel plants, 440 megawatts of electric four steel plants, 440 megawatts of electric capacity and 460 megawatts of steam capacity. capacity and 460 megawatts of steam capacity.

Steel mills save over $100 million per year and Steel mills save over $100 million per year and avoid significant air pollution avoid significant air pollution

The COThe CO22 reduction is equivalent to the uptake of one reduction is equivalent to the uptake of one

million acres of new trees.million acres of new trees.

The projects are profitable; were recently sold for The projects are profitable; were recently sold for $335 million to our firm $335 million to our firm

90 MW Recycled from Coke Production90 MW Recycled from Coke ProductionChicago in BackgroundChicago in Background

Has US Power Industry Made Has US Power Industry Made Optimal Decisions? Optimal Decisions?

We analyzed major power generation We analyzed major power generation technologies over 1988-2002 periodtechnologies over 1988-2002 period

Central generation needs new T&D, DG Central generation needs new T&D, DG needs 10% or less new T&D wires.needs 10% or less new T&D wires.

Assumed 8% cost of capital for CG, 12% Assumed 8% cost of capital for CG, 12% for DGfor DG

Determined retail price/kWh needed in Determined retail price/kWh needed in each year, given then current data.each year, given then current data.

Long Run US Marginal Costs/ MWhLong Run US Marginal Costs/ MWh

020406080

100120140160180

2004

$/M

Wh

Average Retail Oil / Gas Rankine Central SCGT

Central CCGT Central Coal Cogen SCGT

Cogen CCGT Cogen Coal Recycled Energy (thermal recovery)

Central Generation

Distributed Generation

Annual US Utility Additions of Electric Generating Annual US Utility Additions of Electric Generating Capacity by Technology 1988 - 2002Capacity by Technology 1988 - 2002

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Year

Gen

erat

ion

Bu

ilt

(MW

)

Nuclear Coal Oil & Gas

Hydro Pumped Storage SCGT

CCGT Other Other DG

Annual US IPP Additions of Electric Generating Capacity Annual US IPP Additions of Electric Generating Capacity

by Technology 1988 - 2002by Technology 1988 - 2002

0

10000

20000

30000

40000

50000

Year

Gen

erat

ion

Bu

ilt (

MW

)

Hydro Coal Wind Oil & Gas

SCGT CCGT Other Other DG

Spread of 435,000 MW Built by US Electric Utilities Spread of 435,000 MW Built by US Electric Utilities 1973 - 20021973 - 2002

Distributed Generation

1%

Central Generation

99%

Distributed Generation Central Generation

Spread of 175,000 MW Built by US IPPs Spread of 175,000 MW Built by US IPPs 1973 - 20021973 - 2002

Distributed Generation

34%

Central Generation

66%

Distributed Generation Central Generation

Percentage of Electricity from CHP Plants in Percentage of Electricity from CHP Plants in Selected Countries (2004)Selected Countries (2004)

0

10

20

30

40

50

60

DE

sh

are

as a

% o

f to

tal

po

wer

gen

erat

ion

Conclusion of Historical Study Conclusion of Historical Study

Electric monopolies limited choices to Electric monopolies limited choices to central plants, ignoring cheaper and central plants, ignoring cheaper and cleaner distributed generation optionscleaner distributed generation options

IPP companies built DG under PURPA IPP companies built DG under PURPA rules, but shifted to central generation rules, but shifted to central generation with passage of EPACTwith passage of EPACT

Neither monopolies nor IPP’s built Neither monopolies nor IPP’s built projects to recycle industrial waste projects to recycle industrial waste energyenergy

What is Optimum Future What is Optimum Future Generation?Generation?

We modeled 8 scenarios to meet EIA projected We modeled 8 scenarios to meet EIA projected US load growth through 2020 (43%)US load growth through 2020 (43%)

Found each technology’s capital cost, Found each technology’s capital cost, performance, emissions for each yearperformance, emissions for each year

Added 100% T&D for central generation, 10% Added 100% T&D for central generation, 10% for DGfor DG

Met load growth with 8 scenarios: all central, Met load growth with 8 scenarios: all central, all DG and blended scenariosall DG and blended scenarios

Results, CG versus DG Dollars(Dollars in Billions)

ItemItem All CG All DG Savings % Saved

Capacity + T&D $831 $504 $326 39%

Power CostPower Cost $145$145 $92$92 $53$53 36%36%

Tons NOxTons NOx 288288 122122 166166 58%58%

Tons SOTons SO22 333333 1919 314314 94%94%

MM Tonnes MM Tonnes COCO22

776776 394394 381381 49%49%

Capital Cost to Supply 2020 Electric Load Growth

0

100

200

300

400

500

600

700

800

900

6.11% 8% 10% 15% 20% 25% 30% 35% 39.38%

% DG of Total US Generation

$ B

illi

ons

Inv. In New Cent. Gen. Inv. In new Dist. Gen. Inv. In T&D

Retail Costs per KWh for Incremental 2020 Load

0

1

2

3

4

5

6

7

8

9

10

6.11% 8% 10% 15% 20% 25% 30% 35% 39.38%

% DG of Total US Generation

Cen

ts /

KW

h

T&D Amorization on New T&DCapital Amorization + Profit On New CapacityFuelO&M of New Capacity

Added Annual Fossil Fuel Use for Incremental 2020 Load

0

2

4

6

8

10

12

6.11% 10% 20% 30% 39.38%

% DG of Total US Generation

Qua

ds o

f F

ossi

l Fue

l / Y

r

Total "New" Distributed Generation Fuel Use

Total "New" Central Generation Fuel Use

Emissions from Generating Incremental 2020 Electric Load

0

100

200

300

400

500

600

700

6.11% 8% 10% 15% 20% 25% 30% 35% 39.38%

% DG of Total US Generation

Tho

usan

d M

etri

c T

onne

s /

Yea

r

SO2 Emissions NOx Emissions PM10 Emissions

Added Annual CO2 Emissions for Incremental 2020 Load

0

100

200

300

400

500

600

700

800

6.11% 8% 10% 15% 20% 25% 30% 35% 39.38%

% DG of Total US Generation

Mil

lion

Met

ric

Ton

nes

/ Y

ear

CO2 emitted for added Cent Gen. CO2 emitted for added Dist. Gen.

Why does the power industry Why does the power industry make suboptimal decisions?make suboptimal decisions?

Many barriers to market competition, can be Many barriers to market competition, can be likened to the layers of an onionlikened to the layers of an onion

The core of the ‘onion’ is the universal ban The core of the ‘onion’ is the universal ban on private wires.on private wires.

There can never be effective competition There can never be effective competition when power cannot move except through when power cannot move except through the monopolist distribution wiresthe monopolist distribution wires

No polity in the world, to my knowledge, No polity in the world, to my knowledge, allows private electric wires.allows private electric wires.

CAEM Mission (proposed)CAEM Mission (proposed)

Change the way the world makes Change the way the world makes power by persuading governments power by persuading governments

to remove all barriers to competitive to remove all barriers to competitive generation and delivery of power generation and delivery of power and end monopoly protection of and end monopoly protection of

electric distribution.electric distribution.

Expected ResultsExpected Results Meet all consensus goalsMeet all consensus goals

Increase availability of energy servicesIncrease availability of energy services Lower capital costLower capital cost Reduce power costsReduce power costs Reduce pollutionReduce pollution Reduce fossil fuel useReduce fossil fuel use Reduce system vulnerabilityReduce system vulnerability Reduce manufacturing job lossReduce manufacturing job loss

Thank you for listening!