Natural Gas, Electricity and CHP

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					Natural Gas, Electricity and CHP
    Evaluating and Marketing CHP
            May 18, 2005


                              Joel Bluestein
                 Energy and Environmental Analysis, Inc.
                           www.eea-inc.com
                             (703) 528-1900
             Overview

• Natural Gas Background
• Electricity Rate Background
• Gas, Electricity and CHP




              Energy and Environmental Analysis, Inc.   2
      Natural Gas Overview
• Gas is produced by hundreds of
  independent producers in North
  America.
• Gas is delivered to market by
  independent regulated pipelines.
• Gas is delivered by utilities.
• Gas price clears on the North American
  market. Transmission/delivery price
  can be locally determined.
              Energy and Environmental Analysis, Inc.   3
      Regional Gas Prices

                                    Gas Price
                                   ($/MMBtu)
          Ilinois                     $6.56
          New York                      $6.93
          Boston                        $6.72
          Texas                         $6.47
          California                    $5.70
Data Source: Enerfax Daily 5/16/05



                    Energy and Environmental Analysis, Inc.   4
                       The Changing Gas Balance
         Historical Gas Price at Henry Hub ($ per                                       Lower-48 Dry Gas Production vs. Dry Gas
                         MMBtu)                                                               Productive Capacity (Bcfd)

$10                                                                            55
$9                                                                             54

$8                                                                             53                                         Hurricane Ivan

$7                                                                             52

$6                                                                             51

                                                                               50
$5
                                                                               49
$4
                                                                               48
$3
                                                                               47
$2
                                                                               46
$1
                                                                               45
$0
                                                                               44
  1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005
                                                                                1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

                                                                                              Productive Capacity       Gas Production


        Divergent trends in gas supply and demand have led to the tight balance
      between supply and demand, higher gas prices, and increased price volatility.
                         TIGHT BALANCE EXPECTED TO CONTINUE

                                                           Energy and Environmental Analysis, Inc.                                  5
                  Natural Gas Supply
 Relying On New Frontiers                   U.S. And Canada Gas Supply
                       40
• Production from                 TCF Per Year
                                                                                      New Supply
  mature producing     35                                                           Maritimes

  areas will decline                                                                Alaska

                       30
  by 1.3 percent per                                                                LNG Imports

  year.                                                               51%    17.4
                       25                        35%      9.9                 TCF   Rockies

• New frontier
                            14%
                                    3.7 TCF               TCF                       MacKenzie Delta
                                                                                    Deep Gulf
                       20
  supplies will
  account for 35       15
  percent and 51            86%
                                     22.0        65%     18.9                         Traditional
  percent of total     10             TCF                  TCF        49%    17.0     Supply
                                                                              TCF
  U.S. and Canada                                                                     Sources
                        5
  gas supply in 2010
  and 2020,             0
  respectively.                     2000                2010                 2020
                                   Energy and Environmental Analysis, Inc.                            6
Proposed LNG Terminals
                                                 Constructed
                                                 A. Everett, MA : 1.035 Bcfd (Tractebel – DOMAC)
                                                 B. Cove Point, MD : 1.0 Bcfd (Dominion – Cove Point LNG)
                                                 C. Elba Island, GA : 0.68 Bcfd (El Paso – Southern LNG)
                                                 D. Lake Charles, LA : 1.0 Bcfd (Southern Union – Trunkline LNG)
                                                 Approved by FERC
                                                 1. Lake Charles, LA: 1.1 Bcfd (Southern Union – Trunkline LNG)
                                                 2. Hackberry, LA : 1.5 Bcfd, (Sempra Energy)
                                                 3. Bahamas : 0.84 Bcfd, (AES Ocean Express)*
                                                 4. Bahamas : 0.83 Bcfd, (Calypso Tractebel)*
                                                 5. Freeport, TX : 1.5 Bcfd, (Cheniere/Freeport LNG Dev.)
                                                 6. Sabine, LA : 2.6 Bcfd (Cheniere LNG)
                                                 7. Elba Island, GA: 0.54 Bcfd (El Paso – Southern LNG)
                                                 Approved by MARAD/Coast Guard
                                                 8. Port Pelican: 1.6 Bcfd, (Chevron Texaco)
                                                 9. Gulf of Mexico: 0.5 Bcfd, (El Paso Energy Bridge GOM, LLC)
                                                 Proposed to FERC
                                                 10. Fall River, MA : 0.8 Bcfd, (Weaver's Cove Energy/Hess LNG)
                                                 11. Long Beach, CA : 0.7 Bcfd, (Mitsubishi/ConocoPhillips – Sound Energy Solutions)
                                                 12. Corpus Christi, TX : 2.6 Bcfd, (Cheniere LNG)
                                                 13. Corpus Christi, TX : 1.0 Bcfd (Vista Del Sol - ExxonMobil)
                                                 14. Sabine, TX : 1.0 Bcfd (Golden Pass - ExxonMobil)
                                                 15. Logan Township, NJ : 1.2 Bcfd (Crown Landing LNG – BP)
                                                 16. Bahamas : 0.5 Bcfd, (Seafarer - El Paso/FPL )
                                                 17. Corpus Christi, TX: 1.0 Bcfd (Ingleside Energy – Occidental Energy Ventures)
                                                 18. Providence, RI : 0.5 Bcfd (Keyspan & BG LNG)
                                                 19. Port Arthur, TX: 1.5 Bcfd (Sempra)
                                                 20. Cove Point, MD : 0.8 Bcfd (Dominion)
                                                 21. LI Sound, NY: 1.0 Bcfd (Broadwater Energy – TransCanada/Shell)
                                                 Proposed to MARAD/Coast Guard
                                                 22. California Offshore: 1.5 Bcfd (Cabrillo Port – BHP Billiton)
                                                 23. Louisiana Offshore : 1.0 Bcfd (Gulf Landing – Shell)
                                                 24. So. California Offshore : 0.5 Bcfd, (Crystal Energy)
                                                 25. Louisiana Offshore : 1.0 Bcfd (Main Pass McMoRan Exp.)
                                                 26. Gulf of Mexico: 1.0 Bcfd (Compass Port - ConocoPhillips)
                                                 27. Gulf of Mexico : 2.8 Bcfd (Pearl Crossing - ExxonMobil)
                                                 Potential Sites Identified by Project Sponsors
                                                 28. Coos Bay, OR: 0.13 Bcfd, (Energy Projects Development)
                                                 29. Somerset, MA : 0.65 Bcfd (Somerset LNG)
                                                 30. California - Offshore : 0.75 Bcfd, (Chevron Texaco)
                                                 31. Pleasant Point, ME : 0.5 Bcf/d (Quoddy Bay, LLC)
                                                 32. St. Helens, OR: 0.7 Bcfd (Port Westward LNG LLC)
                                                 33. Offshore Boston, MA: 0.8 Bcfd (Northeast Gateway – Excelerate Energy)
                                                 34. Galveston, TX: 1.2 Bcfd (Pelican Island – BP)
                                                 35. Pascagoula, MS: 1.0 Bcfd (Gulf LNG Energy LLC)
                                                 36. Port Lavaca, TX: 1.0 Bcfd (Calhoun LNG – Gulf Coast LNG Partners)
                                                 37. Philadelphia, PA: 0.6 Bcfd (Freedom Energy Center – PGW)
                                                 38. Pascagoula, MS: 1.3 Bcfd (ChevronTexaco))
                                                 39. Cameron, LA: 2.6 Bcfd (Creole Trail LNG – Cheniere LNG)
                                                 40. Astoria, OR: 1.0 Bcfd (Skipanon LNG – Calpine)
                                                 Canadian Approved and Potential Terminals
                                                 41. St. John, NB : 1.0 Bcfd, (Canaport – Irving Oil)**
                                                 42. Point Tupper, NS 1.0 Bcf/d (Bear Head LNG - Anadarko)**
                                                 43. Quebec City, QC : 0.5 Bcfd (Project Rabaska – Enbridge/Gaz Met/Gaz de France)
                                                 44. Rivière-du- Loup, QC: 0.5 Bcfd (Cacouna Energy – TransCanada/PetroCanada)
                                                 45. Kitimat, BC: 0.34 Bcfd (Galveston LNG)
                                                 46. Prince Rupert, BC: 0.30 Bcfd (WestPac Terminals)
                                                 47. Goldboro, NS 1.0 Bcfd (Keltic Petrochemicals)
                                                 Mexican Approved and Potential Terminals
                                                 48. Altamira, Tamulipas : 1.12 Bcfd, (Shell)**
                                                 49. Baja California, MX : 1.0 Bcfd, (Sempra & Shell)**

                                                                                                          7
                                                 50. Baja California - Offshore : 1.4 Bcfd, (Chevron Texaco)

       Energy and Environmental Analysis, Inc.
                                                 51. Lázaro Cárdenas, MX : 0.5 Bcfd (Tractebel/Repsol)
                                                 52. Puerto Libertad, MX: 1.3 Bcfd (Sonora Pacific LNG)
       Obstacles For Supply Growth
• Large Capital                                • Uncertainty About
  Requirements                                   Future Gas Demand
• Liquidity Crunch                             • E&P Infrastructure &
                                                 Technology
• Access Restrictions
                                               • Cumbersome
• Investor Recognition                           Approvals Process
  of Opportunities
                                               • Environmental and
• Price Volatility                               Siting Issues
  Creates Uncertainty
         There is much uncertainty about future
                gas supply development.

                         Energy and Environmental Analysis, Inc.        8
                    Projected Annual Average Henry Hub Gas Price
    Continued price                                                                                                            Henry Hub gas prices
    pressure likely to                                                                                                        will average between $5
       11.00
   persist for next few                                                                                                         and $7 per MMBtu -
          years.
       10.00                                                                                                                     1990 levels will not
                                   9.00                                                                                                 return.
                                   8.00
              (2004 $ per MMBtu)




                                   7.00
Fuel Prices




                                   6.00
                                   5.00
                                   4.00
                                                                                                   Long-term prices in parity with
                                   3.00
                                                                                                             oil prices.
                                   2.00                                                            Long-term oil price of about $35
                                   1.00                                                              per barrel (real$) assumed.
                                   0.00
                                          1997   1999   2001   2003   2005   2007   2009   2011   2013   2015   2017   2019    2021   2023   2025


                                                  Natural Gas                        Residual Fuel                            Distillate
                                   Sources: Historical data from Platts Gas Daily, Projection by Energy and Environmental Analysis, Inc.
                                                                             Energy and Environmental Analysis, Inc.                                9
  AGF SCENARIO ASSUMPTIONS

                         Expected                   Expanded      Existing

Drilling Moratoria        Unchanged                 Relaxed       Unchanged
Intermountain West Access Unchanged                 Increased     Unchanged
Alaskan Pipeline             2014                      2014        Not Built
LNG in 2020                18 Bcfd                   23 Bcfd       5.3 Bcfd
New Gas-Fired Generation    60 GW                    30 GW         60 GW




                        Energy and Environmental Analysis, Inc.         10
                           AGF Gas Price Scenarios
              $10


              $9
                                                                                      Existing
              $8


              $7


              $6
$2003/MMBtu




                                                                                      Expected

              $5


              $4

                                                                                   Expanded
              $3


              $2


              $1


              $0
                    2004   2005   2006   2007   2008   2009   2010   2011   2012   2013    2014   2015   2016   2017   2018   2019   2020


                                                         Energy and Environmental Analysis, Inc.                                            11
     CHP and Energy Prices

• Typical CHP application reduces
  electricity purchases, increases gas
  purchases.
• CHP trades increased capital cost and
  gas purchases for lower electric
  purchases.
• Electricity savings must offset gas and
  capital costs.

               Energy and Environmental Analysis, Inc.   12
            The Concern

• Higher gas prices will swamp electricity
  savings.
• A reasonable concern where gas and
  electricity prices are decoupled.
• But - electricity markets are changing
  and increasingly linking to gas
  markets...


               Energy and Environmental Analysis, Inc.   13
     The Price of Electricity

• Average cost/regulated prices
  vs
• Marginal cost/competitive prices




               Energy and Environmental Analysis, Inc.   14
    Historic Electricity Prices

• Regulated electric rates, based on
  average cost of utility generation.
• Majority of electricity generated by low-
  cost nuclear, coal, hydro assets.
  – Energy cost $25-$35/MWh (2.5 - 3.5 cents/kWh).
• Large electric user rates relatively low -
  <$0.05/kWh ($50/MWh).
  – Retail rates higher than wholesale energy cost.


                  Energy and Environmental Analysis, Inc.   15
   Restructured Electric Prices

• Wholesale price based on the marginal
  unit at each hour.
• Marginal units in many areas are gas-
  fired units for much of the year, even
  where coal is the primary energy source.
• In this case, gas and electricity prices
  are linked.


               Energy and Environmental Analysis, Inc.   16
                           Load Duration Curve
     18,000
                  Peaking Turbines
     16,000
                       160 Hours
                   0.1% of Generation
     14,000


     12,000                               1100 Hours
                                        2% of Generation

     10,000
                                                                                    4700 Hours
MW




                   Cycling Gas, Oil                                              90% of Generation

      8,000
                                    Gas Combined Cycle
      6,000
                                                                                                        8760 Hours
                                        Base Load Coal                                               58% of Generation
      4,000


      2,000
                                              Nuclear
        -
              1       1001         2001           3001       4001       5001       6001         7001           8001
                                                                Hours

                                                     Energy and Environmental Analysis, Inc.                             17
When Are Electricity and Gas Linked

  • Restructured electric markets
    – Marginal cost pricing
  • Where gas-fired units are on the margin
    most of the time.
    –   California/Northwest
    –   Texas
    –   Northeast U.S.
    –   Illinois - more and more



                      Energy and Environmental Analysis, Inc.   18
Wholesale Gas/Electric Price Linkage

                      Gas Price                  Electricity Price
                     ($/MMBtu)                      ($/MWh)
   Ilinois              $6.56                          $47
   New York              $6.93                               $57
   Boston                $6.72                               $66
   Texas                 $6.47                               $48
   California            $5.70                               $52
     Data Source: Enerfax Daily 5/16/05



                        Energy and Environmental Analysis, Inc.      19
     Changing Electric Rates

• Price caps are coming off in restructured
  markets.
• Utilities moving to market-based rates
  for large customers.
• Electricity prices will track gas prices.
• Electricity prices are more than the
  energy component.


               Energy and Environmental Analysis, Inc.   20
           Comm Ed Example
• Large customers being transitioned from
  Rate 6L to Rate HEP.
• Electricity charged at PJM day-ahead rates
  plus capacity charges.
• PJM hourly rates can be low at off-peak
  times but very high at peak, especially
  during high demand periods
   – Prices easily over $0.10/kWh during summer.
Need to consider future pricing in project
 evaluation! Energy and Environmental Analysis, Inc.   21
             Conclusions
• Gas prices are higher and will stay higher.
• Electricity prices will track gas prices in
  restructured markets with gas on the
  margin.
• Need to consider forward-looking, full cost
  of electricity in project evaluation.
• CHP can be competitive in these markets.
• CHP has greater value than energy
  commodity price.
                Energy and Environmental Analysis, Inc.   22