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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
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