Download - Global energy horizons 2007 briefing report
Global Energy Horizons Scenarios of the Energy Future
Scenario analysis is a proven technique to anticipate, rehearse and respond to market uncertainty, future risks and strategic opportunities. Global Energy adds value to the traditional scenario planning process by leveraging its analytic software tools, data and market expertise to provide actionable quantifiable results to complement the qualitative power of scenario analysis to help our clients manage uncertainty and turn their energy strategies into actionable results. Global Energy Horizons 2007 has been expanded to include broad consideration of the uncertainties associates with CO2 regulation and the growing pressure for greenhouse gas reductions worldwide.
Scenario analysis offers a credible check to tunnel vision and the tendency to base
strategy on one view of the future—especially if the scenario impacts are
quantified to provide actionable results. Combining scenario analysis with Global
Energy’s advanced analytic software, risk expertise and data creates realistic and
measurable alternative futures. Simulating the impact on market fundamentals of
the distinct economic, regulatory, and technological parameters that underlie
each distinct possible future takes scenario planning to the next level.
It works by iteratively building plausible alternative views of the future given
different economic, regulatory, and technological driving forces. Properly
implemented, the process should challenge participants’ mental maps, check
over-optimism, provide strategic insights, engender a common strategy language,
and lead to better decision-making.
Scenario analysis is a proven strategy for managing uncertainty. The process
acknowledges that both today and tomorrow’s business environment are
increasingly complex and unpredictable. Unexpected events, shocks, and
inevitable surprises will drastically change the marketplace. This has never been
truer than it is today, when fuel price, regulatory, environmental, and competitive
risks are growing.
Scenario analysis provides the framework for critically and systematically testing
strategy options for the future. The framework is the broad set of possible future
business environments or scenarios developed. While a set of rigorous scenarios
is a chief output, as equally important benefit is the iterative and interactive
process of putting forth and challenging ideas about how the future may unfold.
Global Energy Horizons is the perfect balance of the qualitative power of scenario
analysis and the quantitative precisions of advanced analytics.
Figure 2-1 Scenario Planning Process
SOURCE: Global Energy.
The Global Energy Horizons Process
The scenario building process begins with a detailed assessment of the key
strategic questions from the perspective of future pre-determined elements and
key uncertainties (see Figure 2-1). Generally, two to four distinct major themes or
patterns are identified in which key uncertainties are played out. These become
the scenarios—the distinct, equally plausible, and internally consistent views on
how the future may evolve.
1. Global Turmoil: Global impact on disrupted petroleum and natural gas
supply imports and economic growth;
2. Technology Evolution: Broader application of environmental controls
including second generation nuclear, mandated CO2 reductions drive
technological advances in utility industry;
3. Global Economy: Shift of major industry in the U.S. to overseas drives
formation of Atlantic Rim Pact and global consolidation of energy
infrastructure;
4. Return to Reliability: Reliability standards adopted after growing concern
of electricity reliability due to brownouts and increased outages drives a lack
in consumer confidence.
Through an iterative process of re-thinking and testing, the scenarios gain rigor
and credibility. Developing internally consistent storylines for each scenario is an
essential part of the thought process since they highlight the connections among
the various forces and events driving a scenario. Timelines are created to identify
important milestones that define each scenario. Signposts are identified to signal
which scenario is unfolding. An important consideration is whether the scenarios
capture all the critical uncertainties. Are there any emerging trends and future
events that will shape the business environment but have not been taken into
account? Have the scenarios sufficiently stretched the mental maps of the
participants?
The Quantitative Process - Global Energy’s Analytic Approach
Electric Markets Modeling
Global Energy uses a fundamentals-based methodology to forecast power prices
in each region. Based on its STRATEGIC PLANNING™ powered by MIDAS
Gold®—a proven data management and production simulation model—Global
Energy simulates the operation of each region of North America.1 Strategic
Planning is an integrated, fast, multi-scenario zonal market model capable of
capturing many aspects of regional electricity market pricing, resource operation,
and asset and customer value.
Strategic Planning generates zonal electric market price forecasts for single and
multi-area systems by hour and is chronologically correct for 30 years. Prices
may be generated for energy only or bid- or ICAP-based bidding processes. Prices
generated reflect trading between transaction groups where transaction group
may be best defined as NERC subregions. Trading is limited by transmission
paths and constraints quantities. The market based resource expansion algorithm
(MRX) builds resources by planning region based on user-defined profitability
and/or minimum and maximum reserve margin requirements in determining
prices. In addition, strategic retirements are made of non-profitable units based
on user-defined parameters.
Gas Price Forecasts
To forecast natural gas prices, Global Energy uses three forecasting phases:
Table 2-1
Gas Price Forecasting Phases
Forecast Phase Period Length Data Source Forecast Technique
Futures Driven First 24 Months NYMEX Henry Hub futures and market differentials
Calculated Henry Hub and liquid market center differentials
Mean Reversion Next 24 Months Global Energy Linear process to gradually equate near-term to long-term trend
Long-term Trend Remaining forecast period (to 2030)
Various Global Energy data sources
Fundamental supply and demand analysis modeling
SOURCE: Global Energy.
To derive the burner-tip forecasts used, Global Energy first examined regional
prices and basis swaps at a number of trading hubs. Using this historical data for
the first 24 months of the forecast, Global Energy developed a differential price
between the appropriate market center nearest to the power plant and the Henry
Hub. Gas prices used for the first 24 months were driven by Henry Hub futures
market prices plus a basis differential (if any). Applying this approach permitted
1 For 2007 Global Energy Horizons, Global Energy Advisors utilized version 2007.163 with a July 19, 2007 executable. The data is representative of spring 2007 Energy Velocity Market Ops with updates for new entry and fuel forecasts.
Global Energy’s forecast to include the recent shifts in natural gas prices. During
the following 24 months of the forecast period, Global Energy imposed a linear
mean reversion process on the forecast. This process aligns natural gas prices
during the first 24 months back to their long-term, fundamental levels. Beyond
the initial 48-month period, Global Energy uses RBAC’s GPCM gas forecasting
model to assess medium- to long-term fundamentals. Prices and gas demand for
electric generation from GPCM are integrated with Global Energy’s North
American Reference Case price forecast.2
Market Areas
Global Energy’s regional market analysis for Global Energy Horizons follows our
Reference Case topology encompassing 76 market zones or transmission zones.
Figure 2-2 Market Areas
SOURCE: Global Energy.
Environmental Emissions Costs and Reduction Targets
Global Energy models emissions of NOX, SO2, Hg, and CO2. Global Energy
Intelligence’s Energy Velocity database includes detailed station data for all these
variables that are based on publicly available data from the EIA and EPA. The
total emissions resulting from our model are also calibrated against historical
EPA data. A description of how each of these pollutants is treated in our model is
discussed below. For all emission costs modeled in this study, we assume that
flexible market based cap-and-trade programs are used (rather than state or unit
specific emission caps).
2 The North American Reference Case is a 25-year price forecast of 76 competitive power markets across every North American Electric Reliability Council region. These forecasts are updated twice per year.
The emission targets modeled in this study are all based on the latest proposed
rules from the EPA. For NOX, SO2, and PM2.5, emission reduction targets are
based on the Clean Air Interstate Rule (CAIR). In a separate regulatory initiative,
the EPA issued in March of 2005, its final Clean Air Mercury Rule (CAMR) that
sets nationwide limits on mercury (Hg) emissions from electric generating units
by introducing Hg emission caps effective in 2010 and 2018. This program covers
all 50 states and seeks to limit Hg emissions by 30 percent by 2010 and 70
percent by 2018, compared to year 2000 emissions of 48 tons nationwide.
In this study, three alternative scenarios are examined. In terms of emission
regulation, the same NOX, SO2, and Hg (but not CO2) rules are adopted under
each scenario. The major difference is the Technology Evolution and Global
Economy scenarios reflect enactment of CO2 legislation and Return to Reliability
has a greenhouse gas tax.
Business Model Implications across the Scenarios
The four scenarios provide a rich format for understanding how the business
landscape may change, key drivers, what are the likely opportunities, and what
capabilities will be essential in creating value. Below we examine how today’s
generic strategies are likely to perform across the scenarios given the
opportunities and risks along the energy value chain. The six generic strategies
selected are those that presently overlap with the wholesale power market.
Scenario analysis provides a means of market testing alternative business
strategies and regulatory regimes to better understand the impacts and
unintended consequences of policy and strategy choices. In every scenarios there
are both risks and opportunities that present challenges to different business
models and types of energy market participants. Global Energy Horizons sees to
help clients manage uncertainty by better understanding both the risks and the
sweet spots in each scenario environment.
A key factor for many clients will be the implications of CO2 regulation on the
choice of fuels, power generation investment options and business strategies.
Two of the four scenarios identify a pathway for meeting expected long term
goals for reducing greenhouse gas emissions---Technology Evolution and Global
Economy. Conversely, two scenarios highlight the risks associated with Global
Turmoil and a fragmented approach to protectionism.
Figure 5-1 Projected CO2 Emissions (U.S. Only)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2007 2011 2015 2019 2023 2027 2031
Ton
s
Global Turmoil Technology Evolution Global Economy Reliability
Target
SOURCE: Global Energy.
Gary L. Hunt, President, Global Energy Advisors l [email protected]