eastern states presentationeastern-states.org/data/esa eastern states presentation 2006.pdf · coke...

1Energy Solutions Associates, LLC

Eastern States Blast Furnace and

Coke Oven Association

Energy MarketsWhat's Going On?

Coal, Natural Gas, and Electric PowerFebruary 2006


Executive Summary

• Prices are up

These are the good old days of the future!Ene

rgy

Cost


A Most Telling Slide


The Basic US Supply Reality


Industrial Energy Consumption


Coal Demand and Pricesare Projected to Rise

• Power sector demand for coal continues to increase in response to higher oil and, more specifically, to higher natural gas prices.

• In 2006, electric power sector demand for coal is projected to increase by 2.2 percent.

• Production is projected to grow by 3.9 percent.

• The average price of coal to the power sector is projected to rise to $1.54 per million Btu in 2005 and to $1.66 per million Btu in 2007.


Natural Gas


Short and Mid Term Drivers

• Weather

• Underground storage statistics

• Crude oil prices affected by geo-political unrest

• Supply interruptions

– Restoration of Gulf of Mexico basin capacity

• Deliverability

– Pipeline curtailments

• Speculation

• Alternate fuels/supplies

Monthly NYMEX Natural Gas Prices 2005 and 2006 YTD

$0

$5

$10

$15

JAN

FEBMARAPRMAY

JUN

JUL

AUGSEPOCTNOVDECJA

NFEB

$ pe

r M

MB

TU

Underground Storage


Issues:NIMBYPerceived Safety

NG Pricing


Natural Gas vs. # 2 Fuel Oil


Natural Gas vs. # 6 (Residual) Oil


Gasified Coal• As the price differential between natural gas and coal increases,

Coal Gasification is gaining more interest and focus as an alternate fuel source.

• Most of the installed plants convert coal, petroleum coke or oil-derived fuels into synthetic fuels &/or synthetic natural gas. They can also be modified to produce ammonia, hydrogen and other chemicals.

• Since 1984, there has been a growing interest in Integrated Gasification Combined Cycle (IGCC) plants - the use of gasification to generate electricity.

• Most states with coal assets are promoting and sponsoring gasification projects.

• The US Energy Policy Act of 2005 has incentives to further accelerate the implementation of gasification and IGCC technology.


Trick: Balance Future Supply and Demand• The Energy Policy Act of 2005 encourages:

– Conservation and more efficient use of natural gas and other forms of energy

• Development of natural gas production in areas currently unavailable– Congress remains in a contentious debate over the construction of a

pipeline to bring natural gas from Alaska’s North Slope to customers in the lower-48 states - enough gas to support all of the United States’ natural gas needs by itself for more than a decade.

– Reassessing current restrictions on energy production on federalland and water areas, in light of growing natural gas demand as well as innovations in exploration and production technology

• Building new marine terminals and related facilities (such as pipelines) where shipments of liquefied natural gas (LNG) can be received and sent along to market areas where additional natural gas is needed.

� The above will only help to maintain the current price range, not improve it.


Long Term

• The prices of global commodities like oil and coal, depend on basic global supply vs. demand dynamics

– For the 2006, global demand for energy remains a core component of commodity pricing. A key component of that is Asian demand.

• Because there is an interdependency between oil and natural gas there is a spillover impact of global oil pricing into natural gas pricing.


NYMEX Forward Strips

6.00

7.00

8.00

9.00

10.00

11.00

2006 2007 2008 2009 2010 2011 2012

$/M

MB

TU

61.00

62.00

63.00

64.00

65.00

66.00

67.00

68.00

69.00

70.00

71.00

$/B

BL

NGCrude


Natural Gas Perspective

• Price increase Drivers– Demand increases

• Population• Environmental choice

– Diliverability problems• Pipeline constraints

– Replacement rate is less than supply depletion

• Limits on new development– Severe weather (hurricanes)

• Permanent supply destruction

– Competing fuel supplies

• Price Mitigators– Reduction in demand

• Switch to alternates• Conservation

– Favorable Policies– Allow development in

protected areas• ANWR• Outer Continental Shelf

– New Import Terminals– Mild weather– Competing fuel supplies


Electricity


Electricity Price Determination• Full Market exposure

– Full exposure to market forces and volatility• Grandfathered contracts

– Pre-deregulation – Subject to price shock at termination

• Rate-Capped tariff service– In states where deregulation has occurred– Rates are capped during CTC collection period– Subject to price shock at end of CTC period

• Tariff service– In states where deregulation has not occurred– Stable pricing at low rates


Regulated Electricity MarketPrice Components

GenerationTransmission Distribution

CTC

One Bundled Price from

Utility


Deregulated Electricity Primary Price Components

GenerationTransmission Distribution

CTC

Component Price

Component Price

Component Price

Component Price

Bundled by LSE(Load Serving Entity)

END USER


PJM Footprint


PJM ISO Profile

• Capacity By Fuel Type (2004)• Total Capacity – 144,000 MW• Nuclear 19.1% - 27,426 MW• Coal 41.5% - 59,760 MW• Natural gas 28.4% - 40,868 MW• Oil 7.0% - 10,112 MW• Hydro 3.7% - 5,301 MW• Solid Waste 0.3% - 413 MW


PJM ISO Profile

• Generation by Fuel Type (2004)• Total Generation 707,489 GWH• Nuclear 32.1% 226,792 GWH• Coal 56.3% 398,061 GWH• Natural Gas 7.2% 51,224 GWH • Oil 0.7% 5,241 GWH • Hydro 3.2% 22,536 GWH • Wind 0.1% 375 GWH• Solid Waste 0.5% 3,260 GWH


PJM ISO

• Determination of LMP– Generation owners “bid” their marginal cost

into market– Resultant LMP Price is primarily natural gas

driven• There is a strong correlation between LMP price

and natural gas prices

– Impact of cheaper coal and nuclear generation is minimal


2 0 0 5 P E C O Z o n e L M P D a i l y Sp r e a d

-

5 0 . 0 0

1 0 0 . 0 0

1 5 0 . 0 0

2 0 0 . 0 0

2 5 0 . 0 0

3 0 0 . 0 0

3 5 0 . 0 0

4 0 0 . 0 0

4 5 0 . 0 0

5 0 0 . 0 0

1 15 2 9 4 3 5 7 7 1 8 5 9 9 113 12 7 14 1 15 5 16 9 18 3 19 7 2 11 2 2 5 2 3 9 2 5 3 2 6 7 2 8 1 2 9 5 3 0 9 3 2 3 3 3 7 3 5 1 3 6 5

D a y

Daily volatility is load driven. As system load

increases, more expensive, less

efficient marginal generators come on.


Electricity Perspective• Electricity pricing is still very dependant on location

– States that have not deregulated offer a price advantage over “competitive markets”

– So called ”competitive” markets have become very volatile and significantly less end-user friendly.

• LMP price mechanism do not result in most efficient price• Market power issues are very worrisome to end-users• Market rules have become very complex and difficult to navigate

• Electricity deregulation is considered a failed experiment by many industrials– There is need of much repair to the market mechanisms before a

truly competitive market can function• California debacle is good example


Conclusion

• Energy prices have increased to a new reality

• Prices are expected to remain at current levels

• Mitigation will be necessary to prevent further increases

• Government policies must become favorable to prevent further increases


Questions?

eastern states presentationeastern-states.org/data/esa eastern states presentation 2006.pdf · coke...

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