Energy Security:Energy Security:Creating a Competitive Creating a Competitive Advantage for IndustryAdvantage for Industry

Hugh BakerHugh BakerPresident, Hunt PowerPresident, Hunt Power

AHC GroupAHC GroupCorporate Affiliates WorkshopsCorporate Affiliates Workshops

June 21, 2005June 21, 2005

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Energy SecurityEnergy SecurityNational Energy SecurityNational Energy Security

Energy is the lifeline of our economyEnergy is the lifeline of our economyWe require affordable energyWe require affordable energyWe require a continuous supply of energyWe require a continuous supply of energy

““Local” Energy SecurityLocal” Energy SecurityEnergy is the lifeline of your businessEnergy is the lifeline of your businessEnergy must be cost effectiveEnergy must be cost effectiveEnergy must be in an “on” stateEnergy must be in an “on” stateEnergy must have a quality componentEnergy must have a quality component

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Factor 1: Energy PricesFactor 1: Energy Prices

The price of energy “has been substantial The price of energy “has been substantial enough and persistent enough to bias enough and persistent enough to bias business-investment decisions in favor of business-investment decisions in favor of energy-cost reduction.”energy-cost reduction.”

– – Alan Greenspan (4/5/05)Alan Greenspan (4/5/05)

There has been a fundamental reset in the There has been a fundamental reset in the market price of energy.market price of energy.

The increased volatility in energy prices adds The increased volatility in energy prices adds significant risk to business operations.significant risk to business operations.

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Rising Natural Gas PricesRising Natural Gas Prices

Commercial Gas Prices

4

5

6

7

8

9

10

11

12

2000 2001 2002 2003 2004

Years

$/ 1

00

0 c

u. f

t.

California

Delaware

Maryland

New Jersey

Pennsylvania

Texas

1

55

Rising Electric PricesRising Electric Prices

Commercial Electric Price Trends

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

2000 2001 2002 2003 2004

Years

Av

g. C

en

ts/K

WH

California

Delaware

Maryland

New Jersey

Pennsylvania

Texas

2

66

Regional Disparities in GenerationRegional Disparities in Generation3WSCC Electric Power Sector Consumption

Estimates (2001)

Natural Gas49%

Petroleum2%

Nuclear17%

Hydro13%

Renewables and Other

18%

Coal1%

PJM Electric Power Sector Consumption Estimates (2001)

Coal49%

Natural Gas6%

Petroleum3%

Nuclear39%

Hydro1%

Renewables and Other

2%

ERCOT Electric Power Sector Consumption Estimates (2001)

Nuclear12%

Natural Gas46%

Hydro0%

Renewables and Other

0%

Coal41%

Petroleum1%

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Factor 2: Grid IssuesFactor 2: Grid Issues

““Between 1984 [official start of recording Between 1984 [official start of recording blackouts in North America] and 2000, utilities blackouts in North America] and 2000, utilities logged 11 outages affecting more than 4,000 logged 11 outages affecting more than 4,000 megawatts – making the probability of any one megawatts – making the probability of any one outage 325 times greater than mathematicians outage 325 times greater than mathematicians would have expected.”would have expected.”

– – IEEE Spectrum, Aug. 2004IEEE Spectrum, Aug. 2004

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Bottlenecks in U.S. TransmissionBottlenecks in U.S. Transmission4

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Utility OutagesUtility Outages Documentation of utility outage Documentation of utility outage

data is a relatively new conceptdata is a relatively new concept SAIDI – records the yearly SAIDI – records the yearly

average outage duration for average outage duration for each customer sampledeach customer sampled

SAIFI – records the average SAIFI – records the average yearly frequency of outages yearly frequency of outages per customerper customer

The data to accurately measure The data to accurately measure these indices is not readily these indices is not readily availableavailable

The limited available data The limited available data suggests, on average, a utility suggests, on average, a utility customer in the U.S. will customer in the U.S. will experience:experience: 1.2 outages per year1.2 outages per year 106 minutes per outage106 minutes per outage

5

1010

Peak Demand Outpaces Peak Demand Outpaces Transmission CapacityTransmission Capacity

Annual transmission investments Annual transmission investments decrease despite increasing load demanddecrease despite increasing load demand

6

1111

U.S. Outages CostsU.S. Outages Costs

Input VariableAverage cost of outages to

user($ / kWh lost):

Residential 2

Commercial 25

Industrial 15

8

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Factor 3: Changing Nature of Factor 3: Changing Nature of Electric LoadsElectric Loads

Utility customers “expect a different Utility customers “expect a different product today than they did twenty years product today than they did twenty years ago. What’s more, utilities and regulators ago. What’s more, utilities and regulators haven’t caught up to that fact.” haven’t caught up to that fact.”

–– Allison Silverstein, formerly FERC Chairman Pat Wood’s Chief of Staff Allison Silverstein, formerly FERC Chairman Pat Wood’s Chief of Staff and Chair U.S. - Canada Power System Outage Task Force (August and Chair U.S. - Canada Power System Outage Task Force (August 2003 Blackout); Hunt Power private interview 5/9/052003 Blackout); Hunt Power private interview 5/9/05

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The Service Based EconomyThe Service Based Economy

60

70

80

90

100

110

120

130

140

49 54 59 64 69 74 79 84 89 94 99 04

Index, 1982=100

year

Energy-to-GDP Ratio Falling

U.S. Energy Use Per Capita9

10

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Growth of MicroprocessorsGrowth of Microprocessors

0

5

10

15

20

25

30

35

40

Market($ billions)

2003 2004 2005 2006 2007

Year

Microprocessor Market

The microprocessor market was $27.4 billion in 2003, and it will increase by 28.5% to $35.2 billion by 2007.

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"The average middle-class American household has about 40 microprocessors / microcontrollers in it. The average new car has about 12 microprocessors / microcontrollers in it."

- Jim Turley, editor in chief of Embedded Systems Programming

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Trends Driving Electric LoadsTrends Driving Electric Loads

Global competition drives industries toward Global competition drives industries toward greater automationgreater automation

Microprocessor growth will continue to expand, Microprocessor growth will continue to expand, driven by new rules and new technologiesdriven by new rules and new technologiesVoice over IPVoice over IPSarbanes – OxleySarbanes – OxleyHIPPAHIPPA

Nanotechnology – In spite of “Flat World” the US Nanotechnology – In spite of “Flat World” the US remains competitive because we are the world’s remains competitive because we are the world’s innovators. Can we power our innovation? innovators. Can we power our innovation?

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Power QualityPower Quality

Refers to subtle deviations Refers to subtle deviations in the quality of delivered in the quality of delivered electricity that causes some electricity that causes some customer equipment to fail customer equipment to fail or damageor damage

98% of fatal power quality 98% of fatal power quality events last events last < < 15 seconds15 seconds

Outages lasting Outages lasting < < 1 sec 1 sec cycles can cause hours of cycles can cause hours of downtimedowntime

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Momentary and Sustained Momentary and Sustained Interruptions CostsInterruptions Costs

• U.S. utility customers lose an estimated $80 billion dollars annually due to outages.

• Roughly 2/3 of costs and lost revenue was due to momentary downtimes.

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The Energy EnvironmentThe Energy Environment

Awareness Control

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A Solutions FrameworkA Solutions Framework Cost of Energy vs. Value of EnergyCost of Energy vs. Value of Energy

““Which means more to you?”Which means more to you?” Cost of Energy Cost of Energy

Operations: Operations: Absolute PriceAbsolute Price significantly affects bottom line significantly affects bottom line Marketing and Sales: Marketing and Sales: Relative PriceRelative Price influences competitive influences competitive

positionposition Financial: Financial: Volatile Volatile expense items reduce the firm’s value expense items reduce the firm’s value

through greater risk profile through greater risk profile

Value of EnergyValue of Energy Operations: Spoilage, Operations: Spoilage, lost productionlost production, data loss, damaged , data loss, damaged

equipmentequipment Marketing and Sales: Marketing and Sales: Loss of customerLoss of customer goodwill due to goodwill due to

disruptions or inability to provide goods and servicesdisruptions or inability to provide goods and services Financial: Lost wages, Financial: Lost wages, downtimedowntime, insurance premiums, insurance premiums

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Cost Based Energy SecurityCost Based Energy Security

The key issue is Price of EnergyThe key issue is Price of EnergyAnything that reduces volatility and Anything that reduces volatility and

uncertainty in energy prices creates value for uncertainty in energy prices creates value for the firmthe firm

Simple payback evaluation approach may Simple payback evaluation approach may not be appropriate if the “base case” has not be appropriate if the “base case” has greater uncertainty than the “alternate greater uncertainty than the “alternate case” case”

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Cost Based SolutionsCost Based Solutions

Hedging activitiesHedging activities Negotiated utility ratesNegotiated utility rates Over the counter forwards and optionsOver the counter forwards and options Exchange traded futures and optionsExchange traded futures and options

Energy efficiencyEnergy efficiency Low hanging fruitLow hanging fruit Many times the most cost effective “technology”Many times the most cost effective “technology”

Self GenerationSelf Generation Combined Heat and Power (CHP)Combined Heat and Power (CHP)

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Value Based Energy SecurityValue Based Energy Security

The key issue is Value of EnergyThe key issue is Value of Energy Sensitivity of operations energy disruptionsSensitivity of operations energy disruptions Financial effects of outages on your bottom line and Financial effects of outages on your bottom line and

customer retentioncustomer retention

Does not take a “blackout” to affect a firm’s Does not take a “blackout” to affect a firm’s competitivenesscompetitiveness Example – Example – Upon a momentary power disruption, it Upon a momentary power disruption, it

takes an average of 16 hours for certain data takes an average of 16 hours for certain data centers to resume normal operationcenters to resume normal operation

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Value Based SolutionsValue Based Solutions

Energy AuditingEnergy Auditing Infrared Scans, Power Quality AssessmentInfrared Scans, Power Quality Assessment

Standby Power Systems Standby Power Systems UPS, On-site Generator, Fuel Storage, UPS, On-site Generator, Fuel Storage,

Transfer Switch SchemeTransfer Switch Scheme

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Power Failure Protection After the Power Failure Protection After the 2003 Blackout2003 Blackout

Emergency generator providing power to your facilityEmergency generator providing power to your facility

Uninterruptible power system (UPS) providing power to your facilityUninterruptible power system (UPS) providing power to your facility

UPS for the individual loadUPS for the individual load

Self-generator utilized for everyday power needsSelf-generator utilized for everyday power needs

Equipment designed to cover momentary voltage dipsEquipment designed to cover momentary voltage dips

Insurance to compensate for damage caused by power failureInsurance to compensate for damage caused by power failure

Sample size = 604 commercial/industrial customers

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Thank youThank you

DiscussionDiscussion

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ReferencesReferences1.1. EIA/DOE, 2004. EIA/DOE, 2004. Historical Natural Gas Data (Average Price Sold to Commercial Historical Natural Gas Data (Average Price Sold to Commercial

Consumers, by State).Consumers, by State).2.2. EIA/DOE, 2004. EIA/DOE, 2004. Historical Electricity Data (Annual Retail Price, State by Sector).Historical Electricity Data (Annual Retail Price, State by Sector).3.3. EIA/DOE, 2001. EIA/DOE, 2001. Electric Power Sector Consumption Estimates, 2001.Electric Power Sector Consumption Estimates, 2001.4.4. FERC, 2001. FERC, 2001. Electric Transmission Constraint Study.Electric Transmission Constraint Study.5.5. Lawrence Berkeley National Laboratory/DOE, 2004. Lawrence Berkeley National Laboratory/DOE, 2004. The Economic Cost of Power The Economic Cost of Power

Interruptions to U.S. Electricity Consumers.Interruptions to U.S. Electricity Consumers.6.6. Hirst/Edison Electric Institute/DOE, 2004. Hirst/Edison Electric Institute/DOE, 2004. U.S. Transmission Capacity: Present U.S. Transmission Capacity: Present

Status and Future Prospects.Status and Future Prospects.7.7. Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical

Utility Industry, Utility Industry, Paroma Sanyal, Brandeis University and Linda Cohen, USC.Paroma Sanyal, Brandeis University and Linda Cohen, USC.8.8. Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997; Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997;

EPRI, 2001a, 2002EPRI, 2001a, 20029.9. EIA/DOE, 2003. EIA/DOE, 2003. Annual Energy Review 2003.Annual Energy Review 2003.10.10. Brown/Federal Reserve Bank of Dallas, 2005. Brown/Federal Reserve Bank of Dallas, 2005. Energy Prices and the Economy.Energy Prices and the Economy.11.11. LaPedus, 2004.LaPedus, 2004.12.12. Souder/DOE, 2005. Souder/DOE, 2005. DOE’s Role Regarding Grid Modernization and Electric DOE’s Role Regarding Grid Modernization and Electric

Reliability.Reliability.13.13. DOE, 2004. DOE, 2004. The Economic Cost of Power Interruptions to U.S. Electricity The Economic Cost of Power Interruptions to U.S. Electricity

Consumers.Consumers.14.14. Ariu/CRIEPI/SERC, 2003. Ariu/CRIEPI/SERC, 2003. Impact of the 2003 North America Blackout on Impact of the 2003 North America Blackout on

Commercial/Industrial Customers of Electric Power Companies.Commercial/Industrial Customers of Electric Power Companies.