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Energy Security: Creating a Competitive Advantage for Industry. Hugh Baker President, Hunt Power AHC Group Corporate Affiliates Workshops June 21, 2005. Energy Security. National Energy Security Energy is the lifeline of our economy We require affordable energy

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Energy security creating a competitive advantage for industry

Energy Security:Creating a Competitive Advantage for Industry

Hugh Baker

President, Hunt Power

AHC Group

Corporate Affiliates Workshops

June 21, 2005


Energy security
Energy Security

  • National Energy Security

    • Energy is the lifeline of our economy

    • We require affordable energy

    • We require a continuous supply of energy

  • “Local” Energy Security

    • Energy is the lifeline of your business

    • Energy must be cost effective

    • Energy must be in an “on” state

    • Energy must have a quality component


Factor 1 energy prices
Factor 1: Energy Prices

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

    – Alan Greenspan (4/5/05)

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

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





Factor 2 grid issues
Factor 2: Grid Issues

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

– IEEE Spectrum, Aug. 2004



Utility outages
Utility Outages

  • Documentation of utility outage data is a relatively new concept

    • SAIDI – records the yearly average outage duration for each customer sampled

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

  • The data to accurately measure these indices is not readily available

  • The limited available data suggests, on average, a utility customer in the U.S. will experience:

    • 1.2 outages per year

    • 106 minutes per outage

5


Peak demand outpaces transmission capacity
Peak Demand Outpaces Transmission Capacity

Annual transmission investments decrease despite increasing load demand

6



Factor 3 changing nature of electric loads
Factor 3: Changing Nature of Electric Loads

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

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


The service based economy
The Service Based Economy

U.S. Energy Use Per Capita

9

Energy-to-GDP Ratio Falling

10

year


Growth of microprocessors
Growth of Microprocessors

11

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

"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


Trends driving electric loads
Trends Driving Electric Loads

  • Global competition drives industries toward greater automation

  • Microprocessor growth will continue to expand, driven by new rules and new technologies

    • Voice over IP

    • Sarbanes – Oxley

    • HIPPA

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


Power quality
Power Quality

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

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

  • Outages lasting < 1 sec cycles can cause hours of downtime

12


Momentary and sustained interruptions costs
Momentary and Sustained Interruptions Costs

13

  • 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.


The Energy Environment

Primary Energy Supply

Awareness

Control

Transportation of Primary Energy

Bulk Conversion Nodes

Electric Transmission System

Electric Distribution System

"Last Mile" Distribution System

Meter

Facility Distribution

System

End-Use Energy Conversion

Nodes


A solutions framework
A Solutions Framework

  • Cost of Energy vs. Value of Energy

    “Which means more to you?”

    • Cost of Energy

      • Operations: Absolute Price significantly affects bottom line

      • Marketing and Sales: Relative Price influences competitive position

      • Financial: Volatile expense items reduce the firm’s value through greater risk profile

    • Value of Energy

      • Operations: Spoilage, lost production, data loss, damaged equipment

      • Marketing and Sales: Loss of customer goodwill due to disruptions or inability to provide goods and services

      • Financial: Lost wages, downtime, insurance premiums


Cost based energy security
Cost Based Energy Security

  • The key issue is Price of Energy

    • Anything that reduces volatility and uncertainty in energy prices creates value for the firm

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


Cost based solutions
Cost Based Solutions

  • Hedging activities

    • Negotiated utility rates

    • Over the counter forwards and options

    • Exchange traded futures and options

  • Energy efficiency

    • Low hanging fruit

    • Many times the most cost effective “technology”

  • Self Generation

    • Combined Heat and Power (CHP)


Value based energy security
Value Based Energy Security

  • The key issue is Value of Energy

    • Sensitivity of operations energy disruptions

    • Financial effects of outages on your bottom line and customer retention

  • Does not take a “blackout” to affect a firm’s competitiveness

    • Example – Upon a momentary power disruption, it takes an average of 16 hours for certain data centers to resume normal operation


Value based solutions
Value Based Solutions

  • Energy Auditing

    • Infrared Scans, Power Quality Assessment

  • Standby Power Systems

    • UPS, On-site Generator, Fuel Storage, Transfer Switch Scheme


Power failure protection after the 2003 blackout
Power Failure Protection After the 2003 Blackout

Emergency generator providing power to your facility

Uninterruptible power system (UPS) providing power to your facility

UPS for the individual load

Self-generator utilized for everyday power needs

Equipment designed to cover momentary voltage dips

Insurance to compensate for damage caused by power failure

14

Sample size = 604 commercial/industrial customers


Thank you

Discussion


References
References

  • EIA/DOE, 2004. Historical Natural Gas Data (Average Price Sold to Commercial Consumers, by State).

  • EIA/DOE, 2004. Historical Electricity Data (Annual Retail Price, State by Sector).

  • EIA/DOE, 2001. Electric Power Sector Consumption Estimates, 2001.

  • FERC, 2001. Electric Transmission Constraint Study.

  • Lawrence Berkeley National Laboratory/DOE, 2004. The Economic Cost of Power Interruptions to U.S. Electricity Consumers.

  • Hirst/Edison Electric Institute/DOE, 2004. U.S. Transmission Capacity: Present Status and Future Prospects.

  • Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical Utility Industry, Paroma Sanyal, Brandeis University and Linda Cohen, USC.

  • Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997; EPRI, 2001a, 2002

  • EIA/DOE, 2003. Annual Energy Review 2003.

  • Brown/Federal Reserve Bank of Dallas, 2005. Energy Prices and the Economy.

  • LaPedus, 2004.

  • Souder/DOE, 2005. DOE’s Role Regarding Grid Modernization and Electric Reliability.

  • DOE, 2004. The Economic Cost of Power Interruptions to U.S. Electricity Consumers.

  • Ariu/CRIEPI/SERC, 2003. Impact of the 2003 North America Blackout on Commercial/Industrial Customers of Electric Power Companies.


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