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How the Electric Energy Landscape Has Changed Since the Enactment of SB 221

How the Electric Energy Landscape Has Changed Since the Enactment of SB 221. Changes in the Marketplace and Unforeseen I mpacts of Implementation Ohio Chamber of Commerce October 18, 2013 Kevin Murray – Executive Director, IEU-Ohio .

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How the Electric Energy Landscape Has Changed Since the Enactment of SB 221

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  1. How the Electric Energy Landscape Has Changed Since the Enactment of SB 221 Changes in the Marketplace and Unforeseen Impacts of Implementation Ohio Chamber of Commerce October 18, 2013 Kevin Murray – Executive Director, IEU-Ohio

  2. Energy and Economy Outlook When SB 221 Was Passed • In November 2007, the Chief Economist at the International Monetary Fund forecast the world economy would slow to a 4 ¾% growth rate in 2008. • Strong demand, causing significant increases in the costs of steel, concrete and other commodities. • Commodity price increases expected to significantly increase the cost of constructing new power plants. • Thermal coal prices at record levels due to strong global demand.

  3. Natural Gas Trends • In 2008, most projections forecast the U.S. would not be able to produce enough natural gas to keep up with domestic demand. • Imports, primarily in the form of liquefied natural gas (“LNG”), would supply an increasing share of the natural gas market. • LNG is a globally-priced commodity. • Natural gas is the marginal fuel for many hours of the year in PJM InterconnectionLLC’s (“PJM”) regional electricity market. • PJM serves all or parts of 13 states, including Ohio and the District of Columbia. • Little knowledge of domestic shale gas.

  4. Natural Gas Outlook 2008 • In its 2008 Annual Energy Outlook, the Energy Information Administration (“EIA”) forecast that U.S. consumption of natural gas would grow modestly to 23.8 trillion cubic feet (“Tcf”) by 2016. • Growth in natural gas demand in the power generation sector offset by declines in the residential and industrial sectors (price response). • Reliance on imported LNG for approximately 25% of supply. • A significant number of LNG import terminals were being pursued by developers. • The Federal Energy Regulatory Commission (“FERC”) and the Coast Guard had approved LNG terminals or expansion projects totaling an additional 17.81 billion cubic feet (“Bcf”) per day of capacity.

  5. Annual Energy Outlook 2008

  6. Electricity Outlook 2008 • No new fossil fired or nuclear plants are going to get built – they are too expensive. • Electricity prices are high and will go even higher. • Energy conservation is necessary to meet power demand and perhaps cheaper than new power plants. • Retail shopping for generation stagnant. • Ohio utilities split between two regional transmission organizations (“RTOs”).

  7. The Great Recession World GDP

  8. Electricity Prices • Fueled by the Great Recession of 2008, demand for electricity, as well as other fuels, fell dramatically. • In response, prices dropped dramatically. • The effects were global in nature. • The effects continue, albeit to a lesser extent, and also driven by other factors today!

  9. The Shale Gale • The development of shale gas has been characterized as the most significant energy innovation of this century. • Shale gas accounted for only one percent of U.S. natural gas supply in 2000. • The EIA’s Annual Energy Outlook 2013 Early Release projects U.S. natural gas production to increase from 23.0 Tcf in 2011 to 33.1 Tcf in 2040, a 44% increase. Almost all of this increase in domestic natural gas production is due to projected growth in shale gas production, which grows from 7.8 Tcf in 2011 to 16.7 Tcf in 2040.

  10. Shale Reserve Impacts • The Potential Gas Committee issued its biennial assessment of the nation’s gas resources in June 2009. This study indicates that the U.S. possesses a resource base of 1,836 Tcf of natural gas. When combining these results with the Department of Energy’s (“DOE”) latest determination of proved gas reserves, 238 Tcf as of year-end 2007, the U.S. has a future supply of natural gas of over 2,000 Tcf. At current consumption rates, this is enough natural gas to supply the nation for the next hundred years. Much of the increase in reserves from prior estimates is largely attributable to increased supplies from unconventional gas plays, specifically from shale gas development.

  11. Natural Gas & Electricity Interdependence • As recently as two years ago, over 50% of the nation’s electricity was generated by burning coal. • In April of 2012, low natural gas prices, caused by a much warmer than normal 2011-2012 winter and record storage levels, resulted in significant natural gas displacement of coal. • Both natural gas and coal provided 32% of the electricity generated in April 2012.

  12. Marcellus Shale • In December 2011, monthly production in the Marcellus Shale averaged 4.9 Bcf per day with 75 rigs in the play directed at dry gas production. • In April 2013, monthly production in the Marcellus Shale averaged 8.9 Bcf per day with 69 rigs in the play directed at dry gas production.

  13. Utica Shale In mid-May, the State of Ohio released a report detailing Utica shale production data from 2012. As of the end of 2012, there are a total of 87 wells in the Utica shale drilled by 11 companies. During 2012, the wells produced a total of 12.8 Bcf of natural gas and so-called natural gas liquids and 635,896 barrels of oil. During 2012, Ohio’s oil production grew by 93 percent and its natural gas production grew by 80 percent from 2011 levels. Of the 87 Ohio wells, only two were in production for more than 300 days in 2012 and 74 were in production for less than half a year, hurting Ohio’s production totals, officials said. The 87 wells were in production for a total of 7,979 days in 2012, according to the report. Utica shale wells represent two tenths of one percent of Ohio wells, yet those 87 wells produced 12 percent of Ohio’s oil and 16 percent of Ohio’s natural gas in 2012. Rick Simmers, chief of the Division of Oil and Gas Resources Management said his agency estimates that Ohio will have 1,012 drilled Utica wells producing oil and natural gas and natural gas liquids by 2015. The state projects there will be 362 Utica shale wells in production by the end of 2013 and 662 Utica wells in production by the end of 2014. The projected volume of natural gas in 2015 is 146 Tcf in addition to 7.2 million barrels of oil and natural gas liquids according to the Division of Oil and Gas Resources Management.

  14. Average Monthly Real-Time Locational Marginal Pricing (“LMP”)AEP-Dayton Hub

  15. Average PJM West Hub On-peak Futures Price ICE Reflects September 2, 2013 Settlement Data

  16. NYMEX Henry Hub Natural Gas Futures Reflects NYMEX Settlement Price as of September 3, 2013

  17. Ohio Retail Electricity Prices • Since 2008, Ohio retail electricity prices have dropped relative to 2008 levels in service areas in which the standard service offer (“SSO”) generation prices are set through a competitive bidding process (“CBP”). • A CBP is used for FirstEnergy (Ohio Edison Company, The Cleveland Electric Illuminating Company and Toledo Edison Company) and Duke Energy Ohio. • A Duke Energy Ohio residential customer using 1,000 kilowatt hours (“kWh”) of electricity experienced a total monthly electric bill decrease by approximately 17.5% at the beginning 2012 due to the CBP. • Presently, 62% of all customers shop for generation supply.

  18. Market-Based Capital Formation • Since 2008, other market-based sources of capital have emerged to fund energy efficiency projects and clean energy projects. • Toledo-Lucas County Port Authority provides low cost financing for energy efficiency measures through its BetterBuildingsNorthwest Ohio program. • Goldman Sachs has a $40 billion target for financing and investing in clean energy and energy efficiency. • Bloomberg New Energy Finance has indicated that Internet–based “crowdfunding” options may help to raise more than $90 billion in “clean energy” investment. • The General Assembly has authorized local governments to establish a revolving loan fund to help property owners finance, among other things, alternative energy technologies, energy efficiency and demand reduction through capital markets (Section 717.25, Revised Code, effective in June 2010).

  19. Conclusion • The facts and circumstances that existed in 2008, as well as the predictions for what lay ahead, are dramatically different than what has materialized.

  20. Questions?

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