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Alaska’s Energy Future: Where is it headed?

Alaska’s Energy Future: Where is it headed?. A guided macro/micro tour – with your vote on key assumptions to inform choices on the path forward. Sponsored by: Renewable Energy Alaska Project (REAP) Presented by: Mark A. Foster, P.E., MAFA February 9, 2011. Overview. Speaker Bio

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Alaska’s Energy Future: Where is it headed?

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  1. Alaska’s Energy Future: Where is it headed? A guided macro/micro tour – with your vote on key assumptions to inform choices on the path forward Sponsored by: Renewable Energy Alaska Project (REAP) Presented by: Mark A. Foster, P.E., MAFA February 9, 2011

  2. Overview • Speaker Bio • History of Energy in Alaska & Observations • Macro & Household level • Energy Economics Questions • How much does it cost? Who Pays? What costs are included/excluded? • Review of a few basic energy alternatives in some detail • Transportation, Heating, Electric Markets • Key economic assumptions to consider in the evaluation of alternatives • Audience Votes on descriptive and prescriptive assumptions about the future – oil & gas prices, GHG emissions regulation/taxes, environmental mitigation considerations, project cost overrun risks • Results – How much does it cost? Who pays? MAFA

  3. Thank You & Disclaimer • I have been extremely fortunate to have enjoyed the support, encouragement and opportunity to collaborate with many talented and passionate Alaskans (and friends of Alaska) on energy issues over the past three decades; special thanks to the AEA, USDA-RUS, NREL, UAA ISER, ACEP, and from the late 1970s/early 1980s, Neil Davis, Arlon Tussing, John Whitehead, Gregg Erickson, and A.J. Horn, Gil Masters, Len Ortolano and Joseph Franzini • The views presented have been independently developed and do not necessarily reflect the views any clients or affiliations • Please direct comments regarding any errors of commission or omission that remain to me via e-mail at mafa@alaska.net MAFA

  4. Speaker Bio • Born and raised in Fairbanks • B.S. Civil Engineering, Stanford University; Senior Report: Economic Analysis of Susitna Hydroelectric • City of Fairbanks Model Energy Code Development, Building Inspector, Plans Examiner • V.P., Ebenal General Construction, Interior Alaska Building Construction • Engineer, Fairbanks Municipal Utility System, Downtown Fairbanks Coal-fired Chena Power Plant • Commissioner, Alaska Public Utilities Commission (1990-1993); Telecom markets, TAPS, Healy Clean Coal • Principal, MAFA; Regulated industries and technology consultant (1994 to present) • President/COO, Anchorage Telephone Utility Long Distance (1997-2000) • VP Product Dev’t/Network Development, Alaska Communications System (1999-2000) • Board of Directors, Alaska Power & Telephone (2004-present) • Board of Directors, HydroWest International (2004-present) • Board of Directors, Chair-Audit & Finance Committee, Anchorage Municipal Light & Power (2009) • Selected consulting engagements (2000-2011) • Agrium, IPPs – Railbelt Energy Markets (Natural Gas, CTL Opportunities) • U.S. Department of Agriculture/ISER/Denali Commission – Sustainability of Rural Utilities • North Slope Borough, Kuukpik – North Slope Utilities, Local Energy Markets, Oil & Gas Opportunities • AEA – Rural Energy Plan; Regional energy plan advisory committees; Co-authorship of renewable economics; Long Term Oil Price Projections, Invited presentation on Railbelt Energy Overview, REGA and RIRP Advisory Committees • APA – Regionalization Opportunities: A Review of BC Hydro History • Native Corporations (Arctice Slope, BBNA, CIRI, Kuukpik) – Alaska Energy Opportunities • ANGDA – Railbelt Gas & Electric Utilities financial capacity; Strategic Overview of Alaska Energy Alternatives • NREL – Renewable/EE Opportunities in Alaska • IAEE – Invited presentations on Railbelt Energy Economics • City of Palmer – District Heat Energy System Opportunity • ISER – Peer Review of Energy Reports (CTL, Renewables) • UAF Cogen Plant Alternatives MAFA

  5. History of Energy Use in AlaskaThe Big Picture from 1960-2010 T, R, C, I Source: EIA Historic Energy Consumption, Alaska (1960-2006) Table 7 MAFA

  6. History: Transportation Sector Source: EIA Historic Energy Consumption, Alaska (1960-2006) Table 11 MAFA

  7. History: Residential Sector Source: EIA Historic Energy Consumption, Alaska (1960-2006) Table 8 MAFA

  8. History: Commercial Sector Source: EIA Historic Energy Consumption, Alaska (1960-2006) Table 9 MAFA

  9. History: Industrial Sector Source: EIA Historic Energy Consumption, Alaska (1960-2006) Table 10 MAFA

  10. Historical synthesis • What do you take away from historic energy consumption patterns? • SE Alaska Mining & Fishing • SW Alaska Fishing • Interior mining • Kennicott Mine • Department of Defense; Federal Investments (APA) • Cook Inlet Oil & Gas; North Slope Oil • Development of jet fuel market • Red Dog Mine • How does that inform your view of the future? MAFA

  11. Southcentral Household Energy Perspectives *Direct includes electricity, gasoline, airplanes, and home heating. Direct does not include purchases of housing, food, clothing, consumables, gov’t, business, industry and church facilities and support. MAFA

  12. Energy Economics Intro • How much does it cost? • Who pays? MAFA

  13. Energy Economics: Key Assumptions – Looking Forward • Oil prices • Natural gas prices • Cost of project development • Environmental considerations • Economic discount rate; what is the opportunity cost of public or private funding MAFA

  14. Energy Economics:Oil Price Reference Forecast Illustrative prices: $110/bbl at refinery =$2.62/gal at refinery (~$19/mmbtu) =$3.00/gal refined product rack (~$22/mmbtu) =$3.20-$7.50/gal to local storage/utility (~$23-54/mmbtu) =$4.00–$9.00/gal delivered to bldgs (~$29-65/mmbtu) MAFA

  15. Energy Economics: Quick review of oil and its competitors Abe Lincoln for the first to guess the big elephant that is not in this picture but should be… MAFA

  16. Energy Economics: Natural Gas Price Reference Forecasts MAFA

  17. Energy Economics: Cost of Project Development, Operations, and Capital Rehab/Replacement in AK Special thanks to Don Mellish for providing information that informs this chart MAFA

  18. Energy Economics: Will downsizing a hydro development on a river basin make it more affordable? How do you measure affordability? Total $ or ¢/kWh Sources: Susitna Hydroelectric Project, Project Evaluation, Interim Memorandum, Table 1 Summary and Appendix B: Detailed Cost Estimates (March 2009); These cost estimates include transmission system interconnection and substation upgrades (Ester, Willow, Knik Arm, University and Devil Canyon) and $45M for a new Energy Management System to help integrate the resources with the balance of the interconnected system. MAFA

  19. Energy Economics: How well do we estimate the cost of hydro Large project cost risk zone Continuing challenge of whether & how To adjust *project cost* estimates To account for large project cost underestimation risks including: Low end estimates Project development cost overruns Source: MAFA Analysis of AEA Hydro Database, 2009 MAFA

  20. Environmental Considerations • Project Development • Site selection, local land use considerations • Time to develop • Local environment/habitat mitigation considerations • Mitigation requirements • Hydro water sharing, air/water cooling for combustion driven electrical generation • Emissions • Air pollution: sox, nox, particulates, GHG, mercury (Hg), etc. MAFA

  21. Project Development Source: MAFA Analysis (2009) of EIA AEO Technical Documentation-Alaska Hydro Resources (2003) Available for Development [Measured in MW of electrical capacity] Around 1 in 8 promising hydro sites *might* be available for development due to conflicts with parks and fishing resources MAFA

  22. Project Development Challenges Includes Chakachamna Chakachamna should be reclassified to 50% dev’t probability (to correct error in IHRED framework) leaving roughly 3.2% in 90% probability Includes Susitna EIA AEO Hydro Resources report (IHRED, 2003) estimates 26% in mitigation costs need to be added to basic Watana dam construction costs to account for fish and wildlife habitat and water monitoring requirements to achieve permit. That amounts to roughly $1B on a $4B construction cost estimate. MAFA

  23. Project Development Challenges:Mitigation allowance and licensing budget EIA AEO U.S. Hydro Resources Report (IHRED, 2003) estimates 26% needs to be added to basic Watana dam construction costs to account for fish and wildlife habitat mitigation and water monitoring requirements to achieve permit at 1000MW scale. At $8.4 billion for the 1200 MW scale, this amounts to roughly $2 billion. Internal estimates at 1200MW scale contain $200 million mitigation allowance. Licensing effort estimated at 6.5% of construction cost at 1000MW scale – amounting to roughly $450 million on $6.9 billion low Watana 600MW construction cost estimate; or $325 million on low low Watana 500MW construction cost estimate of roughly $5 billion. These estimates may be low. Licensing percentage for smaller scale project likely to be higher as smaller scale has higher capital cost per unit of water impounded raising conflicts between limited water for habitat mitigation vs. water for electricity, especially as hydroelectric interests attempt to capture more water for winter peak electrical demand in order to deliver on promise of “cheap” electricity when most needed. MAFA

  24. GHG Emissions Regulation/Cost MAFA

  25. Economic Discount Rate • What is the value of a $1 today compared to a $1 a year from now, 10, 20, 30, 40, 50 years from now? What opportunities do we give up? • Range of estimates: • Diversified Permanent Fund = 5% real • Federal OMB = 7% real • AEA B&V IRP = 7% nominal; ~4.5% real • Others… • Zero or negative; long run social discount rate 3% • How we *finance* the development and construction is a separate and distinct analysis MAFA

  26. Illustrative Energy Economics: Long Run Levelized Cost • Long-run Levelized Cost of Energy comparison • Equivalent Uniform Annual Cost (EUAC) methodology • Attempts to create a metric that you can compare to today’s unit cost of c/kWh or $/mcf • Components • Capital • Operating • Fuel • Regulation MAFA

  27. Summary of Illustrative Scenarios MAFA

  28. Illustrative Scenario 1 [$3.50HH, $24CO2, 0% CapExRisk, 5% real] MAFA

  29. Illustrative Scenario 2 (~AEA B&V IRP) [$4.50HH, $84CO2, 0% CapExRisk, 4% real] MAFA

  30. Illustrative Economics: What factors drive the results • Capital cost estimates for large capital/low fuel cost technologies (hydro, coal, tidal, wind, biomass, geothermal, CTL, GTL) can make the project very competitive or very expensive compared to natural gas – and the capital costs estimates appear to be very sensitive to who is sponsoring the estimate • The price of natural gas and its potential volatility is a key factor in evaluation of alternatives in Southcentral, including end-use efficiency, especially related to heating of residential, commercial, government, institutional and industrial buildings. • Coal prospects are sensitive to assumptions about CO2 costs and natural gas prices MAFA

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