conference wrap up and commentary - mid-c · pdf fileprivate and confidential | for use by...

Private and Confidential | For use byoriginal recipient only

1

Mid-C Conference, Wenatchee

Conference Wrap UpAnd Commentary

Presented by:

Aiman El-Ramly

Chief Strategy Officer

ZE PowerGroup

July 25, 2012

• Strategic Consultancy and Software Development Firm

• Incorporated in 1995

• Based in Vancouver BC

• Developers of the award winning ZEMA Suite for Enterprise Data Management

• Offices in

– Vancouver

– Houston

– Raleigh

– London

– Singapore

• Aiman El-Ramly, MBA, CMC

– Chief Strategy Officer

2

Private and Confidential | For use by original recipient only

ZE PowerGroup Inc.

• It has been 5 years that I have been closing atMid C, and I continue to be amazed at how Bigand how small it all is

• I always think that my statements might beradical, but I am always outdone by myspeaking colleagues

• It has been interesting – I continue to believethat the answers to the questions will comeout from this conference

• Let us review

Private and Confidential | For use by original recipient only 3

2008 – Renewable energy was the thing

• Can renewable energy be produced economically andreliably and can that energy be stored and shipped.There are no conclusive answers.

• Will nuclear make a comeback• Can coal be clean• Is there enough oil and gas• Can regulators sustain renewable portfolio standards if

utilities do not support the premise and demandcontinues to grow?

• Is the fear of global warming enough to change theenergy landscape or does the physical landscape haveto degrade to a point that the earth is at crisis?

• Is the earth at crisis now?

2009 – A hint of a shift east and gas in decline

• Wind can not compete with natural gas under $8.00• Coal is still the culprit• Transmission is still a constraint• Waxman Markey

– >20% RPS is not likely any time soon (not with any degree ofreliability unless you include existing hydro)

– 17% emission reduction is possible by 2020 (with higherefficiency natural gas generation)

– 83% by 2050 is possible (if all Americans give up their cars, stopgoing to the bathroom and give up on take-away)

• Better get used to more big hydro in the west• Better get used to more gas or nuclear in the east• Hope that clean coal can be an option in the middle• China and India are going for bust – so what does it matter


2010 – Deep Water Horizon & deep energy woes

• Increasing oil prices makes – and accordinglynatural gas and power prices makes:– Extraction from oil sands more economic

– Import of oil necessary

– Wind power more feasible (within technological limits)

– Big hydro more enticing

– Clean coal a real alternative

– Nuclear more likely

– Electric cars more plausible

– SUVs less affordable

– RPS targets more realistic

– Smart Grid more pressing

– Investment in new technologies / R&D more attractive

– A review of Cap and Trade necessary

– Conservation obvious

– Economic uncertainty extended


http://news.discovery.com/earth/zooms/offshore-oil-drilling-trial.html

2011- The world heats up

• Middle east liberation may mean new political and trade alignments– Does the mid-east look east as has Africa– Does China tap Arab oil and develop new corporate ties

• The Rise of China– Biggest energy consumer, overtaking US– Fast growing economy– Holds US debt– Chinese may rule the world – maybe – possibly –

mutually assured economic destruction(the X-man will not save the day)

– China and US also locked in ongoing energy crisis• Who gets the oil• Who gets the LNG – retrofitting for export• Who develops the international trade ties• Who has the right to uncontrolled emission

In 2012, While Nuclear is Coming Back

• “The independent U.S. Nuclear Regulatory Commission voted inFebruary 2012 to grant a combined construction and operatinglicense for two reactors at Southern Co. subsidiary Georgia Power’sPlant Vogtle, near Waynesboro. It is the first combined license everapproved for a U.S. nuclear energy facility, which will become thenation’s first new nuclear units built in 30 years. On March 30, 2012,the NRC issued combined construction and operating licenses toSouth Carolina Electric & Gas Company for two reactors nearJenkinsville, South Carolina.

Some 19 companies and consortia are studying, licensing orbuilding more than 30 nuclear power reactors. Of the more than 30,there are currently five under construction by three companies andconsortia. The U.S. Nuclear Regulatory Commission is activelyreviewing 10 combined license applications from 9 companies andconsortia for 16 nuclear power plants.”


And California may be is on its way

• California's three large IOUs collectively served20.6% of their 2011 retail electricity sales withrenewable power.– Likely helped by a reduced energy demand– “The new (2012-20222) forecast begins approximately

3 percent below CED 2009 in 2010, reflecting asignificant drop in actual electricity consumption in2009 and 2010 as the recent recession worsenedrelative to the outlook in 2009, combined with arelatively mild weather year in 2010.”

– If demand remains low the 33% percent target by2020 may be feasible, but not with $2 gas and newnuclear, unless nuclear = renewable.


The real news is the continued shift east


Pax Mongolica)

Pax Americani

Pax Ottomana

Pax RomanaPax Britannica

Pax Sinica

?

East

WEST

Pax Persica

A series of Global Pax (Peace Through Might)

• Pax Sinica (Han Dynasty Tang Dynasty early SongDynasty Yuan DynastyMing Dynasty Qing Dynasty ?

• Pax Mongolica ( Temujin / Ghengis Khan unified MongolTribes Tsardom of Russia Ends with the Holy RussianEmpire and the Black Death)

• Pax Persica (Achaemenid – Persian Empire)• Pax Ottomana (the culmination of the Umayyad Caliphate)• Pax Romana (Byzantine Pax Augusta culminates with

the Holy Roman Empire)• Pax Britannica (British Empire)• Pax Americana (Unstated American Empire)• Back to Pax Sinica


The King is Dead

• WE NEEDA NEWMODELThe US Trade Deficit,US Federal BudgetDeficit, US CurrentAccount Deficit, OilPrice, Iran, Iraq,Guns and Butter,and OTC Derivatives pushed me off the wall


I am not on my own

• I thought I may have been on my own but …

– Doug Frazier emphasized that things are going tochange, essentially the second law ofthermodynamics

– Bill Dearing said to look to Europe to see howintegrated markets can work – can the Northwestjoin the EU, please?


More

– Arnie Podgorsky – in typical Lawyer fashionstarted by disavowing his statements and let usknow out that his statements are not WSPPapproved – we need to be flexible

– I think Arnie disavows his statements because hesuggests that we return to divine rule to solve ourenergy problems – THE WSPP IS DEAD – LONGLIVE THE NEW WSPP

– Can the WSPP be a proxy for the EU?


More more

– Bill Gaines made it clear that the Northwest is justrealizing that energy policy is not working – really– can we join the EU please?

– Michael McLaughlin points out that FERC staff canbe wrong and market power is very hard todemonstrate – not sure that this is a goodcombination … should we join the EU?


More more more

– Scott Spettal – is keeping eye on China, are theystill dumping product in the US, can we matchtheir growth in renewables? I suggest we will notcatch up, and we will also export all our LNG toChina, following Alberta’s lead


More more more more

– Clare Breidenich – introduced herself to the NERDSand then went on to assure the pocket protectorwearing crowd that Cap and Trade will not go well andsmooth when launched January 1 – New RPSregulation is overly complicated and lacks clarity – weare going to drive participants out of California

– California Electricity Oversight Board does notunderstand the electricity market

– Next UFC event will be California versus WECC– California RPS can join Quebec RPS … small and

French, but not really European

– I say we the NERDS should unite and rule the world,or at least the Northwest


More more more more more

– Malcolm McLellan and Gregory Junge – Gas andelectric coordination FERC’s major push – coal togas switching

– General discomfiture in rate of switching off coal

– Not a situation in China


More more more more more more

– Keith McGrane – no worries though, the Irish havefigured it out and have brought their technologyto Montana – ready for the whole Northwest

– But not really – stuck at the crossroads, eithertake down the wind towers or build storage

– Use nuclear alongside pumped / compressed airstorage – off-peak / on-peak optimization

• Can you say black start baby


More more more more more more more

– Craig Collar – forget about wind, let’s gotidal, even if the efficiency is low, it isexpensive, could sink a tug, impactthe habitat, and will chop up fish and whales – canyou say sushi

– Stephen Fisher – FERC order 1000 – so what?

– Northwest is good at coordinating over beer and wine

– A transmission plan does not convert to transmittingcurrent – who will pay for it is secondary

Every speaker has highlighted regulatory uncertainty

– And I , Aiman El-Ramly, I agree with them … hence


• Hegemony refers to the relative peace maintainedby the dominant civilization at the time by virtue ofits political, economic, military and cultural power

• Energy, and vast access to cheap electricpower, has propelled the US as the dominantwestern influence on the global stage particularly after WWII

• Recent events have called into question American dominance and can beseen in the uncertainty in energy markets, as well as the disconnect ofbetween local and global energy markets

• Are we seeing a swing east on the world stage and how might this affectthe power market (as a possible proxy for commodity markets in general)

• The Pax that comes with empire building is directly connected to theestablishment of commodity markets and wealth creation by thedominant civilization

22


From Pax to Uncertainty

Explained by the 2nd Law of Thermodynamics

• Doug Frasier introduced the Rudolf Clausius’s theconcept of entropy

• Change is constant – and moreso in the Northwest• The second law of thermodynamics: the total

entropy of any system will not decrease other thanby increasing the entropy of some other system

• Or, chaos is the norm as the universe expands andenergy is dispersed

• Classically, entropy is the measure of energy available for work• As the entropy of the universe increases the total available energy

is becomes less useful "heat death of the Universe"• With no thermodynamic free energy the universe will no longer be

able sustain motion or life


Empires and the Divine Right

• As kingdom citizens everything we do mustbe first moved by DivineMotivation and Kingdom Vision

• Arnie Podgorsky suggests that if Americareverted to British Rule and let the Queenhave her divine right we would solve theenergy problems in the US, basically the UScould join the EU and bow to the queen

• I suggest that the wind integration wouldstill be a problem

• As an aside, the US essentially removed thelast living divine emperor (horoshito) withvictory over Japan in WWII


The other Many Names of Divine Right

• Commoditization• Imperialization• Energization• Industrialization• Automation• Liberation• Regulation• Deimperialization• Democratization• Capitalization• Americanization• Deregulation• Globalization• Digitization• Stimulization• Asianation


• Bill Dearing provided a rousing history of the Mid Columbiastarting from the Bonneville Power Act

• The west follows on in a tradition of American inventism

• Ben Franklin, Thomas Edison, George Westinghouse,Samuel Insull, Roosevelt, Herbert Hoover …

• Thereafter we get the Bonneville Power Act and the historic Mid-C 100 Mile Bus

• Bill Dearing suggests today that the WECC, WSPP, PUC, NERC, NWPP, FERC, BPAand the Joint Initiative are having trouble managing hydrology, conservation,transmission, fish, GHG,RPS, reserves certainly it is a state of imbalance, no doubt

• Maybe there are too many parties trying to manage too many conflicting priorities

• Basically the ball has stopped and we are just shifting cash around

• Power in the 20th century becomes an American commodity

26


Electrifying a Nation


27

But it starts with the Federal Power Act

• Arnie Podgorsky highlighted that from the 1930’s to the 1990’s theUS had cost based rates via the Federal Power Act

• Then it all changed we went from divine right (integratedplanning) to a free market base

• 1987 FERC experiment in wholesale trading on to full open accesswith 888 in 1995 889 2000 (yes, the FERC RTO mandate was amajor fail)

• It was the Boston tea party all over again, except we did not get aunifying constitution but a series crisis, bankruptcy and recession

• Arnie puts out the radical idea that you can have a market withoutan RTO – YES!! – he calls it the WSPP

• In not so hidden words, a return to public power utilities workingtogether in an integrated planning model

• I think the Northwest is slowly returning to this model• Low energy prices and a de-emphasis of trading for trading’s sake is

a healthy environment for this type of discussion

• 1933: Federal Power Act / New Deal

• 1978: Public Utilities Regulatory Policy Act

• 1987: WSPP formed by FERC as temporary entity to facilitate competitive power tradingin the west

• 1990: Henry Hub natural futures contract launched

• 1992: Energy Policy Act (EPAct), a framework for the wholesale electricity competition

• 1996: FERC Order 888 (permits independent generators access to transmission)

• 1996: NYMEX Electricity futures trading initiated

• 1996: Alberta Power Pool, ERCOT PJM introduced

• 1998: Cal-PX Launched (Cal-PX bankrupt soon after Cal ISO)

• 1999: FERC Order 2000 (encourages transcos to join RTO/ISO structure)

• 2006: FERC’s Order 670 establishes anti-manipulation rules

• 2007: Renewable Portfolio Standards

• 2009: American Recovery and Investment Act

• 2010: Dodd–Frank Wall Street Reform and Consumer Protection Act

• 2012: Smart Energy Act?28


Regulating the Advantage

The Northwest is not left out

• Bill Gaines points out that ONLY in the last two years has the NWrealized “Wenatchee we have a problem”

• I might point out that near bankruptcy of California in 2001 duringthe energy crisis might have been an indication of a problem

• Bill Gaines correctly indicates – Wind and Hydro are not incented towork together

• Michael McLellan says the same of power and gas, and gas and coal• Clare Breidenich said as much for RPS• Keith McGrane says let’s talk about nuclear and pumped /

compressed air storage as the way forward• Stephen Fischer says I really don’t know how much transmission

costs – does anyone?• There is no clarity or coordination, there is no easy way forward• Is this not the crux of why deregulation has been a shambles –

rapidly assembled, reactionary, patchwork market based regulationthat does not have market participants working together


The Northwest is not left out more …

• Market based regulation in the absence of trueintegrated planning will never work – the last instanceof true integrated planning was the creation of theWSPP in 1987 … and then there was FERC order 636,888, 889, 890, 1000, 2000 … … …

• LIONS and TIGERS and BEARS – OH MY• Initiatives like the New Market Assessment Committee

made up of individuals with some institutionalknowledge may be a start

• I might suggest, however, that the NMAC does notneed to spend too much time studying the DONOTHING option

• All will be revealed December 31



31

Toto, We are Not in Kansas Anymore

• 2001 FASB 133 Accounting for Derivative Instruments and Hedging Activities

• 2002 Sarbanes Oxley

• 2009 American Recovery Act

• 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act

32


Trying to Reform

1.5 Trillion Dollars since December 2, 2001Represented in the 10 largest

US Bankruptcies in History

American Recovery Act Stimulus $787 Billion

Recent FERC reform of Energy

• Michael McLaughlin introduced Obama’s 2009 initiative of theOffice of Policy and Innovation

• And the near immediate strategic plans• The FERC Agenda Roadmap as of 2011

– Reserve margin– Environmental regulation– Gas electric interdependence– Variable generation– Demand Side Management– Transmission

• Not surprising Exactly the same issues that Bill Dearing suggestedare not working in the Northwest

• New Order 1000 Transmission Planning and Cost AllocationCompliance Filing for public utilities (890 for private) – due inOctober

• Critical admissions by Michael – FERC staff is wrong at times!


From the FERC Website

• Order No. 1000 is a Final Rule that reforms the Commission’selectric transmission planning and cost allocation requirements forpublic utility transmission providers. The rule builds on the reformsof Order No. 890 and corrects remaining deficiencies with respectto transmission planning processes and cost allocation methods.– I just want to suggest that the history of regulatory reform in the US

demonstrates that the remaining deficiencies are never fullycorrected

– Not humanly possible, especially given the speedin which regulation in put in place

– And I think that it is fateful that Order 1000 is halfof Order 2000 and we know that standard marketdesign died the good fight

• The US does not have the Asian long /generationalview on market development and this is a problem

• Wild wild west and quick draw McGraw is wrong


35


Commoditizing Electricity

2000-2001: market manipulation led to the US Energy Crisis

• PG&E, San Diego Gas & Electric went throughpublic bailout ; $45 billion in cost

• Skilling not so lucky

36


Market in Perpetual Crisis

Western power market prices are driven by regulation and manipulation

37


Power Markets Drivers

Pre 1996 1996-1999 1999

Safety Deregulation Recovery

Reliability Market expansion Enforcement

Cost of Service Market principles Smart Grid

Energy Security Energy Security

Environment

Did true Adam Smithstyle competition ever existin power markets?A failing in modern capitalism?

Oil prices are driven by politics and global events

38


The Story of Oil

0

30

60

90

120

150

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

$/B

bl

Global Energy Events and WTI Oil Prices

IraqInvadesKuwait

Gulf War

Nowruz PlatformPersian Gulf Spill

Chernobilnuclear

Ixtoc Gulfof Mexico

3 MileIsland

FinancialCrisis

The U.S. natural gas prices are driven by local supply/demand

39


The Story of Gas

0

2

4

6

8

10

12

14

16

18

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

$/M

MB

tu

Henry Hub Natural Gas Prices

EPA included NG inmajor sources of HAP;FERC order 636-competition in NGindustry

EIA published reportabout increased roleof gas

All local NG marketsconnected to NorthAmerica NG market

HurricanesKatrina, Rita

Economicslowdown,abundantsupply

Volatility of the U.S. natural gas prices is at the historical low

40


Where Has All the Volatility Gone

Is lost volatility a sign of an eroding energy market or eroding demand?Is there something more sinister at play?

Power and gas disconnect

• Malcolm McLellan provided someinteresting comments on power and gasphysics and the theory of relativity

• Electricity travels at speed of light, gas is not• Firm and interruptible do not mean the same thing• The lack of coordination is problematic• But no worries, FERC is analyzing the 80 some

comments and will have a technical conference –although urgency is lacking as the problem is seen asbeing at least three years away

• The electric companies can build their own pipelines ifneeded

• Current market structures / rules in inhibit reliability


U.S. natural gas prices are not ANY MORE correlated with crude oil

42


Oil and gas disconnect

What is the significance of the disconnect in the fossil fuels?

• Spread between three main world benchmarks increasing

• WTI is at the lowest level

• Abundant domestic supply

• Limited import and export

43


US and Global Oil Disconnect

• Mergers– Duke + Progress– Constellation + Excelon– Constellation MX Energy– Allegheny + First Energy

• Acquisitions– Gavilon on the market– Viterra being bought out by Glencore

• Retractions– Societe Generale– Credit Suisse– Barclays– BNP Paribas

• Volatility arrested, volumes down, demand at low• Power and gas flat, chasing new markets (softs and metals)

44


Markets in Consolidation / Retreat

Is there really a trading panacea to be found in other commodities?Stephen Fischer says love the one you are with – meaning stick with gas

The pace of economic recovery has beenslower than anticipated

45


Slow Climb Out

U.S. GDP*

•Estimated for 2011 2.7-2.9%

•Actual 2011 GDP was 1.7%

U.S. Unemployment**

•December 2011 - 8.5%

•January 2012 - 8.3%

• Recession driving down local demand - Surplus in WTI

• US oil markets need transportation to export to Asia

• China aligns with the Middle East – fading US influence

• Arab Spring rewrites rules of engagement

• China also aligning with Canada (Kitimat LNG Terminal)

• Chinese relative investment strength impacts long-termtrade balances

• Challenges to US economic recovery

• Obvious sustained local energy demand implications

46


What is Happening Here?

Is the Role of the US as the global consumer reversing?Will the US become an exporter of resources?Does this changes the US relative industrial position?Bill Dearing says we should look to Europe as the countries there are moreintegrated than say the states in the NorthwestStephen Fischer say the Northwest planning cycle is slower than the systemdevelops

47


China as the Dominant Consumer

20%

14%

5%4%

57%

Saudi Arabia's Oil Exports byDestination in 2009

Other

US

Mediterranean

Europe

Far East

Data Source: The CIA World Factbook

Far EastUS

What happens if the Far East converges with the Middle East?Scott Spettel warns us that China is till very much on the move!

• Increase in shale gas production

• Demand down

48


There is a lot of Natural Gas Available

• Natural gas capacity expansionsare being sustained

• Maxed out in 2008 as recession hits

49


No Shortage of Transportation

• US Introduces RPS

• Perhaps poorly timed

• Scott Spettel emphasizes we may be near the endof the limit for wind in the Northwest

• Claire says we will need to wait and see if the new regulation removes RPSlimitation – and CARB is putting in place extremely complicated regulation

• What constitute resource shuffling is not clear – is RPS just a card game?

50


Complicated by RPS

2006 2011

Curtailing wind

• Keith McGrane emphasizes that wind curtailment isreal

• The current structure does not support the level ofwind, need to rethink what we are doing rethink ourbusiness model

• The problem is the owners of wind are notthe owners of storage (in the Northwest it isHydro), where is the incentive, who willbuild new storage for the ancillary markets

• What is the structure and price of storage,FERC will need to make some new rules –or borrow the rules from Ireland

• Although it is not economic under energy arbitrage


• Actual power generation additions (natural gas-fired units prevail)

• Malcolm McLellan - coal will continue to decline relative to gas, this trendwill increase – by 2035 235 GW new generation, 60% will be gas – whatare the reliability impacts – on an atypical day there may be insufficientgas = outage, just as in the 2011 southwest power outage – the problem isthe gas did not come off the pipeline

52


But Not Withstanding

The pace of renewable generation expansion depends on governmentalsupport through tax credits and subsidies

– The Business Energy Investment Tax Credit that reduces federal income taxes

• 30% for solar, fuel cells and small wind

• 10% for geothermal, micro-turbines and Combined Heat and Power

– The Federal Renewable Energy Grant Program offers to pay the costs up to– 30% for fuel cell, solar, or small wind electric technologies

– 0% for other renewables

– The Renewable Electricity Production Tax Credit is a corporate tax credit based on the actualelectrical output and differs by the resource type

53


Still in Subsidy

Resource Type In-Service Deadline Credit Amount

Wind December 31, 2012 2.2¢/kWh

Closed-Loop Biomass December 31, 2013 2.2¢/kWh

Open-Loop Biomass December 31, 2013 1.1¢/kWh

Geothermal Energy December 31, 2013 2.2¢/kWh

Landfill Gas December 31, 2013 1.1¢/kWh

Municipal Solid Waste December 31, 2013 1.1¢/kWh

Qualified Hydroelectric December 31, 2013 1.1¢/kWh

Marine and Hydrokinetic (150 kW or larger)* December 31, 2013 1.1¢/kWh

What happens to the industry when the subsidy dries up?

54


And We Could Go On Conjecturing

But we have all said enough

What I say

• Thanks to everyone for their time

• Thanks to all our great speakers today

• Thanks to Doug and Bill (and family) for their hardwork and generous hospitality

• It has been a blast!


Three Gorges Dam on the Yangtze River, China, constructedin 1993. It is the largest hydroelectric dam in the world,more than five times the size of the Hoover Dam. work wasfinished on May 20, 2006, nine months ahead of schedule. Atemporary barrier called cofferdam was built before theconstruction. Now that it is completed, this wall has to beblown away. A total of 191 tonnes of explosives had to beput in place at 1,700 sites along the barrier.

conference wrap up and commentary - mid-c · pdf fileprivate and confidential | for use by...

Documents