Hunt Power Energy Security

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Energy Security:Creating a Competitive

Advantage for IndustryHugh Baker

President, Hunt Power

AHC GroupCorporate Affiliates WorkshopsJune 21, 2005


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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


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Factor 1: Energy Prices

The price of energy has been substantialenough and persistent enough to biasbusiness-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 addssignificant risk to business operations.


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Rising Natural Gas Prices

Commercial Gas Prices

4

5

6

7

8

9

10

11

12

2000 2001 2002 2003 2004

Years

$/1000cu.ft.

California

Delaware

Maryland

New Jersey

Pennsylvania

Texas

1


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Rising 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

Avg.

Cents/KWH California

Delaware

Maryland

New Jersey

Pennsylvania

Texas

2


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Regional Disparities in Generation

3WSCC Electric Power Sector ConsumptionEstimates (2001)

Natural Gas49%

Petroleum

2%

Nuclear

17%

Hydro

13%

Renewables

and Other

18%

Coal

1%

PJM Electric Power Sector ConsumptionEstimates (2001)

Coal

49%

Natural Gas

6%

Petroleum

3%

Nuclear

39%

Hydro

1%

Renewables

and Other

2%

ERCOT Electric Power Sector Consumption

Estimates (2001)

Nuclear

12%

Natural Gas

46%

Hydro

0%

Renewables

and Other

0%

Coal

41%

Petroleum

1%


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Factor 2: Grid Issues

Between 1984 [official start of recording

blackouts in North America] and 2000, utilities

logged 11 outages affecting more than 4,000megawatts making the probability of any oneoutage 325 times greater than mathematicians

would have expected.

IEEE Spectrum, Aug. 2004


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Bottlenecks in U.S. Transmission

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Utility Outages

Documentation of utility outagedata is a relatively new concept SAIDI records the yearly

average outage duration foreach customer sampled

SAIFI records the average

yearly frequency of outagesper customer

The data to accurately measurethese indices is not readilyavailable

The limited available datasuggests, on average, a utilitycustomer in the U.S. willexperience: 1.2 outages per year 106 minutes per outage

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Peak Demand Outpaces

Transmission Capacity

Annual transmission investments

decrease despite increasing load demand

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U.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

Electric LoadsUtility customers expect a different

product today than they did twenty yearsago. Whats more, utilities and regulators

havent caught up to that fact.

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


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The 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 Microprocessors

0

5

1015

20

25

30

35

40

Market

($ bill ions)

2003 2004 2005 2006 2007

Year

Microprocessor Market

The microprocessormarket was $27.4 billionin 2003, and it willincrease 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 Loads

Global competition drives industries towardgreater automation

Microprocessor growth will continue to expand,

driven by new rules and new technologies Voice over IP Sarbanes Oxley HIPPA

NanotechnologyIn spite of Flat World the USremains competitive because we are the worldsinnovators. Can we power our innovation?


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Power Quality

Refers to subtle deviationsin the quality of deliveredelectricity that causes some

customer equipment to failor damage

98% of fatal power qualityevents last < 15 seconds

Outages lasting < 1 seccycles can cause hours ofdowntime

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Momentary and Sustained

Interruptions Costs

U.S. utility customers

lose an estimated $80billion dollars annuallydue to outages.

Roughly 2/3 of costs

and lost revenue wasdue to momentarydowntimes.

13


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The Energy Environment

Awareness Control


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A Solutions Framework

Cost of Energy vs. Value of EnergyWhich 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 firms 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


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Cost Based Energy Security

The key issue is Price of Energy

Anything that reduces volatility anduncertainty in energy prices creates value for

the firm

Simple payback evaluation approach may

not be appropriate if the base case hasgreater uncertainty than the alternate

case


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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)


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Value Based Energy Security

The key issue is Value of Energy

Sensitivity of operations energy disruptions

Financial effects of outages on your bottom line andcustomer retention

Does not take a blackout to affect a firms

competitiveness ExampleUpon a momentary power disruption, it

takes an average of 16 hours for certain datacenters to resume normal operation


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Value Based Solutions

Energy Auditing

Infrared Scans, Power Quality Assessment

Standby Power Systems

UPS, On-site Generator, Fuel Storage,

Transfer Switch Scheme


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Power Failure Protection After the2003 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

Sample size = 604 commercial/industrial customers

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Thank you

Discussion


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References1. EIA/DOE, 2004. Historical Natural Gas Data (Average Price Sold to Commercial

Consumers, by State).2. EIA/DOE, 2004. Historical Electricity Data (Annual Retail Price, State by Sector).3. EIA/DOE, 2001. Electric Power Sector Consumption Estimates, 2001.4. FERC, 2001. Electric Transmission Constraint Study.5. Lawrence Berkeley National Laboratory/DOE, 2004. The Economic Cost of Power

Interruptions to U.S. Electricity Consumers.6. Hirst/Edison Electric Institute/DOE, 2004. U.S. Transmission Capacity: Present

Status and Future Prospects.7. Deregulation, Restructuring, and Changing R&D Paradigms in the US Electrical

Utility Industry, Paroma Sanyal, Brandeis University and Linda Cohen, USC.8. Balducci et al., 2002; Willis and Scott, 2000; Hunter et al., 2003; IEEE, 1997;

EPRI, 2001a, 20029. EIA/DOE, 2003. Annual Energy Review 2003.10. Brown/Federal Reserve Bank of Dallas, 2005. Energy Prices and the Economy.11. LaPedus, 2004.12. Souder/DOE, 2005. DOEs Role Regarding Grid Modernization and Electric

Reliability.13. DOE, 2004. The Economic Cost of Power Interruptions to U.S. Electricity

Consumers.14. Ariu/CRIEPI/SERC, 2003. Impact of the 2003 North America Blackout on

Commercial/Industrial Customers of Electric Power Companies.

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