Energy Costs for Water Suppliers: Prospects and Options · 2 AMWA – Energy Costs -3- Oct-2008 Energy Costs: Major Cost for Water Suppliers Second only to labor in operating costs

1

Energy Costs for Water Suppliers:Energy Costs for Water Suppliers:Prospects and OptionsProspects and Options

AMWA Annual MeetingOctober 20, 2008

Bill KempVice President, Business

Strategy & Planning Services

BUILDING A WORLD OF DIFFERENCE®

-2- Oct-2008AMWA – Energy Costs

Agenda

Energy Costs in Water O&M

Carbon Legislation Implications

Outlook for Power and Gas Prices

Energy Cost Management Strategies

2


Energy Costs: Major Cost for Water Suppliers

Second only to labor in operating costs

Typically accounts for 10-15% of operating costs Pumps Treatment processes Vehicle fleet, facilities

Rising faster than other operating costs

Complexity of electric rates complicates management Usage characteristics / tariff classification Multiple rate components (fuel clauses, trackers, etc.)

● Energy cost volatility and budget variances● Impingement on short term operating budgets


Top Overall Electric Utility Concerns - Trends

● Environmental issues now at top of mind● Reliability, aging workforce, and aging infrastructure close behind

3


Carbon Emissions Legislation: Biggest Environmental Worry

● Carbon issues even more dominant● Water supply fading in importance as droughts ease

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percentage of IOU Respondents

Coal production

Site remediation

Water effluent

Particulates

Coal transportation

Nuclear fuel disposal/storage

Water Supply

Mercury

SO2

NOx

Carbon emissions legislation

Environmental Issues of Most Concern for Electric IOUs

1 Least Concern 2 3 4 5 Most Concern

Average

Rating

4.22

3.32

3.28

3.15

3.05

2.89

2.87

2.85

2.82

2.66

2.63



Agenda





4


GHG Caps Will Drive Marginal Abatement Costs

● Cap trajectories vary widely● B-L-W calls for a ~30% total reduction from 2006 levels by 2030● Rapid near-term GHG reduction could balloon carbon price● Recession could defer effects of legislation

2008 Level


Regional GHG Initiatives

Western RegionalWestern RegionalClimate ActionClimate ActionInitiativeInitiative ––economy-widereductions 15%below 2005 levelsby 2020

Midwest GHG Reduction Accord –multi-sector reduction target 60%-80% below current levels

Regional GHGInitiative – capspower plantemissions in 2009,10% reduction2015-2019

Western Climate

Initiative

Midwestern

Greenhouse Gas

Reduction Accord

RGGI

RGGI - ObserverMidwestern

Greenhouse Gas

Reduction Accord

- Observer

Western Climate

Initiative -

Observer

Near term regional impacts

5


Shifting Resource Economics with Carbon Constraints

● Renewables and nuclear become more attractive● Lower cost options likely not sufficient to meet caps

CoalGas CC, $7.75/MBtu

Gas CC, $10/MBtu

IGCC

IGCC w/ CO2 Capt.

Nuclear

Biomass

GeothermalWind (Energy Only)

Wind (Gas-Firmed)

70

80

90

100

110

120

130

140

150

0 10 20 30 40 50

Carbon Price, $/ton CO2

Levelized

Co

st

of

En

erg

y,

$/M

Wh

(2010)

Source: B&V analyses


Generation Build: Shift to Renewables + Gas

Source: B&V AnalysisGrowing momentum; extended tax breaks

Billion $ - 2006 US Capital Additions

Hydro$0.4B

Natural Gas$6.1B

Coal$1.5BWind

$4.4B

Geothermal

$0.04B

Solar$1.2B

Biomass

$3.2B(90% biofuels)

$7.6B

“Other”

Hydro$0.4B

Natural Gas$6.1B

Coal$1.5BWind

$4.4B

Geothermal

$0.04B

Solar$1.2B

Biomass

$3.2B(90% biofuels)

$7.6B

“Other”

Fossil: $7.6 BillionRenewables: $9.2 Billion

6


(1) Does not include transportation and sequestration costs of $6-10/ton CO2. Highly site-specific.(2) Does not include 33% capital cost premium for base IGCC plant over PC.

● Huge increase in fuel costs for PC. 30% parasitic load means ~3:2 ratio ofgross to net output.

● Incremental cost for CCS lower for IGCC, but base plant more costly● Capital cost of CCCT roughly doubles.● Marginal cost of CO2 abatement (PC retrofit) in $70-80/ton range by ~2030

Higher costs, lowernet output.

Energy used incapturing carbon.

More processesand equipment.

Notes

22% (2)

20%

22% (2)

IGCC

53%47%Levelized Cost($ per busbar MWh) (1)

15%50%Net Energy Efficiency(mmbtu per busbar MWh)

98%44%Capital Cost

GasCCCT

Super-critical

PulverizedCoal

Change From AddingCCS To New Base Plantof Stated Type

[$1/ton CO2 = ~$1/MWH for coal]

Carbon Capture: Costly Control Option


Electric Rate and Economic Impacts Rate increases from CO2 abatement dependent on generation

mix and market structure. Will vary by company and region.

States/regions with more carbon-intensive baselines mayironically have lower costs of abatement. More allowances,cheaper reductions.

Percentage market price increases bigger in coal-dominantregions, but gas increasingly on margin (price setter).

Increases in total electric rates due to CO2 abatement likely to beat least 40-60%. Spread over number of years.

Long-term demand response to higher prices could besubstantial; tailing off of load growth.

Gentle near-term cap trajectory needed to avoid economicdislocations from blow up in carbon price.

Environmental regulations driving cost increases; sound familiar?

7



Agenda






Typical Electric Utility Cost Mix(aggregate for all U.S. electricity utilities)

Dominated by generation costs; ~50% is purchased energy

Production Capital

Production Non-Fuel O&M

Production Fuel

Production Purchased Power

T&D Capital

T&D O&M

Customer Operations

SG&A

Other Capital

Generation

Trans.& Dist.

Other

Source: U.S. EIA

8


Planned Generation Additions Mostly Gas-Fired

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Ad

dit

ion

al C

ap

acit

y (

MW

)Gas CT Gas CC Coal Nuclear Wind

Source: Ventyx, B&V Analysis

TechnologyCapacity Additions

MW (2009-2024)Gas CT 66,183Gas CC 228,611Coal 23,441Nuclear 2,716Wind 5,292Total 326,243

● Carbon price concerns pushing coal off table● Gas serving as the gap filler


Gas Production Shifting to Rockies and Non-Conventional

Source: B&V Analysis

0

10

20

30

40

50

60

70

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Bcf/d

Rockies Texas Gulf LA San Juan Mid-Cont Permian

Appalachian SoCal PNW ESC Mid-West NGP

Lower 48 natural gas productionexpected to peak in 2020 at 61.5bcf/d due to additional Alaska

supplies coming to market.

Market-clearing supplies rising in cost

9


B&V Forecast for Natural Gas Prices

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Jan-

10

Jan-

12

Jan-

14

Jan-

16

Jan-

18

Jan-

20

Jan-

22

Jan-

24

$/MMBtu

Historical

B&V Forecast without CO2

B&V Forecast with CO2

Source: Platts GASdat, B&V analysis

(At Henry Hub)

● Shale plays drive U.S. gas prices through 2015● North American gas still below world price levels


Projected Electricity Price with CO2

$-

$50

$100

$150

$200

$250

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13

Jan-

14

Jan-

15

Jan-

16

Jan-

17

Jan-

18

Jan-

19

Jan-

20

Jan-

21

Jan-

22

Jan-

23

Jan-

24

Subperio

d E

nerg

y M

ark

et P

rice (

$/M

Wh)

Off Peak Eastern Canada Off Peak Florida Off Peak IESO (Ontario) Off Peak ISO New England

Off Peak Midwest ISO Off Peak MRO Off Peak New York ISO Off Peak PJM Interconnect

Off Peak Southeast Off Peak Southwest Power Pool Off Peak Historical On Peak Eastern Canada

On Peak Florida On Peak IESO (Ontario) On Peak ISO New England On Peak Midwest ISO

On Peak MRO On Peak New York ISO On Peak PJM Interconnect On Peak Southeast

On Peak Southwest Power Pool On Peak Historical

Forecasted Average Wholesale Electricity Price(Eastern Interconnect, Including CO2 Compliance Costs)

Source: Enerfax,B&V Analysis

● Power prices without carbon cost rising slightly below inflation● ~2-3 times inflation rate with carbon cost; regulatory effects● Higher and more volatile in gas-dominated power markets

~5-7% CAGR 2009-2024

Start of carbon constraints

10



Agenda






Energy Cost Management Options

Reduce EnergyConsumption

Produce Energy

Lowest hanging fruit

$● Energy efficiency:

process, equipment● Energy re-capture:

waste heat, low-headhydro

● Load shifting: movingmore demand off-peak

Revise SupplyArrangements● Tariff schedule negotiation: missed opportunities?● Energy retailers:

cost vs. risk balance

$$Optimize

costs/risks

11


Energy Cost Management Options

Reduce EnergyConsumption

Economics improving, but still utility-specific

Revise SupplyArrangements

● Leverage back-up generators; source of capacity value● Self-generation must be competitive with utility power purchases

(with environmental adjustments)● Fossil-fuel generation (gas, coal) not cost-effective on small scale● Economics of renewables highly location-specific. Early year costs

typically higher. More attractive in higher cost regions.● Tax breaks and incentive programs can sometimes bridge the gaps● More options for combined water/wastewater systems

Optimizecosts/risks

Produce Energy

$$$



Agenda





Black & Veatch Background

12


Phase 1

• Climate changescenarios

• Conditional usageforecasts

• Carbon footprint• Environmental risk

assessment• Technology

assessment

AssessmentPhase 2

• DSM/EE resourcesand programs

• Electric/gas/emissions marketanalysis

• Integrated resourceplanning

• Strategic analyses(SWOT, 5 Forces)

• Climate changeopportunities

Analysis ofAlternatives

Phase 3

• Corporate +environmentalstrategic plans

• Climate changestrategy

• Implementation plan• Performance

management

StrategicSynthesis

Climate Change PathfinderTM

Phased approach to planning for climatechange

Robust over range of plausible GHGscenarios

Internal, then external evaluation

Up-side opportunities as well ascompliance

Implementation focus

Draws on threerelated streamsof planning services(strategic, resource,environmental)


Strategy Solutions Strategy & Planning

Regulatory Business Environmental

Market Analysis Demand Side Management Resource Planning Risk Management Regulatory & Rate Mergers & Acquisition

Planning and Evaluation Integration

Enterprise Perspective + Technical Depth = Integrated Real-World Solutions

Technology Solutions Technology Strategy

Review Development Implementation

Business Systems Evaluation Selection Implementation

SmartUtility / SmartGrid Evaluation Implementation

T&D Planning

Process Solutions Transaction Support

Asset Acquisition Asset Divestiture

Asset Performance Asset Mgmt. Program

Program Design Implementation / Integration

Asset Condition Assessment

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and practices Leverages Black & Veatch’s 90 years of experience and 9,000 utility industry professionals, including

the collective talents acquired from three prominent consultancies

Documents

Energy Costs for Water Suppliers: Prospects and Options · 2 AMWA – Energy Costs -3- Oct-2008 Energy Costs: Major Cost for Water Suppliers Second only to labor in operating costs