Propane Market Outlook: Identifying Propane Market Opportunities and Assessing PERC Driven Demand Potential Presented by Mike Sloan and Bruce Henning [email protected]

Propane Market Outlook: Identifying Propane Market Opportunities and

Assessing PERC Driven Demand PotentialPresented by

Mike Sloan and Bruce [email protected]

[email protected] 9, 2010

mailto:[email protected]


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Objective: Provide market context for the Stage-Gate process and Upcoming Strategic Planning Discussion

Identify market opportunities• Market share • Number of units/customers in marketplace• Unit gallon sales

Determine potential PERC impact in key market segments• Assess share of market needed to reach identified potential.• Translate changes in market share to new unit sales and customer captures.

Calculate potential PERC impact on propane gallon sales.• Impacts utilize PERC data and market information where available.• Where not available, ICF utilized reasonable assumptions subject to PERC

review.

Inform the PERC Stage-Gate process and strategic planning efforts.

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Residential48%

Commercial20%

Resellers6%

Industrial 6%

Agriculture11%

Internal Combustion9%

ICF Baseline Forecast of Propane Demand 2015

(Million Gallons)

Demand in 2015

Change Since 2009

Residential 4,580 -6.6%

Commercial 1,901 2.1%

Resellers 624 22.8%

Industrial 604 10.9%

Agriculture 1,009 -22.2%Internal Combustion 876 11.7%

Total 9,594 -3.1%

Odorized Propane Demand

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Near-Term Odorized Propane Consumption with PERC Driven Demand

-

2,000

4,000

6,000

8,000

10,000

12,000

Mil

lio

n G

all

on

s

Near-Term Odorized Propane Consumption Forecast

PERC Driven Demand

PERC Driven

Demand

5

Residential

Engine Fuel

Commercial

Industrial Agricultural

Other Markets

2010 2011 2012 2013 2014 2015

Demand Absent PERC Programs

The PERC Driven Demand Wedge is the sum of the Market Wedges from all of the PERC Programs in all of the Propane Market Segments.

Gal

lons

6

What do these Market Wedges Represent?

Market wedges represent assessment of the size of potential propane market opportunities.

• Market wedge segmentation based on market opportunities identified by PERC staff and Advisory Committees.

Amount of each wedge ultimately achieved will depend on:• The level of investment by PERC and the propane industry• Market conditions• Regulatory environment.

Next steps in market wedge analysis• Extension to other market segments, programs, and new technologies• Risk-adjusted cost-benefit analysis

The PERC strategic planning process will determine how resources are allocated to target each of these wedges.

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Residential Sector Market Challenges and Opportunities

8

Baseline Residential Demand

Source: ICF Forecast

0

1,000

2,000

3,000

4,000

5,000

6,000

Mill

ion

Gal

lons

Residential Propane Demand Forecast by End-Use

Primary Space Heating Supplementary Space Heating Water Heating

Cooking/Other Applications Manufactured Housing Seasonal Housing

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Residential New Construction Market

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2

Ann

ualiz

ed H

ousi

ng S

tart

s (M

illio

ns)

Historical Quarterly Housing Starts and ForecastsFannie Mae

Freddie Mac

Federal Reserve

Mortgage Bankers Assoc.

National Assoc. of Realtors

10

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

$160.0

(Bill

ion

$)

Forecast of Remodeling Activity(Homeowner Improvement Expenditures) Homeowner Improvements

Billions of $

Harvard Joint Center on Housing Forecast

Harvard Joint Center on Housing Forecast

ICF ProjectionICF Projection

11

(150,000)

(100,000)

(50,000)

-

50,000

100,000

150,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Num

ber o

f Hou

seho

lds

Net Year over Year Changes in Propane Heated Households

Site Built Housing

Manufactured Housing

12

2010 2011 2012 2013 2014 2015


Residential Sector Wedges

Increase New Home Share

Replace Electric Water Heaters

Reduce Losses

Fuel Oil Conversions

Fill the House

Gal

lons


13

2010 2011 2012 2013 2014 2015

Increase Share of New HomesMarket Opportunity Increase market share to

position propane for rebound in housing market.

Propane in 6.5% of new households

Share increasing since 2002, despite market downturn.

Program Target: Additional 1.0% to 1.5% of

new homes 5,000 to 15,000 new homes

per year. 55 million gallons per year of

incremental propane sales by 2015.



Gal

lons


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2010 2011 2012 2013 2014 2015


2010 2011 2012 2013 2014 2015


Displace Oil Equipment Market Opportunity 8.4 million existing fuel oil

households consume the equivalent of 7.5 billion gallons of propane per year.

Residential oil heating in decline due to environmental issues and market conditions.

Program Target: Increase capture rate by 2%

to 3% per year. 9,000 households per year. 40 million gallons per year

of incremental propane sales by 2015.




Gal

lons

15

2010 2011 2012 2013 2014 2015

Reduce Conversion Losses Market Opportunity More than 75,000 propane

heated homes switch to other fuels each year.

• Electric/geothermal heat pumps.• Natural gas.

South hit hardest. Decisions to convert often

occur when homes are sold to a new owner.

Program Target: Reduce switching by 5% to

6% of total opportunities per year.

7,500 households per year. 20 million gallons per year of

incremental propane sales by 2015.

Gal

lons

Reduce LossesReduce Losses

Gal

lons


16

2010 2011 2012 2013 2014 2015

Replace Electric Water HeatersMarket Opportunity 4.4 million propane

customers use electric water heaters.

Total potential: 500 million gallons per year.

Program Target: Capture additional 2% of

electric water heater replacements

7,400 water heaters per year.

8 million gallons per year of incremental propane sales by 2015.



Gal

lons


17

2010 2011 2012 2013 2014 2015

Fill The House Market Opportunity 8 million existing propane

customers could add a propane furnace, water heater, or cooktop/range

Total potential of 1.5 billion gallons

Program Target: Increase share of existing

equipment replacements by 1.0% to 1.5% per year.

14,000 new applications annually.


Fill The HouseFill The House

Gal

lons


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2010 2011 2012 2013 2014 2015

Potential PERC Driven DemandResidential

Gal

lons

Incremental Share of Potential Market

Average Number of Units per

Year (2011-2015)

Incremental Propane Sales per

Unit

Incremental Gallons Per Year

in 2011

Incremental Gallons/Year in

2015Residential Sector

New Home Construction 1.1% 13,700 750 9,470,000 55,070,000 Fuel Oil Conversions to Propane 2.5% 9,100 750 12,590,000 40,060,000 Reduce Propane Residential Losses 5.5% 7,500 450 6,380,000 20,080,000 Replace Electric Water Heaters in Propane Homes 2.1% 7,400 170 2,570,000 7,690,000 Fill the Propane House 1.3% 14,300 120 3,430,000 10,140,000 Sum of Residential Sector Programs 52,000 34,440,000 133,040,000

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Commercial Sector Challenges and Opportunities

Commercial sector includes restaurants, schools, houses of worship, motels, hotels, retail stores, service businesses, malls, assembly and recreational halls, police and fire stations, warehouses, storage facilities, and hospitals.

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0

500

1,000

1,500

2,000

2,500

Prop

ane

Dem

and

(Mill

ion

Gal

lons

Commercial Odorized Propane Demand by Region

Pacific

Mountain

West South Central

East South Central

South Atlantic

West North Central

East North Central

Middle Atlantic

New England

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Commercial Sector Challenges and Opportunities Second largest propane business segment.

• 20% of existing odorized propane market.

• 10% of the total commercial floor space is served by propane for one or more application.

Significant opportunities to increase propane applications in buildings currently using propane.

Commercial fuel oil demand: 3.6 billion gallons of propane equivalence.• Commercial fuel oil market is expected to decline steadily over time due to cost and

environmental issues.

• Large existing propane customer base (cooking & water heating) using fuel oil for heat.

Diverse market less reliant on space heating.• Wide variety of different customer types, resulting in smaller discrete markets that are harder

to evaluate and target effectively.

Growth in propane demand from future commercial customers likely to be offset by:

• Price induced conservation.

• Fuel switching from propane to electricity (and other fuels) by existing customers.

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2010 2011 2012 2013 2014 2015

Ga

llon

s

Commercial Sector OpportunitiesMarket Opportunities: New construction Fuel oil conversions Additional propane

applications in existing buildings

Program Target: Additional 1.0% to

1.5% of market opportunities.


New Commercial ProgramsNew Commercial Programs

Baseline Commercial

Demand

23

Internal Combustion Engine Sector Challenges and Opportunities

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Source: ICF Forecast

0

100

200

300

400

500

600

700

800

900

1000

Prop

ane

Dem

and

(Mill

ion

Gal

lons

)

On-Road Vehicles

Off-Road Engines

Forklift

Internal Combustion Sector Propane Demand

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Propane Engine Fuel Challenges

New technologies threaten propane in some markets.• Electricity/hybrids in forklift market.

Propane first cost issues remain significant.• Propane engines face an economy of scale issue.

In many markets, propane advantages are driven by government policy and legislation, which is uncertain.

In diesel markets, propane must overcome positive perceptions of diesel engine reliability and power characteristics.

Propane faces cultural and infrastructure issues in new markets.• Changes in business operating practices needed to integrate propane equipment.• Changes in marketing and service practices needed to sell propane equipment.

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Market Trends Driving Propane Engine Fuel Opportunities

Environmental and energy security concerns provide opportunities for propane on- and off-road equipment.

• Energy and tax legislation may provide significant competitive advantage to propane applications

• Current focus on “green” energy favors propane.

Diesel fuel costs are expected to increase more rapidly than gasoline and propane prices.

• International supply/demand balance likely to drive diesel fuel prices up more than propane or gasoline prices.

Diesel engine costs have increased dramatically due to new NOx emissions requirements.

• Up to $10,000 per vehicle for new heavy duty vehicles.

• From $4,000 to $6,000 per vehicle for new medium duty vehicles.

• $0.15 per gallon of diesel consumed for urea used in new NOx control systems.

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2010 2011 2012 2013 2014 2015

Ga

llon

s

Engine Fuel Sector Wedges

Outdoor Equipment

Commercial Mowers

On-RoadVehicles

Baseline Engine Fuel

Demand

28

2010 2011 2012 2013 2014 2015

Ga

llon

s

On-Road Vehicles Market Opportunity: On-road fleet vehicle

market. PERC supported

vehicles in or near market.

Program Targets: OEM programs

1.0% – 1.5% of Ford F250/350s and Ford E-Series van market.

3% of GM 6.0 liter market.

School bus programs: 7% of Class A and Class C markets.

110 million gallons per year by 2015.

On-Road VehiclesOn-Road Vehicles


Demand

29

2010 2011 2012 2013 2014 2015

Ga

llon

s

Commercial MowersMarket Opportunity: 150,000 - 200,000

commercial mowers, and 200,000 -250,000 consumer mowers sold annually

Significant propane opportunity due to environmental concerns and propane operating cost advantages

Propane units from major manufacturers are currently in the market

Program Target: 10% market share by 2015

24,500 units per year. 160 million gallons per year

by 2015.

Commercial Mowers

Commercial Mowers


Demand

30

2010 2011 2012 2013 2014 2015

Ga

llon

s

Other Outdoor Lawn and Garden Equipment

Market Opportunity: Outdoor equipment

manufacturers (trimmers, blowers, mowers, etc.)

Propane units are currently available in the market.

Propane units are cleaner and quieter than alternatives.

Program Target: 2 million units per year and

16 % of the market by 2015.

• 2/3 consumer• 1/3 commercial


Outdoor EquipmentOutdoor

Equipment


Demand

31

2010 2011 2012 2013 2014 2015

Ga

llon

s

Potential PERC Driven DemandEngine Fuels Sector



Year (2011-2015)


Unit

Incremental Gallons Per Year

in 2011


2015Internal Combusion Engine Sector

On-Road Vehicle Programs 10,900 29,730,000 109,710,000 Ford and GM OEM Vehicle Programs 1.7% 9,800 3,500 26,600,100 96,200,100 School Bus Programs 6.8% 1,200 2,030 3,130,000 13,510,000

Commercial Mower Programs 9.8% 24,500 1,220 29,460,000 158,560,000 Outdoor Equipment Programs 12.1% 1,341,600 20 18,910,000 81,880,000 Sum of Internal Combustion Engine Sector Programs 78,110,000 350,150,000

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Other PERC Programs to be Evaluated

Residential Markets• New technologies under development

Commercial Markets• New technologies under development

• Combined heat and power• Commercial heat pumps• Other new technologies

• Targeted application programs to be developed.

Engine Fuel Markets• California off-road propane/diesel injection• Forklift market support and development• New on-road engines and vehicle platforms• After-market conversions

Agricultural Markets• New technologies under development• Targeted application programs.

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Year (2011-2015)


Unit


2011


2015Residential Sector

New Home Construction 1.1% 13,700 750 9,470,000 55,070,000 Fuel Oil Conversions to Propane 2.5% 9,100 750 12,590,000 40,060,000 Reduce Propane Residential Losses 5.5% 7,500 450 6,380,000 20,080,000 Replace Electric Water Heaters in Propane Homes 2.1% 7,400 170 2,570,000 7,690,000 Fill the Propane House 1.3% 14,300 120 3,430,000 10,140,000 Sum of Residential Sector Programs 52,000 34,440,000 133,040,000

Commercial Sector Programs 3,600 1,900 7,000,000 50,000,000

Internal Combusion Engine SectorOn-Road Vehicle Programs 10,900 29,730,000 109,710,000

Ford and GM OEM Vehicle Programs 1.7% 9,800 3,500 26,600,100 96,200,100School Bus Programs 6.8% 1,200 2,030 3,130,000 13,510,000

Commercial Mower Programs 9.8% 24,500 1,220 29,460,000 158,560,000 Outdoor Equipment Programs 12.1% 1,341,600 20 18,910,000 81,880,000 Sum of Internal Combustion Engine Sector Programs 78,110,000 350,150,000

Sum of Residential, Commercial and ICE Sector Programs 119,580,000 531,880,000

Values represent the size of the market opportunity, before consideration of propane industry funding allocations for 2011-2015.

Summary of Potential PERC DrivenMarket and Demand Impact Estimates (2011-2015)

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Final Thoughts

The propane market wedges could add more than 500 million gallons per year of propane demand by 2015 if opportunities are fully realized.

The propane market wedges represent: • A look at propane markets identifying the most important opportunities where PERC and

propane industry programs may have an impact.

• A framework for defining market/business opportunities.

• A first step (but nowhere near the last step) in the Stage-Gate process.

The wedges have not yet been evaluated for risk or cost effectiveness.

The wedges are not (yet) PERC targets or recommendations, but do provide an assessment of the size of the potential market opportunities.

Propane Market Outlook: Identifying Propane Market Opportunities and

Assessing PERC Driven Demand PotentialPresented by

Mike Sloan and Bruce [email protected]

[email protected] 9, 2010



Documents

Propane Market Outlook: Identifying Propane Market Opportunities and Assessing PERC Driven Demand Potential Presented by Mike Sloan and Bruce Henning [email protected]