25th Annual Pittsburgh Coal Conference. Visions for a Sustainable Energy Future: Impacts for Coal and Energy Consumption

Transcription

1 25th Annual Pittsburgh Coal Conference Visions for a Sustainable Energy Future: Impacts for Coal and Energy Consumption September 30, 2008 Mark Gabriel

2 Five Megatrend Destinies Universally Impact the Energy Industry Destiny of the Carbon/ Capacity Conflict Destiny of Intelligent Infrastructure ENERGY INDUSTRY Destiny of Demographics Destiny of Business Model Evolution Destiny of Customer Engagement R. W. Beck Troutman Sanders Renewables Conference

3 The Destiny of Carbon Constraints/Capacity Conflict Demand for new power sources will outstrip capacity the U.S. 50,000 MW challenge Demand for clean energy will reach beyond capacity Public perception contrasts with the reality of the system Renewables are being viewed as a possible answer 44% price increases NERC report shows majority of regions will be capacity short within the next five years Lieberman-Warner: the $1,500 per family question and killing coal until 2020

4 Comparative Costs in Levelized Cost of Electricity, $/MWh IGCC CF PC Biomass 50 Nuclear Cost of CO 2, $/metric ton Source: EPRI

5 The Renewable/Coal Dilemma Three key drivers of renewables: Environmental (carbon) constraints Increased coal, oil, and natural gas prices due to rising demand Inability to build thermal generation or nuclear in time Green guilt

6 We Have Been Here Before 5,000 turbines in the Altamont Pass 576 MW name plate/125 MW Considered obsolete and not working Built after 1970s energy crisis U.S. 2008: 5,329 MW of wind is planned 920 MW coal

7 The Destiny of Intelligent Infrastructure $28 billion will be spent in next 5 years in T&D alone, much of it adding intelligence to existing systems Distributed energy can only make it on the grid with an advanced system Critical need to understand dynamic effects of linking communications, computing, and energy

8 The Destiny of Demographics 30% of all science and engineering degrees are held by people over 50; average age of a lineman is approaching 48 Expectations of and needs for service are expanding Movement to warmer climates drives needs Generational expectations Aging workforce Movement to warmer climate Destiny of Demographics

9 The Destiny of Customer Engagement Customers are clamoring for the focus on renewables Public will demand the Burger King model of have it your way Systems to manage customer interaction will be required in new and challenging ways Customers do not believe they want electricity from coal

10 The Destiny of Business Model Evolution M&A, asset divestitures, and realignments will continue through the next decade Huge increases in the cost of generation including renewables and infrastructure will require new partnerships across industry lines Companies cannot afford to build plants without teaming Customers will demand new industry engagements Financial community will drive many of the changes

11 The Janus Conundrum: Looking Back or Looking Forward Choice of Capital Investment Reliance on the Past Reliance on the Future Repair, replace, rebuild Status quo, current opportunity optimized System limited to yesterday s technology Reduced returns, limited upside, exposure to competition Invest in new generation of technology New business opportunities System expansion Competitive advantage Mark A. Gabriel, Visions for a Sustainable Energy Future

12 Facing the Future There will be a large creation and re-distribution of shareholder value in the transition to a low carbon economy. - Tom Delay, CEO, The Carbon Trust It is important that we avoid outcomes at the extremes of the policy debate, and move forward instead with solutions that make common sense and achieve a balance of our environmental, energy and economic needs. - David Ratcliffe, CEO, Southern Company

13 The Value and Potential of Coal Coal continues to be viable: A stable commodity with little volatility, competitive when gas prices are over $4.00/mbtu All fuels must meet near zero emissions by 2010 Solutions to environmental issues: Carbon trading Sequestration Advanced clean technology Energy efficiency leverage

14 Fear and Loathing in the Board Room Risk of non-recovery is scaring executives IGCC is mislabeled as too expensive Reality: all plants are expensive today Supporting future carbon capture is a passiveaggressive way of killing coal The 20 year window is not the problem the 10 year window is the problem

15 New Business View for Utilities C0 2 /Operating Expenses C0 2 /Investment EPS Sustainability & Carbon Rate Impact P/E ROE Org Operations Investment EBITDA DPS Management and Dispatch of Current Assets Cash Flow New Investment

16 CO 2 Beyond the IPO Price Discussion around favored legislation, start date, and initial price will become irrelevant as early as two years from now Next paradigm will focus on how CO 2 will interact/ influence other commodities from an assetinvestment perspective Naïve to think it is uncorrelated Lessons Maturity paths Modeling stochastics SOX NOX Trading Coal Legislation CO 2 Time Power B-100 NG

17 Future U.S. Coal Generation Coal is an important option in a secure, robust, and diverse generation portfolio Resolving the carbon/energy/environment conflict is key Difficulty in finding new coal plant sites increases the value of maintaining and expanding existing sites Existing investment in coal plants is high value of undepreciated assets makes retirement uneconomic

18 What Wild Cards will be Played? How will demand be met in the future? This depends on many factors... Regulatory and Technology wild cards Economy Environmental regulation Hydrogen economy Distributed generation Energy efficiency

19 We Need to Develop a Technology Roadmap New Nuclear Newly Envisioned Future High Low $ Benefit Co-firing Plant Efficiency Enhanced Oil Recovery Asset Management IGCC Carbon Capture Coal-to- Liquids Opportunity Zone Status Quo Immediate 1 Yr 5 Yrs Benefits Long Range Benefits 10 Yrs

20 Predictions on Coal s Future Strategic fuel mix electricity production will change with time, however the current 50% coal mix will not change drastically Commodity prices fluctuate more quickly than plant additions and deletions - coal s success depends on stability and plant performance Significant incentives are needed for alternatives even with carbon included The wildcards risk, new technology, carbon prices

21 Volatility and Viability Volatility in Gas = Viability in Coal Cost in Managing Renewables= Viability in Coal

22 Questions? Mark Gabriel Vice President and Principal (916)