Investment Opportunities in the US Electric Power Sector

Transcription

1 Investment Opportunities in the US Eectric Power Sector Assef Zobian Cambridge Energy Soutions Presented to Lazard Freres & Co. LLC September 10, 2003 Boston, MA

2 Presentation Outine About CES Investment Opportunities in Generation Market Transmission Assets Energy Trading Information Technoogy and Hardware

3 About CES Cambridge Energy Soutions is a software company with a mission to deveop software toos for participants in dereguated eectric power markets. CES-US provides information and toos to assist market participants in anayzing the eectricity markets on a ocationa basis, forecast and vaue transmission congestion, and to understand the fundamenta drivers of short- and ong-term prices. CES-US staff are experts on market structures in the US, system operation and reated information technoogy

4 Products & Toos DAYZER: Day-Ahead Locationa Market Cearing Prices Anayzer (a mode for each RTO). Assists in anayzing the impact of various market uncertainties on ocationa market cearing prices, transmission congestion and associated price risk. RANDOMIZER: An option-based mode for vauing eectric power generation and transmission assets. Utiizes information on historica and impied voatiity of ocationa prices in forecasting future prices and vauating assets.

5 Products & Toos NAPD: North America Eectric Power Transmission and Generation Database for each NERC region. Provides detaied information on various system eements via a web-based interface OPTIMALSCH: Optima Scheduer heps power pant operators optimize the operation and dispatch of their generation assets across various products for a singe unit or portfoio of generation units

6 Generation Market There is an excess generation capacity in most of the US (with some oca needs: NYC, San Francisco, & Forida) Demand growth, reguation and technoogica innovation wi drive the market for new entry More efficient generation technoogies Cycica nature with boom-bust cyce

7 Impact of Dereguation & Cycica Behavior Generation Capacity by Year Source: EIA Year Summer Capacity (MW)

8 Regiona Generation Mix Source EEI

9 Generation Market Over the past 4 years, the average annua growth rate of generation capacity was 5% compared to a nationa average annua demand growth rate of 2% Generation excess to ast for next 4-5 years in most regions Exisiting and New Generation Summer Capacity (MW) Year New Entry (MW Onine) New Entry (MW Expected) Existing (MW) Increase (%) , , % , , % , , % ,156 26, , % , , % (source EIA) 980,583

10 Eectricity Demand Growth by Region Demand Average Annua Growth Rate US WSCC-RMP WSCC-NWP WSCC-CNV WSCC-AZN WSCC SPP-S SPP-N SPP SERC-VAC SERC-TVA SERC-SOU SERC-ENT SERC NPCC-NY NPCC-NE NPCC MAPP MAIN MAAC FRCC ERCOT ECAR Region AAGR AAGR Source: ES&D 2002 %

11 Generation Market More than 95% of the new capacity are natura gas-fired units In the past 4 years generation capacity increased by 22% (173,616 MW), but sti ess than third the proposed and announced panned capacity Many projects were withdrawn, canceed or aborted after construction

12 Generation - Opportunities Buying distressed generation assets (exampe Exeon assets in MA) Loca markets such NYC, LI, Forida, San Francisco, etc.. Renewabe sources (driven by reguation, most states have requirements of 5% or more of tota energy to be renewabe by 2010) New coa fired generation (driven by high natura gas prices) Distributed Generation

13 Transmission Investments Current investment eve in transmission assets is ess than historica eves throughout the US; around $3 biion/year (compared to around $5 biion in 1975) The annua average panned transmission ines additions measured in circuit mies is ess than 1% over the next 10 years Transmission Lines Circuit Mies (230 KV and above) 230 KV 345 KV 500 KV\ 765 KV DC (A) ,437 51,025 25,000 2,426 2, ,515 53,855 27,343 2,518 2,450 AAGR 0.6% 0.6% 1.0% 0.4% 0.1% Source: NERC ES&D 2002

14 Do We Need More Transmission? Given that demand is growing at a 2% rate shoud eectric power transmission grow at a simiar rate (in some measure, MW-mies, mies etc)? No, because: Better utiization of existing transmission system Gas pipeine and oca generation can substitute for transmission Reguatory and financia hurdes to transmission investments

15 Competition from Natura Gas Pipeines Consider for exampe NYC where there are two options to increase deivered energy: Option 1: buid a new transmission ine either AC or DC from upstate NY, or from NJ Option 2: buid new combined cyce units in NYC or sma combustion turbines in many ocations around the city (NYPA s approach). And buid additiona gas pipeine capacity into the city, if needed (NYC is short on natura gas especiay in the winter)

16 Gas Pipeine Additions Source EIA

17 Hurdes to Market-Based Investments Permitting and sitting Difficuty to capture the vaue of a transmission ine in a network (externaities): Lower congestion Increased reiabiity (Better stabiity) Lower osses Lower oca requirements for anciary services and Instaed Capacity Perception of reguatory risk!! (investments over 20 years with a high risk of changing the rues in the next few years)

18 Transmission- Opportunities Buying existing transmission systems/companies (exampe DTE transmission system). This is very attractive since investment is reativey ow risk with high return (around 12%). Buiding new transmission ines (exampe, Transenergie DC ine, Path 15, back-to-back DC converters) New technoogies for transmission and for operation & contro of power system to extend the ife of existing systems, or squeeze more juice out of them

19 Transmission- Opportunities Exampes of needed transmission upgrades: Between: NY and northern VT, Georgia and Forida, Minnesota and Wisconsin (WUMS) Into: NYC, Long Isand, South Western CT, San Francisco, San Diego, Eastern Coorado Path 15 There are proposas at different eves to address most of these needs

20 Expected Changes Wi the recent power outage in the Northeast cause some reguation driven technoogies and investments? Maybe, but expect some changes in reguations to encourage new investments Acceerated depreciation for transmission assets (from 20 to 15 years) Higher rate of return on equity (to attract new investments) or performance-based rates Federa sitting authority that makes the process of buiding transmission ines reativey easier for interstate congestion areas (The House version of the pending energy egisation incudes the above provisions)

21 Expected Changes- RTOs More decision making authority for regiona transmission organizations (RTOs) on transmission investments (currenty imited to reiabiity investments not economic investments ) Impementation of the standard market design (SMD) with ocationa margina prices (LMP) wi send better price signas for transmission investments

22 Energy Trading The market wi not disappear, there is a rea demand and suppy for a rea product Trading companies wi change to risk managers? Insurance providers? Or asset managers (trading around their assets to maximize their vaues) Wi the market move towards ong-term contracts and hedging backed by physica assets or short-term hedging deas? Wi there be fewer payers and ess iquidity in the market?

23 Energy Trading Which ones woud survive? Investment banks are entering the trading market (exceent credit rating) A move towards transparent prices using centraized power exchanges (NYMEX)

24 Information Technoogy Do we have an antiquated transmission system? The answer is no, but maybe the system IT is antique. Some parts of System Contro and Data Acquisition System (SCADA) are sti based on od technoogies The move to RTOs wi hep in updating these systems, use newer and better hardware and software for system operation, monitoring and contro

25 Information Technoogy - Opportunities Better technoogies to coordinate operation of interconnected system (software and hardware) Better communication among transmission operators Seams among RTOs Better technoogies to monitor and contro the transmission system (smart devices) Better data metering, coection, communication, and anaysis toos

26 Other Transmission System Technoogies Communication (Fiber Optic networks) Metering Fexibe AC Transmission System (FACTS) devices Super-conducting cabes and storage devices Digita switches Sef Heaing transmission system technoogies (inteigent software running various system components) Smart transmission system

27 Q & A