U. S. Energy Policy - geestrategies

sprocketflipOil and Offshore

Nov 8, 2013 (7 years and 10 months ago)


U.S. Energy Policy and Its
Development Strategies




OCTOBER 22, 2004






The policy basis in the United States for restructuring its
electric and natural gas industries to enable market
competition to set prices

How well thus far


or not

this policy has worked to
achieve its anticipated objectives

How this policy has led to fresh concerns regarding
continued affordability and availability of energy

What is being considered in the U.S. to address these


Basic Cornerstones of Current
U.S. Energy Policy

Secure supply

generally maintained through
diversity of fuel types and source locations


no threat to public health and welfare

Reasonably affordable

(For electricity) Always available (i.e., reliable and not
subject to unintended interruption)

Clean (non
polluting to air or water)


The Reality Today:

Some supply may become increasingly reliant upon
foreign sources, making energy security even more

Cost of fuel for energy (natural gas & electricity) will
likely be volatile and rising

System could become less reliable as demands grow
and necessary infrastructure investment deferred
because of lack of regulatory certainty


Projection Through 2025: The U.S. Thirst
for Energy Will Continue Unabated

U.S. electricity demand expected
to grow by 1.8 percent annually
(from 3,600 billion kwh to 5,500
billion kwh)

Demand for natural gas expected
to grow by 1.4 percent annually
(from 22.8 Tcf to 31.4 Tcf)

Coal consumption will grow by 1.6
percent annually (22.2 quadrillion
Btu to 31.7 quadrillion Btu)

Source: Energy Information Administration / Annual Energy Outlook 2004


U.S. Electricity generation by
fuel, 1970

(billion kilowatthours)

Although coal use has
numerous issues, discussion
today will be deferred

Even with environmental
challenges, it will remain the
dominant fuel

With a 200
year supply, U.S. is
the “Saudi Arabia of coal”

Major concerns center on
natural gas because of supply
availability and price volatility

Source: Energy Information Administration /
Annual Energy Outlook 2004


Key Milestones Over The Last
Half Century

For most of the last century, natural gas and electric power were highly
regulated by government

These services were considered “natural monopolies”, unable to draw
competition because of high costs of market entry

Natural gas wellhead prices controlled

Wholesale & retail power prices controlled

However, by the 1970’s, natural gas shortages occurred because of lack of
financial incentives for producers

Also, electric power generation technology advances made efficient, affordable
power from others more feasible

Eventually, policy makers chose to deregulate prices (in most areas of the U.S.)

Natural gas supplies grew and prices stayed level for almost a decade


U.S. Natural Gas Markets Today:
Issues Over Price

Higher spot prices and greater volatility than seen during the 1990’s when
gas prices were around $2.00

3.00 per MMBtu


8.00 per MMBtu in summer

$10.00 per MMBtu in winter

Allegations of market manipulation being claimed by some, and state and
federal investigations were triggered

Role of traders/speculators questioned in driving up spot prices

But reason can be largely attributed to economic forces of supply (which is
declining) and demand (which is increasing)


Current U.S. Natural Gas Domestic
Supply Forecast through Year 2025

Higher wellhead gas prices
no longer yield greater gas
production, contrary to prior

More drilling necessary just
to maintain production
because of higher rates of
production declines

Despite more drilling, higher
prices expected because of
greater offshore drilling, and
use of technology intensive

Source: Energy Information Administration / Annual
Energy Outlook 2004


New Sources Of Natural Gas Will
Be Required to Meet U.S. Demand

Imported Liquefied
Natural Gas (LNG)

Alaskan production

sources (tight gas,
shale gas, and
coalbed methane)

Source: Energy Information Administration / Annual Energy Outlook 2004


Will LNG be the Answer?

Three dozen LNG proposals being considered

Each faces daunting technical and permitting hurdles,
slowing process of completion

Safety & security questions raised

Even if successful, raises reliance on imports
thrusting U.S. energy security into global dependence
akin to oil


Electricity Generation’s Growing
Dependence on Natural Gas

Natural gas has become the “fuel of choice” for new power generation

Environmental advantages

Shorter lead times of completion

Improved efficiencies

From 2000 to 2004, 200,000 Megawatts (MW) of new power plant
capacity was added to existing capacity base of 903,000 MW

94 percent of this new capacity was natural gas fueled

Currently, higher risks for power plant developers:

Exposure to higher fuel costs

Exposure to price volatility


For New Electric Generation, Natural
Gas is the Preferred Fuel

Source: Energy Information Administration / Annual Energy Outlook 2004

Annual Additions To Electricity Generation Capacity

By Fuel, 1950
2002 (Gigawatts)


Electricity Sector Market

Until 1990’s, electric utilities held monopolies for transmission,
distribution and generation services in all markets

Early 1990’s: Federal government allowed creation of independent
power producers, thereby creating a competitive wholesale power
market and deregulating the generation sector; transmission and
distribution remained monopolies

1990’s: states began to require unbundling of services or
functional separation of services/ some generation was sold to
independent power producers

Some states began allowing retail power competition


But Notable Failures Have Occurred In
Competitive Electricity Markets

California badly designed its deregulated retail market, resulting in
an economic and political crisis

Wholesale prices surged when supplies were short

Customers were economically harmed by unreasonably high prices
passed on at the retail level

One major utility underwent costly bankruptcy

Voters removed the Governor of California in special election and
elected instead an international action movie star and aging


California’s Current Governor: A Warrior
to Tame the Power Markets . . .



Electricity Generation’s Current
Dilemma: Overcapacity

Markets are overbuilt with 25
40% excess and some
as much as 100%

Oversupply of generation capacity will last for at least
five years in most regions.

Natural gas and coal will continue to supply the vast
majority of generation growth

Natural gas price volatility will continue to affect
electric prices



Plagues the Electricity
Delivery Infrastructure System!

Disproportionate attention has been placed on generation

Transmission system investment has been declining for over 25 years
by $115 million/yr in real dollars

Source: E.Hirst,
“Transmission Crisis
Utilities Fortnightly
September 15, 2000


Policy Disputes And Regulatory Uncertainty
Currently Discourage New Transmission
Infrastructure Investment

Electric industry restructuring reform
has resulted in diffusion of
government oversight

Lack of clarity over which
government entity (state or federal)
regulates transmission system

Some states and federal government
disagree over jurisdiction

owning utilities
unwilling to invest if cost recovery left


Proposals to Reexamine the Role of
Government Regulation of Power

Basic Premises:

Fuel diversity is essential to maintain public policy goal of energy security

Electricity prices must be affordable and fairly consistent over time,
allowing for periodic rate increases

Many question whether competitive markets will achieve this alone

Others propose greater government role to oversee or mandate electric
supply portfolio:

Combination of long
term contracted supplies and spot market supplies

Diverse fuel sources

Others advocate full or partial resumption of government regulation over
entire electricity industry, including power generation sector


Lessons Learned from U.S. market reforms for
natural gas and power generation

Markets tend to function in a cyclical manner, sometimes causing shortages
and surpluses of traded commodities (effects of supply and demand)

Electric power and natural gas are no different

if they are regarded as
commodities, they will be subject to a “boom and bust” cycle

But the public’s unchecked exposure to these forces can cause political
problems and reactionary responses

Opening natural gas and electricity sectors to market competition was not a

Consumers benefited from greater available volumes of affordable gas for
a lengthy period

Risk of failure remains on independent power providers, not utility


Lessons Learned from U.S. market reforms
for natural gas and power generation (con’t.)

But markets can be unforgiving

Consequently, the proper role of government regulation and oversight
needs continued rethinking

Total reversal of market
oriented policy would be difficult, expensive,
and likely discourage capital urgently needed for infrastructure

Need to properly balance market freedom with government regulation
so that public is not asked to shoulder undue market risk

Government policy can play a constructive role so long as it is focused,
coherent, and consistent over time, allowing for fine
tuning calibrations


Some Lessons for China’s
Proposed Energy Sector Reforms

Learn from mistakes of others such as the U.S.

There is no single “perfect” model for creating an
energy market

Take best practices from other countries

Don’t delay reform to try to reach a “perfect”
outcome, but endeavor to craft a workable scheme
that avoids major,
ex post facto


Don’t overreact if something unintended occurs


Thank You For Your Attention

Xie Xie


Robert W. Gee


Gee Strategies Group LLC

7609 Brittany Parc Court

Falls Church, VA 22304



703.698.2033 (fax)