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The Risks, They JustKeep On Coming

( Impacts of Environmental Bills in Congress )

GAMS Anniversary SeminarSeptember 19, 2003

Lloyd R. Kelly Vice President & Partner

Hill & Associates, Inc.(410) 263-6616 ext.104 / L.Kelly@hillandassoc.com

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HAPPY BIRTHDAY, ALEX

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Order of Presentation

1. How Our Models Work

2. Results of Modeling Current Bills In Congress

3. Discussion of the Risk Implications

4. Conclusions

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International CoalTrade Model

National Power Model™• Dispatch Economics• 90+ Control Areas

• Seasonal/TOD Prices, Flow & Gen.

DemandModel

GDPWeatherElectric Intensity

Transmission• Bi-Directional Simultaneous Flows• Seasonal Limits• Time-of-Day Rates

Regional Emission Limits• SO2, CO2, NOx

GenerationDatabase(all units)

GenerationCost Supply

Models

Hill and Associates, Inc.Electric Generation, Coal and Emissions Forecasting System

Utility FuelEconomics Model

• Fuel Switching• Clean-up Equip Choices

• Allowance TradingStrategies for• SO2• NOx• Particulates

Demand• Industrial• Commercial• Residential

GenerationDatabase

(coal units)Coal Supply Curves• Cash Cost by Mine • All Regions• By Coal Type

• New Build• Gas & Oil

Forecast

Coal Plant Costs&

EmissionsForecast

Plant/Area by TOD• Generation• Power Flows• Marginal Prices• Emissions

• Unit Info• Transp. Rates• Compliance

Costs

Coal Plant Energy Demand

SeasonalDispatch Costs,Emission Rates

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Three Factors Differentiate Us

• Our Coal Mining Cost Curves By Detailed Type of Coal

• The Feedback Loop With Dispatch, Coal Choice and Equipment Decisions Co-Dependent

• Simultaneous Interplay of Pollutant Limits

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Emission Actual 1999 NAAQS Clear Skies Initiative Sen. Carper'sAs Introduced in Congress "CAP 2002"

SO2 12.0 million tons 4.35 mm in '10 4.5 mm in '10 4.5 mm in '083.0 mm in '18 3.5 mm in '12

2.25 mm in '15NOx 7.1 million tons OTC Stepdown '03 2.1 mm in '08 1.7 mm in '12

21-State SIP Call '05 (1.582 mm East/0.538 mm West)1.7 mm in '18 (1.162 mm East/0.538 mm West)

Mercury 48.6 tons None 26 tons in '10 24 tons in '0815 tons in '18 5-16 tons in '12 (EPA set cap) 10 tons (H&A)

CO2 2.19 billion tons None None ~2.6 billion in '08 (2005 levels)~2.3 billion in '12 (2001 levels)

Multi-Emission Limits

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Last Year’s OutlookTotal U.S. Steam Coal

Including "Snapshot" Results

2.81 Gas (4.13)CO2

3.31 Gas (4.86)

3.81 Gas (5.60)4.31 Gas (6.33)4.81 Gas (7.06)

0

200

400

600

800

1,000

1,200

1,400

1,600

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Mill

ion

To

ns

NAQ BUS BNHCO2 Snapshot Gas Price Sens.

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This Year’s StudyTotal U.S. Coal Production

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200

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1,200

1,400

2003

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Mill

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NAQ SKY CAP Gas Price Sens.

$3.80 Gas

$2.80 Gas

$2.30 Gas

$4.30 Gas

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Different Types of Risk for Coal

• The Risk of the Carper Bill Being Passed (Or Any Other Form of Fixed CO2 Limits)

• The (Mercury + Gas Price) Risk– More Insidious (Looks OK from One Angle)– Coal Tonnage Alone Doesn’t Tell Whole Story

• Risks Not Reflected In Our Modeling

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CO2 Impact: It Ain’t Rocket Science• Starting Point: 3.904 Billion MWH

• If Grows 2.5%/yr for 25 Years = 7.238 Bln

• Assume 20% Is Hydro, Relicensed Nuc.s, etc (Remaining 80% Is Fossil-Fired = 5.790 Bln)

• Even If ALL Fossil-Fired Is Natural Gas, Result is CO2 Emission of 2.29 Billion Tons (vs Carper Bill Limit of 2.3 Bln – No Coal!)

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CO2 Allowance Prices$/Ton

$0.00

$100.00

$200.00

$300.00

$400.00

$500.00

$600.00

$700.00

$800.00

$900.00

$1,000.00

2003

2004

2005

2006

2007

2008

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2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

$/T

on

NAQ SKY CAP

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Current Global Mercury Emissions

• Total of Natural, Anthropogenic & Oceanic = 5500 tons

• U.S. Anthropogenic = 158 tons (2-3%)

• U.S. Power Plants = 48.6 tons (<1%)

• Geologists’ Anecdote: 1 Volcano Erupting…

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Measurement of Hg Emissions

• Dispute Over Whether They Can Be (And Are Being) Measured Accurately

• SO2 and NOx Range 2-12 million tons/year

• Hg : 50 tons/yr (<1mm, <1k, <100 )

• SO2 and NOx in Coal: lb./million Btu

• Hg in Coal: lb./trillion Btu (i.e., one-millionth the level of other pollutants)

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But Isn’t Mercury Poisoning Especially Bad?

• State of Hawaii – Continuous Simmering Volcanic Emissions + Occasional Eruptions … Why don’t we hear about a lot of mercury deaths there ?

• EPA Administrator Browner’s Official Basis: “There is a ‘plausible link’ between man-caused emissions of mercury and the possible bioaccumulation in the food chain and the possibility that the level could become high enough to adversely affect the health of women of childbearing age and young children.”

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Mercury Impact:Highly Volatile w/ Gas Prices

• Unlike CO2 This Is Economic Trade-Off

– A Brand-New Gas-Fired Combined Cycle Plant Simply Wins The Dispatch Competition vsMany Coal-Fired Plants

– The Balance Point Changes, Obviously, With Natural Gas Price

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Hg-Surviving Coal vs Gas Price

800

900

1,000

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2.00 2.50 3.00 3.50 4.00 4.50Gas Price ($/mmBtu)

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2003 NAQ Case

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Dis

patc

h C

ost

$/M

Wh

COAL

GAS

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2015 SKY Case

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80D

ispa

tch

Cos

t $/

MW

h

COAL

GAS

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2015 SKY Sensitivity, GAS -$100

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70D

ispa

tch

Cos

t $/

MW

h

COAL

GAS

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2003 NAQ Case

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Dispatch

Cost $/M

Wh

COAL

GAS

2015 SKY Case

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Disp

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Cost $/M

Wh

COAL

GAS

2015 SKY Sensitivity, GAS -$100

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Disp

atch

Cost $/M

Wh

COAL

GAS

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What’s The Point Here On Mercury?

• Don’t Focus As Much On The Single “Correct” Answer As On The RISK!

– If Supply/Demand Balance For Natural Gas Shifts (Drilling, LNG, Trans-AK and/or Trans-Canada Pipeline, etc), Then Much Of Coal Industry Gets Killed Under Hg Limits

– Remember, U.S. Utilities’ Hg Is Less Than 1% Of The Global Atmospheric Load !!!

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But Coal Tonnage AloneDoesn’t Tell The Whole Story

• Mercury Allowance Price of About $150,000 per lb. X 52,000 lb = $7.8 bln

• In Fact, For 2010:– NAQ Sum (Mwh * Disp_Cost) = $92 bln– SKY Sum (Mwh * Disp_Cost) = $78 bln

( $14 billion per year extra cost to generate )

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Other Risks Not Shown ByOur Modeling

• We Traditionally Choose To Use Identical Electric Demand Across Scenarios (i.e., No Price Elasticity of Electric Demand)– Utility Generation Would Suffer At These Levels– U.S. Economy Would Get A Huge “Hit”

• Our Models Are Currently Set Up To Assume Any Gas Infrastructure Needed Would Arrive– But Carper Case (w/ CO2Lim.) Goes To 42 TCF !

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CONCLUSIONS

• Our Models Aren’t Perfect, But We Are Probably Getting Closer Than Many Others (especially Government analyses)

• The Threat Is Real! (and Risk Affects Capital Availability)

• Key Decision-Makers Are Starting To Realize This May Be An Unacceptable Risk

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BACKUP SLIDES

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Some Mercury Technology• 3 Forms of Mercury (Hg)

– Elemental (gas at boiler temperatures) – Hg o

– Ionic (gas) – Hg ++

– Solid Particles (Predominantly HgCl2)

• 2 Forms of Capture– Gaseous Hg adsorbed onto porous particles (PAC), then

collected with ESP’s or Bag Houses (PM collection)– The predominant Hg solid compounds are soluble in

wet scrubber solutions & captured by wet FGD

• Elemental Hg is hardest to capture, but can be oxidized to Ionic (belief that SCR promotes this)– PRB coal high in elemental form

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1.0 lb Hg Hg++

(Ionic Gas)

0.10 lb Hg

0.60 lb Hg

0.120 lb Hg

Hg°(Elemental Gas) 0.30 lb Hg

(or, 88.0%Removal)

Eastern Bituminous Coal – Mercury Modeling( 1.0 lb Hg Basis )

HgCl2 (Solid)

Max.CleanupEquip.

(Scrub,SCR &PAC )

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1.0 lb Hg Hg++

(Ionic Gas)

0.10 lb Hg

0.15 lb Hg

0.292 lb Hg

Hg°(Elemental Gas) 0.75 lb Hg

(or, 70.8%Removal)

PRB Coal – Mercury Modeling( 1.0 lb Hg Basis )

HgCl2 (Solid)

Max.CleanupEquip.

(Scrub,SCR &PAC )

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Coal Basins Losing/Gaining Tonnage via Mercury Limits

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C u m u la tiv e C a p a c i ty (M M T P Y )

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Cas

h C

ost (

$/To

n)Generic WV All Mines Cost Curve

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C u m u la t i v e C a p a c i ty (M M T P Y )

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Cas

h C

ost (

$/To

n)Simplified Generic Cost Curve

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C u m u la t i v e C a p a c i ty (M M T P Y )

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Cas

h C

ost (

$/To

n)

B a s e Y r + 1 5 B a s e Y r + 1 0 B a s e Y r + 5 B a s e Y r

Cost Curve Movement Over Time

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Powder River Basin Coal Production

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NAQ SKY CAP

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Central Appalachia Coal Production

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NAQ SKY CAP

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Illinois Basin Coal Production

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NAQ SKY CAP

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Colorado, Utah, New Mexico Coal Production

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NAQ SKY CAP

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Northern Appalachia Coal Production

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NAQ SKY CAP