We generated Low, Medium, and High case fuel price projections for the years 2010-2030 for the following fuels:
Incremental natural gas in Southcentral Alaska delivered to a utility-scale customer Incremental diesel delivered to a PCE community utility tank Incremental diesel delivered to a home in a PCE community Incremental home heating oil purchased in Anchorage, Fairbanks, Juneau, Kenai, Ketchikan, Palmer, and Wasilla
This memorandum provides documentation of the assumptions and methods that we used. A companion Excel workbook contains the detailed projectionsAlaska Energy AuthorityIntroduction / General methods and assumptions / Natural Gas / Fuel Oil / Reference

Fay, Ginny

Saylor, Ben

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     Alaska Fuel Price Projections 2010-2030       prepared for: Alaska Energy Authority   prepared by:  Ginny Fay Ben Saylor    Institute of Social and Economic Research University of Alaska Anchorage  July 30, 2010  ISER Working Paper 2010.1     2 July 30, 2010 Contents  Introduction ..................................................................................................................................... 2 General methods and assumptions .................................................................................................. 2 Natural Gas ..................................................................................................................................... 4 Fuel Oil ........................................................................................................................................... 7 References ..................................................................................................................................... 10    Introduction We generated Low, Medium, and High case fuel price projections for the years 2010-2030 for the following fuels:   Incremental natural gas in Southcentral Alaska delivered to a utility-scale customer  Incremental diesel delivered to a PCE community utility tank  Incremental diesel delivered to a home in a PCE community  Incremental home heating oil purchased in Anchorage, Fairbanks, Juneau, Kenai, Ketchikan, Palmer, and Wasilla  This memorandum provides documentation of the assumptions and methods that we used. A companion Excel workbook contains the detailed projections. General methods and assumptions Base year and time horizon Our projections run from 2010 to 2030. They are computed and reported in inflation-adjusted year 2010 dollars. We recognize that a ―projection‖ for 2010 is unlikely to match actual 2010 data. However, much of the data that we rely on have only been published through 2009. Ultra low sulfur diesel premium We include a five cent additional cost starting in year 2008 for rural areas only, to account for the additional refining costs of ultra low sulfur diesel. This value can be quickly changed within the workbook. Carbon pricing The carbon pricing component of the model takes a given assumed price per metric ton CO2, beginning at a given assumed year, and increasing at a given assumed annual percentage per year. Similar to the ultra low sulfur diesel premium, these assumptions are parameters that can be changed in the workbook.   3 July 30, 2010 For the High case we have assumed an allowance price trajectory based on the Massachusetts Institute of Technology (MIT) Future of Coal study.1 The MIT group described their ―High CO2 Cost‖ case as a $25 per metric ton CO2 allowance cost measured in 1997$, imposed in 2015 and increasing at 4% (which we increase to 5%) per year above inflation thereafter.  We have adjusted the 1997$ for inflation through 2010 and also assumed that the price trajectory begins in 2010 at a lower level that passes through the MIT benchmark in year 2015.  The $25 benchmark price converted to 2010 dollars is $33.87.  The Low case parameters correspond to the ―Low CO2 Cost‖ case from the MIT study, with $9.48 ($7 in 1997$ adjusted to 2010$) starting in 2010, increasing by 5% per year.  The Mid case is somewhat arbitrarily set in the middle, at $15.20 (2010$) starting in 2010 increasing by 5% per year.  The prices per metric ton are converted to prices per gallon of distillate fuel using the coefficient from EIA (http://www.eia.doe.gov/oiaf/1605/coefficients.html).  Figure 1 summarizes the assumed carbon price trajectories.  Figure 1. Carbon price trajectories (year 2009$ per metric ton CO2)                                                    1 Massachusetts Institute of Technology. 2007. The Future of Coal: Options for a Carbon-Constrained World. (March). Available at: http://web.mit.edu/coal/   4 July 30, 2010 Natural Gas Background The Cook Inlet natural gas market is structurally different from the Lower 48 natural gas markets because it is not connected to a large pipeline network and has relatively few buyers and sellers of gas. As a result, Cook Inlet does not have a natural gas spot market to reveal the true market value of natural gas. In Lower 48 natural gas markets, the market value of gas is revealed by market forces as thousands of buyers and sellers bid on natural gas spot markets. Most natural gas used by Lower 48 utilities is not purchased on the spot market but the physical access to spot markets ensures the price utilities pay for gas reflects the true value of the gas. Public utility regulators in these markets generally do not have to regulate the price utilities pay for natural gas because the price is largely determined by local and regional markets.  In contrast, the Cook Inlet natural gas market has no spot market and thus no clear market value. Instead, all natural gas sales are based on indexed prices agreed upon in contracts negotiated between natural gas producers and a limited number of buyers. These contract prices are negotiated between natural gas producers and utilities and may not reflect the true value of the gas because utilities do not actually bear the cost of the gas. Instead the entire natural gas cost is passed onto the utilities’ customers who do not directly participate in negotiations. The Regulatory Commission of Alaska (RCA) is tasked with protecting the utilities’ customers by ensuring that rates are fair and reasonable. Unlike its Lower 48 counterparts, the RCA must determine what merits a fair and reasonable natural gas price in the absence of a natural gas market price.  Historically, natural gas prices, as determined by RCA approved contracts, pegged the price of natural gas to a basket of Lower 48 price indexes including natural gas, crude oil, and heating fuel. This pricing method resulted in low natural gas prices until recently when a drastic increase in oil prices drove up the price of Cook Inlet natural gas purchased on these contracts.  Cook Inlet natural gas is now becoming relatively scarce, necessitating significant capital investment on behalf of the natural gas producers to meet growing demand. The producers have argued that the return on capital for Cook Inlet natural gas investments needs to be competitive with capital investments in other markets and indicated that they need the Southcentral price to more closely resemble Lower 48 prices. Under this reasoning the Cook Inlet producers, local utilities, and the RCA began to agree to and approve contracts with the Cook Inlet natural gas price indexed to Lower 48 spot prices.2  Assumptions  The analysis in this report assumes that Chugach Electric Association (CEA) is the marginal supplier of electricity in Southcentral Alaska. Also, it is assumed that the recently approved                                                  2 For more information on Southcentral Alaska natural gas prices and contracts, see the RCA website: http://rca.alaska.gov/RCAWeb/home.aspx   5 July 30, 2010 supply contract between CEA and ConocoPhillips is the marginal supply of gas for electric power generation.  The concept of marginal supply in this context refers to the most recently purchased energy to supply electricity, not to the energy supply that would first be disrupted or offset in the case of new renewable energy. This is appropriate for forecast prices because the most recently purchased energy is a better indicator of future energy prices than previously purchased energy.  The contract between CEA and ConocoPhillips, filed May 12, 2009 (http://rca.alaska.gov/RCAWeb/Certificate/CertificateDetails.aspx?id=7eefd8ff-1630-4ed0-80f6-59e1aed8e391), states that ConocoPhillips will supply natural gas sufficient for CEA to meet 100% of unmet gas requirements through April 2011,  roughly 50% of Chugach’s unmet gas requirements from June 2011 through 2015, and about 25% of Chugach’s unmet needs in 2016 (Figure 2).   Figure 2. Chugach Electric Association natural gas supply, 2009-2016  Image reproduced from Chugach Electric Association, Gas Supply Contract with ConocoPhillips, 2009.  The majority of the gas to be supplied to Chugach Electric Association for base load electric generation is termed ―Firm Fixed Gas.‖ The price of this gas is based on an index of four natural gas spot markets from natural gas producing areas. This index is termed ―Production Area Composite Index,‖ or ―PACI.‖ The PACI consists of:  El Paso, Permian Basin; under the heading Permian Basin Area  Waha; under the heading Permian Basin Area  ANR, Oklahoma; under the heading Oklahoma  Columbia Gulf, Louisiana; under the heading Louisiana-Onshore South  6 July 30, 2010  Agua Dulce Hub: under the heading South-Corpus Christi  In recent history, the price of PACI has been 90% that of Henry Hub3 and the prices of both have been highly correlated (Figure 3). Forecasting forward, we assume that this price relationship will continue and the PACI price, and, thus, the marginal gas price in Southcentral Alaska, will be Henry Hub x 0.9.  Figure 3. Relationship between PACI and Henry Hub natural gas prices, 2005-2009  Image reproduced from Chugach Electric Association, Gas Supply Contract with ConocoPhillips, 2009.  Forecast  The Chugach contract assumes one mcf (one thousand cubic feet) of natural gas equals one mmBtu (million British thermal units) of natural gas. The Energy Information Administration (EIA) forecasts the Henry Hub price in dollars per mmBtu but the Chugach Electric Association gas is priced in dollars per mcf. This forecast uses the same assumption that the Southcentral Alaska natural gas price in dollars per mcf equals 90% of the forecast Henry Hub price in dollars per mmBtu. Figure 3 shows the forecasted EIA Henry Hub spot price and the calculated Southcentral Alaska gas price.                                                   3 Henry Hub is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX). It is a point on the natural gas pipeline system in Erath, Louisiana.  7 July 30, 2010    Figure 4. Relationship between Henry Hub Spot Prices and Southcentral natural gas prices, 2006-2030  Source: EIA, Report:  An Updated Annual Energy Outlook 2010, Reference Case.  ISER calculations  Fuel Oil Background Fuel oil prices are simpler (although not easier) to project because there are no existing complex contracts with formulas to be followed. Our projections are based on EIA AEO projections of crude oil. We use the Composite Refiner Acquisition Cost of crude oil (CORAC) as the basis for the fuel oil projections. Key Assumptions Assumption 1. The price of diesel to a particular PCE utility bears a stable linear relationship to the RAC crude price, but the coefficient is allowed to be different than 1.0 and is not allowed to vary by community. A coefficient above 1.0 indicates ―percentage markup pricing‖ as opposed to a straight pass-through of a crude price increase dollar for dollar.  Assumption 2. We were not able to rigorously determine a home delivery surcharge by statistical methods—there appears to be no consistent relationship between residential home heating fuel prices and crude oil and PCE utility fuel prices. However, the average difference  8 July 30, 2010 between the 2009 PCE fuel price and Alaska Housing Finance Corporation (AHFC) fuel survey price was $1.00. As a result, we suggest that the community utility fuel price plus $1.00 per gallon be used as the avoidable cost of home delivery when small amounts of home-delivered fuel are being avoided. However, when substantial amount of delivered fuel is avoided (e.g., a community district heating system or mass retrofit for biomass heating), then we suggest that the appropriate credit for avoided delivery charges is zero. The suggested heating fuel premium based on the amount of fuel is shown in Table 1 below. These are the amounts applied in the Renewable Energy Fund project economic review models.   Table 1. Suggested fuel premiums per gallon of displaced fuel  Source: ISER fuel price analysis.  Determining the value of an avoided gallon of fuel oil for spacing heating by renewable energy projects is complex because a substantial portion of the costs that ultimately determine the price per gallon of village home heating fuel are fixed. In addition, specific community circumstances, such as whether a bulk fuel storage facility was recently upgraded or will soon need to be, influence actual potential avoided costs; most of the costs of storage and delivery can only be avoided in ―lumps.‖ More analysis of community non-utility fuel use and prices will be necessary as more energy projects displace space heating diesel fuel.  Projection method The fuel oil price projection is based on the imported crude oil price projection from EIA’s Annual Energy Outlook (AEO) updated in May 2010.    1. Obtain EIA’s Annual Energy Outlook 2010 from the following URL: http://www.eia.doe.gov/oiaf/aeo/index.html  2. Obtain the forecast Imported Crude Oil Price from Table 1 for the reference, low price, and high price cases.  3. Obtain the monthly ―U.S. Crude Oil Imported Acquisition Cost by Refiners (Dollars per Barrel)‖ (CORAC) from the following URL: http://tonto.eia.doe.gov/dnav/pet/pet_pri_rac2_dcu_nus_m.htm  4. For each month, convert the crude price from step 3 to 2010 dollars (―real crude price‖) using the CPI-U for that month and the average CPI-U (U.S. Consumer Price Index for All Urban Consumers, http://www.bls.gov/CPI/) for 2010 (the January – May average was used in our calculations).  Gallons of Displaced Heating Fuel Heating Fuel Premium< 1,000 $1.001,000 < 25,000 $0.6525,000 > 100,000 $0.33> 100,000 $0.00Gallons of Displaced Transportation FuelsAll $1.00 9 July 30, 2010 5. Calculate the average real crude price by fiscal year.  Divide by 42 to obtain real crude price per gallon.  6. Obtain PCE fuel prices from fiscal years 1981 – 2009.  The PCE Statistical Reports for fiscal years 2002 through 2009 can be obtained from the following URL: http://www.aidea.org/aea/programspce.html.4    7. Calculate the average CPI-U by fiscal year, and convert the PCE prices to 2010 dollars based on the average CPI-U for that fiscal year and the average CPI-U for 2010.  8. Generate a dummy variable for each community but one (the control community).  9. The dataset on which the regression will be performed now consists of one observation per community per fiscal year, with at least the following variables:  community  fiscal year  real fuel price per gallon  real crude price per gallon  a series of (n-1) dummy variables, where n is the number of communities, and the value of the variable is 1 if it corresponds to the community of the given observation, and otherwise 0  10. Perform an ordinary least squares regression with real fuel price per gallon as the dependent variable, and real crude price per gallon and the community dummy variables as the independent variables.  The slope for all communities is the coefficient of the real crude price.  The intercept the each community is the constant term of the regression, plus the coefficient of that community’s dummy variable (in the case of the control community, the intercept is just the constant term).  11. Some communities with little or no data require using data from other communities as a proxy.  The proxy communities suggested by AEA, listed with the original community first, then the proxy, are as follows:  For Dot Lake: Substitute: Tok  Hollis: Craig  Klawock: Craig  Thorne Bay/Kasaan: Craig  Kasigluk: Nunapitchuk  Pitkas Point: St. Mary’s Make the following additional substitutions:  Chignik Lake: Chignik Lagoon  Klukwan: Kake  Kobuk: Shungnak  Napakiak: Napaskiak                                                  4 Data from prior years were obtained from Mark Foster (mafa@gci.net).   10 July 30, 2010 Perform these substitutions not by copying data points from the proxy community into the missing slots, but by copying the regression coefficients from the proxy community.  12. Use the slope and intercepts to predict fuel oil price per gallon for each PCE community as a function of Imported Crude Oil Price per gallon from the EIA Annual Energy Outlook 2010 (Low, Mid, and High cases) for each year from 2009 to 2030, or any assumed crude oil price.  13. The above prices are for utilities. For avoided use of home-delivered fuel, add $0/gallon if a significant amount of fuel is avoided. Add $1.00 if a small amount is avoided (no clear relationship was found between AHFC surveyed home heating oil prices and PCE utility fuel prices, but the average difference was about $1.00). See assumption 2 and Table 1 above for more details.   14. For urban places (Anchorage, Fairbanks, Juneau, Kenai, Ketchikan, Palmer, Wasilla), obtain prices for heating oil from Alaska Housing Finance Corporation’s annual fuel price surveys conducted in years 1999 through 2009 (contact ISER or AHFC to obtain this data).  Use the average of #1 and #2 heating oil.  Where prices are missing, use the price included in the Alaska Food Cost Survey conducted for December (http://www.uaf.edu/ces/fcs/) (there will still be some missing data points).  15. To obtain crude oil prices corresponding to the time frame of the heating oil prices, calculate the average CORAC per gallon for October through December of each year from 1999 to 2009 in nominal dollars.  16. For each place and year, subtract the average CORAC just calculated for that year from the fuel price for that place and year.  Put this difference into real 2010 dollars using the same CPI as above. Put the average CORAC numbers in real 2010 dollars as well.  17. For each place, do a linear regression with the price difference as the dependent variable and CORAC as the independent variable, each year being one observation for that place consisting of a fuel-crude price difference and a crude oil price.  18. Use the regression coefficients to predict the difference between fuel price and CORAC for each place and year as a function of Imported Crude Oil Price per gallon (Low, Mid, and High cases) for each year from 2010 to 2030.  Add to these the projected CORAC to obtain a projected heating oil price.  References Alaska Energy Authority, Power Cost Equalization, fuel prices from fiscal years 1981 – 2009.  The PCE Statistical Reports for fiscal years 2002 through 2009 can be obtained from the following URL: http://www.aidea.org/aea/programspce.html  Alaska Food Cost Survey, http://www.uaf.edu/ces/fcs/   11 July 30, 2010 Alaska Housing Finance Corporation, Annual fuel price surveys conducted in years 1999 through 2009.  Chugach Electric Association. Gas Supply Contract with ConocoPhillips, May 2009. Available at: http://rca.alaska.gov/RCAWeb/ViewFile.aspx?id=95B1BE87-1123-4D04-8766-964E7F813A77  Massachusetts Institute of Technology. 2007. The Future of Coal: Options for a Carbon-Constrained World. (March). Available at: http://web.mit.edu/coal/  US Department of Energy, Energy Information Administration. Updated Annual Energy Outlook 2010 Reference Case Service Report, May 2010. Available at: http://www.eia.doe.gov/oiaf/aeo/index.html  US Department of Energy, Energy Information Administration. ―U.S. Crude Oil Imported Acquisition Cost by Refiners (Dollars per Barrel)‖ (CORAC): http://tonto.eia.doe.gov/dnav/pet/pet_pri_rac2_dcu_nus_m.htm  

Alaska Fuel Price Projections 2010-2030

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Alaska Fuel Price Projections 2010-2030

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