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Vol. 12, No. 29 Week of July 22, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Anchorage chamber works on energy

Report says state needs energy policy, both for infrastructure coordination and to promote conservation

Kristen Nelson

Petroleum News

Energy costs in Southcentral Alaska impact the region’s economy — but would have a substantially greater impact if natural gas were not available, the Anchorage Chamber of Commerce was told July 16.

Tony Izzo and Joe Griffith, co-chairs of a chamber task force set up earlier this year to address the energy needs of Southcentral, gave chamber members a preliminary report, calling what they had an outline of a report yet to be approved by the chamber board.

One preliminary conclusion the task force has reached, the men said, is that the state needs an energy policy.

Izzo, formerly CEO of Enstar Natural Gas Co., said the chamber started talking in the December-January timeframe about creating “a guiding document of recommendations that we could put forth to decision makers, policy makers that would address long-term energy supply in Southcentral.”

The goals set for the task force by the chamber’s executive committee were to identify short- and long-term energy issues impacting chamber members and short- and long-term solutions for those issues.

Concerns have been rising in Southcentral both about natural gas prices and about deliverability of gas on peak usage days in winter, with North Slope gas widely considered the long-term solution for deliverability, if not for price.

Assuming Southcentral Alaska one day has access to North Slope natural gas, what does the area do in the interim? And what are the energy alternatives if North Slope natural gas isn’t available in the future?

Alternatives cost multiples of natural gas

The consumer cost of natural gas in Southcentral Alaska, the cheapest source of home heating in the area, has more than tripled in the last 10 years — from $1.91 per thousand cubic feet in 1997 to $7.03 per thousand cubic feet this year — and Cook Inlet natural gas deliverability is dropping off, Izzo said.

He said the task force wanted a perspective on energy costs and wanted to identify the choices that are out there if you can’t heat with natural gas and what the economic impacts would be.

They used a thermal comparison.

If you are on natural gas in Southcentral today, Izzo said, that cost today is $8.73 per million Btu. In Fairbanks, where liquefied natural gas has to be shipped in, the cost is $22.10 per million Btu.

Alternate fuels in Anchorage range from No. 2 fuel oil at $17.28 per million Btu, to propane at $24.78 and a cost for electricity that ranges from $23.49 to $37.17 per million Btu, across four Southcentral utilities.

Economy would take a big hit

There is “a big economic impact” if you have to replace natural gas for heating, Izzo said, with multiples of almost five.

Overall, Southcentral spends some $242 million a year to heat with natural gas.

Switching to No. 2 fuel oil would add $237 million to that cost — a total of $479 million, almost double. Propane would add $445 million a year, almost three times what natural gas costs.

Those dollars, he said, “are coming right out of the economy.” If energy costs double, “this business community would get hurt hard.”

And switching to electric heat would add from $409 million to $789 million — a total as more than four times the cost of natural gas for the most expensive electric utility.

Izzo said those numbers don’t “include the cost to convert” from natural gas.

Asked if the task force addressed what would happen if a North Slope gas line isn’t built, Griffith said “every discussion you have comes around to what’s going to happen with AGIA (the governor’s Alaska Gasline Inducement Act).” He said the feeling of the task force is that “if the big line doesn’t happen a smaller line has to occur and we don’t have any choices but to do that.” Griffith said it hasn’t been put before the chamber’s board of directors for their approval, “but I would be campaigning for that point of view.”

“I think the answer became clear in the process that the economic alternative of not doing it is probably going to be the worst-case scenario,” said Izzo. If there’s no North Slope gas the alternative is to go with one of the other options. If the consumer faces paying $50 more a month or $100 more a month, the choice will be $50, “and I believe that will be the spur line or bullet line,” Izzo said, referring to building a small-diameter gas pipeline from the slope to Southcentral if the larger line to outside markets is not built.

Energy conservation an issue

What is needed to ensure that the Southcentral economy is in the best position 10 or 15 years from now?

Izzo said the task force believes the state needs a fiscal plan to bridge the gap between diminishing oil and new gas revenues.

The state also needs a conservation policy — the constitution mandates utilization, development and conservation of natural resources for the maximum benefit of the people, he said.

“You can go to almost any other state in the United States and find meaningful conservation programs.”

Izzo said he’s “not criticizing anybody that’s involved with them, but based on what we heard, there are no meaningful conservation programs. In fact, rate structures reward utilities for volume.”

Izzo said cost is one way to enforce conservation: A rural presenter told the task force his home in rural Alaska has the same square footage as the home of one of his children in Anchorage; while he uses half the power his bill is twice that for the Anchorage home.

Griffith said that in addition to volume rewards in the case of gas “there are certain benefits for bigger users in the electric industry.”

“Some of that’s got to change,” he said. Possibilities to encourage conservation include a higher charge for usage at peak times.

“There’s a whole different set of criteria that I think we’d develop if we were very, very serious about pursuing conservation on a grand scale and I don’t believe we’ve taken the necessary steps to make that happen yet,” Griffith said.

Strategic infrastructure planning needed

The task force isn’t asking for “regulatory involvement running utilities,” Izzo said, but “using Alaska’s energy resources to meet the direct needs of Alaskans must be a priority action.”

State government isn’t involved in energy planning at a high enough level, he said. There are bits and pieces but no overall plan, and “as we found through the process, all of Alaska is connected in regards to energy,” Izzo said.

“There needs to be an integrated energy policy plan,” but there isn’t one and no one is empowered to develop one, he said.

Asked what is needed to get a state energy policy, Izzo said “it will take somebody in the executive branch to mandate it.”

Izzo said coordinated strategic planning for energy infrastructure and investment is needed.

When utilities talked about plans for new power plants and the task force asked how a plant would work on the grid and if the utility had talked to other utilities, “the answer would be no,” he said.

Izzo said he wasn’t criticizing any of the planned projects but “how could we know — any of us know — if it’s going to be good for the region or the community if we don’t have the other stakeholders looking at it and saying well here’s how it is going to affect us?”

One thing that came up in task force discussions was a Department of Energy at the state level that could ensure coordination between power generation and energy infrastructure projects.

“Now I’m a capitalist,” Izzo said: “I’m not standing here promoting government running or taking over utilities. … But having an idea of who’s doing what and how it’s going to impact the overall grid or the overall infrastructure would be a positive thing.”

A statewide energy plan would also help, Izzo said, in addressing how renewable energy and alternate energy sources might fit into the picture.

As to why the task force didn’t pursue renewables and alternative energy, Izzo said that in addition to a plentiful supply of natural gas just 800 miles away, there is probably a billion dollars in natural gas infrastructure already in place.

And Griffith, formerly general manager of Chugach Electric Association, said alternative energy can’t come close to the cost of natural gas. “It’s simply cost and availability and the system,” he said. “… Someday the price of energy may be sufficient that it will make wind power competitive or geothermal or the cost of a coal plant.” Coal is relatively inexpensive in the long run, Griffith said, but it’s costly “on the front end to get the plant in place and there is a lot of resistance to coal use anywhere in this country.”

Gas supply contract regulation reactive

The task force also found “regulation of utility gas supply contracts is reactive not proactive.”

Izzo said again that it’s not meant as a criticism, “but an observation that we are in a very dynamic transition period of time where we’ve structured our whole system of how things work in this region regarding energy around a model that’s 40 years old.” That makes regulation reactive, he said, and it makes it difficult for folks “to invest money, to identify projects and to know that there’s some certainty that you might have a chance of getting it approved.”

“And so the observation is that folks are now sitting on the sidelines; they’re afraid. They want to wait and see what happens,” Izzo said.

Izzo said the task force didn’t do an analysis of energy prices, but every comment they heard was that “prices are likely to go up” for all energy — natural gas, oil, propane and electric.

There are already issues with deliverability of natural gas in Cook Inlet on cold days, he said. “And high energy prices and reduced gas deliverability are likely to damage the economy of Southcentral and have already damaged rural economies.”

The task force heard from one rural presenter that “energy refugees are being created” by the high cost of energy in rural communities. Rural energy costs are double or triple what they are in Southcentral, Izzo said.

He said while people relocating to Southcentral because of high rural energy costs may not have a negative impact, it is an impact on the region.

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