Balancing Our Energy Needs

Wachovia Executive Lecture Series
Bill Coley
President
Duke Power

N.C. State University
Raleigh, NC

I’m pleased to be here at N.C. State today, and thank you for that warm welcome. I hope you were able to join us in November when we had Duke Energy Day here at N.C. State. A number of our executives were speaking about job opportunities at Duke. But if you didn’t attend that event, rest assured that we’re impressed with the graduates you produce and we will be back at future job fairs.

I bet when I was scheduled to be a part of the Wachovia Lecture Series months ago, the organizers hoped that by some miracle I could somehow make the sleepy energy industry interesting to today’s college students.

After all, it’s traditional to think of the electric business as dull … boring … routine. Maybe some of you think the same way. But remember when it comes to your life - your stereo, your TV, your PC, everyone’s e-mail, e-business and e-commerce - everything runs on what my company produces … and that’s E-lectricity.

It’s an e-normous responsibility. As we’ve seen in California this winter, electricity not only powers our possessions - it also powers our life.

We produce the one “Old Economy” commodity that is absolutely essential to the New Economy - whatever shape it takes.

Last year, everyone on Wall Street must have figured it out, too. Because while the dot.coms crashed, the high-techs stumbled - Duke Energy stock raced up 70 percent. This year, the news is not so much about Wall Street, but about Main Street - and making sure we have enough electricity to power the homes and businesses along Main Street.

I know college students are too busy to watch television these days. I’m sure everyone is out there burning the midnight oil studying, reading or cramming for mid-terms.

So in case you haven’t noticed—the latest trend on TV these days, from my viewpoint, is the explosion of these reality-based TV shows - Survivor, Big Brother, Temptation Island. These shows don’t have scripts, don’t have glamorous actors and actresses - don’t have laugh tracks to tell you what is funny. These are shows where real people, make real mistakes - and we watch it.

One year ago, these shows started to get popular. And when something gets popular, you know what happens? You get a lot of them! The networks started churning out more and more of these shows. We got some good ones - we got some bad ones. But without a doubt, we got too many. There’s an old saying about fertilizer: if some is enough, then more is better. The same applies to TV programming. It can quickly get out of balance.

Balance—It’s a word that is usually referred to in a personal sense. I’m sure either your parents or your advisor have talked about balance. You’ve got to balance your social life and your academic life. To put it even clearer - too much partying and not enough studying and you’ll flunk out of school.

Similarly, a well-rounded life means that there is more than studying and classes.

It happens in business, too. It happens in my industry. I’d like to address that issue of balance today - to echo how this country needs to properly balance our use of energy with concerns about our environment, and also about how we meet that demand for energy.

When you look at the Real World of the electric industry, you are looking at an industry that has as much growth potential as any Internet company out there. One-third of all people on this planet (about 2 billion people) don’t have electricity in their homes. The United States alone must expand its output of electricity by about 50 percent over the next 20 years to keep up with the current level of growth in demand.

The Internet is driving much of this growth in demand. When you factor in PC usage, plus the servers that support the infrastructure of the Web - Internet usage has quickly grown to account for about 8 percent of the total U.S. energy demand.

This Palm Pilot that I carry is comparable to the energy demands of a refrigerator when you factor in the support system that runs it.

We live in a high-tech world - but it runs on that basic electricity that’s been around for 100 years - and a lot of it. The question - and the key question - is how are we going to supply that electricity in years to come?

We’re beginning to hear of a new Energy Crisis - and we’re getting a glimpse of it right now. Maybe you didn’t notice it here, but in California, power is in short supply. Customers are seeing their bills double from the year before. Utilities that were operating under a rate freeze, were having to buy expensive power and sell it to their customers for less than they bought it. Many of those companies soon found themselves staring at bankruptcy. And that was before the state began rotating blackouts to curb demand.

The best thing I can tell you here today … is that I don’t see that happening in North Carolina. But that’s not to say that we can relax here in North Carolina - or any state in the Southeast.

The reasons for this energy market earthquake in California gets at the very heart of the issue I raise with you today: the issue of balance - doing what it takes to meet our growing energy needs.

You may find this hard to believe—for the past 10 years, there were no new major power plants built in California. In-state suppliers generated what they could, and then the delivery system imported electricity from suppliers outside of California the extra they needed. The first rumble came when accelerating growth in demand outstripped even those extra supplies - helped along by a number of dry seasons that hampered hydroelectric output.

This was driven by California’s growing economy, which itself was a phenomenon of high-tech demand. The rest is a lesson from Business 101—rising demand, less supply —- and the price of the product goes up. The system gets out of balance.

There are a lot of parties right now blaming each other about the power shortages in California. Many are pointing the finger at deregulation - opening up the power markets to competition. Although I have some reservations on how deregulation was handled in California, that is not the problem. The real blame is that the state watched energy demand rise, but didn’t plan to meet that demand - and may have actually thwarted moves to increase supplies to meet that growing demand.

I’ve been hearing and talking so much about California from inside Duke - I’d be interested to hear the thoughts of you, who don’t have a vested interest in the subject. So I’ll be happy to take questions after my speech.

However, one question that might be asked is “Could this possibility happen anywhere else?” Well, over the past eight years, energy usage in the United States has risen 23 percent while new energy capacity has only risen 6 percent. If you had to pick another hot spot - it might by the Northeast area of the U.S. this summer.

Duke managed to announced, license and build a plant in Connecticut in only 12 months a few years ago - that’s very fast in my industry. So that area has been adding new capacity. We’ll see how hot this summer turns out.

But the bigger question is why all is this happening? One place to look is the ever-increasing hurdles placed on energy companies that are building power plants and the infrastructure to deliver it. I doubt many of you think about the electricity you use everyday - Where does it come from? How is it produced? How does it get from the power plant to my house? We know that we want it, and we’re mad when it’s not there.

But we also know some people don’t want a power plant next door. Or down the street. And sometimes, not even in the same county. I’ll bet that in your career, you’ll hear the phrase “Not in my backyard.” And as you know from watching ACC basketball, it’s tough to win in someone else’s backyard. Further, there are some today who subscribe to the “Banana” theory - “Build Absolutely Nothing Anywhere Near Anyone.”

To make matters worse, there isn’t much agreement over what kind of power plant is the best one to build.

In the early days of Duke Power, we built hydroelectric plants. And although hydro plants are clean, and are basically a renewable energy - it would be impossible to build a new one today … let’s say on the Neuse River. That would mean flooding thousands of acres in this area - displacing wildlife and probably a number of homeowners, too. I don’t see that happening.

Coal is our country’s most abundant fossil fuel. In fact, there is more energy in the coal reserves in the U.S. than in the oil reserves of the Middle East. Coal is still the backbone of the nation’s electric market - churning out about 60 percent of all electricity.

And although we’ve made great strides to clean up emissions from coal-fired power plants - air emissions are still greater than from other types of power plants. When it comes to siting a new power plant - coal hasn’t been in the mix lately. Duke Power has eight coal-fired power plants - but the last one was built more than 25 years ago.

Our country cannot meet its energy needs and support our standard of living by eliminating coal as a source of electric generation.

We live in a world where siting a new power plant takes a lot of talent, persistence - and a little bit of luck. Imagine you were siting a new power plant and had to go into a County Commission meeting and explain why this coal-fired power plant would be good for their county. That would be a tough sell, wouldn’t it? But it is something we must do in our industry.

Of course, there is nuclear power - which makes up 20 percent of this nation’s energy and about 50 percent of ours. Duke Power operates three nuclear power plants - one in North Carolina; two in South Carolina. They are some of the most efficient, most reliable power plants on our system. Our Oconee Nuclear Station in South Carolina has produced more power than any other power plant in the country over the past three decades. One of the last nuclear plants to come on-line is not very far from here - the Shearon-Harris Plant built by CP&L.

Nuclear has a great story. There are virtually no airborne emissions from a nuclear plant. That white smoke you see coming off Shearon-Harris is just water vapor from its cooling tower. No different from what is produced by a tea kettle.

However, over the years nuclear has had its problems, too. Three Mile Island, Chernobyl are etched into history. There are no nuclear plants under construction today in the U.S., and there are no firm plans for one on the drawing board.

Then there is natural gas - a clean-burning alternative to coal. The plants can be built quickly. And the efficiency of these plants has increased greatly over the past decade. So popular is natural gas right now that more than 90 percent of new power plants are being built to burn natural gas. In the energy industry, we call it “The Fuel of Choice.” And it was one of the reasons why Duke Power bought Houston-based PanEnergy back in 1996. They were a mid-stream gas pipeline company, and we knew that gas would be important to any electric company going forward.

We were right in that decision. But I believe we cannot continue to rely solely on natural gas to fuel our future energy needs. We’re seeing a preview of that this winter when cold weather has made natural gas expensive for both power plants and home heating. I don’t know if your parents heat with natural gas - but I doubt they’ve been very happy with their heating bills this winter.

The answer to our energy question - and this may not surprise you - is a call for balance as we strive to meet our future energy needs. And despite painting a bleak picture a few minutes ago, balance is really not out of the question.

One of the last coal-fired plants finished in this country was designed and built in South Carolina by a sister company of Duke Power. It’s an efficient plant, with much lower emissions than older coal-fired power plants. It can be done.

In the Far East, nuclear power plants are still being built. They are safer, more reliable that any power plants being built today. You don’t hear much about that, but there is a thriving nuclear power industry continuing in this world. Spain, Sweden and Taiwan all depend heavily on nuclear. In France, more than 75 percent of that country’s electricity is produced by nuclear.

We must recognize the importance of nuclear and all fuel sources in establishing a balanced energy strategy for our country. There is no reason why there can’t be a rebirth of nuclear in this country.

And, in fact, it has to happen if you and your children expect to have a standard of living at least as good as what we enjoy today.

The key for us is this: accept the demands that we face in meeting our growing demand for energy. We must accept that no form of energy is perfect. To ignore planning for our energy demand is the worst thing we can do. Energy isn’t like TV sets, or toys or other products we buy everyday. We can’t have it made in China and shipped over here. We need to take responsibility.

There is talk of building power plants on the border of California and Mexico and shipping the power to the U.S. I’m sure some plants will get built there, but that’s not a long-term solution to our energy question.

We must realize that the demands for growth our high-tech economy is placing on our electric system is the same type of demand that air conditioners and TV sets did a generation ago.

We must balance our demand for electricity with the resources to meet that demand. And we must recognize that with each option there are drawbacks. There are environmental impacts and economic consequences that have to be dealt with. One fact I like to point out is that the emissions from our coal-fired power plants are actually 40 percent less than they were a decade ago. And we have steps underway to reduce those emissions even further.

Our plants are running more, but emitting less. That’s a source of pride for us at Duke Power. But there is no way to cut out all emissions from these plants. The only way that’s possible is to just turn them off.

What about conservation? Duke Power continues to work with customers on conservation. One of our most successful conservation programs is actually a market-based solution. We offer an hourly pricing program to our large customers that lets them see what the price of power will be tomorrow on an hour-by-hour basis. Electricity is actually a very volatile commodity - the price at 5 p.m. on a hot summer day is a lot more expensive than 2 a.m. when everyone is asleep.

We let our customers make market-based choices about when to use and not use electricity.

We need to keep our eye on the horizon - especially where technology is concerned. We need to be mindful of distributed generation - fuel cells and microturbines that can be sold directly to the small customer. These may revolutionize the energy industry by reducing our dependence on large power plants. But they’re not a panacea.

But all these factors - conservation, new technology and a shifting balance - must reckon with the same reality: growth in demand will continue. Each year, Duke Power adds about 60,000 new customers, or new households each year. If you consider that each household has 3-plus people, that’s like adding a city of 180,000 each year. Some of you may come from towns smaller than 180,000, so that may give you a sense of what I’m talking about. Duke Power has to plan to meet the needs of those new customers every year.

I’m not smart enough to stand here today and give you a complete plan to solve our energy needs for the future. I can’t stand here and say that coal, or nuclear or natural gas will be the silver bullet that solves all of our energy problems. I can’t do it—because I know that there is no single solution to our energy needs.

But there is an underlying principle that I know will serve us well: balance - it will be a mix of natural gas, coal and nuclear that meets our energy needs in the future. It will be a mix of conservation and generation. It will be a mix of new technology and market-driven innovations that will carry us forward. And it will balance energy needs, environmental concerns and economic realities.

We can’t depend on another state or another country to produce the energy we need in North Carolina. We need to take control of our energy future.

I hope some of you will join me in the energy industry in the future - maybe some of you will join me at Duke Power. But that theme of balance should be with you in whatever field you select. Whether it is balance in your family life or balance in your stock portfolio - we live in a world where today’s answers don’t always address tomorrow’s questions.

If we put too much stock in one cure, one procedure, one method of producing electricity - we run the risk of having one change throw us off balance. And no matter what industry you are in, when the lights go out - everything stops.

Balance sounds like such an easy answer, a simple answer - but it is one we can easily forget. My hope is that my industry seeks to restore balance in meeting the energy needs of this country. I also hope that balance finds its way to your life, too.

Thank you.