Minnesota Energy Systems, A Primer Developed for the Clean Energy Resource Teams

The Minnesota Project

University of Minnesota’s Regional Sustainable Development Partnerships.

March 2004

Communities and Local Energy Minnesota Energy Systems, A Primer Communities and Local Energy ENERGY SYSTEMS IN MINNESOTA

This booklet provides CERTS members with a general overview of the systems that deliver the energy that runs our economy, keeps us warm, and provides necessities and conveniences of modern life.

The energy system is divided into four end use sectors: residential, commercial, industrial and transportation. End use of energy refers to the point where energy is consumed to provide some benefit or service, such as light or heat. Basic energy resources are referred to a primary energy sources. Primary energy sources include resources like Figure 1. Energy End Use in coal, petroleum, natural gas, nuclear fuels, flowing water, Minnesota, 1999 wind, and solar radiation. Minnesota’s total energy use in the four end use sectors was approximately 1,700 trillion Btus in 2000.

Industry and transportation are the largest end use sectors in the state. They each use somewhat more than one-third of the energy consumed in Minnesota. The remaining one- forth to one-third of energy consumption is divided between the residential and commercial sectors-with the residential sector taking a little larger share.

Source: Minnesota Department of Commerce Fossil fuels Figure 2. Inputs Used to Produce dominate the market for primary energy sources in Energy Consumed in Minnesota, 1999 Minnesota. Petroleum, coal and natural gas supply about 88% of the energy used in Minnesota. 7% Renewable energy sources such as wind power, hydropower, wood, and ethanol constitute about five percent of the energy supply. Nuclear power supplies the remaining seven percent.

Electric power is an intermediate energy sector. Electric power producers convert primary energy sources into higher value electricity. The electricity is then used to provide a service, such as lighting or powering motors, in one of the end use sectors. Source: Minnesota Department of Commerce Electric power production uses about 1/3 of the primary energy supplies consumed in Minnesota.

In all energy applications, there are inherent inefficiencies. A portion of energy is lost during conversion from one form of energy to another. About two-thirds of the energy value found in the fuels used to generate electricity is dissipated through losses in the power plants and transmission system.

Minnesota’s economy and population are growing, resulting in growing consumption of energy as well. Minnesota’s largest petroleum refinery has recently expanded, two new ethanol plants are in advanced stages of development and the consumption of electricity is growing at about 2% per year. The Minnesota Project 2 Minnesota Energy Systems, A Primer Communities and Local Energy The Electric Power Sector

Access to electrical power is largely taken for granted in the United States. We switch lights on and plug machines and they work. A large and complex system ensures that the electricity is available reliably, efficiently and at the correct voltage.

THE GRID

Users and suppliers of electricity are integrated across the “grid”. The grid is the network of power Figure 3. The Electric Power Grid plants, high voltage transmission lines, lower voltage distribution lines and substations that interconnect the generating plants and power lines of different voltage. The grid is usually described as having three components: generation, transmission and distribution. • Generation: The power plants that convert primary energy forms (coal, natural gas, falling water, blowing wind etc) to high value electricity. • Transmission: High voltage power lines are used to “transport” electricity from bulk generating sources to areas where it is consumed. Source: How Stuff Works • Distribution: Low voltage power lines (approximately 7,200 volts) carries electric power short distances from high voltage power lines to electric power customers.

GENERATION

Utility generating capacity is divided into three categories: base load, intermediate and peaking. Because electricity cannot effectively be stored, power plant output must match the collective demand, measured in megawatts (MW), of all the utility customers at Figure 4. Daily Load Curves for Excel Energy, 1999 any given time. Power plants are brought online or dispatched to meet the load as demand rises. Power plants are dispatched based on operating cost.

Base load power plants are the system’s workhorses. They run at or near full capacity “24-7”. They are predominantly coal fired and nuclear power plants. Base load plants have high capital costs, but low operating Source: Minnesota Department of Commerce costs. They produce most of the energy, measured in megawatt hours (MWh). The Minnesota Project 3 Minnesota Energy Systems, A Primer Communities and Local Energy

Peaking power plants are fired up only to meet the highest levels of demand. These power plants are used only a few hours per day or even a few days per year. Peaking plants have lower capital costs, but typically high operating costs. These plants can be fired up and brought up to full capacity very quickly. These generators are usually spun by gas turbines or diesel engines.

Intermediate or load following, power plants, as the name implies, fall in between base load and peaking plants. They ramp up or ramp down production to follow the daily patterns of demand. These plants may burn coal, fuel oil or natural gas. Intermediate plants are less efficient than base load but still operate at a moderate cost.

Distributed generation is usually developed as part of a system to serve a local energy load. The excess electricity is sold back to an electric utility. Combined heat and power (CHP) systems make use of the waste heat associated with electrical generating technologies such as steam turbines or gas turbines. The waste heat is then used for commercial or industrial purposes. CHP facilities can utilize 80% or more of the energy value in the fuel consumed, whereas a central station power plant will, at best, utilize 40% of the energy in the fuel. Distributed generation also includes small renewable energy installations, like a community based wind power project or “roof-top” solar installations.

Intermittent power sources are those that cannot be dispatched, and include wind and photovoltaic cells. These technologies operate when the wind blows or the sun shines. They are often considered base load generation, because output is fully utilized when the resource is available. Considerable discussion has taken place about what impacts intermittent resources have on system reliability and costs for backing up the capacity with dispatchable resources. However, experience shows that wind and solar can readily contribute 10% or more of the energy to the system without significant cost or reliability concerns.

PRIMARY ENERGY IMPUTS INTO ELECTRICAL GENERATION

Table 1. Fuels Used to Supply Electricity to MN, 1998 Coal dominates the fuel mix used to produce electricity consumed in Minnesota, Fuel % Fuel % Of see Table 1. Three nuclear reactors also Coal 76.4% Nuclear 16.5% provide a significant portion of the Hydro 2.4% RDF/MSW 1.8% electricity consumed in Minnesota. Until Natural 1.4% Wood .08% now utilities used a relatively small amount Gas of natural gas for energy production. This is Petroleum 0.3% Wind/Solar 0.2% beginning to change. Excel Energy is Source: Minnesota Department of Commerce converting some generating capacity in the Twin Cities Metro Area from coal to natural gas. Also a number of new gas fired power plant are under development. Wind power production is also expanding rapidly in the state. State policy calls for 10% of electric energy sold in the state to be generated by renewable resources by 2015. Wind will likely capture a large portion of this market.

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The Transportation Sector

Transportation consumes a little more than one-third of the primary Figure 5. Crude Oil energy used in the state. Cars and trucks dominate the transportation Distillation sector, but it also includes airplanes, trains, barges, and off-road equipment such as farm and construction equipment. Petroleum (gasoline and diesel fuel) is the dominant energy source for the transportation sector. These fuels are energy dense and easy to handle, which are desirable characteristics for mobile energy sources. The Minnesota transportation sector used approximately 3,600 million gallons of petroleum products in 1999 -over 700 gallons per capita. Usage continues to trend upwards as more people are driving larger vehicle further.

Transportation fuels are delivered to the consumer through a global infrastructure. Oil is produced around the world Figure 6. Crude Oil Cracking and shipped to refineries, which process oil into a variety of products. Source: Flint Hills Resources Processing is accomplished through distillation and cracking. Distillation separates hydrocarbons through boiling crude oil at varying temperatures. Refiners also break large hydrocarbon molecules into smaller molecules. Heat is applied to the larger hydrocarbons, often in the presence of a catalyst. Two refineries are located in Minnesota, Flint Hills Resources (Pinebend) and Marathon Ashland Petroleum Company. They are both located in southeastern suburbs of the Twin Cities. These refineries produce for a regional market including Minnesota. Source: Flint Hills Resources Additional petroleum products sold into the Minnesota market are refined in Superior Wisconsin; Mandan, North Dakota; and Whiting, Indiana.

Petroleum is shipped over long distances by pipeline. Pipelines deliver crude oil to the refineries. Pipelines also deliver the refined products to over a dozen points in or near Minnesota. These points, or terminals, have truck-loading facilities. Terminals also incorporate storage facilities called tank farms. The fuel is then shipped by truck to gas stations and other private fueling stations.

By law, nearly all gasoline sold in the state is blended with 10% ethanol. Fourteen Minnesota ethanol plants produce around 300 million gallons of fuel per year. More plants are in various planning and development states as well. Ethanol is trucked to pipeline terminals where it is blended with gasoline, prior to shipment to retail outlets. There is also growing interest in similar policies to create markets for biodiesel, which is refined vegetable oil.

The Minnesota Project 5 Minnesota Energy Systems, A Primer Communities and Local Energy Non-Electric Energy Use in the Residential, Commercial and Industrial Sectors

One-third of primary energy consumed in Minnesota is consumed to produce electricity production, and other third is consumed for transportation and the remaining third of primary energy is consumed in homes, businesses and factories – largely for heat. The defined categories of end use sectors are:

• The Residential sector consists of living quarters for private households. Uses of primary energy include: space heating, water heating, and cooking. • The Commercial sector broadly consists of service-providing facilities and equipment. It includes everything from the local gas station to large office buildings. It also includes institutional living quarters, such as nursing homes. Uses of primary energy include: space heating, cooling, water heating, and refrigeration. • The Industrial sector consists of all facilities and equipment used for producing, processing, or assembling goods. It also includes energy used to generate electricity predominantly used on site.

ENERGY SOURCES USED

Table 2. Minnesota Non-Electric Primary Energy Use by Sector, 2000

Industrial Commercial Residential All Sectors Use* % Use* % Use* % Use* % Coal 40.4 12% 0.1 0% 0 0% 41 7% Natural Gas 105 32% 96 89% 131.4 76% 332 55% Petroleum** 133.4 41% 10.2 10% 33 19% 177 29% Wood and Waste** 47 14% 1 1% 8.2 5% 56 9% Total 325.8 100% 107.3 100% 172.6 100% 606 100%

*Use is in trillion Btus, ** Includes wood and refuse derived fuel. ** Includes petroleum converted into non-energy products such as asphalt paving. Source: United Stated Department of Energy

As can be seen in Table 2, natural gas is the dominant source of Figure 7. Natural Gas Pipelines non-electrical energy in the Minnesota. It is especially dominant in the residential and commercial sectors. Petroleum represents the second largest source of primary energy used in these sectors. Solid fuels—coal, wood and wastes, plays the most significant role in the industrial sector. Solid fuels present considerable fuel and ash handling headaches for small energy users making them much less desirable.

FUEL DELIVERY INFRASTRUCTURE

Access to cost effective transportation infrastructure is critical for an energy resource to be competitive. Natural gas requires direct Source: Enron Corporation connection to pipelines. Where natural gas is available nearly all The Minnesota Project 6 Minnesota Energy Systems, A Primer Communities and Local Energy

residential and commercial energy users opt for it. However, because gas pipelines are not available in rural areas and many small communities, approximately one-fifth of Minnesota households rely on propane and fuel oil, which can be trucked much more economically.

Coal, which is a very bulky fuel, is expensive to truck in Figure 8. Rail Lines in Minnesota large quantities or over long distance. Thus access to rail lines is a major factor impacting the ability to use coal. As the mileage and density of railroads has declined, the potential areas where coal is a competitive fuel have declined as well. In addition, cost competitive natural gas, plus higher environmental compliance costs associated with coal have discouraged the use of coal. Wood and waste hold a share of the industrial energy supply comparable to coals. This stems from the large forest products industry in the state. Processing wastes, such as bark and saw dust represent a low cost fuel to that industry. Also Minnesota has enacted public policies that aggressively promote the incineration of and energy recovery from municipal solid waste over land filling. Source: Minnesota Department of Transportation

Regulation of Energy Industries

Regulations are government (federal, state and local) restrictions on private activities in order to protect the public health, safety and welfare. Regulations may include environmental standards, public safety standards (such as building codes), licensing of certain professions, and economic regulations.

ENVIRONMENTAL REGULATIONS

Energy Facilities are subject to a variety of federal and state environmental regulations. The federal Clean Air Act and the Federal Clean Water Act impose specific limits and regulations on the types of emissions that a power plant or other energy facility may emit. The Minnesota Pollution Control Agency and the U.S. Environmental Protection Agency have the primary responsibility for issuing and enforcing various emissions permits. The Minnesota Environmental Quality Board oversees siting of major energy facility including pipelines of 6” diameter or greater, transmission lines of 100 kV, power plants of 50 MW or greater capacity and wind power development of 5 MW of greater.

LAND USE REGULATION

Energy facilities may also be subject to local land use regulations imposed by counties, cities and townships. The general concept underlying land use regulation is to separate uses that are not compatible. Additional protections of public health, safety and general welfare can be enacted through local ordinances. State law pre-empts local government rules for facilities subject to EQB siting regulations.

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ECONOMIC REGULATION

Natural gas and electric power utilities are subject to economic regulations. These industries are natural monopolies, because it would be cost prohibitive for competing companies to build duplicate distribution infrastructure. In the early part of the 20th Century, federal and state laws were passed to create regulatory structures that would prevent private energy companies from abusing monopoly powers. These regulatory structures provided considerable oversight of a range of business decisions, including decisions about services provided and prices charged. In return utilities were provided exclusive rights to specific geographic service territories and allowed to make stable and predictable rates of return on investments. The Federal Energy Regulatory Commission and the Minnesota Public Utilities Commission oversee the utility industries.

Economic oversight varies in intensity depending upon the type of utility involved. Investor owned utilities (IOUs) are subject to the greatest level of scrutiny, because of the conflict between the profit motive of shareholders and the public interest. Municipal utilities are not price regulated by the state or federal government, as they are accountable to locally elected officials and not beholden to profit seeking shareholders. The Rural Electric Cooperatives are also not subject to regulation of prices. These cooperatives are not-for-profit organizations, and each customer is a member. The cooperative governance structures make the organization accountable to the member owners.

In the late 1970s, many regulated industries were completely or partially deregulated. For example the federal government no longer sets routes and prices for interstate trucking or commercial aviation. The result has been increased competition, wider services and reduced prices. The natural gas and electricity markets have also been increasingly freed of economic regulation. Natural gas prices were set at the wellhead, until the oil crises of the 1970s created an imbalance between price and demand. The federal government continues to ensure that interstate transport of natural gas is open and accessible, and the Minnesota PUC continues to ensure that gas utilities do not abuse monopoly powers. The federal government has also deregulated wholesale transactions in the electric power market. As a result an industry of independent power producers has emerged. Some parts of the country, where the price of electricity is high, have also experimented with retail deregulation. Individual customers are allowed to select one of several competing power suppliers. This is much like the long distance telephone market. However, the distribution of electric power remains a regulated monopoly.

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Sources for the Figures and Tables

Figure 1. Minnesota Department of Commerce, Minnesota Energy Planning Report 2001 available on line at: www.state.mn.us/cgi-bin/portal/mn/jsp/home.do?agency=Commerce Figure 2. Minnesota Department of Commerce, Minnesota Energy Planning Report 2001 available on line at: www.state.mn.us/cgi-bin/portal/mn/jsp/home.do?agency=Commerce Figure 3. howstuffworks.com, used with permission. Figure 4. Minnesota Department of Commerce, Minnesota Energy Planning Report 2001 available on line at: www.state.mn.us/cgi-bin/portal/mn/jsp/home.do?agency=Commerce Figure 5. Flint Hills Resources, www.fhr.com/refining101, used with permission. Figure 6. Flint Hills Resources, www.fhr.com/refining101, used with permission. Figure 7. Enron Corporation Figure 8. Minnesota Department of Transportation

Table 1. Minnesota Department of Commerce, Energy Policy & Conservation Report 2000. Available on line at: http://www.state.mn.us/cgi-bin/portal/mn/jsp/home.do?agency=Commerce Table 2. US Department of Energy, Energy Information Administration

This project was made possible by a grant from the US Department of Energy and the Minnesota Department of Commerce.

The Minnesota Project thanks Flint Hills Resources and howstuffworks.com for permission to use copy righted graphics.

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