The Energy Landscape: What a Difference a Year Makes!

In the fall 2015, falling oil prices were a recent phenomenon and many believed prices would rebound. Today, oil prices have fallen as low as $30/barrel this heating season and some suggest further decline and/or low prices will continue for some time. In the recent past, high oil prices put retail oil dealers on the defensive, seeing many oil consumers switch to natural gas to save money. Today, low oil prices have put retail oil dealers on the offensive, with a renewed focus on pricing, in addition to efficiency, environmental benefits, and service, which were traditional selling points for natural gas.

Tim Lyons, partner at ScottMadden, joined industry leaders as a presenter at the Northeast Gas Association Sales & Marketing Conference. This presentation highlights the changing energy landscape and reviews how retail oil dealers, plumbers, and oil customers have responded to these events.

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Sussex Economic Advisors, LLC (Sussex) and affiliates have relied upon certain public and other sources of information consistent with standard consulting practices. Sussex makes no warranties or guarantees regarding the accuracy of any estimates, projections or analyses contained herein. Those reviewing the information contained herein waive any claim against Sussex, its partners and employees. Sussex shall not be liable to any party reviewing this information.

    • Northeast Gas Association 2016 Sales & Marketing Conference
    • The Energy Landscape: What a Difference a Year Makes!
      March 24, 2016


  • Energy Landscape Tim Lyons
    What has changed since last year?

Oil Heat Consumers Bill Wietecha
How opinions changed in past year

Initiatives Tim Lyons

    • What a Difference a Year Makes!

Falling oil prices were a recent phenomenon
$100 per barrel in Jul 2014
$45 per barrel in Jan 2015
Most consumers believed that low oil prices would not continue
65% believed the price of oil will go up in the future
EIA was projecting prices would go up (but not to levels seen in 2014)
$75 per barrel in 2016
Northeast gas utilities continued to hold a strong price advantage over heating oil

    • Sales and Marketing Conference: THEN
    • Source: EIA
    • Source: Bloomberg; Sussex analysis.

Continued decline in oil prices
Below $30 per barrel
Morgan Stanley:
In an oversupplied market, there is no intrinsic value for crude oil. $20-to-$25 oil price scenarios are possible simply due to currency (dollar appreciation)
Oil companies
Cost cutting, layoffs
Falling U.S. rig counts
EIAs short-term outlook
2016 $34 per barrel
2017 $40 per barrel

    • Sales and Marketing Conference: NOW
    • Source: Bloomberg; Sussex analysis.
    • Source: Bloomberg; Sussex analysis.

Continued Decline in Retail Oil Prices

    • Source: U.S. Energy Information Administration (EIA), Sussex Analysis

Impact on Other Industries

    • Plunging oil prices are set to hit the electric car industry hard, but Tesla vehicles won’t be the worst affected. Tesla CEO Elon Musk

    • Declining Oil Prices
    • Oil Industry Response

Lower fuel bills
94% as primary or secondary reason
38% better long-term price expectation
Improved energy efficiency
14% as primary reason
44% as secondary reason
Environmentally friendly/ cleaner burning fuel
25% as secondary reason
Similar response for reduce dependence on foreign oil

    • Oil Industry Survey: Whats Important to Oil Consumers?1
    • 1. Goldberg, Rich, Inside the mind of todays home heating oil customer, Indoor Comfort Marketing, September 2015.
    • Importance of Bioheat
      For those who are thinking of converting, this is a very big deal.

Survey (Contd): Whats Driving Them To Convert?1

    • 36% likely to convert
      7% extremely likely
      29% somewhat likely
      New homeowners
      Almost 20% say they are extremely likely to convert
      Price outlook driving interest
      41% think their fuel costs will be higher than other options in five years
      Only 6% think oil will be less than other fuels
      Recent price drop not fully appreciated
      it seems like consumers will need another year or two of lower oil prices to really rethink their calculations. If that happens, the playing field will certainly shift
      Not strong positive about oil
      Of those that want to stay with oil, only 18% cite that they are happy with oil
  • 1. Goldberg, Rich, Inside the mind of todays home heating oil customer, Indoor Comfort Marketing, September 2015.

Upfront conversion costs
40% believe it will cost less than $5,000 to convert
Long payback
19% think its less than two years
46% think its two to five years, with little tolerance for a longer period
Environmental concerns not a major factor
Only 1% identify environmental issues with natural gas or electricity as a reason to stay with oil
Nor are safety concerns
Only 3% say they are staying with oil principally because of safety concerns with other fuels

    • Survey (Contd): Whats Holding Them Back?1
    • Bioheat is a potential game changer for those thinking about converting.
      However, less than 12% of oil customers know what Bioheat is.
    • 1. Goldberg, Rich, Inside the mind of todays home heating oil customer, Indoor Comfort Marketing, September 2015.

Oil Industry Messaging Price

    • Heating oil is not more expensive than natural gas
      Statistics show that, depending on where you live, heating oil was less expensive than natural gas throughout most of the last 22 years
      Heating oil is more efficient than gas
      On average, heating oil burns about 16% more efficiently than gas
      Conversions are an expensive gamble
      Consumer Energy Council of America (CECA) recently stated, it’s financially unwise for consumers to convert from oil to gas heat”
      Customer anecdotes
      Some dealers have heard from customers who regret switching to natural gas
      Heating oil systems have a longer life
      The average life expectancy of an oil heat appliance is 30 or more years if they are properly maintained. The average life expectancy of a natural gas furnace is only 11-14 years

Is Cleaner than ever
Oil heat is 95% cleaner than it was in the 1970s
Is Green
Heating oil burns so cleanly that its emissions aren’t regulated by the Federal Clean Air Act
Burns as Cleanly as Natural Gas
National Oilheat Research Alliance study concluded that Bioheat fuel blends using ultra- low-sulfur heating oil can match or exceed the performance of natural gas in terms of reducing GHG emissions
Is Renewable
Oil heat is moving toward new, environmentally friendly, plant-based biofuel blends

    • Oil Industry Messaging (Contd) Environmentally Friendly

Oil Industry Messaging (Contd) From the Oil Dealers

    • Price drop has been welcomed
      Having heating oil remain competitive is essential to the survival of the industry. (Falcon Oil in Blakely, PA)
      Prices are now low and have stabilized
      This is the lowest oil prices have been in 10 years and we expect them to go even lower
      Oil prices have stabilized and will stay here for a long time. If anything, they will go down even further
      We have programs where you can get a fixed low price and if it goes lower, you get the advantage
      Oil is as clean burning as natural gas and gas prices are going up. All the new technology is in oil and the government supports it
      It is a really exciting time for oil heating customers.Prices are low and the oil heating industry is transitioning to a superior fuel product. By adding biodiesel, a renewable, carbon-neutral fuel to low-sulfur heating oil, heating oil retailers are actually delivering a better product at a significantly lower price. What could be better?

    • Oil Industry Response
    • Consumer Opinion

Opinion Survey: Whats Changed Since Last Year?

    • Phone interviews in December 2015 and January 2016 with Northeast homeowners
      Use oil as primary heating fuel
      Located in or near major cities and suburbs; excluded rural locations
      Spoke to person that makes decisions about heating fuels
      Conducted by research specialists with extensive energy experience
      Authored by Bill Wietecha

Current View of Oil Heat Consumers

    • Price decrease is now more apparent
      In the news; from their neighbors; from the dealers
      Of course, the warm winter has helped
      Less urgency to convert
      Less pain in staying with oil
      Still issues with oil
      Many dealers
      Confusing price options
      However, more willingness to deal with it as price is rightor at least better

Findings: What Is Liked Best about Oil Heat?

    • Note: Multiple responses accepted.

Findings (Contd): What Is Liked Least about Oil Heat?

    • Note: Multiple responses accepted.

Price drop is more apparent
41% like oil for current price
55% see value for the cost
More neutral responses among dislikes
29% have no real dislikes
However, still issues being an oil heat customer
Pricing packages are confusing
Those who locked in prices months ago stand to pay more for oil

    • Key Takeaways
    • “You are taking a chance if you lock in to that price before the season comes around. You never know what you are going to get with oil. If I had my choice, I would rather go with gas or propane.
      Its very frustrating because you plan it, and years past its always gone up, and now it doesnt, and now you go, Is this really worth doing?
      I still have to call five dealers to get the best price. Everyone has a story.
      Oil prices are so unpredictable.

Findings (Contd): Oil Price Today vs. Last Year?

    • Q: How has your oil price changed since last winter?

Oil price decrease now readily apparent
Warm temperatures have helped lower their bill

    • Todays Oil Prices (Contd): Key Takeaways
    • I am thrilled that this winter has been so mild. Oil prices are a lot less than the past few years.
      It sure helps that the price of oil is down considerably.

Findings (Contd): Oil Price in Next 3 to 5 Years vs. Today?

    • Q: In the next 3 to 5 years, do you think the price of oil will: go up, stay the same, or go down?

Continued concern about future oil prices

    • Future Oil Prices (Contd): Key Takeaways
    • If I could only believe that these prices will hold
      Oil is like this. The price is low when there is a mild winter. It will be $3 a gallon when we have a cold winter.
      Oil prices are so inconsistent.
      My dealer told me that oil is going to stay [low]. And if that is true, I will stick with oil and not switch to gas.

Findings (Contd): What Drives Heating Fuel Decisions?

    • Q: Here are some reasons that homeowners choose a heating fuel. Please score each of these on a scale of 1 to 10, with 1 being not important to your choice of heating fuel and 10 begin extremely important to your choice of heating fuel.

Findings (Contd): Motivations for Switching

    • Note: Multiple responses accepted.
    • Q: What would make you switch to a new heating fuel?

Findings (Contd): Influence of This Years Price in Switch to Gas?

    • Q: How has the price change since last winter influenced your likelihood of switching to natural gas?

Declining oil prices have reduced interest in converting to natural gas
Many are in a wait-and-see mode
Heating system
Homeowners are now looking for deals to switch vs. standard offering

    • Switching to Gas (Contd): Key Takeaways
    • I have been considering natural gas, but with oil prices what they are; they would have to offer a sweet deal on a new furnace.
      I was ready to make the switch to gasbut I would have been at break even because of all the efficiencies in three years. I am holding off.
      I was planning on switching to natural gas last winter, but with oil prices so low, I am going to wait.
      They brought the gas line to my street two years ago, but it is just too much to make the switch. If oil was $2.80 a gallon, its a different story, but right now, its [low].
      If my furnace died, I would switch to gas. But oil prices are such that it just isnt worth spending all that money.
      Im in a wait and see mode.

Findings (Contd): Consumers Take Long-Term View on Prices

    • Q: If I told you that over the past five years, the average price of natural gas has been between 25-35% less than oil, but right now it is only 15% less than oil, would that influence your decision to switch to natural gas?

Findings (Contd): Likelihood of Switching at Various Savings

    • Percentage reflects those scoring 7 or higher. Ratings do not factor in conversion costs.
    • Q: What would you score your likelihood of switching to natural gas if the price of natural gas were [10%, 30%, 50%] less than the price of oil, with 1 being no interest and 10 begin extremely interested?

    • Research Findings
    • Marketing Initiatives

    • Marketing Initiatives

Modify Contribution Policy Avista (Washington)

    • Purpose
      Opportunity to expand natural gas distribution system; promote economic development; address barriers to conversion
      Increase construction cost allowance through change in line extension method
      Residential heating customer: increases allowance to $3,789 from $1,920
      New method: Perpetual Net Present Value (PNPV) method
      PNPV = New Customer Margin/Rate of Return
      Apply excess construction cost allowance as a rebate for customer equipment
      Applies only to those customers converting to natural gas from another fuel source
      E.g., $3,789 in allowance less $2,345 in average construction cost = $1,444 in excess allowance

Connecticut Natural Gas: East Hampton expansion
11-mile, $5.7 million expansion
Agreement with town includes:
Convert nine schools and municipal buildings
Five-year, $0.5 million tax break
Pay for repaving costs
Southern Connecticut Natural Gas: Deep River expansion
4-mile expansion into a new community
Municipal buildings
Large businesses.
Yankee Gas: Wilton expansion
3.5-mile expansion
Downtown business district, municipal buildings

    • Partnerships with Communities, Large Businesses CT
    • PURA Order:
      it is reasonable to approve the LDCs purchase of the capacity contracts, so that they can compete with a lower home heating oil price by accessing the lower cost Marcellus Shale gas.
      Public Utilities Regulatory Authority (PURA), Docket No. 13-06-02RE02, at 11.

Vermont Gas and NG Advantage partnership
Developed Gas Island in Middlebury, VT
Isolated network in advance of gas expansion project
Serves Cabot Cheese, Middlebury College
Plans to connect to renewable natural gas plant on nearby farm
NG Advantage
Serves International Papers mill in Ticonderoga, NY
14-20 trucks per day

    • Partnerships with Large Businesses (Contd)

Target Area Build-Out (TAB) program
Designed to build out distribution system incrementally into target areas
Replace upfront customer contribution (CIAC) with monthly surcharge for a 10-year period
Applied to all customers within the TAB area
Residential heating surcharge is $95 per year, or 7% of annual bill
Approved by Maine Public Utilities Commission in December 2015
First expansion into Saco
Planned construction in Spring 2016

    • Deploy Creative Rate Mechanisms Unitil (Maine)

Gas Industry Messaging Savings


Messaging (Contd) New Programs


Messaging (Contd) Initiatives


Three Takeaways

    • Find the Opportunities
    • Develop Creative Approaches
    • Reconsider Position in the Marketplace
    • New offerings
      New markets
      New business partnerships
    • Commercial vs. residential
      On-system vs. off-system
      Equipment replacement vs. conversion
    • Market segmentation
      Offerings and value proposition
      Key competitors

Tim Lyons
ScottMadden, Inc.
(formerly Sussex Economic Advisors)

Timothy S. Lyons, Partner, ScottMadden, Inc. (formerly Sussex Economic Advisors, LLC)
Mr. Lyons has 30 years of experience in the energy industry and has held a number of senior positions at several natural gas utilities and energy consulting firms. His utility experience includes managing marketing and sales, rates and regulatory affairs, and customer service departments. Mr. Lyons consulting experience includes rate and regulatory support, marketing and competitive intelligence for utilities and energy companies. Mr. Lyons assignments include: LDC distribution expansion, natural gas marketing and sales programs; customer service programs; new rate structures and designs; retail access programs; and creative gas purchase strategies. He has testified before public utilities commissions in Connecticut, Maine, Massachusetts, Rhode Island and Vermont. Mr. Lyons is published in American Gas Association, Public Utilities Fortnightly and Power and Gas Marketing and has presented before a number of industry groups. Prior to joining Sussex, he served as Vice President of Sales and Marketing for Vermont Gas, Vice President of Marketing and Regulatory Affairs for Providence Gas (now part of National Grid), Director of Rates at Boston Gas (also part of National Grid), and Project Director at Quantec Management Consulting. Mr. Lyons holds a B.A. in Mathematics and Economics from St. Anselm College, an M.A. in Economics from the Pennsylvania State University, and an M.B.A. with a concentration in Finance from Babson College.

Bill Wietecha, Marketing Specialist
Bill is a marketing specialist with over 35 years of experience as an account director at major, national advertising agencies until 1994, when he opened his own marketing firm, The BRW Group. Bill has worked with numerous Fortune 100 brands including Sears, Starbucks, McDonalds, General Mills, The Hartford, IBM and scores of others across numerous industries. In the past 10 years, Bill has focused on the energy industry. Working with a number of Northeast gas utilities on strategic, research based projects. Bill has been at the forefront of consumer attitudes towards home heating fuels. Bills team has performed phone interviews with over one hundred thousand New England homeowners and have uncovered key strategic opportunities that have helped guide critical decisions about gas expansion. Bills unique approach has helped his clients get below the surface to understand not only the functional aspects of homeowner decision making, but the emotions behind the decision that play an integral role in maximizing conversion strategies.


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