Propane Market Outlook:
Identifying Propane Market Opportunities and
Assessing PERC Driven Demand Potential
Presented by
Mike Sloan and Bruce Henning
msloan@icfi.com
bhenning@icfi.com
April 9, 2010
Objective: Provide market context for the Stage-Gate
process and Upcoming Strategic Planning Discussion
 Identify market opportunities
•
•
•
Market share
Number of units/customers in marketplace
Unit gallon sales
 Determine potential PERC impact in key market segments
•
•
Assess share of market needed to reach identified potential.
Translate changes in market share to new unit sales and customer captures.
 Calculate potential PERC impact on propane gallon sales.
•
•
Impacts utilize PERC data and market information where available.
Where not available, ICF utilized reasonable assumptions subject to PERC
review.
 Inform the PERC Stage-Gate process and strategic planning efforts.
2
ICF Baseline Forecast of Propane Demand 2015
Odorized Propane Demand
(Million Gallons)
Demand
in 2015
Resellers
6%
Change
Since
2009
Residential
4,580
-6.6%
Commercial
1,901
2.1%
Resellers
624
22.8%
Industrial
604
10.9%
Agriculture
Internal
Combustion
1,009
-22.2%
876
11.7%
Total
9,594
-3.1%
Commercial
20%
Industrial
6%
Agriculture
11%
Residential
48%
Internal Combustion
9%
3
Near-Term Odorized Propane
Consumption with PERC Driven Demand
12,000
PERC
Driven
Demand
Million Gallons
10,000
8,000
6,000
4,000
2,000
-
Near-Term Odorized Propane Consumption Forecast
PERC Driven Demand
4
The PERC Driven Demand Wedge is the sum of the Market Wedges
from all of the PERC Programs in all of the Propane Market Segments.
Other Markets
Agricultural
Industrial
Gallons
Commercial
Engine Fuel
Residential
Demand Absent
PERC Programs
2010
2011
2012
5
2013
2014
2015
What do these Market Wedges Represent?
 Market wedges represent assessment of the size of potential propane market
opportunities.
•
Market wedge segmentation based on market opportunities identified by PERC
staff and Advisory Committees.
 Amount of each wedge ultimately achieved will depend on:
•
•
•
The level of investment by PERC and the propane industry
Market conditions
Regulatory environment.
 Next steps in market wedge analysis
•
•
Extension to other market segments, programs, and new technologies
Risk-adjusted cost-benefit analysis
 The PERC strategic planning process will determine how resources are
allocated to target each of these wedges.
6
Residential Sector Market Challenges and
Opportunities
7
Baseline Residential Demand
Residential Propane Demand Forecast by End-Use
6,000
5,000
Million Gallons
4,000
3,000
2,000
1,000
0
Primary Space Heating
Supplementary Space Heating
Water Heating
Cooking/Other Applications
Manufactured Housing
Seasonal Housing
Source: ICF Forecast
8
Residential New Construction Market
Historical Quarterly Housing Starts and Forecasts
1.2
Fannie Mae
Annualized Housing Starts (Millions)
Freddie Mac
1.1
1.0
Federal Reserve
Mortgage Bankers Assoc.
National Assoc. of Realtors
0.9
0.8
0.7
0.6
0.5
0.4
2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2
9
Homeowner Improvements
Billions of $
Forecast of Remodeling Activity
(Homeowner Improvement Expenditures)
$160.0
$140.0
$120.0
(Billion $)
$100.0
$80.0
$60.0
$40.0
$20.0
$0.0
Harvard Joint Center on
Housing Forecast
10
ICF Projection
Net Year over Year Changes in Propane Heated Households
150,000
Site Built Housing
100,000
Number of Households
Manufactured Housing
50,000
-
(50,000)
(100,000)
(150,000)
2004
2005
2006
2007
2008
2009
11
2010
2011
2012
2013
2014
2015
Residential Sector Wedges
Fill the House
Replace Electric
Water Heaters
Reduce
Losses
Gallons
Fuel Oil
Conversions
Increase New
Home Share
Baseline
Baseline Residential
Residential
Demand
Demand
2010
2011
2012
2013
2014
12
2015
Increase Share of New Homes
Gallons
Increase New
Home Share
Baseline
Residential
Demand
2010
2011
2012
2013
2014
2015
13
Market Opportunity
 Increase market share to
position propane for rebound
in housing market.
 Propane in 6.5% of new
households
 Share increasing since 2002,
despite market downturn.
Program Target:
 Additional 1.0% to 1.5% of
new homes
 5,000 to 15,000 new homes
per year.
 55 million gallons per year of
incremental propane sales by
2015.
Market Opportunity
 8.4 million existing fuel oil
households consume the
equivalent of 7.5 billion
gallons of propane per year.
 Residential oil heating in
decline due to
environmental issues and
market conditions.
Displace Oil Equipment
Gallons
Fuel Oil
Conversions
Baseline
BaselineResidential
Residential Demand
Demand
2010
2011
2012
2013
2014
2015
14
Program Target:
 Increase capture rate by 2%
to 3% per year.
 9,000 households per year.
 40 million gallons per year
of incremental propane
sales by 2015.
Reduce Conversion Losses
Market Opportunity
 More than 75,000 propane
heated homes switch to other
fuels each year.
Reduce Losses
•
•
Electric/geothermal heat pumps.
Natural gas.
Gallons
Gallons
 South hit hardest.
 Decisions to convert often
occur when homes are sold
to a new owner.
Program Target:
Baseline
Residential
Demand
2010
2011
2012
2013
2014
15
2015
 Reduce switching by 5% to
6% of total opportunities per
year.
 7,500 households per year.
 20 million gallons per year of
incremental propane sales by
2015.
Replace Electric Water Heaters
Gallons
Replace Electric
Water Heaters
Baseline
Residential
Demand
2010
2011
2012
2013
2014
16
2015
Market Opportunity
 4.4 million propane
customers use electric
water heaters.
 Total potential: 500 million
gallons per year.
Program Target:
 Capture additional 2% of
electric water heater
replacements
 7,400 water heaters per
year.
 8 million gallons per year
of incremental propane
sales by 2015.
Market Opportunity
 8 million existing propane
customers could add a
propane furnace, water
heater, or cooktop/range
 Total potential of 1.5 billion
gallons
Fill The House
Gallons
Fill The House
Baseline
Residential
Demand
2010
2011
2012
2013
2014
2015
17
Program Target:
 Increase share of existing
equipment replacements
by 1.0% to 1.5% per year.
 14,000 new applications
annually.
 10 million gallons per year
of incremental propane
sales by 2015.
Potential PERC Driven Demand
Residential
Incremental
Share of
Potential
Market
1.1%
2.5%
5.5%
2.1%
1.3%
13,700
9,100
7,500
7,400
14,300
52,000
750
750
450
170
120
Gallons
Residential Sector
New Home Construction
Fuel Oil Conversions to Propane
Reduce Propane Residential Losses
Replace Electric Water Heaters in Propane Homes
Fill the Propane House
Sum of Residential Sector Programs
Average
Number of Incremental
Units per
Propane
Incremental
Year (2011- Sales per Gallons Per Year
2015)
Unit
in 2011
2010
2011
2012
2013
18
2014
2015
9,470,000
12,590,000
6,380,000
2,570,000
3,430,000
34,440,000
Incremental
Gallons/Year in
2015
55,070,000
40,060,000
20,080,000
7,690,000
10,140,000
133,040,000
Commercial Sector Challenges and
Opportunities
 Commercial sector includes restaurants, schools, houses of worship,
motels, hotels, retail stores, service businesses, malls, assembly and
recreational halls, police and fire stations, warehouses, storage
facilities, and hospitals.
19
Commercial Odorized Propane Demand by Region
2,500
Propane Demand (Million Gallons
2,000
Pacific
Mountain
1,500
West South Central
East South Central
South Atlantic
1,000
West North Central
East North Central
Middle Atlantic
500
New England
0
20
Commercial Sector Challenges and
Opportunities
 Second largest propane business segment.
•
•
20% of existing odorized propane market.
10% of the total commercial floor space is served by propane for one or more application.
 Significant opportunities to increase propane applications in buildings
currently using propane.
 Commercial fuel oil demand: 3.6 billion gallons of propane equivalence.
•
•
Commercial fuel oil market is expected to decline steadily over time due to cost and
environmental issues.
Large existing propane customer base (cooking & water heating) using fuel oil for heat.
 Diverse market less reliant on space heating.
•
Wide variety of different customer types, resulting in smaller discrete markets that are harder
to evaluate and target effectively.
 Growth in propane demand from future commercial customers likely to be
offset by:
•
•
Price induced conservation.
Fuel switching from propane to electricity (and other fuels) by existing customers.
21
Commercial Sector Opportunities
Gallons
New Commercial Programs
Program Target:
 Additional 1.0% to
1.5% of market
opportunities.
 50 million gallons per
year of incremental
propane sales by 2015.
Baseline
Commercial
Demand
2010
2011
2012
2013
Market Opportunities:
 New construction
 Fuel oil conversions
 Additional propane
applications in existing
buildings
2014
22
2015
Internal Combustion Engine Sector
Challenges and Opportunities
23
Internal Combustion Sector Propane Demand
1000
900
On-Road
Vehicles
Propane Demand (Million Gallons)
800
700
600
Off-Road
Engines
500
400
300
200
Forklift
100
0
Source: ICF Forecast
24
Propane Engine Fuel Challenges
 New technologies threaten propane in some markets.
•
Electricity/hybrids in forklift market.
 Propane first cost issues remain significant.
•
Propane engines face an economy of scale issue.
 In many markets, propane advantages are driven by government policy and
legislation, which is uncertain.
 In diesel markets, propane must overcome positive perceptions of diesel
engine reliability and power characteristics.
 Propane faces cultural and infrastructure issues in new markets.
•
•
Changes in business operating practices needed to integrate propane equipment.
Changes in marketing and service practices needed to sell propane equipment.
25
Market Trends Driving Propane Engine
Fuel Opportunities
 Environmental and energy security concerns provide opportunities for
propane on- and off-road equipment.
•
•
Energy and tax legislation may provide significant competitive advantage to propane
applications
Current focus on “green” energy favors propane.
 Diesel fuel costs are expected to increase more rapidly than gasoline and
propane prices.
•
International supply/demand balance likely to drive diesel fuel prices up more than propane or
gasoline prices.
 Diesel engine costs have increased dramatically due to new NOx emissions
requirements.
•
•
•
Up to $10,000 per vehicle for new heavy duty vehicles.
From $4,000 to $6,000 per vehicle for new medium duty vehicles.
$0.15 per gallon of diesel consumed for urea used in new NOx control systems.
26
Engine Fuel Sector Wedges
Outdoor
Equipment
Gallons
Commercial
Mowers
On-Road
Vehicles
Baseline
Engine Fuel
Demand
2010
2011
2012
2013
27
2014
2015
On-Road Vehicles
On-Road Vehicles
Gallons
 OEM programs
 1.0% – 1.5% of Ford
F250/350s and Ford
E-Series van market.
 3% of GM 6.0 liter
market.
 School bus programs: 7%
of Class A and Class C
markets.
Baseline
Engine Fuel
Demand
2010
2011
2012
2013
Market Opportunity:
 On-road fleet vehicle
market.
 PERC supported
vehicles in or near
market.
Program Targets:
2014
28
2015
 110 million gallons per
year by 2015.
Commercial Mowers
Market Opportunity:
 150,000 - 200,000
commercial mowers, and
200,000 -250,000 consumer
mowers sold annually
 Significant propane
opportunity due to
environmental concerns and
propane operating cost
advantages
 Propane units from major
manufacturers are currently
in the market
Gallons
Commercial
Mowers
Baseline
Engine Fuel
Demand
2010
2011
2012
2013
2014
29
2015
Program Target:
 10% market share by 2015
 24,500 units per year.
 160 million gallons per year
by 2015.
Other Outdoor Lawn and Garden
Equipment
Outdoor
Equipment
Gallons
 Outdoor equipment
manufacturers (trimmers,
blowers, mowers, etc.)
 Propane units are currently
available in the market.
 Propane units are cleaner
and quieter than
alternatives.
Program Target:
 2 million units per year and
16 % of the market by
2015.
Baseline
Engine Fuel
Demand
2010
2011
2012
2013
Market Opportunity:
•
•
2014
30
2015
2/3 consumer
1/3 commercial
 80 million gallons per year
of incremental propane
sales by 2015.
Potential PERC Driven Demand
Engine Fuels Sector
Average
Number of
Units per
Year (20112015)
Incremental
Share of
Potential
Market
10,900
9,800
1,200
24,500
1,341,600
1.7%
6.8%
9.8%
12.1%
3,500
2,030
1,220
20
Gallons
Internal Combusion Engine Sector
On-Road Vehicle Programs
Ford and GM OEM Vehicle Programs
School Bus Programs
Commercial Mower Programs
Outdoor Equipment Programs
Sum of Internal Combustion Engine Sector Programs
Incremental
Propane
Sales per
Unit
2010
2011
2012
2013
31
2014
2015
Incremental
Gallons Per Year
in 2011
29,730,000
26,600,100
3,130,000
29,460,000
18,910,000
78,110,000
Incremental
Gallons/Year in
2015
109,710,000
96,200,100
13,510,000
158,560,000
81,880,000
350,150,000
Other PERC Programs to be Evaluated
 Residential Markets
•
New technologies under development
 Commercial Markets
•
New technologies under development
• Combined heat and power
• Commercial heat pumps
• Other new technologies
•
Targeted application programs to be developed.
 Engine Fuel Markets
•
•
•
•
California off-road propane/diesel injection
Forklift market support and development
New on-road engines and vehicle platforms
After-market conversions
 Agricultural Markets
•
•
New technologies under development
Targeted application programs.
32
Summary of Potential PERC Driven
Market and Demand Impact Estimates (2011-2015)
Incremental
Share of
Potential
Market
Residential Sector
New Home Construction
Fuel Oil Conversions to Propane
Reduce Propane Residential Losses
Replace Electric Water Heaters in Propane Homes
Fill the Propane House
Sum of Residential Sector Programs
Average
Number of
Units per
Year (20112015)
1.1%
2.5%
5.5%
2.1%
1.3%
Commercial Sector Programs
Internal Combusion Engine Sector
On-Road Vehicle Programs
1.7%
Ford and GM OEM Vehicle Programs
6.8%
School Bus Programs
9.8%
Commercial Mower Programs
12.1%
Outdoor Equipment Programs
Sum of Internal Combustion Engine Sector Programs
Incremental
Gallons/Year in
2011
Incremental
Gallons/Year in
2015
13,700
9,100
7,500
7,400
14,300
52,000
750
750
450
170
120
9,470,000
12,590,000
6,380,000
2,570,000
3,430,000
34,440,000
55,070,000
40,060,000
20,080,000
7,690,000
10,140,000
133,040,000
3,600
1,900
7,000,000
50,000,000
3,500
2,030
1,220
20
29,730,000
26,600,100
3,130,000
29,460,000
18,910,000
78,110,000
109,710,000
96,200,100
13,510,000
158,560,000
81,880,000
350,150,000
10,900
9,800
1,200
24,500
1,341,600
Sum of Residential, Commercial and ICE Sector Programs
Incremental
Propane
Sales per
Unit
119,580,000
531,880,000
Values represent the size of the market opportunity, before consideration of propane industry funding allocations for 2011-2015.
33
Final Thoughts

The propane market wedges could add more than 500 million gallons per
year of propane demand by 2015 if opportunities are fully realized.

The propane market wedges represent:
•
•
•
A look at propane markets identifying the most important opportunities where PERC and
propane industry programs may have an impact.
A framework for defining market/business opportunities.
A first step (but nowhere near the last step) in the Stage-Gate process.

The wedges have not yet been evaluated for risk or cost effectiveness.

The wedges are not (yet) PERC targets or recommendations, but do
provide an assessment of the size of the potential market opportunities.
34
Propane Market Outlook:
Identifying Propane Market Opportunities and
Assessing PERC Driven Demand Potential
Presented by
Mike Sloan and Bruce Henning
msloan@icfi.com
bhenning@icfi.com
April 9, 2010