propane market outlook appendix final market... · 2009 propane market outlook assessment of key...

2009 Propane Market OutlookAssessment of Key Market Trends, Threats, and Opportunities Facing the Propane Industry Through 2020

P r e s e n T e d B y :

REgIonAL MARkEt outLook AppEnDIx

Prepared for the Propane Education and Research Council by ICF International, Inc. 9300 Lee Highway Fairfax, Virginia 22031 Tel (703) 218-2758 www.icfi.com Principal Authors

Mr. Michael Sloan [email protected] Mr. Richard Meyer [email protected]

Table of Contents Appendix A: Regional Residential Propane Markets .................... 1

1. Northeast ..............................................................................................................2

1.1 New England .................................................................................................2 1.2 Middle Atlantic ...............................................................................................6

2 Midwest Region.....................................................................................................9 2.1 West North Central ......................................................................................10 2.2 East North Central .......................................................................................13

3. South Region.......................................................................................................16 3.1 South Atlantic ..............................................................................................17 3.2 East South Central ......................................................................................20 3.3 West South Central .....................................................................................23

4. West Region........................................................................................................26 4.1 Mountain......................................................................................................27 4.2 Pacific ..........................................................................................................30

Appendix A-iii

List of Figures Figure 1: Northeast Regional Propane Household Data from the American Housing Survey ....................... 2 Figure 2: New England Home Heating Fuel Market Share of New Residential Construction Starts............. 3 Figure 3: New England Forecast of Propane Housing Market ....................................................................... 4 Figure 4: New England Forecast of Odorized Propane Demand.................................................................... 5 Figure 5: Middle Atlantic Home Heating Fuel Market Share of New Residential Construction Starts ......... 6 Figure 6: Middle Atlantic Forecast of Propane Housing Market.................................................................... 7 Figure 7: Middle Atlantic Forecast of Odorized Propane Demand ................................................................ 8 Figure 8: Midwest Regional Propane Household Data from the American Housing Survey......................... 9 Figure 9: West North Central Home Heating Fuel Market Share of New Residential Construction Starts . 10 Figure 10: West North Central Forecast of Propane Households................................................................. 11 Figure 11: West North Central Forecast of Odorized Propane Demand ...................................................... 12 Figure 12: East North Central Home Heating Fuel Market Share of New Residential Construction Starts. 13 Figure 13: East North Central Forecast of Propane Households .................................................................. 14 Figure 14: East North Central Forecast of Odorized Propane Demand........................................................ 15 Figure 15: South Regional Propane Household Data from the American Housing Survey ......................... 16 Figure 16: South Atlantic Home Heating Fuel Market Share of New Residential Construction Starts ....... 17 Figure 17: South Atlantic Regional Forecast of Propane Households.......................................................... 18 Figure 18: South Atlantic Regional Forecast of Odorized Propane Demand ............................................... 19 Figure 19: East South Central Home Heating Fuel Market Share of New Residential Construction Starts. 20 Figure 20: East South Central Regional Forecast of Propane Households................................................... 21 Figure 21: East South Central Regional Forecast of Odorized Propane Demand ........................................ 22 Figure 22: West South Central Home Heating Fuel Market Share of New Residential Construction Starts 23 Figure 23: West South Central Forecast of Propane Households................................................................. 24 Figure 24: West South Central Forecast of Odorized Propane Demand ...................................................... 25 Figure 25: West Regional Propane Household Data from American Housing Survey ................................ 26 Figure 26: Mountain Home Heating Fuel Market Share of New Residential Construction Starts ............... 27 Figure 27: Mountain Forecast of Propane Housing...................................................................................... 28 Figure 28: Mountain Forecast of Odorized Propane Demand ...................................................................... 29 Figure 29: Pacific Home Heating Fuel Market Share of New Residential Construction Starts ................... 30 Figure 30: Pacific Forecast of Propane Households..................................................................................... 31 Figure 31: Pacific Forecast of Odorized Propane Demand .......................................................................... 32

Appendix A-1

Appendix A: Regional Residential Propane Markets

The following charts and discussion represent data on regional propane markets. This includes historical data and ICF’s near-term forecast. The historical data presented includes the Survey of New Residential Construction and the American Housing Survey, data sets provided by the U.S. Department of Commerce and Census Bureau. The Survey of Construction reports on new home construction statistics. Data is collected from a sample of building permit data and supplemented by data of canvassed areas that do not require permits. New home construction characteristics reported include home price, lot size, region of construction, number of bedrooms and bathrooms, and primary home heating fuel installed. ICF’s principal data analysis derived the national market shares of home heating fuels in new home construction, as well as the characteristics of homes using propane for space heating. This discussion of the national results of the data analysis can be found in Section 4.1.5 in the main report. The following subsections summarize the results of the regional analysis of home heating fuel market share. The regional charts show distinct characteristics, differing from each other and the national market average. Readers may find the regional data useful and more applicable to their local service territories. The biannual American Housing Survey (AHS) provides data on the households using propane and other home heating fuels. The AHS is a longitudinal study, where the same residences are surveyed over time, and the market data available from the AHS is available on a regional basis (Total U.S., Midwest, Northeast, South, and West). Data from the recent 2007 release is incorporated into this report.

Census RegionsRegion Division State Region Division StateNortheast New England Connecticut Midwest East North Central Illinois

Maine IndianaMassachusetts MichiganNew Hampshire OhioRhode Island WisconsinVermont West North Central Iowa

Middle Atlantic New Jersey KansasNew York MinnesotaPennsylvania Missouri

South South Atlantic Delaware NebraskaDistrict of Columbia North DakotaFlorida South DakotaGeorgia West Moutain ArizonaMaryland ColoradoNorth Carolina IdahoSouth Carolina MontanaVirginia NevadaWest Virginia New Mexico

East South Central Alabama UtahKentucky WyomingMississippi Pacific AlaskaTennessee California

West South Central Arkansas HawaiiLouisiana OregonOklahoma WashingtonTexas

Appendix A-2

1. Northeast (New England, Middle Atlantic) Recent data from the American Housing Survey indicates considerable growth in propane households in the Northeastern region. In 2005, the AHS reported 1,821,000 homes using propane for one or more end-uses. This has grown to 2,109,000 in 2007, a 15.8 percent increase. This is due to growth in the number of households using propane for such major applications as space heating, water heating, and cooking1. Since 2003, the number of households using propane for primary space heating has grown significantly, up from 619,000 to 816,000 in 2007. During this period, the number of households using propane for water heating increased from 716,000 to 841,000 and the number of households using propane for cooking increased from 1,410,000 to 1,503,000.

Figure 1: Northeast Regional Propane Household Data from American Housing Survey

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1999 2001 2003 2005 2007

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Primary Space Heating Water Heating Cooking Fuel

1.1 New England Connecticut, Maine, Massachusetts, Rhode Island, Vermont New data from the Survey of New Construction indicates that piped natural gas continues to be the number one heating fuel used in new home construction in the New England area. Through 2007, natural gas has edged out heating oil market share in the

1 National and regional American Housing Survey data is not published for other end-use propane applications such as fireplaces and dryers. Data is available for supplemental space heating through 2005.

Appendix A-3

New England region, though heating oil retains a significant share. Both fuel oil and natural gas, however, have seen a downward trend since 2000. Natural gas has dropped from a 52.4 percent market share in 2000 to 42.1 percent in 2007. Heating oil has dropped from 39.6 percent to 32.4 percent in 2007. Propane, in the meantime, has made considerable advances in this region since 2002, jumping from a 5.7 percent market share to 22.5 percent in 2007, the biggest jump occurring between 2004 and 2005.

Figure 2: New England Home Heating Fuel Market Share of New Residential

Construction Starts

0%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004 2005 2006 2007

Mar

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Electricity Natural Gas PropaneHeating Oil No Heat / Other

This significant gain in propane market share is likely attributable to two factors. The first is the strained fuel oil supply issues within the region, prompting existing and potential fuel oil customers to switch to the next viable alternative, propane. The second is the increasing price disparity between fuel oil and propane prices. Historically, fuel oil has retained a competitive advantage in fuel price per unit of heat output. But due to the rapidly evolving national energy market, this competitive gap has closed and opened new markets for propane.

Appendix A-4

Figure 3: New England Forecast of Propane Housing Market

Net Change in Households Using Propane for Primary Space Heating

(2,000)(1,000)

-1,0002,0003,0004,0005,0006,0007,0008,0009,000

2006 2007 2008 2009 2010 2011 2012

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Site Built Housing Manufactured Housing

In 2007 there were 265,000 homes using propane for primary space heating in the New England states2. This includes approximately 249,000 site-built homes and 16,000 manufactured homes. ICF is forecasting about 1 percent growth in the site-built housing sector over the 2007 to 2012 period. Some of this growth will be offset by declines in the manufactured housing sector, which is projected to decline about 3 percent per year.

2 Propane households based on data made available by the American Community Survey and American Housing Survey.

Appendix A-5

Figure 4: New England Forecast of Odorized Propane Demand

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Primary Space Heating Supplementary Space HeatingWater Heating Cooking/Other ApplicationsSeasonal Housing Manufactured Housing

Based on ICF’s database and near-term forecast of odorized propane demand, residential propane consumption in the New England states was 345 million gallons in 2007, up from 2006 due to a return to colder-than-normal weather. In 2008, demand decreased by 4 percent to 332 million gallons due to the short-term surge in propane prices in the first half of the year and the slowdown in the propane housing market. Prices are forecasted to continue to depress consumption thereafter. ICF calculates slow growth in total residential consumption from 2009 to 2012 as prices remain low and increased propane market share in construction spurs new propane load. (See discussion on prices and uncertainty in main report section 5.1.2).

Threats and Opportunities The fuel oil conversion market for space and water heating equipment shows the greatest opportunity for growth in the Northeast. In addition, propane has shown momentum as a preferred heating option within new household construction, while fuel oil’s position in this market has declined. Propane’s competitiveness in these markets is further bolstered by the shrinking price disparity between fuel oil and propane (see main report section 2.1). In the colder areas of the Northeast, electricity does not perform well due to a combination of high electricity prices and equipment efficiency issues at lower temperatures, thus removing one of propane’s prime competitors. As a result, propane is well positioned in New England, with the potential for significant growth.

Appendix A-6

1.2 Middle Atlantic Pennsylvania, New Jersey, New York Survey of New Construction data shows that since 2004 the new market for fuel oil households has taken a significant downward trend. The heating oil market share dropped from 18.6 percent in 2004 to 5.5 percent in 2007. Electricity and natural gas have made upward strides in this period, with electricity jumping from a 3.5 percent share in 2004 to an 11.6 percent share in 2007. Similarly, natural gas rose from 63.2 percent to 74.1 percent during the same period. Propane has performed consistently over this period, the exception being in 2004 when its share jumped to 14.3 percent, up from an average of 8.1 percent from 2000-2003. In 2007, propane retains a 7.3 percent market share of new home construction.

Figure 5: Middle Atlantic Home Heating Fuel Market Share of New Residential Construction Starts

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

2000 2001 2002 2003 2004 2005 2006 2007

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Natural Gas

0%

5%

10%

15%

20%

25%

30%

2000 2001 2002 2003 2004 2005 2006 2007

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Electricity Propane Heating Oil No Heat / Other

Appendix A-7

Figure 6: Middle Atlantic Forecast of Propane Housing Market


(5,000)

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20,000

2006 2007 2008 2009 2010 2011 2012

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In 2007 the total number of site-built homes using propane for space heating was 459,000 homes. The manufactured housing market is considerably smaller, totaling approximately 30,000 households in 2007. Looking forward, steady growth is projected in this region over the forecast period. ICF calculates the total number of propane homes (site-built and manufactured housing combined) to increase about 1.5 percent per year from 2007 through 2012, largely due to growth in the propane site-built housing market. But this growth is dampened by the decline in the manufactured housing market, which, although smaller in magnitude, is projected to be declining at over 4 percent per year.

Appendix A-8

Figure 7: Middle Atlantic Forecast of Odorized Propane Demand

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Residential propane consumption modestly decreased from 2007 to 2008, shrinking by less than a percent. From 2008 into 2009, demand is expected to grow 2.7 percent due to drops in fuel prices from their peak in July 2008. Assuming prices remain at more historical levels, moderate growth is forecasted after 2009, increasing about 2 percent per year. But another major increase in propane prices, as seen during the run-up in 2008, could significantly reduce this demand growth. Threats and Opportunities The threats and opportunities within the Middle Atlantic area are similar to those of New England. A key difference, though, is the larger competitive threat from electricity. The more moderate climate allows electric-based heating applications to compete more readily with propane. As more users switch away from oil as their preferred heating fuel, electricity is better positioned (compared to the upper Northeast) to capture market share and convert these users to electric applications. Propane nonetheless enjoys a price advantage in this region compared to electricity, and the decreasing price disparity between propane and fuel oil positions propane well to compete for conversion opportunities.

Appendix A-9

2 Midwest Region (West North Central, East North Central) The American Housing Survey reports the number of households using propane increased from 2,485,000 in 2005 to 2,558,000 in 2007. Part of this increase is the result of growth in households using propane for primary space heating, which rose from 2,091,000 in 2003 to 2,135,000 in 2005 to 2,146,000 in 2007. The number of homes using propane for water heating and cooking decreased during this time as well. Propane cooking households dropped from 1,141,000 in 2005 to 1,120,000 in 2007. Propane water heating households dropped from 1,314,000 in 2005 to 1,265,000 in 2007. This data suggests that many homes are increasingly using propane for only one application.

Figure 8: Midwest Regional Propane Household Data from American Housing Survey

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1999 2001 2003 2005 2007

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Appendix A-10

2.1 West North Central Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota

Figure 9: West North Central Home Heating Fuel Market Share of New Residential Construction Starts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007

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Natural GasElectricity

0%

2%

4%

6%

8%

10%

2000 2001 2002 2003 2004 2005 2006 2007

Mar

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PropaneNo Heat / OtherHeating Oil

Natural gas retains the highest market share of new home construction in this region. At 62.5 percent, this share is down from 82.8 percent in 2000, a steady decline that began in 2003. Some of this loss in market share is likely due to the rise of new home construction in areas off the natural gas main, presenting opportunities for electricity to

Appendix A-11

capture these natural gas inaccessible homes. Electricity showed a sharp jump in market share after 2004, rising from 10.7 percent in 2004 to 31.2 percent in 2007. Propane has shown some volatility in market share, alternating between 5.0 and 10.1 percent since 2000. A four year trend since 2003 shows a total decline of about 2.5 percent, but the average market share over this period is consistent with the longer term 2000-2007 trend of 7.4 percent.

Figure 10: West North Central Forecast of Propane Households


(10,000)

(5,000)

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15,000

2006 2007 2008 2009 2010 2011 2012

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Based on the national housing slowdown and the resulting decrease in new site-built propane homes, ICF anticipates a decline in the total number of propane households, less than one percent per year, during the forecast period. This decline is compounded by a shrinking manufactured housing market that is calculated to decline at a rate of 5 percent per year from 2008 to 2012.

Appendix A-12

Figure 11: West North Central Forecast of Odorized Propane Demand

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Odorized propane demand grew from 2007 to 2008 due largely to colder-than-normal weather in the region, which offset the record propane prices seen during the first half of 2008. Consumption during 2009 is forecasted to shrink 9 percent. This is a result of, in part, declines in the propane housing stock and lessened demand due to normal weather. As the economy begins to rebound, and assuming prices remain at more historical levels, a turnaround in demand is expected in 2010 and will continue, albeit moderately, through 2012, rising a per year average of about one percent. Threats and Opportunities Data from the American Housing Survey points to a large number of households using propane for only one application. For example, in a given home, propane may be used for cooking, but fuel oil is used for space heating. Since the same data indicates a dwindling number of homes using fuel oil for their heating applications, it is likely many of these homes may be converting only one application when its time for a replacement. Therefore, the opportunity exists for marketers to target these single-application households with incentives to switch to propane when replacing old heating units, especially those fueled by heating oil. These incentives must convey the benefits of propane – its comfort and reliability – over its electric counterparts.

Appendix A-13

2.2 East North Central Illinois, Indiana Michigan, Ohio, Wisconsin

Figure 12: East North Central Home Heating Fuel Market Share of New Residential Construction Starts

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007

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Natural Gas

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12%

14%

16%

18%

20%

2000 2001 2002 2003 2004 2005 2006 2007

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In the East North Central region, the home heating fuel market within new home construction is dominated by natural gas, which retains a market share of 71.0 percent. There has been a decline since 2000, though, dropping nearly 12 percent from the peak of 82.6 percent in 2004. This drop is correlated with a simultaneous rise in both electricity and propane market shares. Propane market share is up from 9.7 percent in

Appendix A-14

2004 to 15.3 percent in 2007. Electricity has similar gains, from 6.6 percent in 2004 to 11.5 percent in 2007.

Figure 13: East North Central Forecast of Propane Households `


(15,000)

(10,000)

(5,000)

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2006 2007 2008 2009 2010 2011 2012

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ICF expects the manufactured housing market to decline at a rate of 4.5 percent per year from 2007 to 2012. Meanwhile, the propane site-built housing market is expected to grow, albeit at slower rates than previous years; data indicates less than one percent per year growth during this time period. The impact of these two housing forecasts largely offset each other, resulting in relatively flat growth in the overall housing market.

Appendix A-15

Figure 14: East North Central Forecast of Odorized Propane Demand

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Propane consumption increased during 2008 compared to 2007 due to colder-than-normal weather in the region, offsetting declines due to high fuel prices. Assuming a normal weather scenario in 2009, demand drops 8 percent, driven by the decline in the economy and the lagged impact of higher prices on use per customer. Looking forward to 2010, lower fuel prices increases the consumption 3 percent from 2009, though there is considerable uncertainty due to volatility in fuel prices. In 2011 and 2012, as the housing market rebounds and new propane construction spurs new fuel load, we are likely to see modest growth in consumption. Threats and Opportunities Natural gas market share of new construction in the East North Central states has been decreasing while electricity’s has simultaneously been increasing. This indicates a growing non-natural gas market in which propane can compete. But electric-based heating applications are successfully competing in this area due in part to relatively lower electricity prices in the region, as indicated by electricity’s rising market share. Nonetheless, propane can do well in this region, especially in areas where harsher winter climates render electricity a less viable option.

Appendix A-16

3. South Region (South Atlantic, East South Central, West South Central)

Data from the American Housing Survey shows a significant loss in the number of households using propane for primary space heating. This corresponds to an increase in the number of homes using electricity and natural gas for spacing heating, indicating an alarming trend for the propane industry in the region. The number of homes using propane for water heating and cooking also declined, implying an overall shrinking propane market in the South.

Figure 15: South Regional Propane Household Data from American Housing

Survey

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1999 2001 2003 2005 2007

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Appendix A-17

3.1 South Atlantic Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia

Figure 16: South Atlantic Home Heating Fuel Market Share of New Residential Construction Starts

10%

20%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004 2005 2006 2007

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Electricity Natural Gas

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2000 2001 2002 2003 2004 2005 2006 2007

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Propane No Heat / Other Heating Oil

Electricity has seen increases in the new home construction market over the last few years. Rising from 50.0 percent in 2000 to 63.2 percent in 2007, much of this gain comes from share lost by natural gas, which has dropped from 44.7 to 31.0 percent over

Appendix A-18

the same period. This is due in large part to the use of efficient electric heat pumps in this region (and other parts of the South). Heat pumps retain their superior efficiencies in the cool winter weather of this region. However, sharp temperature drops correspond to decreased efficiencies in heat pumps. In the Northeast, for example, the harsh winters and significantly colder conditions render the efficiency benefits of electric heat pumps moot. Propane has retained a relatively constant market share over the analysis period. From 2000 to 2007, propane has averaged a 4.9 percent share in home heating fuel of new home construction. Both 2006 and 2007 were higher than average, with a market share of 5.4 and 5.6 percent respectively.

Figure 17: South Atlantic Regional Forecast of Propane Households


(20,000)

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2006 2007 2008 2009 2010 2011 2012

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ICF projects that growth in the total number of propane homes will stay relatively flat through the forecast period, exhibiting only very modest gains. The slowdown in new residential construction results in an annual growth rate of one percent a year in propane site-built homes. These new homes are offset by the shrinking manufactured housing market, which is declining by over 5 percent per year, thereby decreasing the total number of propane homes in the region.

Appendix A-19

Figure 18: South Atlantic Regional Forecast of Odorized Propane Demand

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Odorized propane demand modestly increased 0.4 percent between 2007 and 2008. Higher prices in the first half of 2008 were offset by cooler temperatures and a significant drop in fuel costs in the last half of the year. Assuming that the retreating fuel prices stay at their more historical levels, ICF calculates demand to rebound in 2009 through 2011, growing at a rate of about 2 percent per year. Growth in primary space heating load will be offset by shrinkage in manufactured housing fuel consumption as that market continues to decline. Threats and Opportunities Electric heat pumps remain a significant threat to the propane space and water heating markets in the South Atlantic states. Electricity continues to dominate the new home heating market, and has acquired much of the market share of new homes that natural gas has not captured. Propane has maintained a consistent share of the new home construction market, even making some gains in recent years. The key challenge will be to maintain this share amidst challenging market conditions, including increasing fuel prices that disproportionately affect propane over electricity.

Appendix A-20

3.2 East South Central Kentucky, Tennessee, Alabama, Mississippi

Figure 19: East South Central Home Heating Fuel Market Share of New Residential Construction Starts

10%

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70%

2000 2001 2002 2003 2004 2005 2006 2007

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2000 2001 2002 2003 2004 2005 2006 2007

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Propane Heating Oil No Heat / Other

Similar to the situation in the South Atlantic region, new construction data for the East South Central region has shown a divergence in market shares between natural gas and

Appendix A-21

electricity since the early 2000s. Starting in 2003, electricity overcame natural gas as the primary heating fuel in new home construction, and this trend has continued through 2007. From 2000 to 2007, the electricity market share increased from 46.2 percent to 66.9 percent. Over the same period, natural gas decreased in share from 50.3 to 30.3, nearly the same percentage that electricity increased. Propane meanwhile retains a relatively small but significant slice of the heating fuel market in this region, holding a 2.6 percent market share in 2007.

Figure 20: East South Central Regional Forecast of Propane Households


(10,000)

(9,000)

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(7,000)

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(5,000)

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Much of the decline of propane heated housing in the South has occurred in the East South Central area. ICF forecasts a decline of 1.6 percent per year in the total number of propane homes due to a declining replacement rate below that of retirements. A large part of this is the decline in the manufactured housing market, which represents about one quarter of the propane housing market in the region. The total number of propane manufactured homes is forecasted to decline about 5 percent per year from 2008 to 2012. Site-built housing is forecasted to decline about 0.7 percent per year during the same period.

Appendix A-22

Figure 21: East South Central Regional Forecast of Odorized Propane Demand

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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ICF anticipates that the East South Central region will continue to experience significant declines in consumption resulting from the decline in new propane home construction due to the national housing slowdown. From 2007 to 2008, odorized propane consumption rose due to colder-than-normal weather, but this trend is expected to reverse as the effect of higher fuel prices and a shrinking propane housing market negatively impacts consumption. Demand is projected to decline from 2008 to 2009 by about 7 percent. This decline reverses in 2010 as the lingering effects of high prices in 2008 are offset by lower, more historical prices moving forward. Demand is expected to stay relatively flat over the 2010 to 2012 period. Threats and Opportunities One of the largest challenges in the East South Central states will be maintaining existing propane market share amidst a number of unfavorable factors. The combination of low electricity prices and warmer weather presents an environment ripe for electric-based applications. Propane starts and placements of manufactured homes using propane are trending downwards, a pattern that is expected to continue. Meanwhile, existing fuel oil customers are switching to natural gas and electricity. The opportunity exists for residential propane marketers to target these conversions, perhaps by providing incentives to switch to propane. This may stem the tide of declines and help to maintain market share. Nonetheless, the marketplace is expected to remain difficult for propane.

Appendix A-23

3.3 West South Central Arkansas, Louisiana, Oklahoma, Texas

Figure 22: West South Central Home Heating Fuel Market Share of New Residential Construction Starts

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2000 2001 2002 2003 2004 2005 2006 2007

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2000 2001 2002 2003 2004 2005 2006 2007

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Propane Heating Oil No Heat / Other

New home construction in the West South Central area displays similar market characteristics as the East South Central, with natural gas and electricity retaining the

Appendix A-24

most market share in new home construction space heating, and propane holding the rest. The West South Central states show higher levels of new construction of natural gas homes versus electricity. Conversely, in the neighboring East South Central states, the two fuels have diverged in terms of market share; electricity has made gains of roughly the same magnitude that natural gas has lost. In the case of the West South Central area, both fuels remain competitive: electricity holds an average 45.9 percent market share and natural gas a 52.2 percent share over the 2000 to 2007 time period. Meanwhile, propane over the same timeframe retains a 1.8 percent average share.

Figure 23: West South Central Forecast of Propane Households


(10,000)

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The West South Central region continues to experience declines in the propane housing market. Manufactured housing has dropped considerably due to a small replacement rate overshadowed by a large retirement rate. Looking forward, ICF forecasts a 5 percent decline per year in propane manufactured homes. While the manufactured housing market shows declines, the downturn in the propane site-built housing market is substantially less. This market, which represents 80 percent of the total residential propane market in the area, is expected to decline very slightly, less than 1 percent per year. The resulting overall decline in propane housing in this area is about 1 percent per year.

Appendix A-25

Figure 24: West South Central Forecast of Odorized Propane Demand

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Odorized propane consumption declined 0.8 percent from 2007 to 2008 due to the rise in fuel prices, offset in part by cold weather during 2008. The declining housing market and high fuel prices will continue to negatively impact consumption going forward. ICF forecasts a drop in demand in 2009 of 10 percent, due in part to a return to more normal weather and warmer-than-normal weather for the first three months. Total demand is expected to increase less than a percent overall from 2009 to 2012, staying relatively flat over 2010 to 2012. Threats and Opportunities Similar to the East South Central region, the propane industry’s largest challenge in these states is maintaining propane market share. The propane housing market’s downward trend is expected to continue, and home heating equipment installed in new home construction is largely dominated by natural gas and electricity. Data from the American Housing Survey shows regional declines in the number of households using fuel oil, suggesting that users are retiring old equipment. Marketers looking to offset the significant declines in gallon sales may be able to target these homeowners seeking to replace old heating oil equipment, though it is currently unclear how extensive this opportunity might be.

Appendix A-26

4. West Region (Mountain and Pacific) Data from the American Housing Survey show a slight decline in the total number of homes using propane in the West. Households fueled by propane for space heating remain largely unchanged from 2005 to 2007, but has shown a growth trend since 2001. Households using propane water heating and cooking have declined slightly from 2005 to 2007. Propane water heating households declined from 823,000 to 792,000, and propane cooking homes declined 634,000 to 578,000. Figure 25: West Regional Propane Household Data from American Housing Survey

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1999 2001 2003 2005 2007

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Appendix A-27

4.1 Mountain Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming

Figure 26: Mountain Home Heating Fuel Market Share of New Residential Construction Starts

20%

30%

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50%

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80%

90%

2000 2001 2002 2003 2004 2005 2006 2007

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Natural Gas

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2000 2001 2002 2003 2004 2005 2006 2007

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Appendix A-28

Natural gas holds a significant share of the new home construction heating fuel market in the Mountain region, averaging 84.1 percent between 2000 and 2007, and rising as high as 86.2 percent in 2003. Electricity has maintained a consistent position in the last few years, averaging an 11.8 percent market share since 2000, but rising high as 13.5 percent in 2006. The propane share of this market has remained relatively steady since 2000, averaging a 3.8 percent market share and holding 4.5 percent of the new home construction starts in 2007.

Figure 27: Mountain Forecast of Propane Housing


(8,000)

(6,000)

(4,000)

(2,000)

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10,000

2006 2007 2008 2009 2010 2011 2012

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Propane site-built housing is expected to increase at a rate over 1 percent per year during the forecast period. This growth is offset by continued declines in the propane manufactured housing sector of about 5 percent per year, resulting in a per-year decrease of less than 1 percent for total propane housing stock.

Appendix A-29

Figure 28: Mountain Forecast of Odorized Propane Demand

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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High fuel prices are the key factor contributing to the recent decline in propane demand. ICF is estimating a 5 percent decline from 2008 to 2009 as the effect of the national housing slowdown is compounded by rising propane prices. This decline reverses its trend into 2010 as prices retreat. ICF is projecting a modest demand increase (less than one percent) in 2011 and 2012. Threats and Opportunities The decline of the propane manufactured housing market will continue to strain the ability to preserve sales volume, as older propane units are replaced with electric versions, if they are replaced at all. But, there still exist opportunities in the modular housing market, where propane has maintained a consistent market share. If this sector continues to be a growth market, propane’s consistent market share in this construction sector offers new opportunities for expansion.

Appendix A-30

4.2 Pacific Alaska, California, Hawaii, Oregon, Washington

Figure 29: Pacific Home Heating Fuel Market Share of New Residential Construction Starts

20%

30%

40%

50%

60%

70%

80%

90%

2000 2001 2002 2003 2004 2005 2006 2007

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Natural Gas

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2000 2001 2002 2003 2004 2005 2006 2007

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Natural gas is the most widely used fuel for home heating in the Pacific region. Natural gas market share of new home construction has historically exceeded 80 percent,

Appendix A-31

though this share declined in 2006 and 2007. Concurrently, electricity made gains in the region, rising from 4.6 percent in 2004 to 13.3 percent in 2007. Much of this new market share came from the declines in the natural gas market. Propane share during this time has stayed steady, averaging a 7.1 percent market share from 2000 to 2007. The share of homes with other fuels or no heat gained during 2004 to 2007, covering the gap left by the decrease in the natural gas market. This is likely due to alternative fuels, such as solar and geothermal, that are financially bolstered by state policies in this region.

Figure 30: Pacific Forecast of Propane Households


(5,000)

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25,000

2006 2007 2008 2009 2010 2011 2012

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The number of site-built housing starts has slowed since 2005 while the manufactured housing market continues to decline due to high retirements and a low replacement rate. ICF projects a 1 percent per year increase in total propane site-built housing per year over the forecast period, while the total propane manufactured housing market is projected to decline at 3 percent per year, offsetting some of the growth in the site-built sector. States in the Pacific region are expected to continue to experience growth in the overall propane housing market. ICF projects that the total propane housing stock will increase about 1 percent per year over the forecast period.

Appendix A-32

Figure 31: Pacific Forecast of Odorized Propane Demand

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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ICF calculates a 2 percent rise in consumption from 2007 to 2008, an increase due to colder weather in 2008 compared to 2007. Propane prices did offset some of this weather-related gain in consumption, though. Using a normal weather projection, ICF forecasts consumption to be flat between 2008 and 2009, due to the confluence of lower propane prices and a declining housing market. This is followed by steady growth in the propane market from 2010-2012, rising approximately 3 percent per year. Threats and Opportunities Declining propane housing starts and high prices create a difficult environment for growth in the Pacific states. Electricity has made considerable strides in this area over the past few years, adding a half million space heating households from 2005 to 2007. Data indicates that electricity has a growing share of the home heating market in new home construction. Nonetheless, the same data indicates modest growth of propane households that will contribute to growing propane demand looking forward. Opportunities exist in states like California, where propane may look to compete as an environmentally friendly fuel following passage of environmental regulations.

Propane Education & Research Council1140 Connecticut Avenue, NW Suite 1075Telephone: (202) 452-8975Fax: (202) 452-9054

www.propanecouncil.orgwww.usepropane.comwww.buildwithpropane.comwww.propanesafety.com

DISCLAIMER

This report was prepared by ICF International for the Propane education & research Council (PerC). The report presents the views of ICF International. The report includes forward-looking statements and projections. ICF has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual market results to differ materially from the projections, anticipated results, or other expectations expressed in this document.

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