House Bill 6 Creates Uncertainty
The drama surrounding House Bill 6, otherwise known as the nuclear bailout bill which was voted into law earlier this summer, has hit a new level reminiscent of the HBO series The Sopranos. Referendum seekers must obtain 265,774 signatures by Oct. 21 to place the question of HB 6 repeal on the November 2020 ballot. Advocates of the new law are trying to impede the collection of these signatures by hiring a team of “blockers” to physically follow the signature collectors and disrupt the process. Polls indicate the law will be repealed if it makes it to the ballot.
If not repealed, Ohio citizens are obligated to pay for the costs of bailing out the uneconomic nuclear and coal power plants to the tune of $150 million per year.
Energy managers should have a keen eye on the outcome of the referendum. There are significant cost and policy implications regardless of which side of the argument is successful.
RSR and DMR Riders Die – Create Savings
Cost relief has come for AEP Ohio and First Energy customers on a portion of their delivery charges.
AEP Ohio customers will enjoy a 20-25% cost reduction ($0.007/kwh) from the elimination of the Retail Stability Rider (RSR). This rider was established in 2012 by the PUCO in order to compensate AEP Ohio $336 million for low PJM capacity auction rates. The total amount has been fully recovered by AEP Ohio with no further obligation by ratepayers.
FirstEnergy customers received a big win as the Supreme Court of Ohio ruled that the PUCO- approved Distribution Modernization Rider (DMR) was unreasonable and unlawful. Although FirstEnergy can keep the money that was already collected by this rider, future charges will be eliminated. This is a delivery cost reduction of around 10% (~$0.003/kwh).
Low Wholesale Energy Market Conditions Create Savings Potential
This summer, wholesale electricity and natural gas markets took a 15% nosedive providing amazing opportunities for energy managers to lock in the lowest rates seen in 20 years. Strong natural gas production, healthy storage inventories and normal summer weather generated enough price pressure to create a freefall in July. Since that time prices have rebounded by about 7% but remain at historically low levels.
It is not known if these low energy prices are just a blip or the new normal. Energy managers should consider locking in a portion of their future energy load at these levels especially for terms starting in 2022 and watch for potential dips to lock in the rest.
Financial Pressure for Producers Could Cause Gas Price Increases
Texas shale oil and gas producers are dropping like flies. Texas shale producers are after oil. They do not see natural gas as their main payload and in many cases flare it as gathering pipes are not always available. Default rates for junk bond-rated producers are nearly 6% this year with 28 companies filing for bankruptcy. The main culprit is not low prices but a large amount of debt is now maturing for these companies. In order to push out the maturity date they are looking to refinance; however, capital is more expensive as energy bonds are seeking higher returns at around 7% while the rest of the corporate market is 4%.
Texas shale accounts for 30% of our overall natural gas supply in the lower 48 states. Energy managers should watch for supply decreases in this area due to the financial strains of these highly leveraged producers. Decrease in production will send natural gas and electricity prices higher.
PJM Capacity Auction in Indefinite Limbo
Each May, PJM holds a capacity auction, three years in advance of the delivery year starting in June. This May the auction was delayed by FERC as rule changes are being considered, primarily driven by Ohio’s passage of House Bill 6. Additionally, the FERC commissioner has recused himself from any decisions regarding capacity auction rule changes as he is conflicted with one of the parties involved in the case. With the commissioner out, FERC does not have a quorum to decide the capacity rules, leaving the auction in indefinite limbo.
Energy managers should be aware that any retail supply contract locking in capacity beyond May 2022 will have additional price risk. The language in most retail supplier contract allows them to true-up the fixed capacity prices once the auction price is known. Be sure to understand your contract language around this price component to protect your price and set proper budgeting expectations.
House Bill 6 Creates Uncertainty