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Energy Guide

All posts by Susanne Buckley

Should Manufacturers Make Electricity?

Customer-owned generation is not a new concept but due to changing energy markets and improved Combined Heat and Power (CHP) technologies, it’s becoming more feasible for more customers. Consumers who are considering generating their own power to bypass rising utility distribution rates, or those needing to replace a boiler, may find this technology penciling out favorably. More professionals are entering the CHP development space challenging customers with this “make or buy” decision. What factors make a CHP project work?

 

Need Heat

 

Standalone customer-sited generation is generally not efficient enough to beat the sum of market generation rates and utility distribution rates. The heat rate (the amount of Btu input needed to make 1 MW of power) is around 16,000 MMBtu per 1 MWh. Considering a delivered price of natural gas of $4/MMBtu, this puts the produced MWh around $64 without even considering operating and maintenance costs. That is not going to work as delivered electric prices for most manufacturers in Ohio are between $50 to $60 per MWh.

 

What makes CHP viable is the ability to capture the heat generated from burning natural gas and using that heat elsewhere in the plant. This captured heat displaces fuel that would be otherwise be required to satisfy the thermal demand in the manufacturing process. This is the classic double dip. Use the benefits of the fuel twice, once to generate electricity and once to make heat. The value of the heat benefit starts closing the gap in customer-manufactured MWhs to where it can be a winner.

 

No brainer opportunities come into play when an existing boiler has come to the end of its useful life. Instead of purchasing a new boiler, CHP should be considered in the design engineering. The CHP engine will reduce the size of a new boiler if not eliminate it altogether. The byproduct of burning natural gas in the engine is kWhs generated right at the plant site, eliminating the need for moving the power across inefficient transmission and distribution lines. Talk about buying local!

 

Need High Tariff Rates

 

If you can shop for generation supply (i.e., your facility is not taking power from a municipality or cooperative) then you are likely receiving very low generation rates. The energy market is near all-time lows and the capacity markets into the future have dropped to very low levels, as well. All this makes for low generation rates. The distribution rates are another matter. Rising transmission rates due to utility infrastructure improvements, as well as a basketful of non-bypassable charges have raised customer distribution rates significantly over the past five years.

 

For those customers located behind municipalities or cooperatives this could be an opportunity to finally take control of your energy costs. Without on-site generation, there is no other mechanism besides reducing consumption to really control electricity costs if you are unable to shop for generation service. Typically, municipalities and cooperatives have high demand charges ($/kW) associated with their tariffs. These high demand charges can drive the overall rate up considerably especially if the load factor is less than 80%.

 

When talking about tariffs I cannot go without mentioning the dreaded deal-killing standby rates. Standby rates are charged by the utility to the customer when the CHP is not operating. If the CHP goes offline, the full load of the facility would move to grid power. In doing so, a new demand for the full load would be established. Depending upon the utility, the customer may be required to pay a majority portion of the new demand charge for the next year, even during those months when the CHP is fully operable. Working these standby demand charges into the deal can pull the plug on any economic benefits.

 

Need the Right Structure with the Right Partner

 

A continuum of deal structures exists for implementing CHP from the customer owning the asset, leasing the asset or just purchasing the energy and heat from the asset. Each of these structures comes with its own set of risks and benefits. From a pure financial play, the customer owning the asset will bring the greatest value but the greatest operational risk and requires mega capital. Partnering with developers that will design, construct and own the project with a lease agreement back to the customer helps alleviate the need for capital investment but the customer will be required to share the benefit with the owner. The final structure which looks like a power purchase agreement also alleviates the need for capital and is a very easy structure of price per unit of heat and energy, but this structure also shares the project benefits with the developer.

 

Just like most things, finding the right partner to implement CHP for your company is critical to the success of the project. Borrowing rates, performance guarantees, price escalators, and off-balance sheet accounting are all the details that can make or break the implementation of CHP. Many developers and even traditional commodity suppliers are now offering CHP development, but there are relatively few completed projects. There can be benefits to using the “new player in town” but more than likely they will be learning on your project which is not a very comfortable position as the customer.

 

However, under the right conditions, CHP can offer a huge benefit that converts uncontrollable electric tariffs to more manageable natural gas costs. Through risk management strategies, it is possible for CHP to produce the benefits of lower cost and more price control.

What Does FirstEnergy Solutions Bankruptcy Really Mean to You

No one would have predicted a few years ago that the very same company fighting our policy makers for the opportunity to live or die by the market through electric deregulation would be the same company succumbing to Chapter 11 bankruptcy restructuring, mainly due to the effects of an open market. The company which once had the largest market share of electric-shopping customers in Ohio has been lobbying everyone, even President Trump, for a life preserver to keep its high-cost power plants operating. When one hears about a perceived utility going bankrupt most immediately think “Get out the candles, honey, the power is going out” but what are the real impacts of this bankruptcy on Ohio’s people, policy and the price we pay for power?

 

People

 

Let’s first understand who the heck is going bankrupt. FirstEnergy Solutions (FES) is a subsidiary to FirstEnergy Corp. Other subsidiaries include the regulated utilities such as Toledo Edison, Ohio Edison and Cleveland Electric Illuminating, which are not included in the bankruptcy action.  FES is NOT the utility. It does, however, own the fleet of power plants formerly owned by First Energy Corp. and it does market this power to customers through its deregulated retail operations.

 

FES has indicated that possibly within the next three years it will close three power plants, two of which are the infamous Perry and Davis-Besse nuclear plants on the shores of Lake Erie; the third a nuclear plant in Pennsylvania.  If this actually occurs, the closing will undoubtedly impact the employees of those plants which have been reported by FES at 2,300 and will reduce the power available by 4,000 MW. The bankruptcy filing requests that the plants continue to operate while FES goes through the bankruptcy process which some experts are saying it could take five years at a minimum. All the while, the company will be looking for a buyer of the assets. In the short term, FES indicated that it is business as usual for employees.

 

The economic challenges of these power plants date back decades with enormous construction cost overruns but the final nail in the coffin was the extreme market pressure from natural gas plants which can produce power at significantly less cost than nuclear power. Here is the evidence: 11,000 MW’s of new natural gas plants in various stages of planning and construction in Ohio.

 

Policy

 

The news of these plants closing has been expected. The company missed the optimum window to sell them, placing all its bets on the ability to lobby for market rule changes and subsidies.   Over the past three years, lobbyists for the company have hit up policy makers like a swarm of locusts. They have been active en masse at the Ohio General Assembly, the Public Utility Commission of Ohio and now the Trump Administration. The efforts have not produced any measurable policy changes as there is little data supporting the need for changes other than the viability of FES.  Additionally, customer groups, environmental groups and independent power producers have stepped up in to be actively engage in the discussion.

 

Despite many policy roadblocks, FES is throwing the Hail Mary in the policy fight arguing for an 83-year law that would declare a state of emergency to keep the plants open. Pointing to grid reliability, FES has requested that the federal government give the plants preferential economic treatment to maintain operation. PJM, the grid operator in charge of reliability, refutes the claims that closing those plants will result in reliability issues. Additionally, PJM has  mechanisms already in place to provide increased revenue to these plants if they are needed for reliability.

 

Price

 

The bankruptcy declaration is not a shock to those close to the energy markets, but it does not ease the pain to the 14,000 FES creditors. The FirstEnergy Corp. stock price did very little on the news and the forward energy markets moved up only a few percentage point. From a short-term perspective, the price to watch is the upcoming PJM capacity auction. This auction determines the price paid to generators by load for committing to meet the system’s peak demand. If FES does not include the 4,000 MW contributed by its nuclear plants in the next auction one would think these auction prices will increase.  The auction will be held next month for delivery in June 2021 to May 2022. (Customers may remember a similar plant closure announcement which occurred  right before the 2015 – 2016 PJM capacity auction. The auction cleared three times the historic average auction price resulting in customer bills increasing by over 25% for that year.)

 

That being said, the new gas-fired power plants under development will more than make up this lost capacity but it is all about the timing. If all the projects are built by the time of these nuclear plants fully retire, there will be enough power to supply two times the demand of every resident in the state of Ohio.  This fundamental is very bearish to long term prices. Replacing these nuclear plants with nearly double the capacity and at a production price significantly less leads us to speculate that prices will remain low for the long term.

 

 

 

 

 

 

 

 

 

 

Customer Driven Energy Innovation

The maturing of energy deregulation is now allowing customers to drive market solutions. In Ohio, this story started in 2009 as customers found savings by leaving utility generation and going to third party generation providers. Now, in order to keep their customers, these providers are beginning to meet market demands for more innovation.  Here are three recent trends.

 

Holistic Energy Planning

With a competitive market comes choices. These choices can be overwhelming especially in a space that can include everything from usage data collecting gadgets to on-site distributed generation.  The energy space is highly fragmented with experts focused on their individual solutions and services. From a customer’s perspective it can be extremely time consuming and frustrating to weed through all the solutions, pitches and expertise flying at them to find the perfect fit for their company.

 

As a result, we are seeing more customers stepping back from the chaos and developing overall energy plans. In this approach, key stakeholders develop an energy vision and mission for their organization that will then guide actions and initiatives. Such a framework establishes budgetary and sustainability goals, evaluation guidelines for new opportunities, methods to prioritize projects and a plan to communicate these guidelines throughout the organization.

 

While it may sound like more effort and resources to put such a plan together, customers are finding – in the long run  – it is more efficient. The plan keeps resources focused and on track even when team members move in and out of the organization.

 

Divesting Customer Energy Assets 

What was once a far-out idea is now coming more and more into the conversation.  Some companies are contemplating selling their energy systems (e.g. company – owned substations, HVAC equipment, energy distribution systems) to energy companies and those energy companies, in turn, providing supply arrangements.

 

Such a deal was recently executed on a very large scale by Engie and The Ohio State University. In its very simplest terms Engie purchased the steam, chilled water, electricity, gas systems from the university for a little over $1 billion. Engie will then optimize those systems and charge the university for energy and other services on a monthly basis over the course of the next 50 years.

 

Obviously, this is the King Kong of deals but this transaction can be scaled to meet the needs of manufacturers with aging energy infrastructure. This construct is getting the ear and interest of those in the finance departments who manage capital budgets. As with everything, the devil is in the details of these complex transactions to make them work for both parties.

 

Engagement Around Consumption

It is nearly impossible to measure program results without clean, consistent and accurate data.  Sleek and frictionless energy platforms are challenging the status quo of data delivered on our energy invoices. Many customers are seeking alternatives to pdf versions of invoices, key punching data and tracking data through spreadsheets.  This is even more critical when companies have ENERGY STAR® and sustainability goals that require benchmarking metrics.

 

Customers are now demanding platform solutions that will store, track and audit these data while seamlessly connecting with ENERGY STAR Portfolio Manager®.  This type of solution allows the customers to finally have the reporting options they need to drive behavioral change, capital spending and project prioritization.

 

Additionally, some consumers are analyzing not just what happened in the past via their invoice but how can they impact consumption on a real-time basis. Customers who want to control not just energy peaks but find anomalies in consumption are moving to more real-time monitoring.  Insights can be used to not only track the health of equipment but also of unexpected human behaviors impacting energy consumption.

 

We are past the tipping point with customer driven solutions and this market will continue to innovate to meet consumer demands.

 

 

 

Links to Energy Empowerment

This Valentine’s Day I thought I would share the energy market information resources I love. These are my go-to sources that help me build a view of the energy market fundamentals, energy pricing trends and to generally stay “in the know”.  Many of these resources are geared toward energy professionals but I have sorted through them to pick out the important bits that energy consumers will find valuable.

 

Energy Information Association (EIA)

EIA has the most comprehensive supply and demand information available and is a major resource for nearly all energy professionals. The site is extremely voluminous which can make it difficult to find what you are looking for, but the weekly updates of standard data can be easy to track and understand. Additionally, the trending reports EIA creates from analyzing their own data can be very insightful.  The site also offers interactive data viewers if you want to go crazy graphing their huge databases.

 

Useful data for end-use customers:

 

Weekly Natural Gas Storage Report

 

Natural Gas Weekly Update

 

Short-Term Energy Outlook

 

NOAA Climate Prediction

Weather is undeniably one of the main factors driving short-term energy prices. Most traders utilize the 6-10 day and 8 -14 day temperature outlooks from NOAA as a key data point to help them manage their risk. This map depicts the confidence the weather forecaster has of above-normal and below-normal temperatures into the near future.

 

6-10 Day Outlook

 

8-14 Day Outlook

 

Engie Historical Pricing Data

Engie has a great website designed to allow access to tons of historic electricity pricing data. The website gives the user the ability to develop historic data reports with just a few clicks. Consumers on a block and index pricing structure can use this site to monitor their budgets intra-month and to monitor pricing trends as they happen. This site will require login credentials but it is free once you set it up.

 

PJM

PJM is another one of those sites that has all the information you ever need if only you could find it. Much of the information is geared toward major stakeholders such as generators and transmission owners but there are a few nuggets that might be interesting to customers such as real time pricing and PJM demand forecasts which can be used to predict the peak days that make up your Peak Load Contribution (PLC).

 

Locational Marginal Pricing Map

 

Data Viewer

 

CME Group

CME Group manages the NYMEX exchange where natural gas futures are traded as well as a host of other energy, agricultural and metal commodities.  The NYMEX is a good place to watch short-term and long-term energy pricing and the correlation between the commodities.

 

NYMEX Natural Gas Futures

 

NYMEX Crude Oil Futures

 

Energy Choice Matters

Energy Choice Matters is a daily publication that informs readers of the business side of the competitive energy business.  Not only does the publication inform readers of regulatory changes it also tracks mergers and acquisitions of the players within the energy space.  The site does offer access to the daily archives but is limited in the search function. Generally speaking, anything big happening in the world of retail energy will likely be covered by this publication. This site will require login credentials but it is free once you set it up.

 

Trusted Energy Professional

No one web link can be more valuable than a trusted energy professional that watches all this data and interprets it into a market view for the customer. Such a professional (broker, consultant, supplier rep, etc.) must be able to talk to these details to deliver a concise market picture.  These web links will empower you to create your own opinion and allow you to have deeper discussions with your energy guide.

 

 

Hottest Energy Issues in 2018

As we entered 2017, the energy marketplace was expected to be filled with uncertainty and boy, it did not disappoint! With the new Administration came a reversal in initiatives on nearly everything energy, and at the state level the battles continued over subsidies for uneconomic power plants. Can we expect the same for 2018?  Below is my lineup of 2018’s hottest issues in the world of energy, both nationally and locally in Ohio.

 

Battle of Generation Subsidies

 

Subsidies continue to be a major battle at the state level in Ohio as the current owners of expensive coal and nuclear plants seek rate payer bailouts that will unequivocally raise prices for consumers. Nearly a half a dozen pieces of bailout legislation were introduced last year with no single bill gaining traction; polls show overwhelmingly that Ohioans oppose paying above-market electricity rates. With the utilities employing a full court press of lobbying power coupled with a gubernatorial election this will continue to be a major point of debate in 2018.

 

At the federal level, the Department of Energy put its own twist on subsidies by releasing a Notice of Proposed Rulemaking (NOPR) proposing preferential economic treatment of coal and nuclear plants. Most experts agree that if implemented, the NOPR will blow up the energy markets, and cost consumers an estimated $3 to $13 billion annually. Also, it is estimated that 75% of those dollars would flow to just five companies, one of which is First Energy. To implement the NOPR, the Federal Energy Regulatory Commission must create rules based on a body of evidence.  Last week, FERC rejected the DOE’s NOPR ending proceedings and opened up their own investigation as to how grid operators are addressing reliability. Watch for the zombies on this issue. Just because the issue looks dead may not mean it is dead.

 

Ohio House Bill 247

 

Representative Mark Romanchuk introduced HB 247 which was crafted to protect and improve the competitive energy markets for Ohio consumers. This bill aims to provide three solutions that benefit consumers: 1) allows refunds to customers if the Ohio Supreme Court rules that electric utilities improperly charged customers; 2) requires all utilities to prove any above-market charges by opening their books through a rate case; and 3) requires utilities to sell their power plants ending the need for generation subsidies. This bill is in direct response to the subsidy legislation lobbied for by the utilities and will be squarely in the boxing ring in 2018.

 

U.S. Position as Net Exporter

 

In 2018, the U.S. will be a net exporter of three of the four major sources of energy in the world; natural gas, petroleum products and coal. The only energy source that will remain net imported is crude oil.

 

The latest and arguably the most important energy source to join the net export list is natural gas. Since 1950, the U.S. has been a net importer of natural gas. Net imports started to shrink in 2007 as the shale regions started producing large quantities of natural gas and petroleum byproducts. These petroleum products were designated a net export in 2011 while natural gas exports exceeded imports the middle of last year. New pipeline infrastructure to Mexico and Canada, conversion of liquefied natural gas terminals from import to export capable and U.S. domination as the top natural gas producer in the world are all contributors.  2018 will be the first full year that all three of these major energy sources will be marked as net exports.

 

Blockchain in Energy

 

Not too far off in the future we will likely begin to start seeing the impacts of blockchain in the energy world. (See previous blog for a more detailed description of blockchain.) Look to the Energy Web Foundation to set the pace of commercializing blockchain technology in the energy sector. It is a non-profit group backed by many of the major worldwide energy companies whose mission is research, development and education of blockchain in the energy industry. Vetting out the most promising use cases of blockchain and creating an eco-system of users will enable the acceleration real life energy applications in 2018.

 

 

Can Blockchain Blowup Today’s Energy Markets?

If you have never heard of blockchain then you are not alone. The concept is budding out of the theory stage with entrepreneurs scrambling to implement its power in nearly every industry from banking, voting, insurance and yes … energy. Blockchain is most famously known as the underpinning of the decentralized cryptocurrency known as Bitcoin, but what the heck is it and how can it impact our current energy markets?

 

At a very high level (which is the only way I could explain it), blockchain is an invisible fabric of data validation that holds the promise of delivering trust and security to online transactions. By its broadest definition it is a foundational technology that operates as an open distributed ledger where records are efficiently verified in a transparent and permanent manner. It is managed by a public peer-to-peer computer network collectively facilitating secure online transactions.

 

These transactions can be monetary such as a deposit or withdrawal of value or informational such as Mrs. Smith voted for Kermit the Frog for president. The list of records “block” is stitched together and validated one after the other using complex mathematical puzzles. Once a puzzle is solved it chains together with the history of every block that came before it in mass collaboration, the “chain.” The data within the block cannot be altered. The more nodes in the chain the more trusted it becomes.

 

A major benefit is the decentralization of storing TRUSTED data across the network. Any asset (money, music, votes, health records, fair trade attributes) can be stored, moved, managed and exchanged without the powerful clearinghouses such as banks, title agents, and exchanges. That also means it cuts out all the intermediary fees between the buyer and seller.

 

The decentralized nature significantly reduces hacking and data manipulation potential inherent in a centralized system. Information is transparent which increases trust in the transaction. The transactions are tracked by a shared transaction ledger with not one organization controlling the data (sorry Google and Facebook).

 

This type of “power to the people” obviously challenges the big intermediaries of our world such as banks, social media companies and government, but how could it possibly be used in energy?

 

Prosumers of Energy Transacting Peer-to-Peer

Consumers who have the ability to produce power, called prosumers, could sell their production to their neighbors directly at prices determined by them rather than the local utility or grid operator. These “virtual power plants” can be used to satisfy demand using the most efficient transfer of energy at the distribution level of service. This model fully decentralizes the energy transaction environment to a peer-to-peer system that is frictionless, efficient and trustworthy.

 

Ownership Documentation of Renewable Energy Credits (RECs)

Authenticity is one of the other promises of blockchain. Verification of a certain attribute, in this case, RECs, will follow the data until its desired buyer. There will be no chance of a single REC being sold multiple times and its source can be clearly tracked and validated.

 

Demand Response Trading

Similar to prosumers selling to their neighbors, demand response participants can sell their unused power to their neighbors. Instead of cranking up the A/C on a certain day maybe a participant would like to use the value of that additional electricity to feed their family that night. The value can be exchanged immediately so that the benefit for demand reduction can be clearly translated for other goods and services, clearly linking behavior with reward.

 

Energy Supply Transactions

Imagine a direct link between energy suppliers and consumers through “smart contracts.” Smart contracts add complex logic and rules over a blockchain to serve as a middleman (lawyer, PUCO, broker, court system, etc.) for agreements. Consumers could purchase directly from energy producers under prearranged terms that are embedded in the blockchain data. If a counterparty breaks any term of the agreement the default mechanisms are automatically applied. The concept of smart contracts creates a fast, low cost, efficient safe ecosystem for buyers and seller to transact.

 

Each one of these energy applications ignore two big challenges of the energy sector: 1) the physical nature of moving energy and 2) the heavy state and federal regulation of our current system. Clearly, system upgrades such as metering, communication and software will need to be implemented before electrons can flow freely peer-to-peer. This will come at a significant cost and take years to implement. The role of regulators must also change to allow smart contracts to guide consumer protections rather than the centralized control of regulation. The status quo will not give up this centralized power easily which will also likely take years of battle with lawmakers.

 

Even though the current system is steeped with challenges it is not stopping progress. Ten big energy suppliers have come together to align blockchain initiatives by forming the Energy Web Foundation. This global non-profit has been formed with the sole purpose of accelerating blockchain technology across the energy sector. Just last month the foundation released its blockchain network for full access to third parties to develop decentralized apps. There is no doubt that blockchain will – someday – be impacting many areas of our society and energy is no exception.

 

Energy Demand Trends – Will They Affect Your Price?

I frequently write about how transformational shifts in energy production and pricing have been benefitting consumers. As I look out at this point in time, I see a few demand shifts that could have a bit of a braking effect on the low costs of energy we’ve been enjoying. Let’s take a look at three of them!

 

On the Natural Gas Market:

 

LNG Exports

 

The increase in low cost natural gas production has provided a new export for the U.S. in Liquefied Natural Gas (LNG). LNG is natural gas that has been turned into liquid by cooling it to -260 F. This liquid is then placed into tankers and shipped to foreign markets where it is expanded by raising the temperature and turned back into a gaseous form. Historically the U.S. has been an importer of LNG. With the advent of shale production and lower NYMEX prices, the LNG import terminals over the past few years have been converted to export terminals.

 

The impact of this new international demand for natural gas on our market is not small. Sabine Pass in Texas is currently exporting 2 bcf per day of LNG which accounts for about 3% of our domestic natural gas production. Four more export terminals are planned for operation by 2020. It is expected that demand will increase to 10 bcf per day or 14% of current domestic production. Putting this in perspective, this new demand would represent nearly half of all natural gas production in the Appalachian shale regions.

 

Mexican Exports

 

Exports of natural gas to Mexico have quadrupled since 2009 and are expected to continue to increase. The Mexican energy ministry has announced a plan that proposes building 12 new pipelines of more than 3,200 miles with the purpose of accommodating the natural gas supply coming from the U.S.

 

Like the U.S., Mexico plans to use this natural gas for new power generation. Current U.S. exports to Mexico are 4 bcf per day. With the expanded pipeline capacity this is expected to increase to 5 bcf per day by 2020 eating up a total of 7% of our domestic production.

 

Bottom line: By 2020, these two new demand sectors will alone consume nearly 21% of our domestic production. Without a significant production increase the low prices we are experiencing today could be threatened.

 

On the Electricity Market:

 

Demand for electricity is best described as anemic, growing just 2% from levels 10 years ago. Energy efficiency measures and technology advancements are keeping most new demand increases in check. This will likely continue but one segment could outrun such efficiency achievements.

 

Data Centers

 

Data gathering and processing is now ubiquitous in our economy and the data centers at the heart of this activity are showing up as a separate demand sector for the electric grid. These centers require 24-hour supply to process information and to cool the servers. In 2014, data centers consumed about 70 billion kWh which is about 2% of the total U.S. consumption. Such consumption was nearly nonexistent just 10 years ago.

 

Even though more and more cloud computing centers are planned, the impact on the overall demand of electricity is expected to increase to only 73 billion kWhs.  Server technology continues to become more and more efficient requiring less energy to do the same amount of work. In addition, the titans of data (Amazon, Google and Facebook) have been fortifying their data centers with their own renewable generation. An example of this is in our own backyard with Amazon’s announcement of nearly 300 MW of wind generation in western Ohio to support its three Buckeye State data centers.

 

Bottom Line: Even with the intense building of data centers the electricity consumption only accounts for 2% of the overall demand for electricity. This is likely not enough demand to significantly move the needle on your energy prices, but we see from these dynamic demand trends how very fluid and responsive the energy markets are … worth keeping an eye on for short and long range planning.

Two Provisions in Your Electric Agreement That Can Bite You

Joe Buyer from ABC Company needs to sign a new electricity supply agreement. He does his due diligence and signs up with Superman Energy Supply for a 3 year fixed rate of 5 cents per kWh. Superman Energy Supply properly enrolls the account to its service and issues the first invoice. Joe Buyer reviews the bill and all looks perfect. He reviews the next few months diligently but then something changes. Joe Buyer gets lulled into a satisfaction trance. From this point forward his eyes barely glaze over the invoice before stamping his approval. Suddenly it is budget season and his boss wants to know why they blew their electric budget. He pulls recent invoices and realizes he has been paying 11 cents per kWh for the past year costing his company $50,000.

 

This sounds like a totally farfetched scenario except that I saw it happen last week. While most electricity suppliers in the market care about their customer’s experience, there are some suppliers that do not have the integrity you’d expect. Their business models are built around high margins realized when customers continue to receive supply beyond their original term. This is a huge gravy train for these suppliers as the contract language for rates beyond the original term is often vague … cha ching!

 

There are two provisions that suppliers commonly use in your electric supply agreements that allow them to charge a price beyond the price in the original term:

 

Hold Over Rate – Variable each month

 

Auto Renewal – New fixed rate for a new term to be determined by the supplier if customer does not reject offer by supplier

 

The more problematic of the two for customers is the auto renewal. This contract provision places the burden on the customer to formally reject the renewal rate offered by the supplier. If the customer does not provide the rejection in writing (reason does not matter … on vacation, sent to wrong contact, thrown away as junk mail, dog ate it), then it is deemed acceptance of the offer.

 

This is obviously a renewal booby trap set for customers by the supplier. The supplier has all the knowledge and control and will use this asymmetry on the customer at their option. I have heard horror stories of outrageous auto renewal rates. Depending upon the supplier, there may be early termination fees if the customer tries to terminate the then-renewed agreement.

 

Hold over rates vary each month typically with an escape clause allowing customers to terminate without penalty. These rates follow the market up and down plus add a sizable margin from the supplier. There are two benefits to hold over rates for the supplier. Monthly variable prices pose much less risk and are easier to manage than fixed rates and they usually contain more margin since they are not in competition with another supplier. For the customer, these rates can be a benefit depending on the market at the time, however, good chances are they are paying more margin to the supplier and do not have the budget certainty of a fixed rate.

 

Both these contract provisions are activated when the customer takes their hands off the wheel and enters a dreamy state of trust with their supplier. Although most suppliers will value that trust, there are some that will take advantage of it.

 

Protection from overcharges when the term of your supply agreement has expired is a matter of contract negotiation and management. Here is what to do: First, if possible, negotiate with your supplier to remove any auto renewal language that exists in your contract. This will protect you against the possible worst scenario outcome. Second, stay engaged and aware of your supply contract term. This is a key service most professional brokers offer so insist that your broker keep you informed. Vigilance is key, otherwise the satisfaction trance can be costly.

 

A Tale of Katrina, Harvey on Your Natural Gas Price

It is hard to wrap our heads around the unbelievable devastation left by Tropical Storm Harvey. Although many of the impacts of this storm are not yet quantified one that has historically been present during the Gulf of Mexico storms was eerily absent, soaring natural gas prices.

 

I wanted to contrast this storm with that of Hurricane Katrina, which affected New Orleans twelve years ago almost to the day of Harvey, to look for reasons why natural gas prices did not react the same way.

 

In 2005, 25% of all the U.S. natural gas production came from the Gulf of Mexico. This gas was transported to the market regions of the Mid Atlantic and Northeast and injected into storage for use during the upcoming winter. When Katrina made landfall, storage levels were 4% above the 5-year average so luckily any short-term production disruption should have minimal impact, right? Wrong.

 

During Katrina, 83% of the Gulf of Mexico production – 10 billion cubic feet per day – was shut down as drilling platforms were evacuated and damaged. This sent NYMEX prompt month prices into a scarcity frenzy reaching nearly $14 from $8 per MMBtu. Prices did not recover until after that winter because Hurricane Rita was soon to follow and an increase in new demand from power generation strained the slowly recovering supply.

 

Now let’s refocus on Tropical Storm Harvey. Storage levels were similar as we are sitting at 1% above the 5-year average. The same exact percentage of the Gulf of Mexico production was shut down at 25%; however, the big fundamental change is that this percentage now represents less than 1 billion cubic feet per day of production vs. 10 billion cubic feet in 2005.

 

Currently, the Gulf of Mexico  is producing less than 5% of the natural gas in the U.S.  The majority of the production is now coming from the shale regions in Ohio, West Virginia and Pennsylvania which have little to no operational disruptions due to storms in the Gulf of Mexico. When Harvey made landfall, NYMEX prompt month prices actually decreased from $2.95 to $2.89 per MMBtu as demand reductions from power outages and flooding in Houston outpaced the production declines in the Gulf.

 

The impact on natural gas pricing from these two devastating storms, Katrina and Harvey, are in stark contrast to each other due to the production shift away from the Gulf of Mexico to the OH-PA-WV shale regions. As we already know, this shale production has reduced natural gas prices to historically low levels and as clearly illustrated with this example, is helping insulate against price spikes caused by storms in the Gulf.

 

Our thoughts are with all those recovering from Tropical Storm Harvey, those in the path of Hurricane Irma and those suffering wildfires in the western states.

 

 

 

What Energy Prices are Telling Us About Electric Reliability

The current energy market is unlike any we have ever seen. The fundamentals have changed drastically and we have yet to reach a point of stasis. Paradigm shifts are happening everywhere: where and how we extract natural gas to how we generate, use and store electricity. The tension between the old and new paradigms often drive opposing views among market participants. This is especially true around the topic of electric reliability which is squarely in the heart of the discussion.

 

Pricing pressure is squeezing out inefficient coal-fired power plants and most recently nuclear plants as well. In order to keep these generation plants financially viable, some asset owners are turning to regulators and politicians for subsidies. Back and forth go the argument over one simple question: Do we have enough power generation to satisfy future demand? Many asset owners say no. But, what does market data say?

 

Experts model the supply and demand of electricity. Most of these experts work for energy trading companies, independent power plant developers and utilities. The information from these models is used to help create a market view or opinion that influences current and future pricing by traders. Can we use this market pricing to inform us about reliability?

 

The ability for supply to meet demand will show up in two elements in the Ohio energy markets: as prices for energy and capacity. Energy in the future is priced based upon where traders believe the market will clear each hour during that future period. Capacity pricing is set by an auction administered by PJM Interconnection, the regional transmission grid operator, based on the price the power plant owners are willing to sell their capacity to meet the demand. Looking at the data for both these markets should give us an indication of the market view for reliability.

 

Wholesale energy in 2020 is 6% cheaper than electricity delivered in 2018. This would indicate that the traders believe there will be an excess and/or cheaper supply of electricity available in 2020 than next year. It also tells us that they believe demand is not going to increase enough to pressure this supply. Not only does 2020 electricity cost less than in 2018, but the trend of the prices for both years has been downward since May and is now sitting at historic lows. Both the downward trending direction and the fact that future years are less costly than next year indicates a market belief that there is an excess of low cost electricity supply. Such excess is positive for reliability.

 

The other price indicator is capacity. Capacity prices are cleared in an auction held by PJM three years in advance of the required delivery. PJM models predict the future demand along with a required reserve margin. The capacity offers by the power plant owners are accepted in ascending order until the demand plus the reserve requirements are satisfied.

 

PJM is required to have approximately a 16% reserve margin. In the last three auctions, the reserve margins resulting from the auctions were from 25% to 50% more than what is required. This over supply of capacity has put downward pressure on the clearing prices. Capacity delivered in 2021 will be 49% lower in price than capacity today. This is another indication of an excess of supply (with no real contribution from demand increases).

 

While markets are not infallible, one cannot argue that this market has a strong and distinct view of the future supply and demand fundamentals. Both the energy and capacity markets are indicating, through pricing, that we are over supplied with cheap power even with the uncertainty of the nuclear fleet and further coal retirements. This data cuts through much of the rhetoric in the reliability discussion with its view that electricity reliability will be strong for the foreseeable future.

 

 

 

 

 

 

 

 

 

 

 

 

 

Leading the Way