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All posts by Susanne Buckley

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Common Mistakes Made by Energy Buyers

Buying energy is not like buying parts, equipment and supplies. Electricity cannot yet be stored in a scalable manner which subjects the buyer to a potentially volatile marketplace. Managing price changes effectively can be extremely beneficial to a budget but the opposite is also true. When energy supply contracts are not executed ideally, customers can experience unnecessary costs. Below are three common mistakes made by energy buyers.

 

Waiting Until Contract Expiration to Seek New Pricing

 

Since electricity trades in the forward market, rates can be locked today for electricity that will be delivered in the future. By waiting until an existing electric supply contract is near expiration to seek new pricing, the buyer gives up price control to the whims of the market at that point in time. Conversely, proactively purchasing electricity when the forward market dips gives the pricing control to the buyer. In the past few years, prices within a twelve-month period have fluctuated around 15% and in extreme years, such as the 2014 polar vortex, as much as 25%.

 

Reducing the spend on energy by 15% to 25% just by proactively purchasing seems like an easy strategy but for some this approach can be daunting. This buying approach requires constant market monitoring which is impractical for most buyers. However, with the use of trusted brokers or suppliers this responsibility can be handed over and the buyer can simply be notified when a purchasing opportunity exists. This teamwork approach brings price control back in the customer’s favor without over burdening the energy buyer.

 

Soliciting Too Few Supplier Proposals

 

There are dozens of competitive electricity suppliers licensed in Ohio. Although not all these suppliers are actively providing offers for every utility and customer class, there is a robust number of suppliers who are more than willing to compete for business. The pool of active suppliers is very dynamic due to new market entries, mergers and acquisitions. Also, the appetite and competitiveness of suppliers change constantly as business development goals adjust within their organizations.

 

Even though contract terms, billing accuracy and good customer service are important, many customers find price to be king. The difference in pricing between suppliers can be to be as much as 10% to 15% for the same customer. This variation can be attributed to many things such as internal cost of capital, margin goals, risk assumptions and market knowledge. Soliciting all the active suppliers gives the energy buyer the power to choose the most competitive and best offer available.

 

Not Planning for Contingencies

 

Deep within the terms and conditions of most supply contracts is language that can cost significant dollars to customers if not managed properly. Early termination fees, notification of account closings, material consumption variances and auto renewal language are all areas where unexpected costs can bite an energy buyer. Most of the time these situations occur because of unusual, and often times undesirable, business conditions that the customer is experiencing. During these stressful times, the last thing that an energy buyer wants to deal with is an unforeseen penalty for electricity supply.

 

Understanding how a supplier handles extraordinary events ahead of time can limit the impact of the potential charges. Regularly scheduled conversations with your energy broker or supplier can help identify operational changes that may impact the economics of the electric supply agreement. Charges may not be avoidable but understanding the potential impact ahead of time will allow for better cost management within the energy buyer’s organization.

Can Trump Save Ohio Coal Plants?

President Trump shocked the international community with his exit from the 2015 Paris climate agreement. In one tweet he stated, “China will be allowed to build hundreds of additional coal plants. So we can’t build the plants, but they can, according to this agreement.”

 

Coal has historically played a significant role in Ohio electricity production but has recently been dwindling. The Paris pact in conjunction with President Obama’s Clean Power Plan sought to cut carbon emissions by 26% to 28% below 2005 levels by 2025. Without the pact, analysts are placing our emission reduction between 15% to 19%.  Is this global decision enough to save the coal-fired electric generation feet in Ohio?

 

Over the past decade, there has been a major shift in the way Ohio produces electricity. Coal plants are retiring in significant numbers while natural gas plants and renewables continue to increase. Less than a decade ago, 85% of the electricity produced was from coal with nuclear making up the balance. Today the portfolio is much more diverse at 60% coal, 24% natural gas, 13% nuclear, 2% renewables and 1% petroleum. While some are quick to blame carbon regulations for this shift most experts agree that it really was the explosion of cheap natural gas from the shale regions that changed the game.

 

Coal plants have high fixed and operational costs compared to other generation technologies. In addition, they cannot quickly ramp up or down to meet the dynamic nature of the wholesale electricity market. They traditionally have made their money by running full-out. The four Ohio coal plants that have closed recently and the two that will be closing next year had low capacity ratings with most running less than 50% of the time. The reason for the weak run times have been attributed to low electric prices, challenges meeting mercury emission requirements and outage issues due to the age of units.

 

That leaves Ohio with seven remaining massive coal plants. These plants have dodged the first round of bullets but there is another round about to come. Eleven new natural gas power plants are in the planning or construction phase with no plans for new coal plants. These natural gas plants are highly responsive to dispatch, have low operational costs and have little to worry about by way of emissions. The amount of new electricity these projects represent could serve twice the population of Ohio.

 

Where is all this power going to go? Demand for electricity since 2000 has decreased by 5% in Ohio even though the population has increased by 2%. This disconnect is due to the impacts of energy efficiency measures and reduced industrial demand. Since current demand won’t easily absorb this increase in generation, these new natural gas power plants will put increased pressure on the viability of the existing coal plants.

 

Trump’s lifting of the carbon emissions restrictions will likely do little to help a majority of the remaining coal fleet. The shift of market fundamentals has been swift and extreme. Natural gas generators and renewables are circling and ready to pounce which will likely displace the weakest of the seven remaining plants.

 

In response to this fundamental market shift, the major investor owned utilities in the state have either shut down the uncompetitive coal plants, sold the profitable coal plants to investors, or are seeking subsidies for some of the remaining plants from the Public Utilities Commission of Ohio and the Ohio General Assembly.

 

It will take time before the impacts of pulling out of the Paris pact are fully understood. Unfortunately, time is not on the side of an uncompetitive coal-fired power plant. As more and more of these plants are under the management of private investors instead of utility rate payers, investors may have little appetite to wait around.  Although President Trump vowed to put coal miners back to work the prospects for employment seem better in the natural gas fields rather than returning to the coal mines.

 

 

 

 

4 Promises of a Smart Grid

Last week, the Public Utility Commission of Ohio (PUCO) launched an initiative with the intent of taking the first steps to modernize the electricity grid in Ohio. The PowerForward initiative will be a series of workshops over the course of the year that will bring together the expertise of many stakeholders to ultimately develop a path to Smart Grid implementation.

 

The term Smart Grid basically means bringing the power of the internet to our century old power grid. It involves a transformation from a centrally controlled system to a decentralized and consumer interactive system by joining together the flow of electricity with real-time communication.  What are the big promises of a Smart Grid to customers?

 

Promise #1: Price Incentive Innovation

 

Real-time communication can monitor the dispatch of large power plants all the way down to individual home appliances. With automatic devices, consumers of all sizes can then manage their participation in the power grid, essentially making decisions about their own power consumption based on real time data. Manufacturers have had the ability to participate in this type of demand responsiveness in exchange for price incentives and a Smart Grid will enable even residential customers to make usage decisions based on real time prices of electricity.

 

Promise Example: Smart appliances can be programed to run during lower-priced off-peak hours; air conditioning units can be responsive to not only temperature but price thresholds. If enough of this load becomes price responsive it can displace the need for new infrastructure such as peaking power plants.

 

Promise #2:  Integration of Distributed Generation to Lower Costs

 

Distributed generation is a term used to describe small power plants, generally owned by private users, which are located near their consumers. The power plants do not require long distance transmission of the power with state of the art efficiency and therefore can be very cost competitive. However, the original grid did not contemplate power being fed into the system at the “end of the line” which can cause potential issues such as voltage sags and frequency disruptions.  Full adoption of distributed generation will require the grid to handle the plug- and-play application of these new assets while maintaining grid quality.

 

Promise Example: A university would like to oversize a solar project in order to sell excess power to the grid. Buyers want the power and are willing to pay market prices. The university is able to implement the project without prohibitive costs to upgrade the distribution system. The distribution system is able to handle the incoming power and route it in the most efficient manner to customers.

 

Promise #3: Increased Efficiency

 

Having two way communications integrated into the grid will allow it to be responsive without human intervention. Our current system requires many human controls at the utility level to react to supply and demand changes. If consumers and power plants are reacting real time to price changes there will be no time for human intervention. The system must be capable of responding to the desires of both stakeholders instantaneously.

 

From the utility perspective having real time communications along the entire delivery path should allow for the delivery of less power through more corridors.  Monitoring line conditions with advanced sensors can alleviate congestion between delivery zones resulting in less volatile pricing between locations.

 

Promise Example: With distributed generation, instead of adding a new transmission line to meet projected demand, power can be rerouted and controlled using numerous existing smaller distribution lines. Demand is able to react to prices resulting lower peaks during hours of high prices. This results in lower hourly energy prices for the entire constrained area.

 

Promise  #4: Increased Reliability

 

Sensors can isolate faulty transmission segments reducing the impact of outages for all those on the circuit. Such automation can instantaneously identify the fault, isolate the issue, transfer uninterrupted supply to working segments and call on generating capacity from adjacent feeders to increase overall reliability.

 

Promise Example: You don’t have to call your utility about an outage; they already know it, have isolated the issue and are working on a solution. Also, instead of everyone in your neighborhood suffering the outage during the hottest day of the year only the neighbors on your street will be miserable.

 

There is little doubt in my mind that now is the time for robust conversation about the future design and potential of Ohio’s electric power grid. PowerForward should prove to be a good start in bringing these conversations together.

 

 

 

 

 

 

Ohio: Leading the Energy Revolution?

The energy revolution is upon us. Ohio is in a period of unmatched change in the way we produce, use and think about energy. Why now? What does it mean to us? And are we poised to take advantage of this opportunity?

 

The change in the energy space over the past eight years is frankly mind blowing. The Ohio General Assembly passed electric deregulation in 1999 but it was the 2009 economic crisis driving energy prices to historic low levels that changed the landscape in a meaningful way.  Customers began leaving utility generation supply in droves in favor of lower cost competitive suppliers. At about this same time, the largest natural gas shale deposits in the world in the Marcellus and Utica regions were discovered. This new energy source created new market dynamics altering how we think about energy in Ohio.

 

In 2009, there were very few deregulated electricity offerings as only a couple of suppliers were actively seeking customers. Today, Ohio is one of the most robust electricity markets in the country with hundreds of licensed brokers, dozens of active suppliers, prolific governmental aggregation buying groups and consumer advocacy groups becoming more and more influential in energy policy. Now over 70% of all energy delivered in Ohio is being sourced by a competitive supplier and customers are able to find the best value in the market like never before.

 

There can be casualties in a paradigm shift and in this transition the casualties are the legacy coal fired and nuclear powered generators owned by the utilities. While policy makers and the utilities figure out what to do with these generation assets that can’t produce earnings,  independent power plant developers have moved in to provide a market solution. Not since the 1950’s have more power plants been planned and built in Ohio. In fact the new generation, which will provide power at nearly half the cost of legacy plants, will be enough to power 2x’s the number of residents living in Ohio.

 

In addition, renewable energy continues to  make a move in affordability as prices to produce photovoltaic panels have dropped by nearly 70% and costs to generate wind decline. These falling costs are mainly attributed to reductions in the components used to make the energy such as solar panels, racking systems and turbines.  In certain applications, these technologies no longer need subsidies to compete with traditional fossil fuel generation.

 

Along with these major fundamental market changes customers are becoming more sophisticated and technology driven. Most customers have now been actively engaged in procuring electricity for eight years and along the way have increased their level of understanding.  At the same time, they have become more technically savvy. The result is a customer that demands technology solutions from energy professionals participating in a dynamic marketplace. This is a far cry from previous decades where customers’ main energy strategy was paying the electric bill on time.

 

Are we ready for this opportunity? The results from JobsOhio would indicate we are ready. In 2011, JobsOhio reported only a handful of companies in the petrochemical value chain with operations in Ohio. This chain includes value driven from energy in its raw form all the way to consumable products such as gasoline, industrial chemicals and polymers. Today, dozens of companies from pipelines, producers, coating companies and refiners have invested in Ohio to the tune of $30 billion and tens of thousands of new jobs.

 

Through the perfect storm of price collapse, exploration and production,  and technology the energy market in Ohio has changed forever. Our awareness of how we consume energy will become more transparent with the implementation of technology and the solutions provided by energy professionals will become more advanced. The next five years will likely look much different than today and it will be interesting to watch how customers become more and more involved with the energy they consume. For most Ohioans, the energy revolution will mean lower prices, more options and greater technology innovation.

 

 

 

5 Ways Your Electric Supply Deal Can Go Wrong

You have done your due diligence, solicited the market for the best supply offers, read and reread the energy contracts, picked your supplier and signed on the dotted line. Energy supply nirvana (insert record scratch sound here) until it is not. A majority of the time things go as planned but what happens when they don’t and how can the more common issues be prevented?

 

1. Complicated Billing: You shouldn’t have to know calculus to figure out your electricity supply invoice. If you typically purchase a standard fixed rate then the invoicing should be a breeze. But, as you move into more sophisticated supply products the complexity will increase.   Items I have seen that create billing confusion are:  a) description of charges so watered down that the actual meaning is lost, b) lack of supporting calculations, c)  no transparency into calculation inputs, and d) no way to validate charges such as true-ups.

 

Prevention: Request a sample invoice prior to contract execution for the exact product you are considering. If the supplier can not easily explain each line item then reconsider the product.  Remember your boss will likely ask you to support the charges and you will be on the hook to explain them.

 

2.  Pass-Through Charges: All electric supply contracts allow for costs to be passed through in the event of change in law, regulation or market rules. This should not and does not include energy market price movements. In the past few years we have seen an uptick in pass-through charges as supplier margins continue to be under pressure making them unable to absorb most impacts from market rule changes. The alternative of pricing this risk into your deal ahead of time will be way too expensive.

 

Prevention: Set your expectations appropriately with your team. The energy market is complex and ever changing so there is a reasonable chance that pass-through charges may appear if you execute a multi-year term. If a pass-through event were to occur, have your supplier explain the cause of the charge and provide the supporting calculation of your exact impact.

 

3. Early Termination: Suppliers purchase forward energy in support of their customer obligations. This allows them to honor your contract rate even if the market goes up. When a customer terminates a contract early there will likely be costs/penalties associated with the unused future power. Early termination can happen for numerous reasons including facility shut down, ownership change, or even misalignment of contract start and end dates. Whatever the reason, early termination fees can be painful.

 

Prevention: Communicate with your supplier about changes that would trigger early termination fees. Under certain circumstances such fees can be reduced or even waived. Early contact is key because once the early termination fee is in the hands of collections, it is difficult to pry open those fingers to get it back.

 

4. 1-800 Customer Service: Nothing is more frustrating than having an issue and the help on the other end of the phone is clueless. Customer service departments vary greatly between suppliers and can test the patience of even a yogi master. Knowing the right questions to ask with the right industry vernacular is critical in resolving your concern. In some cases, the supplier will win through sheer customer exhaustion of the process.

 

Prevention: Do not accept this as your fate. This is where a reputable broker/consultant worth their salt will shine. Make them do the leg work for you using their knowledge and supplier relationships. They will know what to say and how to say it to get the answers and resolutions you need.

 

5. Lack of Transparency: Transparency by both customer and supplier is the foundation to creating a sound relationship throughout the term of your agreement.  Issues can arise when a customer enters into a deal knowing that operations will change drastically within the term. Or when a supplier is opaque to what may or may not be included in the rates that are quoted. Any issue can be resolved as long as both want a fair and equitable outcome.

 

Prevention: If you feel your energy sales person is not being completely transparent then reconsider placing your trust with them. The buying balance is definitely tipped toward the seller in energy contracts as the acumen for the product lies with the supplier. Follow your instincts and work with only those suppliers/brokers/consultants that earn your trust.

 

Leading the Way