Regional Energy Commission. Program Outreach

Transcription

1 Regional Energy Commission Program Outreach Wednesday, July 13, 2011

2 Agenda Regional Project Overview Street Lighting Upgrade Outdoor Lighting Upgrade Energy Market Update Market Structure Power & Gas Pricing Price Drivers & Outlook Status & Recommendations Current Contract Status Procurement Recommendations 1

3 Agenda Regional Project Overview Street Lighting Upgrade Outdoor Lighting Upgrade Energy Market Update Market Structure Power & Gas Pricing Price Drivers & Outlook Status & Recommendations Current Contract Status Procurement Recommendations 2

4 Regional Projects Street Lighting Upgrade Regional Approach for street lighting upgrades All town inventories obtained from CL&P Originally formulated 6 options, final approach is a blend of two options Final Proposed Project - Purchase street lights from CL&P, utilizing contractor maintenance and a phased conversion approach to LEDs Regional Hybrid Option Capital Costs Annual Utility Cost Annual Maintenance Costs Annual Savings # of fixtures kwh Savings Year 1 $380,000 $296,987 $109,836 $180, ,391,533 Year 2 $313,388 $272,613 $112,277 $202, ,560,249 Year 3 $313,388 $248,239 $114,718 $224, ,728,966 Year 4 $313,388 $223,865 $117,158 $246, ,897,682 Year 5 $313,388 $199,491 $119,599 $268, ,066,399 Year 6 $313,388 $175,117 $122,040 $290, ,235,116 Year 7 and after $0 $175,117 $122,040 $290,565 2,235,116 * LED costs are expected to decrease in the next few years. This analysis does not attempt to estimate the reduction in LED fixture costs. Costs included in this analysis are based on current LED costs. * Number of fixtures : Year 1 reflects complete purchase from CL&P. Years 2-6 reflects a 20% conversion of inventory to LED. 3

5 Regional Projects Outdoor Lighting Upgrade Upgrade study focusing on outdoor lighting including ornamental street lighting currently owned and maintained by the Towns Inventories obtained from each individual Town Analyzing conversion options from current fixtures to Metal Halide and/or LED SourceOne is in the final stages of analysis for presentation to the Regional Energy Commission

6 Agenda Regional Project Overview Street Lighting Upgrade Outdoor Lighting Upgrade Energy Market Update Market Structure Power & Gas Pricing Price Drivers & Outlook Status & Recommendations Current Contract Status Procurement Recommendations 5

7 National Electricity Market Structure Source: FERC Connecticut is part of ISO-New England, the independent system operator tasked with maintaining reliability on the New England power grid ISO-New England is the market-maker for wholesale power and capacity transactions in the region, managing the Forward Capacity Market and the Day-Ahead and Real-Time power markets New England is an open and competitive market for both power supply and retail 6

8 Marginal Nat. Gas Costs Set Electricity Prices Marginal Price Competitive electricity markets are set-up to dispatch the most cost-effective electricity generators needed to meet the electricity demand on the grid Grid operators (NE-ISO, NYISO, PJM, etc.) accept bids from generators and create a bidstack that creates a price curve for electricity Demand expectations set a market clearing price; all generators receive this marginal price Due to fuel costs and dispatch ability, natural gas plants often represent the marginal generation source and, thus, the clearing price is often equal to the marginal cost of generation at a natural gas-fired facility 7 Peak Load Source: PennState

9 New England Power/Gas Price Correlation The market-setting power of natural gas facilities is illustrated in the high correlation between region gas and power prices Generation and transmission limitations can lead to power price spikes unrelated to the price of the underlying fuel source Algonquin City-Gate Gas Price, $/Dth (blue) NEISO-Hub On-Peak Pricing, Weekly Rolling Average, $/MWh (red) Natural Gas: Algonquin City-Gate Electricity: NEISO-Hub On-Peak, Weekly Rolling Average Trading Date

10 Natural Gas Pricing Dynamics Commodity & Basis Natural gas futures contracts for delivery at Henry Hub are traded on NYMEX and are highly liquid. The Henry Hub price is the commonlyreported market-price 9

11 Basis Price Depends on Production & Infrastructure Basis prices are generally lower in regions that have significant natural gas production and are located along major pipeline routes Price spikes during periods of high-demand are common in areas with limited transportation infrastructure (such as New England) New gas discovery in the mid-atlantic shale plays has led to basis flattening as the production region has expanded outside of the Southeast Pipeline capacity expansion should also moderate Northeast basis in the coming years 10

12 Agenda Regional Project Overview Street Lighting Upgrade Outdoor Lighting Upgrade Energy Market Update Market Structure Power & Gas Pricing Price Drivers & Outlook Status & Recommendations Current Contract Status Procurement Recommendations 11

13 NYMEX Natural Gas Historic Pricing Hurricanes Katrina & Rita Credit Crisis Shale Gas / Recession 0 Historically, prices for natural gas have been highly volatile, varying between $4-14 / MMBtu Since 2009, prices have been relatively low and very stable compared to prices over the prior six years Recent price stability is the result of a glut of domestic supply and a slow economy that is hindering demand growth Unforeseen events generally drive price spikes as there are no prior opportunities to price those events into the market price 12 NYMEX Natural Gas Price ($/MMBtu) Trading Date

14 NYMEX Nat Gas Forward Market Curves (rem) Strip 2012 Strip Strip 2014 Strip 4.00 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 There has been a slightly bullish market for the remainder of CAL 11 and CAL 12 over the past few weeks due to forecasted temps and storage comparisons versus last year We expect the bullish market to continue over June due to the forecasted temps and storage comparisons versus last year Low level of long-term volatility suggests that there is not a rush to fully lock long-term open positions 13 NYMEX Natural Gas Strip Price, $/MMBtu Trading Date

15 NYMEX Closing Prices Fall 2011 price currently trading above 2010 closing prices as a result of the hurricane premium priced into fall prices Fall 2010 prices were depressed due to the lack of hurricane activity affecting Gulf Coast production and processing facilities 2011 hurricane season predicted to be more active than average NYMEX Natural Gas Closing/Trading Prices (Henry Hub) ($/Dth) Month January $5.81 $4.22 $4.72 February $5.27 $4.32 $4.70 March $4.82 $3.79 $4.68 April $3.84 $4.24 $4.59 May $4.27 $4.38 $4.62 June $4.16 $4.33 $4.64 July $4.72 $4.36 $4.69 August $4.77 $4.22 $4.72 September $3.72 $4.22 $4.73 October $3.84 $4.25 $4.77 November $3.29 $4.40 $4.92 December $4.27 $4.61 $

16 Connecticut Historic and Future Power Prices Power futures show stable prices through 2012 that are consistent with the recent, relatively lower pricing (all prices in $/MWh of wholesale power) Peak/off-peak blended price is an accurate representation for flat-load facilities, but will be less than power prices for facilities with heavy peak-hours loads Current futures prices present an opportunity for long-term procurements $150 Conn Day-Ahead Power (5-Day Rolling Avg) $125 $100 $75 $50 $25 NePool Conn 5MW Day-Ahead Future Swap Historic Power Prices 2010 $ $51.44 Future Power Prices 2011 $ $52.38 $0 15 Power Price ($/MWh)

17 Asymmetric Risk/Reward Environment EIA price forecasts illustrate the asymmetric risk/reward environment for unhedged gas and power exposures Limited downside suggests the expected value of a hedged position is more affordable than an unhedged position $12 $10 $8 $6 $4 $4.78 $3.11 $1.32 $2.20 $2 EIA Henry Hub 95% CI (Lower) $0 Jun-11 Sep-11 Dec-11 Mar-12 Jul-12 Oct-12 Jan Natural Gas Price, $/Dth Henry Hub Futures EIA Henry Hub 95% CI (Upper)

18 Agenda Regional Project Overview Street Lighting Upgrade Outdoor Lighting Upgrade Energy Market Update Market Structure Power & Gas Pricing Price Drivers & Outlook Status & Recommendations Current Contract Status Procurement Recommendations 17

19 An Energy Revolution: Domestic Shale Gas 18

20 Natural Gas is a Real US Resource U.S. shale plays rank as the some of the largest identified natural gas fields in the world The next big discussion is going to be about the export of LNG Permits are underway for 8.5 bcf / day of liquefaction for exports from the US to high priced countries Source: D.O.E., Chesapeake Energy 19

21 Shale Gas Impacts on NYMEX pricing The big driver for low forward nat gas pricing continues to be the abundance of U.S. shale gas plays Shale production is currently at about 14 bcf/day out of total US production of 60 bcf/day. Shale production is expected to grow to almost 50% of US production by 2030 Breakeven pricing for production of $3-$4 per Dth less for wet well production provides a long runway for low US gas pricing Absent infrastructure constraints, many forecasts show that Marcellus could supply the entire Northeast Source: Chesapeake Energy 20

22 Shale Gas Profitable at Low Natural Gas Costs The relatively low breakeven price for many shale resources suggest that producers will continue to exploit U.S. shale reserves even at current prices of $4-5/MMBtu The lack of shale plays with significant production available at prices below $3.50/MMBtu suggests that the breakeven prices will help maintain a floor on natural gas prices no lower than $3.50/MMBtu Estimated Shale Play Breakeven Prices Source: Wood Mackenzie 2009 December Long Term View 21

23 Forecast Calls for Increasing Shale Production The growth in U.S. shale gas production continues to reduce the need to import natural gas, especially high-priced LNG which currently represents 11% of net imports (1.2% overall) The low break-even costs of shale gas will continue to have a moderating effect on long-term power and gas prices Source: EIA, Annual Energy Outlook, U.S. Annual Natural Gas Production (Tcf)

24 Global LNG Pricing & Effect on Domestic Prices Global LNG pricing completely inverts LNG coming into the US Hess recently withdraws from a long fought battle for LNG facility in southern MA Dominion is attempting to persuade FERC to require shippers to pay part of costs to maintain Cove Point s temperature Sabine Pass s approval for export to all countries is strong indicator that other non-free trade export approvals will be forthcoming While initial economics appear clear, there are questions about how market will be sustained over 20 year period. Clear shale plays exist in Poland and China that could impact Asian and EU LNG pricing Challenges in moving LNG importers to a US based HH pricing scheme Source: FERC.gov 23

25 Where Does the LNG Go? Asia LNG is a key driver for global pricing due to limited (e.g. China) or non-existent pipeline infrastructure (e.g. Japan) Spain / Portugal have only limited access to the broader EU gas pipeline network L.A. pricing is effectively the cost of liquid fuels minus LNG infrastructure cost US pricing and supply is supported by existing infrastructure build which may support LNG supply to Asia US Supply is largely driven by NBP / HH pricing. 24

26 Relative Energy Prices Affect Power Markets The parity of coal / gas pricing and pending EPA regulations will drive a migration from coal to gas as a fuel source for the power generation sector Oil / gas price ratios in the U.S. continue at unprecedented terms which is only exacerbated by challenges in the Middle East Libyan civil war impacts 1.5 MMb/day of light sweet crude but OPEC should be able to absorb disruption Elevated oil prices will be a challenge to speed of any economic recovery 20 Natural Gas (HH) Crude (WTI) 16 Coal (Central App.) Energy Prices ($/MMBtu)

27 E&P Firms Shifting Focus from Gas to Crude The price premium for crude oil has driven oil and gas firms to shift investment focus from natural gas well development to crude exploration, as illustrated be the shift the rig count The slowdown in natural gas rigs could slow supply growth and apply positive pressure to natural gas prices in the coming years Despite the focus on crude oil and other petroleum liquids, natural gas will continue to be produced due to the associated nature of gas and liquids in many wells 2,000 1,800 1,600 Total Rig Count Gas Rigs Oil Rigs 1,400 1,200 1, Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul U.S. Rig Count

28 Bleak Economic Outlook: Bearish Energy Market After strong job growth in February-April, payroll expansion fell dramatically in May and June, with the economy adding only 18,000 jobs in June, almost 100,000 less than expected Ben Bernanke, Fed Chairman, confirmed both the slowing of the economic recovery the end of QE2, the financial stimulus plan of quantitative easing that purchased U.S. Treasury bonds This did have the positive effect of reducing inflationary pressures and contributing to a reduction in the price of dollar-denominated crude oil The potential for a U.S. default on government debt could have a drastic economic consequences, quickly increasing the cost of borrowing and leading to significant layoffs Significant injections of natural gas into storage, despite increasing summer temperatures, indicates a reduction in industrial demand Together, these factors have created significant uncertainty in the state of the U.S. and global economy, putting bearish pressures on the natural gas market 27

29 Agenda Regional Project Overview Street Lighting Upgrade Outdoor Lighting Upgrade Energy Market Update Market Structure Power & Gas Pricing Price Drivers & Outlook Status & Recommendations Current Contract Status Procurement Recommendations 28

30 CT Day Ahead vs. CL&P Default Service For a 5,000 MWh load, the savings of 3 rd party supply on a day ahead product versus default CL&P rates would have been $219,000 since *CL&P Last Resort Service (55-58) > 500 kw **Day Ahead Rates include additional $0.025 per kwh for supplier margin and pass-thru costs of ancillaries (capacity, congestion, RMR, LFR, etc.) 29

31 Regional Energy Commission Electricity Status Town of Branford Annual Consumption: 18,420,000 kwh Currently on an all inclusive, fixed contract with TransCanada Power through December 2014 at $ per kwh TransCanada s blend & extend pricing through Dec. 2015: $ * Total Savings for February 2011 December 2015: $100,000 Town of Durham Annual Consumption: 338,204 Currently on an all inclusive, fixed contract with Integrys Energy through December 2012 at $ per kwh SourceOne recommends this account blend & extend to December 2015 Town of Guilford (Board of Education) Annual Consumption: 4,471,691 kwh Currently on an all inclusive, fixed contract with TransCanada Power through December 2015 at $ per kwh No option to extend out past December 2015 Town of Madison Annual Consumption: 6,000,000 kwh Currently on an fixed contract with Noble Energy through January 2014 at $ per kwh with Capacity, RMR and LFR passed through ($ all in) Noble s blend & extend pricing through December 2015: $ * Total Savings for February 2011 December 2015: $121,800 Town of Guilford Annual Consumption: 3,662,400 kwh Currently on an all inclusive, fixed contract with TransCanada Power through February 2014 at $ per kwh TransCanada s blend & extend pricing through December 2015: $ * Total Savings for February 2011 December 2015: $69,300 Westbrook Board of Education Annual Consumption: 2,856,000 Currently on an all inclusive, fixed contract with TransCanada Power through December 2014 at $ per kwh TransCanada s blend & extend pricing through December 2015: $ * Total Savings for February 2011 December 2015: $43,000 * Pricing from January

32 Power Procurement Recommendations Extend power contracts with existing suppliers using a blend & extend product, where available, to a ultimate contract end-date of December 2015 Currently the bleak economic outlook and glut of supply in the natural gas market has resulted in low power prices in both the real-time and futures market Blend and extend contracts allow for power prices to be reduced in the near-term by providing a single, updated power price from now through 2015 price reductions occurring in the currently uncontracted period at the end of the term will be spread over both the current and future contract periods Extending all contracts to 2015 will effectively put the REC on a similar contracting cycle Concurrent contract end-dates will enable a single procurement for the aggregated load This can result in greater interested from suppliers and, as a result, more competitive pricing A single aggregated load will simplify the process of managing and hedging an energy portfolio An actively managed portfolio with layered hedges can provide some long-term budget certainty without sacrificing the opportunity to make tactical purchasing decisions when prices are favorable 31

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