Direct Energy Business Monthly Webinar. Expressly for Channel Partners August 5, 2015

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1 Direct Energy Business Monthly Webinar Expressly for Channel Partners August 5, 2015

2 Webinar Agenda Tim Bigler, Sr. Market Strategist Randall Burns, Power Pricing Supervisor-PJM Commodity Market Update Recent Changes in PJM capacity pricing All Question & Answers 2

3 Commodity Market Update Tim Bigler, Sr. Market Strategist

4 Gas/Power Themes NATURAL GAS Short Term Storage versus El Nino Medium Term Stable U.S. Gas Production? Long Term - Will Demand Catch Up to Supply? Basis Influences POWER Lower Electricity Energy Costs Due to Lower Gas Prices/Efficiency Black Swan? Potential Coal Price Increases Lower Risk Premiums Driven by NG 4

5 U.S. Storage End of Season Will it Matter? 4,400 3,900 3,400 2,900 2,400 1,900 1,400 U.S. Storage (BCF) 11/1/2015 3,800 or 4,100 bcf? Will El Nino expectations override? EIA 5

6 Winter 2015 El Nino Weather Pattern May Dominate Bcf/M JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 6

7 NYMEX 12M Strip & Cal s At/Near All-Time Lows $7.50 $7.00 $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $ $2.50 Bcf/M JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 8/6/2010 8/6/2011 8/6/2012 8/6/2013 8/6/2014 Bloomberg Finance L.P.; FOR INFORMATIONAL PURPOSES ONLY NG 12M NG 2016 NG 2017 NG 2018 NG 2019

8 Will Sub-$3.50 NG Price = Flat NG Production? BCF/D RECORD 73.8 BCF/D APR 2015 RECORD 20.4 BCF/D APR 2015? Y-o-Y U.S. ~3.2 bcf/d NE ~3.0 bcf/d U.S. Dry Production Northeast Production? 8 Bentek Energy LLC; EIA

9 Will Sub-$3.50 NG Price = Flat NG Production? 9 Bentek Energy LLC; EIA

10 Lower Crude oil $/bbl, lower NG output? I F Associated Gas T H E N EIA 10

11 11 Flat NG Production Forecast? WHY? All-time low drilling/production costs Higher production volumes per dollars spent NGL/Oil price uplift Long term pipeline commitments Increasing demand Share price concerns

12 Will U.S. Demand Catch Supply? If Yes, When? SUPPLY? DEMAND

13 U.S. Demand/Mexico/Canada/LNG/LPG Exports Support Future U.S. Production Henry Hub EIA; RBN Energy 13

14 U.S. Demand/Mexico/Canada/LNG/LPG Exports Support Future U.S. Production Antero Resources, Simmons & Co. Int l 14

15 NG Basis Pipeline/LNG Projects Impact 15 Bentek Energy LLC

16 JUL 15 DEC 15 MAY 16 OCT 16 MAR 17 AUG 17 JAN 18 JUN 18 NOV 18 APR 19 SEP 19 FEB 20 JUL 20 DEC 20 MAY 21 OCT 21 MAR 22 AUG 22 JAN 23 JUN 23 NOV 23 APR 24 SEP 24 FEB 25 JUL 25 DEC 25 MAY 26 OCT 26 MAR 27 AUG 27 NG Basis Pipeline/LNG Projects Impact -$0.15 -$0.35 -$0.55 TCO Basis -$0.75 -$0.95 -$1.15 -$1.35 DOM Basis Dominion Pipeline MOVING TO ADDITIONAL/NEW DEMAND (i.e. MW) ASSUMPTION IS HIGHER DEMAND = $$$/MMBtu Columbia Pipeline LESS CONSTRAINTS; GREATER ACCESS TO LOCAL GAS -$ Bloomberg Finance L.P.; FOR INFORMATIONAL PURPOSES ONLY

17 2016 NG Basis+Commodity Reflect Regional Constraints $8.00 $7.00 $6.00 $ Columbia - TCO Inbound Constraints 2016 Algonquin 2016 Transco Z6 NY $3.00 $ Bloomberg Finance L.P.; FOR INFORMATIONAL PURPOSES ONLY 2016 Tetco M Transco Z6 Non-NY $4.00 $ Dominion South 2016 MichCon 2016 Chicago Citygate Outbound Constraints

18 Why Gas Basis is IMPORTANT 2015 & 2016 Northeast Summer Delivered Gas AT Coal in DOM S/TETCO M3/TRANSCO Non-NY & NY NEGATIVE BASIS NYMEX Gas>Coal 18 COAL Gas=Coal

19 Energy MWh Price Set by Natural Gas Example: Need to generate 100,000 MW Everyone gets paid $60 / MWh Fuel Options Options Natural Gas 13,000 MW Last Unit available can generate 5,000 MW Cost = $60 / MWh Coal 51,000 MW Cost = $30 / MWh Nuclear 36,000 MW Cost = $20 / MWh

20 PJM CAPACITY Less Coal More Gas PJM 20

21 New NG Power Plant Efficiency Lowers Electric Energy Prices Gas Plant Heat Rate Btu/kWh 12,000 Assumption: $4/MMBtu Gas Input U.S. GAS RECORD U.S. RECORD $48OIL U.S. 28Y HIGH 10,000 $40 8,000 $ s XXXX

22 New NG Power Plant Efficiency Raises Coal to Gas Floor Gas Plant Heat Rate Btu/kWh 8,000 10,000 12,000 Assumption: Coal $32/MWh U.S. GAS RECORD U.S. OIL 28Y HIGH RECORD $3.20 $ s 22 U.S. $ XXXX

23 Low Coal Prices Benefit All Power Regions $6.00 $5.50 $5.00 $4.50 $4.00 CSX Coal 12M NYMEX NG 12M $3.50 $3.00 $2.50 $2.00 6/25/2010 6/25/2011 6/25/2012 Bloomberg Finance L.P.; FOR INFORMATIONAL PURPOSES ONLY 23 6/25/2013 6/25/2014

24 Low Coal Prices For How Much Longer? SNL Energy 24

25 2016 Power Prices Regional Fixed Price Gas Impacts $70.00 $65.00 $60.00 $55.00 $50.00 $ NYISO J 2016 PJM WEST 2016 MASS HUB $ Northern Ill Hub $ CAISO SP1 5 $30.00 $ NYISO A Bloomberg Finance L.P.; FOR INFORMATIONAL PURPOSES ONLY 2016 ERCOT North 345KV

26 Gas/Power Summary PRODUCTION Double Digit Growth - How much longer? Economics Unhedged gas is unprofitable NG PRICING Commodity Stagnant gas production may imply higher $$$ Basis Producers moving gas to higher priced markets Budget Fixed or Managed Approach MW PRICING Gas/Electric Prices Highly correlated Capacity costs Recent highs may NOT hold Budget Fixed or Managed Approach 26

27 Questions? 27

28 PJM Capacity Update Randall Burns, Power Pricing Supervisor-PJM

29 PJM Capacity Performance Forced Outages Winter Vortex PJM

30 What Happened/ What s Changing. Polar Vortex - Dispatched generation didn t all perform (especially some peaker plants), PJM, upset that purchased capacity didn t show, demanded stiffer penalties for future failures Accepting the generators argument that Higher penalty = Higher Risk, FERC agreed the capacity auctions should be re-run DEB s position: that there was a more efficient and fair means of achieving the same result

31 PJM Capacity Performance What does it actually mean? 1. Capacity costs are going up a. Resource investment has declined over time b. Increased risk premiums for non-performance/penalties 2. System reliability should improve a. Historic forced outage rate has steadily increased overtime PJM MAAC Capacity Clearing Price vs. NET CONE $400 $350 $ / M W D a y $300 $250 $200 This gap need to close $150 $100 $50 $0 MAAC Clearing Price $/MW-Day MAAC NET CONE $/MW-Day

32 PJM Capacity Performance No Excuses Generation = Increased Costs $?-$? Per MWH P H A S E I N % $2.5-$4.5 Per MWH Estimate $4.0-$5.5 Per MWH Estimate 60% 70%?? $?-$? Per MWH 80% $?-$? Per MWH 90%

33 Capacity Performance Keys PY 16/17 $/MWh (50% LF) DAY DEOK DUQ $4.58 $4.58 $4.58 DPL JCPL METED $2.33 $2.33 $2.33 FE_OH PP COMED $4.00 $4.00 $4.58 PECO PENELEC PEPCO $2.33 $2.33 $2.33 AECO $2.33 PPL $2.33 APS BGE $4.58 $2.33 RECO AEP_OH $2.33 $4.58 PY 17/18 $/MWh (50% LF) DAY DEOK DUQ $5.58 $5.58 $5.58 DPL JCPL METED $4.08 $4.08 $4.08 FE_OH PP COMED $5.58 $5.58 $5.58 PECO PENELEC PEPCO $4.08 $4.08 $4.08 AECO $4.08 PPL $4.08 APS BGE $5.58 $4.08 RECO AEP_OH $4.08 $5.58

34 Questions?

35 Thank you for attending today s Webinar! Today s slide presentation can be found at: