2017 Deloitte Renewable Energy Seminar Innovating for tomorrow November 13-15, 2017

Transcription

1 2017 Deloitte Renewable Energy Seminar Innovating for tomorrow November 13-15, 2017

2 Energy market update Ashlee Christian, Senior Consultant, Deloitte MarketPoint LLC Martin Lin, Specialist Leader, Deloitte MarketPoint LLC

3 Contents Regulatory and policy issues 4 Natural gas market dynamics 10 Renewables development in ERCOT and the CREZ experience 15 Managing oversupply in California 22 Copyright 2017 Deloitte Development LLC. All rights reserved. 3

4 Regulatory and policy issues Copyright 2017 Deloitte Development LLC. All rights reserved. 4

5 Regulatory and policy issues US CO2 emissions US CO2 emissions have been declining for the past several years: Across all sectors, 2015 levels were nearly 12% below 2005 levels. In energy, 2016 levels were about 25% below 2005 levels. Source: All sectors CO2 data from US Environmental Protection Agency (EPA) Greenhouse Gas Inventory Data Explorer, accessed/downloaded October 25, 2017; Energy sector CO2 data from US Energy Information Administration (EIA) Monthly Energy Review, September 2017, Table 12.6; chart and change from 2005 by Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 5

6 Regulatory and policy issues Paris Agreement The Paris Agreement entered into force on November 4, 2016: 197 parties have signed, and 169 parties have ratified. Parties required to establish Intended Nationally Determined Contributions (INDCs). Review of progress and INDCs planned for every five years. USA submitted its INDC on March 31, 2015, and the INDC calls for: 17% reduction in greenhouse gas (GHG) emission below 2005 levels by 2020, and 26-28% reduction below 2005 levels by USA announced intention to withdraw from the Paris Agreement on June 1, 2017: Withdrawal notice can be given any time after three years from date the Agreement entered into force. Withdrawal takes effect one year after receipt of notification. Source: United Nations Framework Convention on Climate Change (UNFCCC), unfcc.int/paris_agreement/items/9485.php, accessed October 25, 2017; U.S. Cover Note, INDC and Accompanying Information.pdf, www4.unfccc.int/submissions/indc/submission%20pages/submissions.aspx; President Trump Announces U.S. Withdrawal From the Paris Climate Accord, White House blog, June 1, Copyright 2017 Deloitte Development LLC. All rights reserved. 6

7 Regulatory and policy issues Environmental Protection Agency (EPA) Clean Power Plan (CPP) CPP calls for an overall 32% reduction in GHG emissions below 2005 levels: CPP sets interim targets starting in 2022 with final targets by Rule finalized on August 3, Implementation of CPP stayed by US Supreme Court on February 9, Proposal for repeal announced by EPA Administrator Pruitt on October 10, Mass-Based Reduction Targets by State Source: EPA Clean Power Plan for Existing Power Plants: Regulatory Actions, archive.epa.gov/epa/cleanpowerplan/clean-power-plan-existing-power-plants-regulatory-actions.html; EPA News Release EPA Takes Another Step To Advance President Trump s America First Strategy, Proposes Repeal of Clean Power Plan,, October 10, 2017; EPA Clean Power Plan State Goal Visualizer, archive.epa.gov/epa/sites/production/files/ /clean-power-plan-state-goal-visualizer_1_0.xlsm, accessed October 25, 2017; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 7

8 Regulatory and policy issues Additional federal activity suggests potential impacts on energy development DOE released its Staff Report to the Secretary on Electricity Markets and Reliability on August 23, 2017: Ultimately, the continued closure of traditional baseload power plants calls for a comprehensive strategy for long-term reliability and resilience. The White House released its Unified Framework for Fixing Our Broken Tax Code on September 27, 2017: Framework envisions repeal of other business credits while preserving tax credits for R&D and low-income housing, potentially affecting the production tax credit (PTC) and investment tax credit (ITC). Lower corporate tax rate and accelerated depreciation may affect tax equity financing. Secretary Perry urged the Federal Energy Regulatory Commission (FERC) to address threats to grid reliability and resilience on September 29, 2017, and proposed the Grid Resilience Pricing Rule: FERC should develop new market rules to ensure that the reliability and resiliency attributes of generation with on-site fuel supplies are fully valued. Markets should establish tariffs for the recovery of costs for maintaining a 90-day fuel supply. Source: US Department of Energy, Staff Report to the Secretary on Electricity Markets and Reliability, August 23, 2017, p14; The White House Press Office and US Treasury Department, Unified Framework for Fixing Our Broken Tax Code, September 27, 2017; DOE News, Secretary Perry Urges FERC to Take Swift Action to Address Threats to Grid Resiliency, September 29, 2017; Notice of Proposed Rulemaking for the Grid Resiliency Pricing Rule, 18 CFR Part 35, Docket No. RM Copyright 2017 Deloitte Development LLC. All rights reserved. 8

9 Regulatory and policy issues Changes at the federal level do not necessarily affect the state and local levels Renewable portfolio standards (RPSs) Requires minimum portions of electricity to be from qualified renewable sources 29 states have RPSs CA, NY as high as 50%; HI 100% Climate Mayors pledged their cities to adopt the Paris Agreement goals 382 mayors have signed on Source: Map from DSIRE, Renewable Portfolio Standards, February 2017; Climate Mayors webpage, climatemayors.org, accessed October 25, Copyright 2017 Deloitte Development LLC. All rights reserved. 9

10 Natural gas market dynamics Copyright 2017 Deloitte Development LLC. All rights reserved. 10

11 Natural gas market dynamics Backwardation in the forward curve Contango has nearly been erased from the NYMEX forward curve over the past four years: NYMEX Forward Curve In 2014, the curve was in contango through However, the curve is now in backwardation between After 2018, annual strips remain below $3/MMBtu through The signal to the market is to produce more now while prices are higher: Production increased in 2017 following a pull back in production in 2016; production levels still not back to record levels experienced in But what about expected increase in demand for natural gas as LNG exports add capacity and exports to Mexico increase? Source: SNL Financial, data accessed on October 10, 2017; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 11

12 Natural gas market dynamics What is the forward curve saying about LNG export capacity? More than 8 Bcf/d of additional LNG export capacity is expected online by 2021: NYMEX Forward Curve vs. Expected US LNG Export Capacity Terminals include Cove Point, Cameron, Corpus Christi, Sabine Pass Train 5, Freeport, and Elba Island. The front of the curve is in mild backwardation over : Is the market expecting significant supply at prices at or just below $3/MMBtu? Does the market doubt that this increased demand will materialize? Source: SNL Financial, NYMEX forward curve data accessed on October 10, 2017; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 12

13 Natural gas market dynamics The new impact of hurricanes Atlantic hurricanes used to be bullish events (supply disruptions), but they are quickly becoming bearish events (demand / export disruptions). Production from Federal Offshore Gulf of Mexico (GOM) has dropped more than 70% since Demand along the Gulf Coast is increasing with additional LNG exports and exports to Mexico. Price spike of Feb 2003 Hurricane Katrina Hurricane Rita Henry Hub Spot Prices Hurricane Ike Polar Vortex Hurricane Harvey Source: SNL Financial, Henry Hub spot price data accessed on October 10, 2017; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 13

14 Natural gas market dynamics Natural gas basis volatility Northeast Basis AECO and Dominion South Basis Henry Hub has remained relatively stable, but certain basis prices have been volatile. Constraints continue to exist in New England, even with new pipelines coming online. Increased production in certain areas have collapsed prices. Source: SNL Financial spot price data accessed on October 10, 2017; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 14

15 Renewables development in ERCOT and the CREZ Experience Copyright 2017 Deloitte Development LLC. All rights reserved. 15

16 Renewables development in ERCOT Texas continues to lead the nation in installed wind capacity with most of the capacity tied to the ERCOT power market ERCOT experienced a wind capacity building boom in the mid-2000s with most capacity in the West Zone. Non-Hydro Renewables Development in ERCOT By 2008, wind generation frequently exceeded available transmission capability resulting in congestion that caused West Zone prices: To be at a discount to the North Zone To become negative at times of high wind generation in the West With increasing West Zone congestion: Development moved to the North, South, and Coastal regions. Overall renewables development slowed for a while. * Partial and/or projected year period Source: ERCOT Capacity, Demand, and Reserve (CDR) report, May Copyright 2017 Deloitte Development LLC. All rights reserved. 16

17 Renewables development in ERCOT Installation of wind capacity in the West Zone resulted in congestion at times of high renewables generation Congestion resulted in over 1,500 hours of negative prices in the West Zone in 2008, even more in 2009: Non-Hydro Renewables Development in ERCOT Federal PTC likely enabled negative prices since the credit required production of energy. Operators could pay an entity to consume its generation and still make money after the credit. Annual average West Zone price discount to North Zone peaked in 2009 at more than $22/MWh. Congestion in the West slowed new development and led to Public Utilities Commission of Texas to implement CREZ: CREZ included nearly $7 B in transmission projects. CREZ was approved in 2009 and completed in * Partial and/or projected year period Source: ERCOT CDR report, May 2017; SNL Financial, price data accessed October 25, 2017; EIA Today In Energy, June 24, 2014; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 17

18 Renewables development in ERCOT Is there a CREZ II in the future? Over the buildout of CREZ, both hours of negative West Zone prices and West/North discount declined: Non-Hydro Renewables Development in ERCOT Overall, prices for West Zone generators improved. West Zone renewables development increased. Extensions of the PTC and ITC were passed by Congress in Dec Negative pricing events in the West Zone and the West/North discount have both increased in recent years: Wind capacity in the West Zone is projected to exceed 18 GW by 2018 and 21 GW by Is more transmission capacity needed soon? * Partial and/or projected year period Source: ERCOT CDR report, May 2017; SNL Financial, price data accessed October 25, 2017; EIA Today In Energy, June 24, 2014; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 18

19 Renewables development in ERCOT Stack evolution over time Installed generation capacity in ERCOT has increased over the years from 2011 to 2017: ERCOT Generation Stack 2011 vs 2017 Wind increased nearly 10 GW to almost 25 GW. Gas increased nearly 43 GW to almost 50 GW. Average of natural gas prices has dropped from over $4/MMBtu in 2011 to about $3/MMBtu in 2017: Implied heat rates appear higher for many nongas-fired sources. For similar load levels, the dispatch heat rate in 2017 can be lower than in prior years. More of the stack is not as dispatch-responsive to marginal cost in 2017 versus prior years. Source: SNL Financial, Generation Supply Curve tool and spot gas prices, downloaded October 16, 2017; ERCOT Hourly Load Data Archives, 2011 ERCOT Hourly Load Data posted October 22, 2015, 2017 Hourly Load Data posted October 9, 2017; Deloitte MarketPoint. Copyright 2017 Deloitte Development LLC. All rights reserved. 19

20 Renewables development in ERCOT Stack evolution over time higher loads, but lower heat rates Hourly market implied heat rate scatter comparison shows the impact of the change in generation stack heat rate experienced over the years: ERCOT North Zone 2011 vs 2017 Points are generally shifted to the right, indicating higher overall loads. Points are generally lower for 2017, indicating the reduced heat rate. Lower gas prices at a lower heat rate result in even lower absolute power prices. Negative market implied heat rates result from negative power prices during those hours. Source: SNL Financial, hourly ERCOT real-time prices and daily gas prices downloaded October 25, 2017; ERCOT Hourly Load Data Archives, 2011 ERCOT Hourly Load Data posted October 22, 2015, 2017 Hourly Load Data posted October 9, 2017; Deloitte MarketPoint; (data shown for Jan Sep). Copyright 2017 Deloitte Development LLC. All rights reserved. 20

21 Renewables development in ERCOT Stack evolution over time returning congestion? CREZ buildout ran through the end of 2013, and 2014 data indicate: ERCOT West Zone 2014 vs 2017 Few hours with negative heat rates, and Fewer instances of very low heat rate hours concentrated at low load periods relative to Evolution of the stack has impacted 2017 results: Significantly more hours with negative heat rates. Significantly more hours with low heat rates even at higher load levels. Core of 2017 plot suggests a lower slope versus Source: SNL Financial, hourly ERCOT real-time prices and daily gas prices downloaded October 25, 2017; ERCOT Hourly Load Data Archives, 2014 ERCOT Hourly Load Data posted October 22, 2015, 2017 Hourly Load Data posted October 9, 2017; Deloitte MarketPoint; (data shown for Jan Sep). Copyright 2017 Deloitte Development LLC. All rights reserved. 21

22 Managing oversupply in California Copyright 2017 Deloitte Development LLC. All rights reserved. 22

23 Managing oversupply in California Utility-scale solar generation capacity has grown three-fold in the past five years In Fall of 2015, a bill was signed by California Governor Jerry Brown that required all state regulated utilities to source 50% of their electricity from renewable resources by 2030; currently about 25% of generation comes from renewables. California Wind and Solar Generation Capacity California has tripled utility scale solar in the last 5 years and more than doubled wind capacity in the last 10 years. At the same time, distributed solar generation increased by 3.5x in the past 5 years. An estimated 4.4 GW of additional solar capacity is planned to be built in the next three years. Source: EIA Electric Power Annual for 2015, released November 21, 2016; EIA Electric Power Monthly for July 2017, released September Copyright 2017 Deloitte Development LLC. All rights reserved. 23

24 GWs Managing oversupply in California More renewables penetration in California has led to the duck curve with a deepening belly and a need for steeper ramping The duck curve leads to two problems: oversupply in some periods and a need for ramping when that oversupply disappears: 30 CAISO Spring 2017 Generation by Type* Curtailments of mostly solar and negative pricing result from an oversupply of generation But when the sun goes down, natural gas generation and imports ramp up to satisfy demand previously served by solar. 15 The duck curve exists throughout the year but is often strongest in the spring when demand is low while hydro is high, spring winds are blowing, and the sun is shining. The belly of the duck curve is getting deeper faster than expected Hour of day Source: CAISO Production and Curtailments Data, May 1, 2014 May 31, 2017, last updated June 16, :47, accessed October 10, Nuclear Wind Large Hydro Thermal Imports Solar *Simple average of every hour of every day for March through May 2017 Copyright 2017 Deloitte Development LLC. All rights reserved. 24

25 MWs Managing oversupply in California A number of approaches have been proposed to alleviate issues related to the duck curve Proposed approaches include: CAISO Curtailments by Year* Storage Time of use rates to flatten the duck curve Demand response / shift customer behavior Improved wind and solar forecasts Energy Imbalance Market (EIM) expansion Additional regional integration Hour of day Source: CAISO Production and Curtailments Data, May 1, 2014 May 31, 2017, last updated June 16, :47, accessed October 10, *Simple average of every hour of every day for each year Copyright 2017 Deloitte Development LLC. All rights reserved. 25

26 This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a detailed description of DTTL and its member firms. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright 2017 Deloitte Development LLC. All rights reserved.