CHP Managing Commodity Price Risk

Transcription

1 An Introduction to Combined Heat and Power CHP 100 1

2 Acknowledgements 2

3 Overview! High and Volatile Natural Gas Prices do not preclude a good CHP project! Managing Commodity Price Risk must be Part of the CHP Package! Understanding What Drives Natural Gas Prices! Natural Gas Price Risk Hedging Strategies! Some Thoughts about Electricity Prices 3

4 Managing Commodity Price Risk must be Part of the CHP Package! Finance Depends on Project Economics! Project Economics Depend on: Cost of Source Fuel (natural gas) Value of CHP Energy Outputs relative ot the market price for those outputs (electricity and thermal)! Fuel Costs and Relative Energy Output Values are moving targets and make investment in CHP risky! The risk of CHP projects can be reduced by utilizing available commodity price risk management tools 4

5 High and Volatile Natural Gas Prices do not preclude a good CHP project! Existing natural gas price hedging strategies can effectively cap natural gas prices within an acceptable range. Clients utilizing larger volumes of natural gas are already using these strategies! Newer natural gas true-up options can allow CHP operators to choose between operating the generation equipment and buying electricity from the grid This may be the best of options for peak or seasonally operated CHP plants 5

6 CHP 100 Why do Commodity Prices Matter? Managing Commodity Price Risk seeks to keep fuel prices within a specified range. 6

7 What is the Current Condition of the Natural Gas Market? There has been a fundamental shift in the natural gas supply/demand balance that has resulted in higher prices in recent years. This situation is expected to continue, but can be moderated. Key Finding of National Petroleum Council Report to Energy Secretary Spencer Abraham (September, 2003) 7

8 A Tight Balance between Supply and Demand Traditional Production Cushion Production Cushion has narrowed Graph Courtesy of EIA 8

9 Leads to High and Volatile Markets Graph Courtesy of EIA 9

10 Short Term Price Forecast Graph Courtesy of EIA 10

11 Daily Demand for Natural Gas in

12 Projected Daily Demand for Natural Gas in

13 Natural Gas Price Risk Hedging Strategies! Definition: Purchasing methods and tools that can minimize and stabilize the prices of commodities.! Types of Hedging: Physical Hedging Financial Hedging 13

14 Physical hedging options! Storage Purchase excess natural gas during lower cost periods Inject gas into storage with LDC or vendor Withdraw gas from storage during higher cost periods! Key assumptions: Gas prices will follow some type of pattern over the medium to long term. 14

15 Benefits and Risks of Physical Hedging! Benefits Cost Stability Buy when prices are marginally lower and use when prices are marginally higher Extra gas cushion for Critical Days and Balancing against unforeseen load variance! Risks Prices may go counter to your well laid plans. Require management and attention. 15

16 Utilizing Storage is Becoming more Challenging Historic Market Prices for Natural Gas ( ) $ $ $ $ $ $ $ Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

17 Typical Financial Hedging Options Index Purchasing Gas is purchased month-by-month at a First of the Month Index price (likely) Chicago Citygate price as recorded by the NGI) Fixed Price Purchase All or a portion of gas needs are purchased at one time, with the vendor providing an average fixed price for the term of the contract. Cap A fixed price for gas is set, but put contracts are purchased to guarantee that when future market prices for gas settle below the fixed cost, the monthly price is adjusted downward toward the lower Index price. Collar A series of put and call contracts are purchased to guarantee that monthly prices for natural gas will be contained within a defined price range regardless of market conditions. Hybrid Approach Where a percentage of each month s gas needs are purchased at a Fixed price, and the remainder purchased at an Index Price. Winter Strip November through March gas is purchased at a Fixed price, all other months are purchased at an Index price. 17

18 Financial Hedging in a Typical Market Hedging Strategy Performance - Monthly Unit Prices ($/Therm) in a Average Market $0.95 $0.90 $0.85 $0.80 $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 July August September October November December January February March April May June Index Contract 1-Year Fixed Cap (at $.80/Therm) Collar (at $.36 and $.80/Therm) Hybrid (80%-20%) Winter Strip 18

19 Financial Hedging in a Rising Market Hedging Strategy Performance - Monthly Unit Prices ($/Therm) in a High Market $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 July August September October November December January February March April May June Index Contract 1-Year Fixed Cap (at $.80/Therm) Collar (at $.36 and $.80/Therm) Hybrid (80%-20%) Winter Strip 19

20 Financial Hedging in a Falling Market Hedging Strategy Performance - Monthly Unit Cost ($/Therm) in a Low Market $0.95 $0.85 $0.75 $0.65 $0.55 $0.45 $0.35 $0.25 July August September October November December January February March April May June Index Contract 1-Year Fixed Cap (at $.80/Therm) Collar (at $.36 and $.80/Therm) Hybrid (80%-20%) Winter Strip 20

21 A look at Wholesale Prices in the Region PJM West rolling 12 and 24 month contracts mo contract 12 mo contract /30/03 1/6/04 1/13/04 1/20/04 1/27/04 2/3/04 2/10/04 2/17/04 2/24/04 3/2/04 3/9/04 3/16/04 3/23/04 3/30/04 4/6/04 4/13/04 4/20/04 4/27/04 5/4/04 5/11/04 5/18/04 5/25/04 6/1/04 6/8/04 6/15/04 6/22/04 6/29/04 7/6/04 7/13/04 7/20/04 7/27/04 8/3/04 8/10/04 8/17/04 8/24/04 8/31/04 9/7/04 9/14/04 9/21/04 9/28/04 10/5/04 10/12/04 10/19/04 10/26/04 11/2/04 11/9/04 11/16/04 11/23/04 11/30/04 12/7/04 12/14/04 12/21/04 12/28/04 1/4/05 1/11/05 1/18/05 1/25/05 2/1/05 2/8/05 2/15/05 2/22/05 3/1/05 3/8/05 3/15/05 3/22/05 3/29/05 4/5/05 4/12/05 4/19/05 $ / MWh Trade Date

22 On Peak and Off Peak Electricity Prices in Illinois 22

23 A Note on Electric Price Volatility 23

24 And a Last Comment 24

25 Balancing fuel cost against market value of CHP outputs! Continuous Operations Determine range of fuel prices that will support profitable CHP operations Establish hedging strategy that will support CHP as well as thermal operations! Variable Operations Negotiate a fuel supply contract with no true-up provisions (i.e. no take or pay requirements) Negotiate a separate electricity supply contract with no true-up provisions Operate CHP system only when spot or month-forward electricity prices are above the generation cost with the CHP system. 25

26 Conclusions! Customers with larger thermal operations should already be engaged in some form of price hedging They will understand the concept of controlling fuel costs; If they don t then you can deliver some value by bringing a commodity partner to the table! The CHP plant will allow the operator more leverage in the deregulated electricity markets More supply options (CHP or grid) will allow CHP users flexibility in negotiating supply contracts! Stabilizing electricity prices may become the primary selling point for CHP Avoiding price volatility in electric markets will increase the overall competitiveness of CHP operators 26