Northeast Energy Summit 1 Veterans Way, Suite 200 Carnegie, PA Steve Dean, ASA, P.E. Managing Principal (412)

Transcription

1 Gas Price Spikes and the Impacts on Power Prices and Dispatch September 17, 2014 Management Consultants, Inc. Northeast Energy Summit 1 Veterans Way, Suite 200 Carnegie, PA Steve Dean, ASA, P.E. Managing Principal (412) sdean@daimc.com

2 Winter 2014: What Happened?

3 Winter 2014 WINTER 2014: WHAT HAPPENED? 3

4 Overview Due to an unusually cold winter, energy prices across the U.S., including in the Northeast, reached extreme levels. The extreme weather conditions highlighted the economic interconnections between natural gas and power markets, and illustrated vividly the influence these forces have on a diverse array of generators and, ultimately, on ratepayers. In this presentation, we will examine: - How demand for energy was affected - How natural gas markets responded - How power markets responded - How power generators responded - How likely these dynamics are to repeat in the future We will focus on several representative markets in the Northeast to illustrate what happened. WINTER 2014: WHAT HAPPENED? 4

5 Heating Degree Days Heating Degree Days Weather Events: Extreme Cold Causes Elevated Heating Demand Boston, MA Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 57 HDD Jan Feb Mar Apr May Jun Syracuse, NY Jul Aug Sep Oct Nov Dec Boston Heating Degree Days Syracuse Heating Degree Days WINTER 2014: WHAT HAPPENED? 1/1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/5 3/12 3/19 3/26 Hercules Janus Nika Pax Quintus Vulcan >1' of snow in IL, IN, MI, NY, MA, VT, NH >18" in MA >1' in NY, VT >2' in MD, NY, PA, VT, VA, WV >1' in ME, MA >26" in VT, >1' in ME, NY 5

6 Supply & Demand: Record (NYISO/PJM) and Near-Record (ISO-NE) Peak Load Meets Supply Outages for Gas and Power 57 HDD 21,365 MW 22,818 MW ISO-NE Winter Peak Load Record (Winter 2003/4) ISO-NE Peak Load Boston Heating Degree Days Syracuse Heating Degree Days 14,974 MW WINTER 2014: WHAT HAPPENED? 1/1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/5 3/12 3/19 3/26 Hercules Janus Nika Pax Quintus Vulcan >1' of snow in IL, IN, MI, NY, MA, VT, NH PJM Generator Outages TETCO M3 Well Freeze-offs >18" in MA >1' in NY, VT TETCO M3 Well Freeze-offs TX Eastern Pipeline Compressor Station Outage 15,000 10,000 >2' in MD, NY, PA, VT, VA, WV >1' in ME, MA January 7th PJM Generation Outages (MW) >26" in VT, >1' in ME, NY 5,000 0 Gas Curtailment Gas Outage Coal Outage 6

7 Extreme Demand and Pipeline Constraints Cause Natural Gas to Skyrocket, with Intraday Highs Exceeding $100/MMbtu on Several Occasions 57 HDD $5/MMbtu 21,365 MW $78/MMbtu Algon Gates Natural Gas ISO-NE Peak Load Boston Heating Degree Days Syracuse Heating Degree Days 14,974 MW WINTER 2014: WHAT HAPPENED? 1/1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/5 3/12 3/19 3/26 Hercules Janus Nika Pax Quintus Vulcan >1' of snow in IL, IN, MI, NY, MA, VT, NH PJM Generator Outages TETCO M3 Well Freeze-offs >18" in MA >1' in NY, VT TETCO M3 Well Freeze-offs TX Eastern Pipeline Compressor Station Outage >2' in MD, NY, PA, VT, VA, WV >1' in ME, MA >26" in VT, >1' in ME, NY 7

8 Unlike Natural Gas Prices, DFO/RFO Prices Saw Relatively Little Change, Serving as a Safety Value in Northeast Markets for Many Generators 57 HDD $5/MMbtu 21,365 MW $78/MMbtu NY Harbor Diesel $25/MMbtu Algon Gates Natural Gas ISO-NE Peak Load Boston Heating Degree Days Syracuse Heating Degree Days $21/MMbtu 14,974 MW WINTER 2014: WHAT HAPPENED? 1/1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/5 3/12 3/19 3/26 Hercules Janus Nika Pax Quintus Vulcan >1' of snow in IL, IN, MI, NY, MA, VT, NH PJM Generator Outages TETCO M3 Well Freeze-offs >18" in MA >1' in NY, VT TETCO M3 Well Freeze-offs TX Eastern Pipeline Compressor Station Outage >2' in MD, NY, PA, VT, VA, WV >1' in ME, MA >26" in VT, >1' in ME, NY 8

9 Power Markets Largely Responded to Events in Natural Gas Markets; Oil & Coal Probably Kept the Lights On 57 HDD $5/MMbtu 21,365 MW $78/MMbtu NY Harbor Diesel $43/MWh $362/MWh $25/MMbtu Algon Gates Natural Gas ISO-NE Peak Load MassHub On-Peak Energy Boston Heating Degree Days Syracuse Heating Degree Days $21/MMbtu 14,974 MW WINTER 2014: WHAT HAPPENED? 1/1 1/8 1/15 1/22 1/29 2/5 2/12 2/19 2/26 3/5 3/12 3/19 3/26 Hercules Janus Nika Pax Quintus Vulcan >1' of snow in IL, IN, MI, NY, MA, VT, NH PJM Generator Outages TETCO M3 Well Freeze-offs >18" in MA >1' in NY, VT TETCO M3 Well Freeze-offs TX Eastern Pipeline Compressor Station Outage >2' in MD, NY, PA, VT, VA, WV >1' in ME, MA >26" in VT, >1' in ME, NY 9

10 The Impact on Generators

11 Evaluating the Impact on Generators With the brief overview of aggregate market conditions presented in the previous several slides, we turn now to looking at generator behavior. On the whole, it appears that power generators responded capably to the challenges. Power prices increased, but only when natural gas prices increased, and in response to significantly elevated load requirements. The aggregate results, however, obscure some noteworthy details. Drilling down, we want to look at three aspects of generator-level impacts: - Utilization: Daily utilization (actual generation / possible generation) of different types of generators. That is, as power and natural gas prices changed, how did markets make use of their generator fleets? By how much did the extreme weather increase generator dispatch? - Profitability: Did higher prices translate into higher profits for generators? Were the appropriate incentives in place to sustain reliability? - Efficiency: How efficiently were markets able to respond to large increases in demand? What was the aggregate cost of congestion? THE IMPACT ON GENERATORS 11

12 Q1 Generation Profile Q1 Average Utilization Factors Marked Shift in Utilization in ISO-NE: When the going got tough, the tough switched to coal and oil. Natural gas markets became constrained as temperatures fell, wells froze, and residential heating demand soared. Notwithstanding soaring demand for power, utilization of gas-fired generators fell relative to previous years. Oil- and coal-fired generator utilization increased substantially. These shifts in utilization were caused by economic fuel dynamics (oil was cheaper than gas at times), the physical availability of gas (or lack thereof), and operational challenges faced by generators. - Oil facilities were dispatched as baseload units over gas as oil became cost competitive. - At times, less than one-third of the market s gas capacity was available. - The share of coal generation would have been even higher had it not been for Brayton Point 3 (640 MW) temporarily dropping off-line in late January. 100% 80% 60% 40% 20% 0% 100% 80% 60% 40% 20% 0% Oil Gas - CC Gas - CT Coal Note: graph excludes nuclear and renewable generation Coal Gas - CT Gas - CC Oil THE IMPACT ON GENERATORS 12

13 Multiple from Avg. Did Higher Prices Translate into Generator Profit? Gross Profit = Revenue Fuel Costs Variable O&M Costs The results presented here are for the typical (average) generator of each type operating in ISO-NE. Relative to average gross profit during the first quarters of , gross profit in 1Q2014 increased substantially. 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x Q1 Gross Profit Gas - CC Gas - CT Coal THE IMPACT ON GENERATORS Despite operating less, gas units earned greater profits on account of the energy prices received. Not only did coal units operate more, but their inframarginal position meant that they captured the full economic upside during the first quarter. In many respects, the outsized profits earned by coal-fired generators occurred because the gasfired generators operated less. 13

14 Peak Gross Profit ($/MWh) Peak Gross Profit ($/MWh) Oil and Gas Profit Margins Although each generator type was more profitable, there were differences in the incremental profitability of generators to rising prices. Gas-fired generator profitability decreased as gas prices increased, because the increases often meant gas curtailment and switching to oil-fired generators, which undercut gas-fired profitability. The results below illustrate the variable generator margin for our hypothetical oil- and gas-fired generators that represent the average generator of each type in ISO-NE for each day in 1Q2014. When gross profit is below zero, the generators would generally not be dispatched. $150 $100 $50 $0 -$50 -$100 -$150 -$200 -$250 -$300 $0 $20 $40 $60 $80 $100 Oil Gas Price ($/MMbtu) $150 $100 $50 $0 -$50 -$100 -$150 -$200 -$250 -$300 Gas - CC -$350 $0 $20 $40 $60 $80 $100 Gas Price ($/MMbtu) THE IMPACT ON GENERATORS 14

15 Total Uplift (million $) NEMA Congestion Cost (as % of LMP) Market Efficiency and Congestion Management No load was shed and system reliability was maintained. As outages and gas curtailments stressed the system, generation capacity reductions ranged between 2,700 MW and 5,000 MW (roughly 10-20% of total supply). Uplift in 1Q2014 exceeded previous annual totals for 2011 and Notwithstanding these increases, congestion remained limited and the $1,000/MWh price cap was never approached in ISO-NE. A great deal of the credit is probably due to ISO-NE s Winter Reliability Program, a one-time fuel (oil) management measure implemented before the start of the winter season that helped restrain prices. - Started with 3 million barrels in December 2013 (out of the 3.5 million that the New England fleet had in inventory) - By the end of February 2014, 2.7 million barrels had been consumed 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% $175 $150 $125 $100 Jan Feb Mar Rest of Year Q THE IMPACT ON GENERATORS $75 $50 $25 $

16 Late January in Detail What is clear in the aggregate results is even more transparent in the detail. On the following slides, we examine one specific episode of storms in late January, illustrating prices, demand, utilization, and generator profitability together on a daily basis. THE IMPACT ON GENERATORS 16

17 Late January in Detail $24/MMbtu NY Harbor Diesel $362/MWh $78/MMbtu MassHub On-Peak Energy Algon Gates Natural Gas $131/MWh THE IMPACT ON GENERATORS $6.47/MMbtu 20,921 MW $26/MMbtu ISO-NE Peak Load 14,974 MW 1/20 1/21 1/22 1/23 1/24 1/25 1/26 1/27 1/28 1/29 1/30 Janus Janus >18" in MA >18" in MA TETCO M3 Well Freeze-offs Boston Heating Degree Days Syracuse Heating Degree Days Weather, electricity demand, and market conditions during winter storm Janus and the following week. 17

18 Late January in Detail $24/MMbtu NY Harbor Diesel As natural gas prices moved higher than fuel oil prices, generator utilization immediately shifted and favored oil-fired generation until market conditions reversed themselves. Oil Utilization $362/MWh $78/MMbtu Gas - CC Utilization MassHub On-Peak Energy 48% Algon Gates Natural Gas 18% 43% $131/MWh 3% THE IMPACT ON GENERATORS $6.47/MMbtu 20,921 MW $26/MMbtu ISO-NE Peak Load 14,974 MW 1/20 1/21 1/22 1/23 1/24 1/25 1/26 1/27 1/28 1/29 1/30 Janus Janus >18" in MA >18" in MA TETCO M3 Well Freeze-offs Boston Heating Degree Days Syracuse Heating Degree Days 18

19 Late January in Detail Gas -CC Gross Margin NY Harbor Diesel $24/MMbtu $104/MWh Oil Utilization $362/MWh $78/MMbtu Oil Gross Margin $0/MWh Gas - CC Utilization MassHub On-Peak Energy 48% Algon Gates Natural Gas 18% 43% $131/MWh 3% THE IMPACT ON GENERATORS $6.47/MMbtu 20,921 MW $26/MMbtu ISO-NE Peak Load 14,974 MW 1/20 1/21 1/22 1/23 1/24 1/25 1/26 1/27 1/28 1/29 1/30 Janus Janus >18" in MA >18" in MA TETCO M3 Well Freeze-offs Boston Heating Degree Days Syracuse Heating Degree Days Consequently, energy prices didn t increase by as much as the increase in natural gas prices alone would imply. Fuel oil switching and increased coal utilization preserved reliability and limited price increases, impairing gas-fired generator margins. 19

20 Responses and Expectations for the Future

21 ISO and FERC Responses to Market Issues ISOs and regulators responded proactively and relatively quickly to the winter s events. ISO New England s Winter Reliability Program proved to be quite effective in maintaining reliability and moderating electricity price increases. FERC issued several orders relaxing price caps and increasing the flow of information between natural gas and power market participants: - January 24, 2014: FERC grants PJM s request for a temporary tariff waiver to allow generators to recover costs above the $1,000/MWh price cap. Excess costs are recoverable as uplift, and therefore costs over $1,000/MWh do not set the market clearing price. - January 31, 2014: FERC grants NYISO generators the ability to recover costs in excess of $1,000/MWh, but does not allow those generators to set market clearing prices. - February 11, 2014: FERC allows generators to submit cost-based offers in excess of $1,000/MWh and allows such offers to set the market clearing price. RESPONSES AND EXPECTATIONS 21

22 Summary: Key Points and Challenges for the Future 1) Power markets worked as intended. High electricity prices were mostly the result of high natural gas prices and equipment outages, rather than electric market failures. 2) Natural gas constraints limited gas-fired generator usefulness at times of peak demand. There is an abundance of gas, with new supply capacity coming online, as well as new pipeline capacity coming online. Planned retirements in the region (older coal and oil units) are not expected to outweigh the capabilities of this new gas. Usability and access to this new gas remains a seasonal concern. 3) Oil- and coal-fired generators (and nuclear!) proved essential to market functioning. The Northeast s ability to switch to oil for power generation is extensive, and provides a safety value for extreme gas prices. ISO-NE continues to evaluate performance incentives under their capacity pricing framework and may continue to directly incentivize oil reserves to fulfill reliability gaps. 4) Natural gas-fired generators were not always able to take advantage of high prices. 5) Congestion was a relatively minor issue thanks to the ISO s advance planning. 6) Capacity is not the same as usability. Winter 2014 revealed weaknesses in relying on natural gas infrastructure to support power generation. Adding gas-fired capacity without ensuring its usability will not improve reliability and may exacerbate price volatility. 7) Pending retirements and CO 2 regulations may impair future reliability without careful planning. 1,200 MW of non-gas capacity is retiring this year (Vermont Yankee and Salem Harbor 3-4). The output of these units alone exceeds the generation procured through the Winter Reliability Program. RESPONSES AND EXPECTATIONS 22

23 Introduction to

24 Who is? Nuclear Industry Experts - Advisors to institutional investors in nuclear assets - Advisors to firms developing new nuclear power plants Energy Market Experts - Industry-leading clients - University-affiliated experts at the Carnegie Mellon University Electricity Industry Center - Published, peer-reviewed research Appraisal & Valuation Specialists - ASA-accredited senior appraisers Power & Energy Market Engineers Electric Market Economists Plant Managers & Operators - Gas Turbine Combined Cycle ( Oildale) - Hydroelectric ( Great Falls) Recognized Expertise American Society of Appraisers Certified Licensed Professional Engineer by National Council of Examiners for Engineering Published, peer-reviewed research - The Appraisal Journal - Journal of Structured and Project Finance - Journal of Economic Behavior and Organization - Public Utilities Fortnightly : RECOGNIZED EXPERTISE 24

25 Decision Analysis Quantitative Risk Analysis ( QRA ) Electric and Fuel Market Studies Electric Market Forecasts Fuel Market Forecasts Statistical Analysis of Asset Performance Hedging Strategy Analysis Analysis of Capital Cost Uncertainty Default Analysis for Loan Guarantees Acquisition and Divestiture Advisory Valuation Litigation Support Appraisal & Valuation Equipment Fair Market Value Appraisal Residual Value Determination Liquidation Value Determination Tax Analysis/Support - Alternative Energy Property Allocations - Business Combinations (SFAS 141) - Goodwill and Intangible Assets (SFAS 142) - Gain or Loss from Acquisition (IRC 1060) WHAT DOES DO? Engineering Consulting Independent Engineer Analysis New Technology Commercialization Power Plant Operation and Maintenance Portfolio Management Feasibility Studies Expert Witness Testimony/Consulting Asset Management Acquisition and Divestiture Support Operations Efficiency Analysis Outage Management On-Site Operations and Maintenance Environmental Compliance Review Permitting, Licensing, and Accounting 25

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