Permian Electricity Market Review & Procurement Strategy Natural Gas Society of Permian Basin Coleman Lewis Power Procurement Supervisor Pioneer Natural Resources Targa Resources March 8, 2016
Agenda Electricity Procurement Strategy ERCOT Electricity Market Review Forward Market ( First of Month ) Natural Gas Price ($/MMBtu) Heat Rate (MMBtu/MWh) Fixed Price ($/MWh) Cash Market ( Gas Daily ) Load Management 1
Deregulation in USA: Natural Gas & Power Deregulated Map 2
Texas Power Market (ERCOT) Overview Electricity provider choice (deregulation) has been in most areas of Texas (ERCOT) since January 1, 2002 Many rural areas are governed by member owned cooperatives ( Coops )which are not open to choice W S N H 3
Electricity Flow from Plant to Customer Generation ( Energy or Supply ) Deregulated Transmission & Distribution ( Delivery or TDU or TDSP or Wires ) Regulated Power Plant Substation Customer REP REP = Retail Electric Provider 4
Current ERCOT Records (as of 2/19/16) 5
Electricity Procurement Strategy 6
What Questions Should I Be Asking? Which purchase strategy is right for my operations to get lowest cost? When is right time to buy? Does a full-year term contract make sense? Am I comparing apples to apples offers? Everyone says they provide the best service, but who actually does? Is my REP on my side of the negotiating table? 7
Electricity Procurement Strategy Selection Customer risk assessment (Budget certainty needed? Load fluctuation?) Market conditions/price risk in forward vs cash markets Source = Constellation Energy Managing in both forward vs cash market is critical. Buy in cash market to get low price but avoid spikes in forward market. 8
What Moves Forward Market Power Prices? Cash Market? $10/MWh = $0.01/kWh Electricity Price ($/MWh) = Nat Gas Price ($/MMBtu) * Heat Rate (MMBtu/MWh) Cash ( Spot ) Market ( Gas Daily ) affected by (in order of influence): 1. Temperature/Precipitation (season) 2. Wind (or lack thereof) 3. Natural gas prices 4. Heat Rate (spinning reserves) 5. Planned or unplanned generation or wires outages 6. High load management activity (curtailment) Forward Market ( First of Month ) affected by (in order of influence): 1. Natural gas prices (marginal fuel cost) 2. Heat rate (generation capacity) (Supply) 3. Cash market price cap level and price trend 4. Economic growth (or lack thereof) (Demand) 5. Temperature 6. Wind (or lack thereof) 7. Market structure and rules (energy vs capacity) 9
ERCOT Summer Day Load Profile Demand (MW) $3,000/MWh = $3.00/kWh Demand Peak Source = ERCOT 10
Forward Market: Natural Gas Price ($/MMBtu) 11
Forward Market Power & Nat Gas Prices (2016-2017) $0.024/kWh Forward fixed power prices trend with forward natural gas prices. 12
20 Year NYMEX HH Prompt Month Close History ($/MWh) Feb-03: Cold weather and low NG storage Nov-05: Hurricanes Katrina and Rita Jan-01: Cold weather and low NG storage Financial Crisis of 2008 followed by market crash Nat Gas Price ($/MWh) Feb-14: Polar Vortex Risk 10 Year Average Reward Natural gas price dips provide opportunity to lock-in low rate in forward market 13
Forward Market: Heat Rate (MMBtu/MWh) 14
ERCOT Total & New Generation Capacity Source = ERCOT 15
Changing ERCOT Resource Capacity Mix Nat Gas and Renewable (wind + solar) energy is increasing % of ERCOT generation mix Source = ERCOT 16
New Generation Development in ERCOT Natural Gas, Wind, and Solar energy sources are the ERCOT future 17
ERCOT Wind Generation Capacity Forecast Source = ERCOT 20,838 MW installed by end of 2016 or 32% increase since 2015 Decrease ATC 7x24 price and increase in off-peak (22:00-06:00) price volatility 18
ERCOT Solar Generation Capacity Forecast Source = ERCOT Decrease in super-peak hour (12:00-20:00) prices 19
New ERCOT Natural Gas Peaker Generation Generation Developer Announces Issuance of Air Permit for New ERCOT Generation January 13,2016 Halyard Energy Ventures, LLC (Halyard) announced that the Texas Commission on Environmental Quality (TCEQ) has issued an air quality permit authorizing the construction and operation of the Halyard Henderson Energy Center (HHEC) in Henderson County, Texas. This is the second air permit that Halyard has received from TCEQ in the past three months, the first being for the Halyard Wharton Energy Center (HWEC) in Wharton County. The HHEC will be a nominal 400 MW natural gas-fired, simple-cycle power generating facility. The facility has received all permits required to begin construction, including its air quality permit and water supply permit, the company said. The project is located within the Electric Reliability Council of Texas (ERCOT). In addition to receiving the air quality permit, the HHEC has finalized interconnections with both the electric grid and gas pipelines. "With five natural-gas developments underway and two of them fully permitted, we are taking a lead in delivering added capacity to meet energy demand within ERCOT," says Karl Dahlstrom, partner at Halyard. "Our projects deliver flexible, quick-start, efficient peaking capacity to complement renewable power in the market." 20
ERCOT West Hub Fwd Heat Rates (2017-2020) (MMBtu/MWh) 02/17/16 01/27/16 Delta Since Last Meeting 12 Month Range Year Ago Actual HR 2017 9.03 9.08-0.05 8.88 9.64 9.20 2018 9.04 9.09-0.05 8.61 9.49 8.97 2019 8.83 9.01-0.18 8.39 9.38 8.83 2020 8.67 8.97-0.30 8.33 9.18 8.51 21
Forward Market: Fixed Price ($/MWh) 22
ERCOT West Hub Fwd Fixed Prices (2017-2020) ($/MWh) 02/17/16 12 Month Range Year Ago Actual Price 2017 $23.66 $23.66 - $33.91 $33.91 $0.024/kWh 2018 $24.25 $24.25 - $34.94 $34.94 2019 $24.06 $24.06 - $35.95 $35.95 2020 $24.36 $24.36 - $35.79 $35.79 23
Cash Market: Temperature, Precipitation, and Wind 24
ERCOT Cash Market (05/18/15 @ 2:55 PM) Current ERCOT Price Cap = $9,000/MWh or $9.00/kWh Nine 5 minute interval settled at ~$900/MWh during morning peak demand Load over forecast Wind under forecast 25
Cash Market Prices (2014 vs 2015) Source = ERCOT 26
Temperature/Precipitation/Wind Forecast Temperature Rain Surface frontal movement Wind generation output can range from 500 10,000 MW Output can drop off quickly Weather impacts demand. Wind impacts supply. 27
ERCOT Cash Market (02/18/16 @ 8:10 AM) Negative congestion Off-Peak price depression Daily Cash Price Average Wind generation OVER forecast Load slightly OVER forecast 28
ORDC + SWOC Adjusted ERCOT West Zone Cash Markets ($/MWh) ORDC + 2015 SWOC Adjusted Averages (vs non-adjusted): Feb-11 = $114.18/MWh or $0.11/kWh Aug-11 = $341.96/MWh or $0.34/kWh Cash market prices can be extremely volatile 29
Load Management: Demand Response 30
Load Management (Demand Response) Demand Response: Load Resources (LR or LAAR): Revenue to customer per MW committed and bid into ERCOT Responsive Reserve Service (RRS) market Emergency Response Service (ERS): Less revenue for customer than LR but slower response time required and fewer events requiring curtailment Supply vs Demand Electricity Supply 31
LR Deployments 2011-2012 32
LR Curtailment Events 2013-2015 No LR curtailment events in 2015 Average curtailment event = up to 60 minutes, 2 to 3 times per year 33
RRS Settlement History (2011-2015) All prices are in $/MWh Date Off-Peak On-Peak ATC 2011 Avg $7.62 $30.58 $22.92 2012 Avg $3.97 $12.62 $9.73 2013 Avg $6.42 $11.45 $9.77 2014 Avg $7.48 $17.48 $14.15 2015 Avg $5.70 $13.96 $11.21 Off-Peak = 22:00 0:600 On-Peak = 06:00 22:00 Total Revenue per 1 MW bid 8760 hrs/year (24 hrs/day no proration) 2011 $200,818 2012 $85,276 2013 $85,590 2014 $123,943 2015 $98,197 34
Residential Electricity Prices www.powertochoose.org 35
Q&A Any future questions please email: coleman.lewis@pxd.com 36