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Category: Electricity

New Year Same Crazy: Regulatory Changes for Energy

Posted on by m.usman@jjtestsite.us

By: Chris Amstutz

Whoever started the idea that 2021 was going to be a more simple, normal year should be run out of town. *Insert more 2021 vs. 2020 meme’s here*.  New COVID strains, new politicians, and continued social uneasiness is making it feel like the 14th month of 2020. Add the fact that complex energy market regulations are back in the headlines and the chaos only grows. We have seen many stories floating around regarding the recent Executive Orders passed by the new Biden Administration affecting energy markets. As with all changes of the guard, it is out with the old and in with the new. We are here to dispel some of the fake news, and lay out what the facts are pointing to at this time.

Despite what your great uncle says on Facebook, Choice! Energy Management takes no stance of morality or political affiliation on any of the issues discussed, and merely hopes to shine a light on events that influence energy market prices.

Executive Order (EO) 13990: Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis

This EO was signed on the first day in office (Jan. 20) and most notably takes aim at cancelling the Keystone XL Pipeline. This notorious pipeline was set to transport 800,000 barrels of oil per day from Alberta, Canada to Nebraska. This infrastructure project is a lightning rod of symbolism, as it has now spanned 3 administrations worth of attention. Its cancellation is seen as a large blow to the Canadian oil industry, as well as the Gulf coast petrochemical industry. It is seen as a big win for environmentalists and Native Americans whose land is near the pipeline’s path.

EO 13990 also repeals more than 100 EO’s from the Trump Administration on climate and energy infrastructure policies. Many of the EO’s from the Trump administration were in place to repeal notable regulatory orders from the Obama administration (Cross State Air Pollution & Clean Power Plan ). The orders now being reinstated will impose limits and increased regulation on pipeline construction, pollution, drilling, emission standards, and power generation fuel sources.

Executive Order(EO) 14008: Tackling the Climate Crisis at Home and Abroad.

This Executive Order is the beefiest of them all on the energy front, and entails many climate and energy policies promised on the campaign trail. The order most notably directs the Secretary of the Interior to impose a 90-day moratorium on new oil and natural gas leases on public lands/waters (though in a way this does break Biden’s other campaign promise to not ban fracking). A few highlights of the implications of the drilling ban are:

  • The area most affected by the ban is the Permian region of Southeastern New Mexico.
  • Many of the companies operating in this region have “stockpiled” leases and the largest producers have up to 3 years to continue operating as usual.
  • Small drilling companies and ironically New Mexico tax revenues (a state that voted 55% for Biden & whose Albuquerque Congresswoman will be the next Secretary of the Interior) will be the most negatively affected.
  • Decreases in oil and gas supply will be minimal in the short run, but could fall in 2-3 years (just in time for a new set of election promises) if the policy is continued.

The winds of change were not limited to the ban on drilling leases. Other policies laid out in EO 14008 include:

  • The establishment of a National Climate Task Force across 21 Federal Agencies, as well appointing John Kerry as Special Presidential Envoy for the Climate.
  • The official development of emission reduction targets. The campaign promise was to set a path to cut all greenhouse gas emissions from the nation’s electric sector by 2035 and to make the country carbon-neutral by 2050.
  • A commitment to clean infrastructure projects, which will likely be manifested in significant grants and continued subsidies for renewable energy. This will have a continued influence on the power industry.

Executive Action: Commitment to the Paris Climate Accord

On his first day in office, President Biden also signed the action recommitting the U.S. to the Paris Climate Accord. While this action does carry a symbolic weight, it does not directly impact the energy markets at this time. The implications will be felt later, with further action taken on the previously discussed EO 14008 (the beefy EO). The extent to which the U.S. commits to lowering carbon emissions will impact all sectors of the energy markets. Natural gas and oil may see increased demand in the next 10 years, but could begin to lose demand past that. Coal usage will likely continue the slow decline. All carbon commodity usage forecasts depend upon on the penetration of renewable energy technologies in the market. Power prices will also be affected but those implications are largely regional and include nuances such as battery storage and intermittency/grid reliability issues.

All in all, the recent Executive Orders have been symbolic of the Biden Administration fulfilling campaign promises. You can view all of President Biden’s Executive Orders here. While there may not be immediate implications for the energy markets from these EO’s, the symbolically anti-carbon stance of this administration will likely have price implications in the next 2-3 years. Pipeline infrastructure, changing power market dynamics, and federal subsidies and taxes are all long term influences. Like any complex market, change takes time, and the implications will show in the future. We may not be able to see the exact path forward at this time, but we do have an idea of the direction. After all, it’s not like anyone accurately predicted the events of 2020 anyway.

via GIPHY

Cover Image Illustration by Jack Taylor, Bloomberg Green

Choppy Waters: Power Market Volatility

Posted on by m.usman@jjtestsite.us

By: Chris Amstutz

Businesses across the country are taking notice of the rapidly changing power generation mix. Is it simply due to the sight of wind and solar farms popping up along the highway? No, rather it is due to something more vital: their bottom line. From California, to Texas, to the Northeast, the impacts of an increase in power generation from renewable sources and a decline in coal-fired power are being felt. What lies on the river ahead? Recent news and pricing movements across the U.S. are showing signs of a straining grid, primed for increased volatility. Volatility presents opportunity in the energy industry and Choice Energy Management is working to remove the blindfold and safely guide your business to a stream of savings (a more enjoyable experience than re-watching Netflix’s “Birdbox” movie). Our first blog post of the roaring 20’s turns the rudder against the stream to dissect the current path for regional power market structures.

Nationally, we have seen a huge shift in the generation mix since 2014. While the chart above gives the breakout in terms of percentage change for each source of electricity, it does not fully tell the story for what is happening in power markets across the United States.  The introduction of intermittent electricity assets to the grid has posed new concerns and challenges that need to be addressed. More plainly speaking, when the wind doesn’t blow and the sun doesn’t shine, how will the electricity grid adapt to keep up with the power demands of end users. Without diverging down the deep, winding stream on the physics and technical nuances of power markets, here are the regions we are monitoring more closely for volatility in 2020:

CAISO: The push towards a Renewable Portfolio Standard for California of 50% by 2030 continues. The state legislature has remained hostile towards fossil fuel and nuclear generation assets. Many believe that the state government is challenging the grid too hard and too fast. The three main utilities (PG&E, SoCal Edison and SDG&E) are all pushing for rate hikes stemming from wildfire liabilities and the increased regional cost of natural gas. This market has already seen tremendous volatility, but tensions have calmed for now.

ERCOT: The latest report on Capacity, Demand and Reserves for ERCOT has projected a 10.5% reserve margin for summer 2020. The margin is projected to loosen to 15.2% and 13% in ’21 and ’22 respectively. Lost base-load generation from coal retirements has not fully been replaced by natural gas fired units. The renewable build-out has been substantial and is expected to grow to 15% of all generation utilized by the end of 2021. Low regional natural gas prices have created a scenario where power prices are near decade lows for all but the summer months. To entice new capacity, generators will need to be profitable in all months of the year, something that is hard, given the low prices 10 out of the 12 months (see below).

PJM: The current battle between the PJM regulators and the Federal Energy Regulatory Commission (FERC) over renewable energy subsidies distorting the market will likely not be solved soon. FERC’s latest order of expanding the Minimum Offer Price Rule (MOPR) aims to ensure competitive generation investment but may simply be an indictment of the flaws in the PJM forward capacity pricing structure.  The outcome of the expanded MOPR will likely beget more regulations from state legislatures, and PJM futures prices will be susceptible to the stroke of a pen.  

The depth of nuance affecting prices in region specific power markets is enough to make even the most avid energy blog connoisseurs head spin. The topics discussed in this blog warrant much deeper discussions than the individual paragraphs present. From 2014 to today, the soft trickling whisper generated from the impact of renewables has grown to a small but roaring stream. Time will tell how choppy the waters will get but there is no denying the potentially volatile effects of incorporating renewable energy into regional ISO’s. Until the day analyzing power markets becomes black and white, see what more Choice! can do to ensure smooth sailing.

Confidential: Choice Energy Services Retail, LP.

Energy Purgatory: SoCal

Posted on by m.usman@jjtestsite.us

By: Chris Amstutz

The recent pricing spikes in California serve as an interesting case study in the energy community. A series of events have aligned in California to give the CAISO grid and SoCal gas system their biggest test in the last ten plus years.  It certainly feels like Murphy’s law is at work in Southern California, and this has left analysts wondering if there could be anything else that could go wrong (hint: there always is). California is now entering a time of energy purgatory. The previously optimistic market analysts have suffered financially and now must atone for their mistakes. So what has made the situation so extreme? Will the conditions continue? And what are the ongoing trends affecting California energy markets? While these questions fall partially upon the agnostic gods of energy, the ultimate implication is whether California will return to the paradise of low prices, or if it will fall further toward a metaphorically and slightly-literal hellscape.

Natural Gas

On July 24th, the SoCal Citygate daily average settled at $39.53/MMBtu, adding something else to the list of things for Californians to complain to their city councils about.  To give perspective, SoCal Citygate averaged $3.20/MMBtu in June-July of 2017, and NYMEX was trading at $2.73/MMBtu that same day. The record high sustained heat led to July being the warmest on record in California. The heat is surely the top culprit for increased daily prices, but this doesn’t nearly sum up the SoCal Gas story. When we look at the entirety of the gas transportation system, we see pipeline capacity restrictions of about 50% in the North and South zones entering the region. This indefinite, limited pipeline capacity becomes especially concerning when you factor in the gas storage situation in not only Southern California but the Pacific region as a whole. The Aliso Canyon storage facility in Los Angeles has just been approved to increase its’ storage capacity to 40% of total capacity, after its ongoing troubles with a leak. Supply constraints and low storage means we could begin to see serious pricing issues in the winter, when Southern California burns the most gas. The long term fundamentals have pushed futures prices higher with the SoCal Border Calendar 2019 strip now at NYMEX minus (-) $0.14/MMBtu, up $0.51 since late April. However, this is still down off of the high on 8/6 when the ’19 strip actually settled at NYMEX plus (+) $0.025. The Calendar 2020 strip is up 20 cents in the same time period. With all of this news, we are setting up for a situation where a moderate fall and warm winter can be the only savior for the region.

Power

On July 24th we saw the daily SP-15 hub price hit an all time high of $377/MW. This represented the peak of pricing during the extended “heat dome” weather period. The extreme heat brought a curtailment notice from SoCal gas to generators in CAISO. This was then passed on in a ‘flex alert’ curtailment notice (not a SoCal body building term) to power consumers. The fundamentals affecting the power market have not been favorable this summer. Certainly the issues with gas supply discussed above play in to this, but we have also seen hydroelectric outputs 30% lower than last year. California has also retired 6 GW of reliable coal/gas fired generation in the last 4 years. This means that solar and wind power have had to take the place of this lost generation, and these resources are inherently more volatile due to their dependence on weather. BUT WAIT THERE’S MORE… we have also seen a highly active year for wildfires (25% above five-year average) in California (reference the “slightly literal hellscape” quote above). Wildfires impact the transmission of electricity into regions, causing increased congestion on lines, even on days when there is adequate generation to meet demand. The futures market has reacted, with the SP-15 Calendar 2019 strip now at $42/MW, up $10 from February. The 2020 strip is up $5 in the same period.

So is the implication that California energy prices are damned for eternity? Obviously not, but the recent run up sits fresh on the mind of traders and analysts. The California market has always had an air of uncertainty to it, but until recently there has not been a pricing premium in the futures markets. This recent panic has burned (no pun intended) a lot of people who had been profiting on rolling the dice month to month during normal market conditions. The threat of what we have seen this year has been known for almost a year and those that diligently locked in their prices beforehand will now profit.  While this may be the current trend, there are already rumors about the California government intervening (surprise, surprise) to keep things like this from happening again, which could potentially push prices lower. Regardless, the gods of energy prices always favor the informed, and Choice Energy Services is here to help keep their light shining favorably (financially) upon your business.

Confidential: Choice Energy Services Retail, LP.