ENERGY PROCUREMENT BASICS 2014 NEHES FALL CONFERENCE MYSTIC, CT

Transcription

1 ENERGY PROCUREMENT BASICS 2014 NEHES FALL CONFERENCE MYSTIC, CT STEVE JALOWIEC, PE, CHFM VICE PRESIDENT OF ENGINEERING SERVICES HOSPITAL ENERGY

2 Energy Markets Wholesale Energy is traded in a financial market. Energy contracts are a financial instrument. Understanding how it is traded is key to ensuring the best pricing, product and contract terms to fulfill your energy purchasing goals. Aggregation with similar load profiles provides additional savings opportunities. Energy is a bottom-line cost: $1 of energy spend requires $50 of topline revenue.

3 The Energy Market is a Financial Market Investment Banks Energy Suppliers Member Aggregation Member

4 Who Dominates the Wholesale Market? Wholesale Energy Counterpar2es Credit Suisse Deutsche Bank Credit Ra2ngs A A Wells Fargo A+ Goldman Sachs Societe General Bank of America A A A

5 Major Supplier Credit Ratings KEMA Top Energy Suppliers GDF SUEZ NA, Inc. (GDF SUEZ SA) Direct Energy (Parent Centrica PLC)/Hess MidAmerican Energy Holdings TransCanada (TransCanada Pipeline, Ltd.) Noble Energy Solu2ons PPL Corpora2on Exelon/Constella2on Energy Group Inc./Integrys First Energy Corpora2on Reliant Energy ( Parent NRG Energy Inc.) Credit Ra2ngs A A- A- A- BBB BBB BBB BBB- BB- S&P Credit Rating Hierarchy Investment Grade AA AA- A+ A A- BBB+ BBB BBB- Non Investment Grade BB+ BB BB- B+ B B- CCC

6 Why does this matter? Key Supplier Contract Price Terms Supplier A BBB+ BBB- Impact Are Contract Terms and Price Fixed? Supplier may not pass through any cost increase caused by change in law, regulation, guideline or interpretation thereof. Supplier may pass through of cost increase caused by change in law or interpretation thereof. If a change in tariffs, rules, etc. affects the contract price, Supplier may adjust price to restore, to the maximum extent feasible, the economic benefits of the Transaction. Exposure to Regulatory Change Can Increase Price During Contract Term What New Costs May Be Imposed By Supplier Beyond Fixed Contract Price? Supplier may not pass through any cost increase. Supplier may only pass through actual costs without any profit to the supplier. Supplier exposes customer to potential increases from changes in rules affecting supply of energy and ancillary charges. Regulatory Changes Are Most Common Cause of Price Increases under Purportedly Fixed Price Contracts.

7 Gas Supply Cost Buckets Utility Invoice: " AKA LDC (Local Distribution Company) cost regulated by state public utility commission to transport your commodity from interstate pipeline to delivery point. Third Party Supplier Invoice: " Commodity traded on public exchanges - NYMEX " Basis includes cost of interstate pipeline transport to LDC along with supplier margin.

8 Electric Supply Cost Buckets Utility Invoice: " AKA LDC (Local Distribution Company) - cost regulated by state public utility commission to transport commodity from interstate pipeline to delivery point. Third Party Supplier Invoice: " Commodity Unlike natural gas there is no transparent public market trading electric supply " Ancillary and Pass Through Charges these components and costs are generally set by the state public utility commission and the regional ISO (Independent System Operator). ISOs are charged by the federal government (FERC) with regulating power supply and flow regionally and across regions (e.g., New England = ISO New England).

9 Typical New England Electric Ancillary Charges Capacity - System capacity to generate enough electricity to meet maximum demand and to regulate generating capacity to match demand. The Capacity market is separate and distinct from the market for electricity. It provides an incentive to the market to invest in new power plants and participate in demand response programs, which are necessary to meet future load growth. Congestion Reflects the system s ability to transmit power from the suppliers to the end users. If transmission lines serving a region are limited in the quantity of electricity they can deliver into a region these charges will increase, and consequently it becomes necessary to rely on relatively more expensive generation located inside the region to meet consumer demand. RMR Reliability Must Run - the term still commonly used in the marketplace to refer to what ISO New England now formally calls Local Second Contingency Protection Resource Net Commitment Period Compensation (NCPC). Daily RMR costs are make-whole payments made to generation resources in constrained areas that are dispatched by ISO-New England for at least part of a day for reliability reasons.

10 New England Electric Ancillary Charges - More LFR Locational Forward Reserves in New England, a market used for acquiring the generating resources needed to satisfy the requirements for 10-minute nonspinning reserves and 30-minute operating reserves. RPS Renewable Portfolio Standard provides renewable energy incentives to the market. Winter Reliability (new) program to provide market incentives in an attempt to address winter weather supply reliability concerns based on the region s dependence on natural gas for electricity production. There are a few other minor charges

11 It can be worse.pa Ancillary Charges Capacity Line Losses Transmission Volumetric Swing Provision Energy Imbalance Energy Transmission owner Scheduling, System Control, & System Dispatch Ancillary Synchronous Condensing Ancillary Regulation and Frequency Response Service Ancillary Marginal Loss De-rate Credit Ancillary Synchronized Reserves Ancillary Operating Reserves Ancillary Day-Ahead Scheduling Reserve Ancillary Reactive Supply & Voltage Control from Generation & other Sources Service Marginal Loss Overcollection Credit Ancillary Black Start Service Ancillary Expansion Cost Recovery Ancillary Transmission Enhancement Charges (TECs) Ancillary Renewable Portfolio Standard (RPS) Charges Ancillary Auction Revenue Rights Credit Ancillary RTO Start-up Cost Recovery Ancillary ISO Administrative Charges Ancillary Reactive Services Ancillary

12 What drives the energy markets Bear Drivers, Factors Driving Prices Lower EIA gas drilling productivity report Pipeline development Transmission development Renewable energy Bearish economic indicators Unusually mild weather Bull Drivers, Factors Driving Prices Higher Natural gas storage levels Bullish economic indicators Environmental concerns Short and long term weather LNG exports Coal stockpile levels

13 Gas Market Review New England Basis Volatility Algonquin City Gate Future Winter Price Trends $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $ Winter 14/15 Winter 15/16 Winter 16/17 Future winters on the rise again, backwardated Winter basis at +$10.12 Winter basis at +$8.73 Winter basis at +$6.76 Courtesy of:

14 Gas Market Review Historical NYMEX Volatility $6.00 NYMEX Natural Gas Continuous Prompt Month Closing Prices ($/mmbtu) $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00

15 Gas Market Review 2014 NYMEX Futures w/trend lines

16 Electric Market Review September 2014 Northern Illinois is flat $70 NYMEX_PJM_COMED, as of $60 $50 $40 $30 $20 OffPeak OnPeak RTC Annual Avg $10 $

17 Electric Market Review June New England is Relatively Flat NE ISO Connecticut Forward Market Prices June 25, On Peak Off Peak RTC Annual Average

18 Electric Market Review September New England is Backwardated Platts_Mass_Hub, as of OffPeak OnPeak RTC Annual Avg

19 Electric Market Review September 2014 Southern California is Contango $60 Plaes_South_Path_15, as of $55 $50 $45 $40 $35 OffPeak OnPeak RTC Annual Avg $30 $

20 Purchasing Strategies There are two basic ways to purchase energy supply. 1 st determine your purchasing strategy goals Budget certainty Maximize savings Or some of both Generally these will match the budget goals of the hospital and require consensus between Facility Management, Finance and Purchasing.

21 Buying Energy: An Exercise in Risk Management Fixed products = price insurance at a firm rate This means the supplier provides a fixed price and charges a premium for taking market price risk Index products = paying the monthly market rate This means the buyer takes the market price risk, which fluctuates daily Typically an index product is a mix of some load at a fixed price purchased in various layers (hedges) and some left at index. Similar to a dollar cost averaging investment strategy. The mix of fixed/index pricing should reflect the hospital s willingness to take market (investment) risk.

22 Comparison of Gas Products Full Fixed price basis and commodity for the full contract term Index Product Basis fixed for the term of the contract. Commodity % of load and/or months fixed % of load and/or months floating at index

23 Comparison of Electric Products Product Pros Cons All-Inclusive Energy-Only Block Peak Hedge All Hours Most comprehensive electric product, includes energy and all ancillaries Low cost product that is matched to the hospital s historic load Cheapest means of purchasing the hospital s base load Fixes the rate during the most expensive months of the year Ancillary values are not truly fixed Lower rates are possible with added risk Introduces market rate exposure for load not covered by the block Increases the amount of market rate exposure Peak Hedge Peak Hours Fixes the rate during the most expensive hours during the periods of peak usage Further increases the amount of market rate exposure

24 Market Analytics - Risk Probability Modeling Probability modeling is the accepted standard for assessing risk in complex undertakings ranging from advanced engineering to space exploration to financial markets. US Coast Guard SAROPS Probability modeling has proven to be much more reliable in managing risk than intuition or past experience. Used by the nation s leading energy financing banks and suppliers to develop your price for energy. Few consultants have direct access to these systems.

25 Example: Gas Budget Exposure Analysis 100% Index Rate November October 2016 Best Case Expected Case Worst Case $3.59 $4.01 $4.41 ($293,774) $2,791,199 $275,500

26 Example: Gas Budget Exposure Analysis 25% Index Rate November October 2016 Best Case Expected Case Worst Case $3.69 $4.01 $4.31 ($224,373) $2,790,027 $210,585

27 Example: Gas Budget Exposure Analysis 50% Index Rate November October 2016 Best Case Expected Case Worst Case $3.80 $4.01 $4.21 ($142,061) $2,788,976 $138,531

28 Example: Gas Budget Exposure Analysis 75% Index Rate November October 2016 Best Case Expected Case Worst Case $3.91 $4.01 $4.11 ($70,071) $2,788,063 $70,731

29 Gas Budget Risk Analysis Summary November October % Fixed 75% Fixed 50% Fixed 25% Fixed 100% Index Best Case $4.06 $3.91 $3.80 $3.69 $3.59 Expected Case $4.06 $4.01 $4.01 $4.01 $4.01 Worst Case $4.06 $4.11 $4.21 $4.31 $4.41 Expected Energy Cost $2,826,501 $2,788,063 $2,788,976 $2,790,027 $2,791,199 Budget Opportunity/Risk $0 $85,927 $174,928 $265,717 $353,694

30 Anyone still awake???? Are you now wondering why all these analytics and market curves are important? The energy markets are the most volatile financial markets. Pricing can change by the minute or even faster. Asking a group of suppliers or consultants for pricing for your load on a certain date and time is fine but what s the context of this price. without knowing what the market is doing at that point in time, how do you really know it is a good time to buy? market analytics are required to make a sound purchasing decision whether you are considering a fixed price or an index product.

31 Bonus material - Cogeneration Lessons Learned Ensure that the full cost of the project includes the cost of borrowing the money. Is replacement power included in the operational costs? Gap Power difference between total load and portion that cogen generates. Power necessary for planned and unplanned downtime. Reliability factor? Who is responsible for the costs of replacement power?

32 Bonus material - Cogeneration Lessons Learned Fuel Costs today s cost of fuel will likely not be the cost 2 or 3 or more years down the road, which will affect operational costs. Be careful of gas costs in areas with high basis costs. Be sure that your gas & electric contracts are structured to avoid penalties for fluctuations in consumption due to cogen downtime.

33 Questions? THANK YOU! Contact Information: Steve Jalowiec, PE, CHFM Vice President Engineering Services Hospital Energy