HOW UTILITY-SCALE WIND CAN BENEFIT FROM NATURAL GAS VOLATILITY PRICING

Transcription

1 HOW UTILITY-SCALE WIND CAN BENEFIT FROM NATURAL GAS VOLATILITY PRICING DAN SEIF, RENEWABLE ENERGY MARKETS, WASHINGTON, D.C. SEPTEMBER 24, 2012

2 My number one fear is that we will be pushed to build natural gas at the expense of solar and wind. Ben Franklin said there are two certainties in life: death and taxes. To that, I would add the price volatility of natural gas Jim Rogers, CEO Duke Energy, June 13, 2012 just as a financial portfolio manager balances yield and risk across different asset types, it s important not to lose sight of the stable Treasuries [efficiency and renewables] in our energy portfolio. Amory Lovins, RMI, Sept. 6, 2012

3 OUTLINE Context: Why we should care about natural gas volatility PUC and utilities decision-making based on assumed lowest cost power (LCOE). Today, natural gas CCGT beats wind without RECs and/or PTC without fuel volatility pricing. With natural gas volatility pricing, wind is often the lowest cost new generation option. Question: How do we put a price tag on volatility? Straddle Utility Short-Term Hedging Budgets Actual Long-Term Contracts Answer: Wind works as a viable hedging strategy Accounting for fuel price volatility changes how Nat Gas cost and Wind LCOEs compare Solutions: How to implement wind as a hedge Regulated Markets: Utilities Deregulated Markets: Large Customers Solutions Residential Solutions

4 DECISIONS BASED ON LCOE

5 DECISIONS BASED ON LCOE IGNORING VOLATILITY LCOE ($/MWh) Fuel Fuel Fuel

6 HISTORICAL PRICES & VOLATILITY 14 U.S. Wellhead Price (2011 $/mcf) Year U.S. Average Wellhead Price

7 U.S. Wellhead Price (2011 $/mcf) : Deregulation Begins : Natural Gas Wellhead Decontrol Act Year HISTORICAL PRICES & VOLATILITY Low Price & Low Vol 70% 60% 50% 40% 30% 20% 10% 0% Annualized Volatility U.S. Average Wellhead Price Historical Volatility

8 NATURAL GAS PROJECTIONS: LONG-TERM Actual Wellhead Price Price (2011 $/mcf) EIA Estimates Year

9 IMPLIED VOLATILITY & FUTURE PRICES Price ($/mmbtu) $6.20 June 2015 $ Date NYMEX Henry Hub Futures 68% CI 95% CI 99% CI 1 standard deviation 2 standard deviations 3 standard deviations

10 VOLATILITY PRICING METHODS 1. Straddle Theoretical Protection against VOLATILITY, not RISK Typically used by speculative traders 2. Utility Short-Term Hedging Budgets Clearly defined budgets ($/mmbtu) Protection against short-term upward price movements 3. Long-Term Contracts Rare, but clear data points Long-term protection best comparison to power purchase agreements (PPA)

11 1. STRADDLE Call Option Right to BUY at given strike price Protects against UPWARD price movements Put Option Right to SELL at given strike price Protects against DOWNWARD price movements Straddle Combination of Call and Put Protects against price movements in either direction to effectively lock-in price

12 1. STRADDLE 6 Henry Hub Price ($/mmbtu) Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 Date NYMEX NYMEX + Straddle

13 1. STRADDLE 90 LCOE & Cost of Generation ($/MWh) Average Wind LCOE $78/MWh (No PTC) By 11/2013 wind is outcompetes CCGT with no PTC or RECs. For long-term PPAs or ratebasing, wind wins easily. 40 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Date CCGT New Build - No Price of Volatility CCGT New Build - Accounting for Volatility

14 2. UTILITY SHORT-TERM HEDGING BUDGETS ACTUAL PREMIUMS BEING PAID Not a reflection of true price of volatility. Always an incomplete risk mitigation. Demonstration of utility willingness-to-pay and/or negotiated appropriate rate controls. A potential capital source for wind projects (i.e. within hedging budgets?)

15 2. UTILITY SHORT-TERM HEDGING BUDGETS Utility Name State $/mmbtu Hedge Budget for Natural Gas PSCo/Xcel Colorado $ $1.82 CenterPoint Energy Minnesota $0.25 Portland General Electric Oregon ½ bid/ask spread on forward contracts Duke Energy Carolinas North Carolina $0 +$ Price LONG CALL +$ +$ THESE CHEAPER OPTION STRATEGIES Price ARE MORE COMMON, Price BUT PROVIDE LIMITED HEDGE VALUE COSTLESS COLLAR -$ -$ -$ CALL SPREAD

16 2. UTILITY SHORT-TERM HEDGING BUDGETS 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Forwards & Swaps PG&E: Derivative Contracts Outstanding By Volume Options Forwards & Swaps Options Congestion Revenue Rights Natural Gas (mmbtu) Electricity (MWh) < 1 Year Between 1 and 3 Years Between 3 and 5 Years > 5 Years UTILITIES HEDGE NATURAL GAS OVER SHORT TIME HORIZONS

17 3. LONG-TERM CONTRACTS PSCo/Anadarko 10-year Contract 8 7 Volatility Mitigation Adder Price ($/mmbtu) Deal Price Cheyenne Hub Forecast Wind 2 1 Average Premium: $1.38 to $2.38/mmBtu Year

18 SOLUTIONS Utility Petition to PUCs; Increase wind allocation in IRP based on full valuation of long-term volatility premiums Large Customer Sign direct wind PPA as a long-term power hedge Include wind PPA contract in VaR calculations Residential Customer Participate in long-term green power program that does not fluctuate with fuel prices

19 SOLUTIONS: UTILITY EXAMPLE: PSCO BUDGET Gas Purchase Year $0.91/mmBtu Budget (Total $30mm) Swaps & Option Strategies

20 SOLUTIONS: UTILITY LCOE & Cost of Generation ($/MWh) Year EIA Reference Case

21 SOLUTIONS: UTILITY LCOE & Cost of Generation ($/MWh) c per mmbtu hedging costs Year EIA Reference Case Reference Case with $0.91/mmBtu Volatility Premium

22 SOLUTIONS: UTILITY LCOE & Cost of Generation ($/MWh) Year Without PTC With PTC EIA Reference Case Reference Case with $0.91/mmBtu Volatility Premium Wind LCOE

23 SOLUTIONS: UTILITY LCOE & Cost of Generation ($/MWh) Year EIA Reference Case Reference Case with $0.91/mmBtu Volatility Premium Wind LCOE

24 SOLUTIONS: UTILITY NPV of Wind Hedge Benefits ($/MWh) NPV of Wind vs. CCGT + $0.91/MMBTU volatility hedge 6% 8% 10% 12% Discount Rate

25 SOLUTIONS: LARGE CUSTOMER Large Industrial Natural Gas Customer Chemical Company Fertilizer Company Large Electricity Customer IT Data Centers Refrigeration Facilities Intermediaries Altenex Model

26 SOLUTIONS: RESIDENTIAL CUSTOMER Customer Rate Increases Due to FCA Customer Rate Increases Due to FCA Customer Rate Stays Constant

27 AUSTIN ENERGY GREENCHOICE PROGRAM Not required participate Texas RPS Program A batch 1 customer paying 1.7 cents per kwh and Currently on 6 th batch: 5.7c/kWh v. current fuel charge averaging 3.615c/kWh, 1,000 through kwh 2021 per month will have saved Open about to all $1,300 customer when classes their (residential, subscription commericial, ends etc) Austin Energy Previous batches: 1: 1.7c/kWh Expired 3/11: net in the money over term 2: 2.85c/kWh Expired 3/11: net in the money over term 3: 3.3c/kWh currently in the money 4: 3.5c/kWh currently in the money 5: 5.5c/kWh 6: 5.7c/kWh

28 CONCLUSIONS Volatility protection is ALREADY being paid for shortterm via options trading. Why not use wind? Long-term wind makes sense as a hedge, even with cheap & low vol gas, no PTC, and no RECs. Solutions using wind as hedge (separate from RPS commitments) exist at ratepayer and large industrial levels, why not utilities?

29 THANK YOU! 7/2012 RMI discussion paper by Lisa Huber Utility-Scale Wind and Natural Gas Volatility: Uncovering the Hedge Value of Wind for Utilities and Their Customers. Available for download at