Energy Budgeting and Procurement: Securing Stable Energy Prices in Today s Volatile Markets Advisory Service for Energy and Climate Change John Lambert Senior Business Development Manager Direct Energy Consulting
Securing Stable Energy Prices in Today s Volatile Markets This presentation will provide guidance on energy procurement that will help you: Take control. Capture the benefits and successfully manage risk. Understand different market products to minimize the exposure to price volatility. Link the different elements of your energy portfolio including Climate Change Action Green Energy procurement. Energy Climate Change Action Green Energy 2
Capture The Maximum Benefits and Successfully Manage Risk While Public Sector consumers may have their own governance issues and practices around procurement, it is important to understand energy markets governance and sales practices. Energy commodities trade hourly in markets such as New York Mercantile Exchange (NYMEX- oil & gas) and Hourly Ontario Electricity Price (H.O.E.P - electricity), which means the price is volatile by nature. As Public Sector consumers buys from Retailers and generally cannot procure from Gas Producers or Electricity Generators it pays to understand the energy market s business practices and be aware of who is who. 3
The Basics About LDCs Natural Gas Gas is available through your Local Distribution Companies (LDC) on a default basis. If you don t transact your own gas supply contracts the LDCs will continue to deliver gas to you but on a regulated basis and with price mechanisms that don t necessarily reflect the market. Gas is priced based on the LDC s acquisition cost of gas but may be billed differently. Gas is shipped from Western Canada to Eastern Canada at the rate of 1/365th of your annual requirement per day through the available pipelines. Options exist for the Customer, a a Retailer or LDC to manage the transportation requirements 4
A Glance at the Pipeline 5
The Basics About LDCs Natural Gas LDC gas prices can be set in advance usually for short periods of time (30-90 days) but can be adjusted after the fact based on the LDC s actual acquisition cost of gas over the same period or longer periods. Not ideal for the budget conscious LDCs do not profit on the purchase and resale of gas. However, LDCs acquire gas on a one size fits all basis.not on the basis of your risk and budgetary objectives. Since deregulation in 1985, LDC pricing and market pricing have been out of synch. 6
Jan-07 Apr-07 Jul-06 Oct-06 Apr-06 LDC vs. Market Prices Historical LDC vs. Market Prices Enbridge Union AECO 5A Settlement 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 7 Price, cents per m3
The Basics About LDCs Natural Gas LDCs are in the business of importing gas into the province, taking delivery of gas, storing it, managing its movement in their pipeline infrastructure and delivering it to your gas meter. Market gas prices are driven by weather, storage inventory, world oil prices and other competing fuels and pipeline interruptions. The art of predicting these things with consistent accuracy is yet to be perfected. With all these uncertainties, it is important to be able to create a strategy that will address your needs. 8
Electricity Electricity Electricity cannot be stored. It is created in real time and must be utilized or wasted. Electricity prices are time sensitive depending on the time of day, day of the week, week of the month and month of the year, therefore it is critical to understand your usage profile based on these time parameters. (Time-of-Use pricing) Electricity profiling can be done from historical hourly data analysis and such data is available to you from your LDC. 9
The Basics About LDCs Electricity Hourly Ontario Electricity Price (H.O.E.P) is determined on the basis of future hourly bids made by the generators into the Independent Electricity System Operator (IESO). Electricity is delivered through your LDC on a default basis. If you don t transact your own electricity supply contracts the LDCs will pass through the regulated average of the each hour s spot price for the preceding billing period. 10
The Basics About LDCs Electricity LDCs do not offer any price programs for default customers. It is near impossible to predict what your end of month price will be on the LDC default supply option. Not ideal for the budget conscious LDCs do not profit on the purchase and resale of power. Limited market with only a handful of generators including Ontario Power Generation and Bruce Power making up more than 50% of the market. 11
When You Use Electricity is Equally Important as How Much You Use Time of Use measurement of electricity usage is critical Average usage measured for pre-defined periods of time On-Peak Period: Monday to Friday 7 am to 11 pm Off-Peak Weekday Monday to Friday 12 am to 6 am Off-Peak Weekend Saturday Sunday 24 hours 12
Gaining Control Requires Analysis External resources (Consultants) provide their customers access valuable tools that: Create load profiles Create Time Block strategies (electricity) Create Seasonal strategies (natural gas) Develop risk profiles Calculate forward net effective costs Compare purchase performance vs. market prices 13
Twelve Month Hourly Consumption Profiles 3.5 3.0 2.5 2.0 MW 1.5 1.0 0.5 0.0 May-02 May-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 14
30-Jan 31-Jan 23-Jan 24-Jan 25-Jan 26-Jan 27-Jan 28-Jan 29-Jan 22-Jan 15-Jan 16-Jan 17-Jan 18-Jan 19-Jan 20-Jan 21-Jan Daily Profiles 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 Customer Profile 15 14-Jan 11-Jan 12-Jan 13-Jan 10-Jan 1-Jan 2-Jan 3-Jan 4-Jan 5-Jan 6-Jan 7-Jan 8-Jan 9-Jan MW
Weekly Profiles 0.25 0.2 0.15 MW 0.1 0.05 0 12-Jun 13-Jun 14-Jun 15-Jun 16-Jun 17-Jun 18-Jun Customer Profile 16
30-Aug Blocking Strategy 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1-Jul 3-Jul 5-Jul 7-Jul 9-Jul 11-Jul 13-Jul 15-Jul 17-Jul 19-Jul 21-Jul 23-Jul 25-Jul 27-Jul 29-Jul 31-Jul 2-Aug 4-Aug 6-Aug 8-Aug 10-Aug 12-Aug 14-Aug 16-Aug 18-Aug 20-Aug 22-Aug 24-Aug 26-Aug 28-Aug 7x24 Block 5x16 Block 5x8 Block 2x24 Block Load 17 MW
Analysis Tools Purchase performance vs. Market and System pricing 18
The Basics About Electricity Pricing Electricity Pre-deregulation electricity prices were subsidized for far too long and were too low, hence were a major contributing factor to the Ontario Hydro debt. In May 2002 market prices began at substantially higher rates than pre-deregulation prices but proved to be a bargain. Multi-year contracts could be secured for 4.5 /kwh for a 7 x 24 Physical Block and 5.9 /kwh for Load Following. Today s prices are ~ 6.0 for 7 x 24 and ~7.0 for Load Following. 19
The Basics About Electricity Pricing Electricity Power prices are driven by weather (temperature), rainfall, wind, world coal prices, nuclear generation capacity, natural gas prices and other competing fuels and transmission interruptions (remember the Blackout?) The art of predicting these things with consistent accuracy has yet to be perfected. Again, it is important to be able to create a strategy that will address your needs and consider these price affecting factors. 20
Government Intervention Electricity Assistance programs are in place on a market transitional basis. Rate Protection Program (RPP) For small accounts of less than 250,000 kwh per year (~$17,500/yr). Fixed discounted prices are in place on LDC default option (if the account is not under a retail contract). Some RPP accounts may be better off on a Retail Contract. Analysis needs to be done. RPP is only a known certainty until March 2008. 21
Government Initiatives Provincial Benefit www.theimo.com/imoweb/siteshared/electricity_bill.asp Market Power Mitigation Rebate www.opg.com/indexserver/asp_indexserver.asp Clean Energy Standard Offer/Conservation Programs/Demand Response Programs www.powerauthority.on.ca 22
Advanced Metering Initiative Ontario Power Authority has mandated a coalition of large LDCs to install 800,000 interval meters in Ontario covering all accounts below 438,000kWh by December 2007 Coalition members include: Toronto Hydro, Enersource, Veridian, Horizon, Powerstream, Hydro Ottawa, Chatham-Kent, London Hydro, Milton Hydro and Newmarket Hydro. Cost to be blended into distribution rate base effective immediately no upfront cash outlay. Alberta and B.C. are going this way as well. So in the near future, you will need to consider several types of electricity pricing products. 23
Advanced Metering Initiative Coalition of large LDCs are to install the balance of 3.5 million interval meters in Ontario covering all accounts above 438,000 kwh by December 2010 In 2005 George W. bush passed an EPAC bill that mandated all LDCs in U.S.A. to file a plan for interval meter installations and Time of Use rate offerings by end of 2008 24
Advanced Metering Initiative Once interval meters are installed, a Time of Use rate will be implemented by your LDC. An imposed different rate for On Peak and Off Peak power use. This could be good or bad depending on your load profile. An alternative is a strategic Physical Block Strategy purchase through a Retailer. Interval meters allow you to proactively adjust your consumption hourly based on price upset. Ontario Power Authority (OPA) offers a Demand Response Program that rewards actionable electricity conservation during peak price hours. Interval metered accounts enable you to price the energy you use, when you use it. 25
Time to Go Green Theoretically, if everyone purchased only 12% of their power needs from green energy sources, we could cut the coal-fired generation in Ontario by half. 26
Green Energy Climate Change Action legislation is not far away. Taxes on excessive use of energy will be the norm (recent Jim Flaherty Federal Budget) Monetization of emissions or green credits will motivate the use of green power and energy conservation investment. Today green power fixed prices range from 6-11 /kwh Many Retailers are now offering green power. Green Power Pricing Consumer s Guide http://www.pollutionprobe.org/whatwedo/greenpower/consumerguide/ontario.htm 27
Gaining Control Energy procurement requires: - Regulatory knowledge, - Awareness of LDC Demand Reduction Programs, - Awareness of OPA Demand Response Programs, - Finance & Legal resources - Several market participant relationships. Internal procurement resources need to gain expertise from external resources. Acquiring energy expertise from energy suppliers and consultants is easy. The choice of which should depend on the amount of fiscal risk you bear in your annual energy purchases. 28
Gain Control of Budget, Processes and Ts & Cs Budget certainty is critical in most businesses to enjoy financial success or at least break even. The Public Sector is no different. Need to control: - your annual renewal dates, - the type of energy products you desire, - transaction processes, - pipeline space options, storage options and billing options - Consumption vs. contract quantity commitments With the proper resources (internal or external) you ll have the best chance of meeting your objectives. 29
Control with Price Certainty Chasing energy market spot prices is a tiresome activity and can lead to disappointment. Suppliers know this is a fool s game. Buying energy is not about gambling with fully open positions (spot pricing only) and waiting to find the lowest price. Buying energy needs to be about setting a budgetary target and developing a strategy around achieving that target. Once the target is set and objectives are in place a strategy may include some open positions that are intended to benefit from a falling market. 30
Energy Procurement Plan Basics Create a plan based on Developing a budget target price Developing a risk profile Diversifying between open and fixed pricing (if necessary) Select and negotiate Enabling Agreements with at least three suppliers who meet your criteria Monitor daily until all the energy in the portfolio can be locked in at or below your budget target price.stick to the Plan. 31
RFP Process for Best Results Issuing a Request for Proposal for Pricing is a dicey game as energy prices are sporadic and therefore it is difficult to determine who is the most competitive supplier at any given time Generally, Retailers who have history in supplying the Public Sector will be very competitive with each other. It is important to know who to deal with on the basis of credit worthiness, track record, flexibility of contract ancillary products and services that may be of interest 32
Enablement is Key Public Sector consumers should consider enabling up to three Retailers for either gas or electricity and execute their Enabling Agreements As Retailer acquisition costs change by the hour, Retailers will only offer firm prices on a limited time basis i.e.) an hour or a day Load profiles and historical detail on all the Customer s electric accounts will need to be submitted in the RFP for Price offers The enabled Retailers need to be advised on what portion of the energy portfolio will be awarded to them subject to final price approval. 33
Apples to Apples Price offers should be submitted electronically within the same hour to be fairly considered for competitiveness. Customers need to make their price acceptance decisions and sign off before the good until time expires. The price can be repeatedly reset and ultimately finalized by having the enabled Retailers issue a binding refreshed Price Confirmation document on a daily basis 34
Effort and Risk The degree to which one strategizes would reflect the amount of perceived risk.i.e.), A $40,000 consumer will not or cannot invest great time and expense in energy procurement whereas a $10 million energy consumer will certainly spend more time and invest in external resources to get it right. Where are you on this scale? Low Risk High Risk Risk Requires More Resources Limited Resources $40K Energy Expenditure Need For Consultant $10 million 35
Understand Your Energy Value Chain 36
It s Thinking About Old Challenges In New Ways Applying Tomorrow s Thinking Today 37 Thank you!