PUCT Raises System-Wide Offer Cap to $4,500/mWh, Immediately Affecting Electricity Prices
The Public Utility Commission announced it’s decision to raise the system-wide offer cap to from $3,000 to $4,500/mWh today. Although not effective until August 1, this ruling immediately affected electricity prices. Prices have shot up and any unsigned contracts are being pulled.
What does this mean for the consumer?
Index Consumers – Even though prices spike up to the cap only a few hours each year, consumers riding an index will be most affected by this cap increase due to price risk exposure. It is suggested at this time that a customer with an index-priced product convert to a fixed-price product.
Fixed Price Consumer – There is speculation around whether or not a retail electric provider (REP) can pass through any cost increases associated with the rate cap by means of the “Change in Law” provision in contracts. Due to each REP’s unique way of hedging, amounts passed through would vary – especially if a REP doesn’t hedge fixed-price contracts appropriately or even at all.
Background on the PUCT’s Decision to Raise Market Caps:
Discussions on raising the cap began when the Electric Reliability Council of Texas (ERCOT) announced decreasing reserve margins. A reserve margin is the amount of available power above the capacity needed to meet normal peak demand levels. ERCOT’s target reserve margin, used to ensure stable grid operation, is set at 13.75% and actual reserve margins are likely to fall below the target by 2014.
The anticipated goal for the cap rate increase is to spur construction of new generation facilities. More generation would lead to an increased reserve margin, resulting in fewer struggles to meet demand during extreme weather situations coupled with Texas’s continuous population growth.
Not only has the PUCT passed the cap increase to $4,500 – They have launched another proposal to set cap rates in future years: $5,000/mWh before summer 2013; $7,000/mWh in 2014; and $9,000/mWh in 2015.
We will keep you updated on any future increases.
California’s Cap and Trade Program Launching January 1
The California Air Resources Board (CARB) is in the end stages of assembling a greenhouse gas cap and trade program. The program officially launches on January 1, 2013 and will cover major sources of greenhouse gas emissions in the State.
The goal of this program is to fight climate change and reduce greenhouse gas emissions to 1990 levels by the year 2020 eventually achieving an 80% reduction from the 1990 level s by 2050.
California, the first and only state to have created a cap and trade system, has now been joined by Quebec.
“Linking with Quebec is a significant advance in California’s efforts to fight climate change and steer our economy toward a clean energy future,” stated Mary Nichols, chairwoman of the CARB.
CARB is developing California’s carbon market and is scheduled to vote on rules this month. If approved, the first linked auction for Quebec and California companies will take place in November.
Cap and Trade Explained
Emissions caps are established by collecting emissions data from large industries. Business are then grouped and assigned an average emissions benchmark. Businesses are allowed to emit 90% of the benchmark in the first year and companies that operate below the cap may sell their excess allowance on the ‘market’. Companies with emissions above the benchmark may purchase these credits.
The cap and trade is a great way to reward companies for reducing their greenhouse gas emissions but will hurt those using fossil fuels, especially those using coal – the dirtiest fuel. The ultimate goal of the program is to eliminate the reliance on any fossil fuels for energy and incent renewable energy growth.
Obama proposed a nationwide cap and trade program in 2009 which didn’t pass. West Virginia and Indiana– states using coal for more than 90% of electricity generation – are safe from any adjustments for now.
Assuming a nationwide program is eventually put in place, any region heavily relying on fossil fuels for their electricity needs will absolutely see an increase in their electricity prices. To comply, plants will need to purchase emissions credits – costs which would be passed on to the consumers.
Decommissioning fossil fuel-fired power plants and preventing any new construction may be the best way to reduce the nation’s carbon footprint, but will definitely affect the end users. Picture courtesy of Legal Planet (legalplanet.wordpress.com)
WHOLESALE HEAT RATES PULL BACK ON ANNOUNCEMENT OF A MILD SUMMER; AFFECTING ELECTRICITY RATES IN TEXAS
The main culprit behind any recent electricity price increase is a wholesale term called “heat rates.” Heat rates are used in the energy industry to determine how efficiently a generator uses heat energy. Generally, natural gas prices and heat rates have an inverse relationship. If natural gas goes up, heat rates go down and vice versa.
The Cost of Electricity = Natural Gas x Heat Rate
Last summer gas prices were around $4 and electricity was around $50/mWh (5 cents/kWh). This means heat rates were at about $12.50. Although gas prices remained steady, during the 4 days in August when demand and threats for blackouts were high, the heat rate was about $91.25; making electricity about 36.5 cents a kWh.
Natural gas prices have stayed relatively stable and are expected to stay that way. However, heat rates began increasing due to tighter reserve margins and the price of electricity was reflecting this fact (Read More). Electricity prices were running a few mils (1 mil – $0.001) higher per kWh in March, April and early May. Refer to the chart below to see the price climb beginning in March and the pullback in mid-May.
Above chart courtesy of MP2 Energy.
Due to mild weather forecasts for this summer, we have seen a pullback in heat rate prices which is bringing electricity prices back down. Also attributing to this price decrease is the announcement of a 500MW generation expansion coming online as soon as next summer. Now is a good time to lock in any electricity contracts before heat rates begin climbing back up on tight reserves or extreme weather.Read More
Japan Possibly Importing LNG From Continental US
Due to last year’s tsunami effects on Japans nuclear fleet, the country now heavily relies on liquefied natural gas (LNG) for their power needs. The fracking revolution has flooded the US natural gas market – prompting many producers to consider export projects.
Japan is currently in talks with Sempra Energy’s LNG project in Cameron, Louisiana; Dominion Resources’ LNG project in Cove Point, Maryland; and Freeport LNG in Texas to buy a combined 30 million metric tons of LNG a year. More information can be found here.
Gas prices in Asia are about seven times higher than US prices, making the export to Japan a profitable opportunity for US natural gas corporations. Like any commodity, exporting from the US decreases the supply and increases the demand causing prices to potentially increase.Read More
Texas Electricity Prices Rise Due to Market Capacity Charges and Shrinking Reserve Margins
Despite 10 year low natural gas prices, why are ERCOT electricity rates now rising?
Wholesale power prices follow natural gas prices, especially in Texas where about half of power plants are powered by this fuel. A compilation of several factors including tight reserve margins and an increased market cap are adversely affecting electricity prices.
Rates have increased by $0.002 to $0.004 per kilowatt hour (kWh) on new retail electric contracts. For a customer with an annual usage of 1 million kWh, this equates to $2,000 to $4,000 in extra costs per year.
Additionally, the population in Texas is increasing by nearly 200,000 people each year and no new generation has been constructed nor have any plans for new generation been submitted. This means Texas’ electricity needs are spread even thinner to accommodate not only the rising population, but the extreme demand in severe winter or summer months.
A reserve margin refers to the amount of available power capacity above the capacity needed to meet normal peak demand levels. ERCOT’s target reserve margin, used to ensure stable grid operation, is set at 13.75%. The forecasted reserve margin for summer 2012 is slightly above that at 13.99%.
Last year’s reserve margins were at 17.5% and still, in February and August 2011, the grid not only failed to meet demand but also set a new winter peak demand record and three all-time summer peak demand records in 4 days. Read More: ERCOT News Release
The lack of generation has led the Public Utility Commission of Texas to come up with a potential solution: raising the market cap. A market cap is the maximum cost a generator can charge for electricity per megawatt. The cap is important during peak demand times and electricity generators rely on these peaks to make a profit.
Wholesale prices of electricity are currently around $40 per megawatt. In August of last year, when record-high temperatures plagued Texas, wholesale prices spiked to the current cap of $3,000 per megawatt or $3.00 per kWh.
The PUC is pushing to increase the cap to $4,500 this summer and potentially up to $7,500 in the next several years. Raising the cap will hopefully bring in new generation by providing a financial incentive to investors. Rather than earning $3,000 per megawatt during peak demand, they will earn a minimum of 1.5 times more than the current cap.
We will keep you updated on any further information regarding the market cap and or reserve margins.Read More
Natural Gas Gluttony Causing One Major Producer to Reduce Drilling Operations
Chesapeake Energy Corporation (NYSE: CHK), the second largest producer of natural gas in the United States, is making vast changes in order to protect their shareholders. Natural gas prices have hit a ten year low causing Chesapeake to decrease drilling in the Barnett, Haynesville and Marcellus Shale Plays. The company is immediately curtailing gross gas production by up to .5 billion cubic feet (Bcf) per day. If prices remain low, the company is willing to increase the curtailment to 1 Bcf a day.
An abundance of shale gas plays (see above image) has led to a surplus in natural gas inventories. Coupled with the mild winter the US has seen, natural gas prices steadily declined. After Chesapeake’s announcement, the market closed up $0.182 to $2.525. Pundits still feel that to have a real impact, other producers such as Exxon, EnCana and Devon Energy will have to follow suit.
Please visit http://rapidpower.net/rpm-market-news to see a real time update on 12, 24 and 36 month natural gas futures prices.Read More
EPA’s CSAPR Delayed
The EPA Cross State Air Pollution Rule finalized in July 2011 has been delayed pending further review. The US District Court of Appeals granted a request from several power generators who stated the January 1, 2012 implementation date was too soon.
The Federal Electric Regulatory Council (FERC) is also concerned with the impact that the rule would have in places like Texas and the New England States where demand is high.
The court is asking that oral arguments regarding this matter take place by April 2012.
As RPM clients, we will continue to keep you informed on this critical piece of legislation.
Previous Articles Regarding the CSAPR:Read More
ERCOT News Release
ERCOT has released both the winter 2011/2012 assessment as well as their biannual assessment for the next 10 years. Risk is very low, according to CEO Trip Doggett, that peak demand will exceed the available resources this winter season. ERCOT will continue to monitor the situation. Beginning summer 2012 it may be a different story. Power reserves — the extra capacity used to avoid rotating outages — will likely fall below the minimim target as they have decreased by five percent. This means we can expect emergency procedures and potential outages.
Click to read more on the Winter 2011/2012 Assessment.Read More
Q4 2011 – Solar Power
Solar Power: Time To Shine?
Renewable energy sources such as Solar power have become an increasingly popular energy resource over the years thanks to decreasing prices and increased awareness via reduced production costs, green energy advocates, government incentives and panel manufacturers’ marketing efforts.
Although solar power is still approximately three times more expensive than electricity produced by natural gas, prices have fallen by two thirds since 2008. To further solar power’s affordability, federal and state governments are offering tax breaks and subsidies.
The federal government offers a tax credit of 30 percent for the gross cost of solar panel installation for residents and businesses. On top of the tax credit, each state offers its own incentives for all forms of renewable energy, including solar.
The Department of Energy (DOE) rolled out the SunShot Initiative in 2007 to decrease solar energy system costs by 75% before 2020. When this goal is reached, systems will even be affordable without any rebates or tax cuts. The main goal has been to drive innovative technology.
Under the initiative, the DOE began backing the company 1366 Technologies this October with a $150-million loan. 1366 believes their new manufacturing process will significantly cut costs, making prices competitive with that of coal.
New thin-film photovoltaic cell technologies are also bringing down the costs and large companies like GE are beginning to manufacture the panels. In October GE announced plans to build the largest thin-film panel factory in the United States.
These initiatives are not only bringing down costs, they are creating jobs and with their implementation, protecting the environment.
Solar’s portion of the power business remains small but has great potential to flourish. According to the U.S. Energy Information Administration (EIA), solar power is capable of providing many times the total current energy demand.
U.S. Department of Energy (DOE) SunShot Initiative; http://www1.eere.energy.gov/solar/sunshot/
Information on state, local, utility and federal incentives and policies that promote renewable energy and energy efficiency: http://www.dsireusa.org/
HAVE SOLAR COSTS COME DOWN ENOUGH FOR YOUR FACILITY?
See the example of a Ft. Worth, Texas territory cost comparison*:
THE SAME SYSTEM COST 1.6 TIMES MORE IN 2006 THAN IT WOULD NOW
*These are simply estimates calculated by RPM based on real numbers from NREL and a solar panel installer. While every state in the US is given the same federal tax credit, each state adds its own incentives. For example, New Jersey offers a yearly payback through their surplus agreements for the first 15 years of your systems life which could slash costs up to 60%.
SOLAR POWER FACTS
- Low-temperature solar collectors also absorb the sun’s heat energy, but instead of making electricity, use the heat directly for hot water or space heating in homes, offices, and other buildings.
- Covering 4% of the world’s desert area with photovoltaics could supply the equivalent of all of the world’s electricity.
- The Gobi Desert alone could supply almost all of the world’s total electricity demand.
- Passing of Bill 632 restricts any Home Owner’s Association from banning solar panels on home rooftops.
- Photovoltaic cells are used to transform energy from the sun directly into electrical power. The amount of electricity generated by a cell depends on a few things including device size, weather and length of exposure to light.
- Since the sun is an intermittent energy source, another electricity source would need to provide power during the evening or during a storm when light is not present or potent. Highest electricity demand is during the day time so the ‘back-up’ energy source would be used sparingly.
- Using solar energy produces no air or water pollution and no greenhouse gases
The nation’s economy gained much-needed strength in the third quarter, as the pace of growth nearly doubled compared to the previous three months.
According to an advanced estimate released on October 27, U.S. gross domestic product grew 2.5% – almost double the second quarter. A poor 0.4% growth in the first three months of the year was followed by a slightly more promising 1.3% increase in the second quarter.
Stronger consumer spending significantly contributed to the growth, helping to make up for cuts in government spending.
An increase of at least 3% is needed to create enough jobs to lower the unemployment rate but economists aren’t expecting to see that rise even through 2012.
OIL AND GAS UPDATE
EIA projects average household heating expenditures for natural gas, propane, and heating oil will increase by 3 percent, 7 percent, and 8 percent, respectively, this winter (October 1 to March 31) compared with last winter, while electricity heating expenditures fall by less than 1 percent. Average expenditures for households that heat with oil are forecasted to be higher than in any previous winter.
This forecast reflects higher prices for natural gas, propane, and heating oil, and slightly milder weather than last winter in much of the nation contributing to lower consumption in many areas.
EIA expects the U.S. average refiner acquisition cost of crude oil to average $99 per barrel in 2011 and $98 per barrel in 2012, compared with $100 per barrel and $103 per barrel, respectively, in the previous Outlook.
Natural gas working inventories ended September 2011 at 3.4 trillion cubic feet (Tcf), about 2.6 percent, or 91 billion cubic feet (Bcf), below the 2010 end-of-September level. EIA expects that working natural gas inventories will approach last year’s high levels by the end of the injection season, typically October-November each year. The projected Henry Hub natural gas spot price averages $4.15 per million British thermal units (MMBtu) in 2011, $0.24 per MMBtu lower than the 2010 average. EIA expects the rate of growth in domestic natural gas production to slow in 2012, with the Henry Hub spot price averaging $4.32 per MMBtu.
Dallas Business Journal Interviews JD
Matt Joyce of the Dallas Business Journal interviewed one of RPM’s business partners, JD, at the TEPA conference. They spoke about the EPA’s “Cross State Air Pollution Rule” and the impact it could have on the electricity market in Texas. The article also highlights challenges ERCOT may face to meet demand in the future.
Check out the article here.Read More