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WEBINAR SERIES INSIDE ENERGY AND SUSTAINABILITY
February, 2, 2017
Q1 ENERGY OUTLOOK UPDATEWinter Update and Impacts to Energy Pricing, 2017 Expectations & DER State of the Market
WELCOMEOUR PRESENTERS
IAN BOWMAN | PRODUCT MANAGEMENT
DIRECTOR
JONATHAN LEE | SENIOR ENERGY MARKET INTELLIGENCE MANAGER
INSIDE ENERGY & SUSTAINABILITY
TODAY’S TOPICS
DER STATE OF THE MARKET Demand for distributed energy resources continues to grow as companies
look to meet their renewables targets.
ENERGY MARKET UPDATE: Q1 2017 Natural Gas Storage: Supplies now at a deficit compared to the 5-year average. Winter Weather: Inconsistent temperatures continue to affect energy prices. Natural Gas Supply and Demand Balance: Increasing demand and stagnant production.
2017 POWER SECTOR TRENDS Changes in the generation mix and emerging technological advances have the potential to transform the industry.
INSIDE ENERGY & SUSTAINABILITY
DER STATE OF THE MARKET – MOSTLY GOOD NEWS
Solar Generation Is up ~40% Year Over Year Now totals ~1.5% of US generation mix
Wind Generation Is up 20% Year Over Year Now totals ~6% of US generation mix
Outlook Is for Similar Growth in 2017 Driven By: Declines in underlying unsubsidized costs Time sensitive federal ITC and PTC subsidies Time sensitive local Net Metering programs and caps Existing Pipeline of Utility, Municipality, Residential,
Community & Corporate Buyers
New Federal Policies Unlikely to Impact 2017 Directly But will introduce additional uncertainty into longer term decision-making
INSIDE ENERGY & SUSTAINABILITY
UNSUBSIDIZED – RECENT WIND AND SOLAR PRICE TRENDS
PRICE DECLINE DRIVERS
Wind Outlook ~3% annual Taller, Lighter, Dynamic Rotors Wind Prediction Software Focus in high wind corridors
Competition between projects asproduction tax credit decreases
Competition vs LOW wholesale rates
Solar Outlook ~7-9% annual Manufacturing Experience Minimized Racking Installation Experience Planning Software, etc.
Module Supply Glut (40% PriceDrop to 35 Cents per Watt)
Increasing Competition andStructured Purchasing
https://www.lazard.com/media/438038/levelized-cost-of-energy-v100.pdf
INSIDE ENERGY & SUSTAINABILITY
DRIVERS FOR 2017 . . . AND BEYOND
Unsubsidized Price Declines Likely to Continue as Manufacturing, Deployment, and Competition Scale Wind down 10%+ over the next 5 years Solar down 30-40% over the next 5 years Industry is driving for smaller, shorter wind offtakes to enable new buyers
Federal Policy Outlook Low likelihood of additional federal regulation/incentives for decarbonization in the near term; Clean Power Plan
is weakened Significantly lower federally funded research and tracking of renewable markets Potential support for transmission infrastructure. Ie. Move wind from Wyoming to Nevada/Southern CA As Federal incentives weaken, localized policies incentives and financial market signals become more important
INSIDE ENERGY & SUSTAINABILITY
DRIVERS FOR 2017 . . . AND BEYOND
State/Utility/Local Markets Outlook States and markets vary . . . Widely, BUT share in common:
Policies and Rates require refactoring as renewables penetrations reach their policy goals. I.e.: 0.5% to 2.5% Solar RPS carve-outs are eventually overwhelmed by growth causing SREC markets to fall or RPS
carve outs to be expanded Reaching net metering caps triggers changes
In search of longer term solutions, many states are studying “Value of Solar” Tariffs So far, there is a wide variance in what counts as “Value” at first 4 Cents Tennessee, 12 Cents Minnesota, 33 cents
Maine (Often determined by who did the study and what policies) Potential jurisdictional and legal challenges await on fairness, equal access, etc. Excel MN, in July of this year was the first Public Utility to implement VOS, and it is focused on Community Solar,
which reduces some likely angles for legal challenges
INSIDE ENERGY & SUSTAINABILITY
DRIVERS FOR 2017 . . . AND BEYOND
State/Utility/Local Markets Outlook Local wholesale markets also provide feedback loops in high penetration markets
Low CA wholesale prices at mid-day due to high solar are driving TOU revamp by 2021 Mid-day=OFF Peak.
West TX Wholesale market is currently very low at around $25/MWH Due to high penetrations of wind. Further additions could drive it lower Additional Transmission, and Exports to Mexico could restore balance
INSIDE ENERGY & SUSTAINABILITY
RISK CONCEPT OF THE DAY: HIGHER PENETRATION FEEDBACK LOOPS
http://www.nrel.gov/docs/fy15osti/64503.pdf
EIA INCLUDES THIS CONCEPT IN SOME OF THEIR MODELING.
As example of how it works in the markets: As more solar is added in CA, it drives the daytime prices lower. Thus driving the value of adding more solar lower.
IMPORTANT: Higher Penetration can retroactively impact projects already in place.
Storage and Demand Scheduling may help a bit, but expect this to continue.
CA is here
INSIDE ENERGY & SUSTAINABILITY
SOLAR PENETRATION BY STATE
http://www.solarleaderboard.com/2016-solar-penetration-state/#prettyPhoto
INSIDE ENERGY & SUSTAINABILITY
RISK CONCEPT OF THE DAY: HIGHER PENETRATION FEEDBACK LOOPS
https://www.eia.gov/outlooks/aeo/pdf/0383(2017).pdf
WHY ALMOST NO WIND AFTER 2021?
WITH OR WITHOUT CLEAN POWER PLAN
PTC has expired.
Potential for persistent low wholesale market prices in windy areas due to high penetration of wind, and low load growth. Makes further new generation additions uneconomic.
INSIDE ENERGY & SUSTAINABILITY
SRECS PRICES DROP WHEN APPROACHING SOLAR CARVE OUT LIMIT
http://www.solarleaderboard.com/2016-solar-penetration-state/#prettyPhoto
You can often see when a state reached their RPS Carve out Target.
Requires legislative action to add more RPS carve out or accept lower solar growth in the near term.
INSIDE ENERGY & SUSTAINABILITY
REITERATING THE GOOD NEWS!
Unsubsidized price declines likely to continue as manufacturing, deployment, and competition scale. Wind down 10% over the next 5 years Solar down 30-40% over the next 5 years
You can manage the risks of higher penetration markets through modeling for those cases, and consciously deciding when to take on the risk. Plus some of the feedback loop risks described are largely due to cleaner grid at lower prices (not all bad)
INSIDE ENERGY & SUSTAINABILITY
ELECTRIC AND NATURAL GAS MARKET DRIVERS2 February 2017
Bearish – Market Influencers Driving Prices Lower:
Natural Gas Production – After hitting a low in October, production beginning to increase as natural gas prices rise.
Economy – Q4 2016 GDP +1.9% annualized growth 156,000 jobs created in December; holiday retail sales flat.
Coal – Weak coal prices lower baseline electric generation costs.
Regional Generation Variations – Subsidizedwind generation in West Texas, localized shale in PJM providing cheap gas to power plants, and incremental pipeline capacity easing in the Northeast.
Bullish – Market Influencers Driving Prices Higher:
Demand – Gas-fired generation remains elevated, strong residential/commercial heating demand.
Natural Gas Storage – At a deficit compared to last year and the five-year average.
Weather Forecast – Winter temperatures colder than last year, supporting wholesale natural gas and electric prices.
LNG – Sabine Pass LNG exporting supplies to global markets.
Mexico Pipeline Exports – Exports up to 3.8 Bcf/day.
ISO Reliability – Retiring coal plants forcing ISO’s to evaluate grid reliability.
Interest Rate Hike – Fed raised rates in December, which marginally increased the cost of capital and could slow natural gas and oil production.
INSIDE ENERGY & SUSTAINABILITY
Tightening of the supply and demand balance has the 12-month strip trading between $3.20 and $3.70
Currently, the strip is near its highest level in over two years
NATURAL GAS 12-MONTH STRIP TRADING AROUND $3.40$/MMBtu – 31 January 2017
Budget Impact:Natural gas 12-month strip is 34% above last year at this time and 58% above February’s 17-year low.$2.00
$2.20
$2.40
$2.60
$2.80
$3.00
$3.20
$3.40
$3.60
$3.80
$/M
MBt
u
Major Support - $2.10
Minor Support - $2.85
Resistance - $3.50
INSIDE ENERGY & SUSTAINABILITY
Futures prices elevated until March 2018
Expectation of a tighter supply and demand balance during that timeframe
Prices are cheaper in the outer months
NYMEX NATURAL GAS FUTURES BACKWARDATED$/MMBtu – 30 January 2017
Budget Impact:Consider the contract term when looking to put third-party supply contracts in place.$2.25
$2.75
$3.25
$3.75
$4.25
$/M
MBt
u
Two Year Trading Range Current PriceNYMEX Henry HubContract Period: Mar 2017 – Feb 2021As of 1/30/2017
INSIDE ENERGY & SUSTAINABILITY
12-MonthRolling Strip
NYMEX Correlation
ERCOT HZ 89.9%
NY ISO J 45.6%
PJM West 26.5%
NEPOOL 21.6%
MISO 76.5%
PG&E NP-15 85.6%
INCREASED WINTER VOLATILITY FOR ELECTRIC 12-MONTH STRIPS$/MWh – 31 January 2017
Budget Impact:Winter volatility in New York and New England markets, but not nearly as dramatic as during the 2013/2014 winter. $20
$30
$40
$50
$60
$70
$80
$90
$/M
Wh
ERCOT AVG NY ISO J PJM NEPOOL MISO PG&E NP15 W
INSIDE ENERGY & SUSTAINABILITY
WINTER 2016/2017NOAA, AccuWeather, EIA – January 2017
A cold start to this winter help propel energy prices higher. However, inconsistent HDDs during January have caused prices to move mostly sideways for the last month.
INSIDE ENERGY & SUSTAINABILITY
CALIFORNIA DROUGHT IMPROVING USDA, NOAA – 24 January 2017
Major drought improvements were made not only to CA, but at many areas of the West, including parts of NV, UT, OR, ID, MT, WY, and CO.
INSIDE ENERGY & SUSTAINABILITY
Natural gas production peaked in Feb 2016 at 79.4 Bcf/day and bottomed out in Oct 2016 at 75.9 Bcf/day
During late 2017, production is expected to climb above 80 Bcf/day, which could limit excessive upside moves
NATURAL GAS PRODUCTION EXPECTED TO RECOVEREIA – January 2017
Budget Impact:Slower production has tightened the supply and demand balance, resulting in higher prices.60
65
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75
80
85
90
0
100
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Natural G
as Rig C
ount
Mar
kete
d Pr
oduc
tion
(Bcf
/Day
)
Natural Gas Rig CountTotal marketed production (left axis) billion cubic feet per day
INSIDE ENERGY & SUSTAINABILITY
-300
-250
-200
-150
-100
-50
0
50
100
2016/2017 Last Year Five-Year Average
First 200+ storage draw in December since 2013
Began withdrawal season at an all-time high, but now supplies are 11.1% below last year and 0.7% below the five-year average
LARGE WITHDRAWALS MOVE STORAGE INTO A DEFICITEIA – January 2017
INSIDE ENERGY & SUSTAINABILITY
NATURAL GAS CAPACITY CONTINUES TO GROWEIA – January 2017
U.S. to add about 11.2 GW of natural gas-fired generation capacity in 2017 and 25.4 GW
during 2018.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Perc
ent o
f Tot
al G
ener
atio
n
Electric Generation By Source
Coal Natural Gas Nuclear Hydro Renewables
Natural-gas fired electric generation was the largest source for the majority of 2015
and 2016.
INSIDE ENERGY & SUSTAINABILITY
REGIONAL ELECTRIC AND NATURAL GAS HUBSEIA – January 2017
$0
$2
$4
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$8
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$0
$20
$40
$60
$80
$100
$120
$/MM
Btu$/M
Wh
NEPOOL DA Algonquin Citygate
The link between electric and natural gas markets is growing as a whole, but regional dynamics can also heavily
influence price direction.
INSIDE ENERGY & SUSTAINABILITY
POWER SECTOR TRENDS TO WATCH DURING 2017January 2017
Generation mix will largely depend on the fate of the Clean Power Plan and other EPA regulations
Renewables continue to grow
Nuclear plants are at risk due to low-priced competition leading to potential subsidies
As energy storage matures, utilities will look to the technology as an alternative to peaking generation
DER growth is forcing utility adaptation and policy debates
Rate design reform will increase as utilities revisit the traditional business model
States will likely take a larger role in the push toward higher renewable goals
INSIDE ENERGY & SUSTAINABILITY
MAJOR TAKEAWAYS
INCORPORATE HIGH RENEWABLE PENETRATION MARKET FEEDBACK LOOPS INTO RENEWABLES MODELING SCENARIOS
REMAINING WINTER WEATHER WILL HAVE A BIG IMPACT ON PRICE DIRECTION. If cold temperatures dominate the second half of winter, energy prices will see continued upward pressure.
Conversely, if temperatures moderate, energy prices could retreat to pre-winter lows.
POWER MARKETS FOCUSING ON REGIONAL DYNAMICS, CAUSING THE CORRELATION TO NYMEX NATURAL GAS TO DECLINE. Some regional electric markets have decoupled from natural gas during the winter, so monitoring pricing at a
more regional level may uncover more buying opportunities.
2017 POWER SECTOR TRENDS During 2017, the beginning of new and the continuation of developing trends will transform the power sector in
significant ways over the next few years.
INSIDE ENERGY & SUSTAINABILITY
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