Fuel Costs Volatility & Risk - APRISE Presentation

Utility Fuel Costs: Volatility & Risk

Asia Pacific Resilience Innovation Summits & Expo

August 24, 2015

Why Focus on Electric Utility Fuel Costs?

•  Fuel costs dwarf /ixed costs

•  Fuel costs are the source of most of the risk

•  To date the discussion of risk has not been adequate –  Single price forecast line

–  High, expected, and low price forecast

–  Such forecasts cannot capture the true variability in future fuel prices

Typical Fuel Price Forecast

0.00

5.00

10.00

15.00

20.00

25.00

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040

Fuel Oil & Natural Gas Forecast Energy Informa8on Administra8on -‐ 2015 Annual Energy Outlook

Residual Fuel Oil Natural Gas

EIA Year 2000 Annual Energy Outlook Here’s What Was Forecasted . . .

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

$/ Barrel 2010 Dollars

Oil Prices -‐ EIA 2000 Annual Energy Outlook

LOW Oil Price

REF Oil Price

HIGH Oil Price

. . . And This is What We Actually Got: Prices That Peaked at 3.8 x EIA’s “High” Forecast

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

$/ Barrel 2010 Dollars

Oil Prices -‐ EIA 2000 AEO vs Actual

LOW Oil Price

REF Oil Price

HIGH Oil Price

Hawaii Fuel Oil

•  Complete view of volatility and risk

•  Generates many possible price paths

•  Based on historical data

•  Veri/ied by others

•  Easily updated

•  Uses generic software

•  Used broadly

Used by uFliFes & energy planning orgs (e.g., Northwest Power & ConservaFon Council; Federal Govt., e.g., DOE/NETL and EPA; and Fortune 500 companies)

Monte Carlo 101

Monte Carlo to Explore Fuel Cost Risk Assumptions & Data


Compare fuel cost risks across

portfolios



portfolios

5-‐year status quo; 25-‐year future portfolio



portfolios


Fossil fuel plus levelized cost of combined cycle gas plants



portfolios



Renewable PPA prices include /ixed asset costs



portfolios



Oil/diesel blend (75% LFSO/ 25% ULSD)

and natural gas

•  Power consumption /ixed at 2014 level

•  Renewable portfolio de/ined with fossil fuels /illing the balance

•  Data sources:

Renewable PPA prices include /ixed asset costs

What’s Not Included and Caveats


Costs for natural gas infrastructure



Grid upgrades



Grid upgrades O&M costs for fossil fuel

plants




plants

Emissions costs


•  This analysis demonstrates principles in planning for and evaluating risk of volatile fuel prices — does not provide an exact answer

•  The accuracy of the results depends upon the accuracy of the assumptions



plants

Emissions costs

Lower costs of renewables

The Size of the Prize or . . . The Scale of the Catastrophe

Key: SQ = Status Quo, RE = Renewable Energy, HH = Henry Hub + $10/mmBTU, Oil linked = 15% Discount to (LSFO 75% ULSD 25%) Blend

•  Monte Carlo: 80% chance of total fuel costs over 30 years of: Ø  $42 -‐ $201 billion total value Ø  $17 -‐ $55 billion PV (8% discount rate)

$-‐

$20.0 B

$40.0 B

$60.0 B

$80.0 B

$100.0 B

$120.0 B

1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% 95% 99%

Status Quo Total Fuel Cost

SQ-‐Total Cost PV

SQ-‐Total Cost SQ-‐Total Cost PV

1% $ 27.1 B $ 12.2 B 5% $ 35.5 B $ 14.9 B 10% $ 41.6 B $ 16.9 B 20% $ 51.9 B $ 20.0 B 30% $ 61.5 B $ 22.6 B 40% $ 72.1 B $ 25.5 B 50% $ 83.3 B $ 28.4 B 60% $ 97.5 B $ 32.2 B 70% $ 116.9 B $ 36.7 B 80% $ 144.9 B $ 43.3 B 90% $ 201.3 B $ 55.5 B 95% $ 261.2 B $ 68.2 B 99% $ 444.4 B $ 105.1 B

Why Natural Gas?

Henry Hub LNG Oil/Diesel

Why Natural Gas?


•  Savings: $0 -‐ $31.7 billion PV if 90% of fossil fuel generation replaced by natural gas at Henry Hub + $10/mmBTU

•  Status quo (oil/diesel blend): Less than 10% chance would be cheaper

$(80.0 B) $(70.0 B) $(60.0 B) $(50.0 B) $(40.0 B) $(30.0 B) $(20.0 B) $(10.0 B)

$-‐ $10.0 B $20.0 B

1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% 95% 99%

Difference: SQ RE w/ HH linked Gas vs. SQ

SQ RE-‐HH Gas Minus SQ-‐Total Cost PV

SQ RE-‐HH Gas Minus SQ-‐Total Cost

SQ RE-‐HH Gas Minus SQ-‐Total

Cost PV

1% $ (354.4 B) $ (74.8 B) 5% $ (191.5 B) $ (42.6 B) 10% $ (139.1 B) $ (31.7 B) 20% $ (89.9 B) $ (21.3 B) 30% $ (65.0 B) $ (16.0 B) 40% $ (48.4 B) $ (12.2 B) 50% $ (36.3 B) $ (9.3 B) 60% $ (26.3 B) $ (6.8 B) 70% $ (16.9 B) $ (4.6 B) 80% $ (8.7 B) $ (2.4 B) 90% $ 0.3 B $ 0.0 B 95% $ 7.2 B $ 2.0 B 99% $ 52.3 B $ 13.6 B

•  “HH LNG vs Oil-‐Indexed LNG-‐Total Fuel Expense Monte Carlo” video to be inserted here

Which Natural Gas? Henry Hub or Oil Linked?

Henry Hub LNG Oil/Diesel-‐Indexed LNG

Which Natural Gas? Henry Hub or Oil Linked?


•  Cheaper compared to what?

•  Status quo > Natural Gas (Lixed discount) > Henry Hub linked gas

•  What’s more important: beating the status quo or total cost?

$(50.0 B) $(40.0 B) $(30.0 B) $(20.0 B) $(10.0 B)

$-‐ $10.0 B $20.0 B $30.0 B

1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% 95% 99%

Difference: SQ RE w/ HH linked Gas vs. Oil linked Gas

SQ RE-‐HH Gas Minus Oil Indexed Gas-‐Total Cost PV

SQ RE-‐HH Gas

Minus Oil Indexed Gas-‐Total Cost

SQ RE-‐HH Gas Minus Oil Indexed Gas-‐Total Cost PV

1% $ (192.0 B) $ (40.0 B) 5% $ (103.9 B) $ (22.6 B) 10% $ (72.7 B) $ (16.4 B) 20% $ (45.9 B) $ (10.8 B) 30% $ (32.5 B) $ (7.8 B) 40% $ (23.5 B) $ (5.7 B) 50% $ (16.8 B) $ (4.1 B) 60% $ (10.8 B) $ (2.6 B) 70% $ (5.8 B) $ (1.4 B) 80% $ (1.1 B) $ (0.2 B) 90% $ 4.1 B $ 1.3 B 95% $ 9.1 B $ 2.8 B 99% $ 92.2 B $ 21.6 B

Status Quo Renewables Plus Gas or . . . High Renewables Plus Gas for the Balance?

•  High Renewables: costs $0.5 B for protection against $8.3 B catastrophe

•  Oil-‐linked gas: pays ratepayers $0.9 B for protection against $15.7 B catastrophe


$(5.0 B)

$-‐

$5.0 B

$10.0 B

$15.0 B

$20.0 B

1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% 95% 99%

SQ RE with High Gas Minus High RE with Low Gas Total Cost PV

SQ RE-‐HH Gas Minus High RE-‐HH Gas-‐Total Cost PV

SQ RE-‐Oil Indexed Gas Minus High RE-‐Oil Indexed Gas-‐Total Cost PV

SQ RE-‐HH Gas Minus High RE-‐HH Gas-‐Total Cost PV

SQ RE-‐Oil Indexed Gas Minus High RE-‐Oil Indexed Gas-‐Total Cost PV

1% $ (1.2 B) $ (1.8 B) 5% $ (1.1 B) $ (1.4 B) 10% $ (1.0 B) $ (1.1 B) 20% $ (0.9 B) $ (0.6 B) 30% $ (0.8 B) $ (0.1 B) 40% $ (0.6 B) $ 0.4 B 50% $ (0.5 B) $ 0.9 B 60% $ (0.3 B) $ 1.6 B 70% $ (0.1 B) $ 2.4 B 80% $ 0.3 B $ 3.7 B 90% $ 1.1 B $ 5.9 B 95% $ 2.3 B $ 8.3 B 99% $ 8.3 B $ 15.7 B

•  “High RE w LNG vs SQ RE w LNG-‐Total Fuel Expense Monte Carlo” video to be inserted here

What’s the Tipping Point for RE Prices to Provide “Free” Insurance?

High Renewable Energy w/LNG Status Quo Renewable Energy w/LNG

•  Renewables with HH gas: nearly free insurance against $8.1 billion catastrophe

•  Oil-‐linked gas: rate-‐payers “paid” $1.4 billion against a $15.5 billion catastrophe


$(5.0 B)

$-‐

$5.0 B

$10.0 B

$15.0 B

$20.0 B

1% 5% 10% 20% 30% 40% 50% 60% 70% 80% 90% 95% 99%

SQ RE with High Gas Minus High RE ($0.14/KWh) with Low Gas-‐Total Cost PV

SQ RE-‐HH Gas Minus High RE ($0.14/KWh)-‐HH Gas-‐Total Cost PV

SQ RE-‐Oil Indexed Gas Minus High RE ($0.14/KWh)-‐Oil Indexed Gas-‐Total Cost PV

SQ RE-‐HH Gas Minus High RE ($0.14/KWh)-‐HH Gas-‐Total Cost PV

SQ RE-‐Oil Indexed Gas Minus High RE ($0.14/KWh)-‐Oil Indexed Gas-‐Total Cost PV

1% $ (0.7 B) $ (1.3 B) 5% $ (0.6 B) $ (0.9 B) 10% $ (0.5 B) $ (0.6 B) 20% $ (0.4 B) $ (0.1 B) 30% $ (0.3 B) $ 0.4 B 40% $ (0.2 B) $ 0.9 B 50% $ (0.0 B) $ 1.4 B 60% $ 0.1 B $ 2.0 B 70% $ 0.4 B $ 2.9 B 80% $ 0.7 B $ 4.2 B 90% $ 1.5 B $ 6.4 B 95% $ 2.7 B $ 8.9 B 99% $ 8.1 B $ 15.5 B

What’s the Tipping Point for RE Prices to Provide “Free” Insurance?

Fuel Choices and Risk: Bottom Line


Costs passed on to

ratepayers


Costs passed on to

ratepayers

LNG can save ratepayers billions


Costs passed on to

ratepayers


May be locked in for

30+ years


Costs passed on to

ratepayers


May be locked in for

30+ years

RE can provide “free insurance” and protect ratepayers

The answer seems clear:

•  Maximize low-‐cost renewables and consider natural gas for the balance

•  Do not simply replace all oil capacity with gas

Economy & Finance

Fuel Costs Volatility & Risk - APRISE Presentation