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Q3 2015 Energy Market Outlook Energy Prices and Market Intelligence Q3 Update September 10, 2015
Presenter: Jonathan Lee, Sr Energy Market Intelligence Manager, Ecova
Prices are near a three-year low, how did we get here?• Natural Gas Production, Storage: Near-record pace.• Power Sector Demand: Helped keep the downside limited.• Summer Recap: Near the 10-year norm.
What’s on the horizon?– Natural Gas Pipeline Projects: Impact to volatility and basis prices.
– LNG Exports: First LNG export facility coming online late 2015.
– PJM Capacity Performance: FERC approved PJM’s new capacity structure.
2016 Budget Influencers– Downside Pressure: Gas production, healthy natural gas storage, weak winter demand,
pipeline capacity additions.
– Upside Potential: Gas-fired generation growth, LNG exports, EPA regulations, unexpected weather, reliability enhancements.
ENERGY MARKET INTELLIGENCE
Natural gas production running 7% higher in first six months of 2015 than 2014
Dry gas production expected to average around 74 bcf/day in 2015
Continued growth seen through 2016
STRONG NATURAL GAS PRODUCTIONEIA - September 2015
Boom largely due to shale production in PA, OH, and WV, which accounted for 2.4% of U.S. production in 2008 and
now accounts for nearly 25%.
SHALE PRODUCTION GROWTHEIA - September 2015
Marcellus leading the way, producing over 15 bcf per day
in 2015.
Power sector demand growth Pipeline infrastructure
expansions Liquefied natural gas exports Exports to Mexico Increases in industrial demand
due to chemical plant additions
FACTORS FOR INCREASED PRODUCTIONEIA - September 2015
0
5
10
15
20
25
30
35
2014 2015 2016 2017 2018
Bcf/
day
Additional Pipeline Capacity
Cost of production vs. the price of natural gas
Decline in oil prices− Potential reduction
in associated gas output
− LNG market less attractive
Interest rate hikes Environmental
regulations
RISKS FOR SLOWING PRODUCTIONEIA - September 2015
Budget Impact: Lower supply would place upward pressure on natural gas prices.
2015 STORAGE REPLENISHMENT
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Nat
ural
Gas
Stor
age
Leve
l (Bc
f)
Natural Gas Storage
Low
Peak
2015 Refill Rate: Could push total
supplies to record high.
Budget Impact: Sufficient storage alleviates supply concerns and leads to lower prices.
SUPPLY OUTPACING DEMAND
Gas production continues to outpace demand, which has put downward pressure on natural
gas prices.
Power Sector experiencing large increases in 2015, but expected to decline in 2016
Industrial demand anticipated to see continued annual growth
EIA – September 2015
RECORD GAS-FIRED GENERATIONEIA - September 2015
The proportion of electricity generated from natural gas outpaced the previous five-year average by 5.1%.
During 2012, low gas prices led to record annual gas-fired generation at 24.9 bcf/day
EIA predicts 2015 annual power sector demand will average 25.2 bcf/day 0%
5%
10%
15%
20%
25%
30%
35%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
U.S. Electricity Generation from Natural Gas (%)
2010-2014 Avg 2015
Budget Impact: In 2012, record power sector demand pushed prices higher as the year progressed.
The summer of 2015 was mostly in line with projections. The West was hot and dry, while the rest of the country was near normal.
Increased power sector demand limited the decline in
natural gas prices.
SUMMER 2015 RECAPNOAA, AccuWeather; EIA - September 2015
FALL TEMPERATURE OUTLOOK
A cooler South Central is likely to persist through Fall, while the is West, North, and East Coast are projected to be above-normal for much of the time.
NOAA, AccuWeather: September 2015
Fall Outlook
EARLY WINTER WEATHER OUTLOOKNOAA, Farmers’ Almanac, AccuWeather - September 2015
Budget Impact: El Niño to dampen energy price increases this winter?
El Niño currently has greater than a 90% chance of strengthening through the winter, which could help CA drought, and keep the North drier and warmer this winter.
El Niño patterns, as shown below, primarily reach maximums during Dec-Feb and typically persist for 9-12 months.
EL NIÑO WINTER IMPACTNHC/NOAA; AccuWeather: September 2015
NATURAL GAS PIPELINE PROJECTS
NE PA Dry9.1 Bcf/day
West Marcellus/Utica
23.9 Bcf/day
An estimated 33 Bcf/day of takeaway capacity
expansions by 2018
3.1 Bcf/day of expansions in 2014 to benefit Northeast
4.9 Bcf/day of expansions planned for 2015 to benefit Northeast
New England to see additional pipeline capacity in 2016
REX ZONE 3 EAST TO WEST
1.2 bcf/day into Chicago and Michigan.
EIA - September 2015
One of the longest pipelines in the U.S., measuring 1,700 miles long.
Zone 3 fully bi-directional. Only U.S. pipeline directly
linking Rocky Mountain and Appalachian supply basins to consumers in the Midwest.
NV
PIPELINE CAPACITY AND GAS BASISExpected Changes 2015 - 2018
Algonquin
Transco Z6NYChicago
Sumas
Dominion SouthColumbia AppSoCal Border
El Paso Permian
Opal
NGPL Midcon
Henry Hub
Oct-1
5No
v-15
Dec-
15Ja
n-16
Feb-
16Ma
r-16
Apr-1
6Ma
y-16
Jun-
16Ju
l-16
Aug-
16Se
p-16
Oct-1
6No
v-16
Dec-
16Ja
n-17
Feb-
17Ma
r-17
Apr-1
7Ma
y-17
Jun-
17Ju
l-17
Aug-
17Se
p-17
Oct-1
7No
v-17
Dec-
17Ja
n-18
Feb-
18Ma
r-18
Apr-1
8
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
09/04/14
03/04/15
09/04/15$/MM
Btu
NATURAL GAS FORWARD CURVE(NYMEX) – 4 September 2015
YOY Decline: 26.6%Six-Month Decline: 9.6%
NATURAL GAS$MMBtu (12-Month Strip) – 4 September 2015 – Short Term Trading Channel
OUTLOOK: NATURAL GAS PRICING
In general, pricing is expected to gradually, and slowly rise through the end of 2016. The EIA anticipates Henry Hub spot prices will remain below $3.50/MMBtu. This appears to be a reasonable cap level for settlement prices as well based on current fundamentals and trend lines.
EIA - September 2015
WHOLESALE ELECTRICITY$MWh (12-Month Strip) – 4 September 2015
Apr-12
Jul-1
2
Oct-12
Jan-1
3
Apr-13
Jul-1
3
Oct-13
Jan-1
4
Apr-14
Jul-1
4
Oct-14
Jan-1
5
Apr-15
Jul-1
5$25
$35
$45
$55
$65
$75
$85
$95
ERCOT AVG NY ISO J PJM NEPOOL PG&E NP15 W
$/M
Wh
12-Month Rolling Strip ERCOT HZ NY ISO J PJM NEPOOL PG&E (NP15)NYMEX Correlation 98.77% 85.22% 67.40% 81.28% 97.60%
WHOLESALE ELECTRICITY YOY DECLINERolling 12-Month Strip: 4 September 2015
NV
ERCOT: -26%
PG&E NP15 West: -21.5%
NEPOOL: -26.1%
NYISO Zone J: -18.6%
PJM West: -4.1%
MISO: -8.1%
Mid-C: -22.2%
OUTLOOK: COMMERCIAL ELECTRIC PRICINGEIA Average Retail Rates ($/MWh) - September 2015
Jan-1
4
Mar-14
May-14
Jul-1
4
Sep-14
Nov-14
Jan-1
5
Mar-15
May-15
Jul-1
5
Sep-15
Nov-15
Jan-1
6
Mar-16
May-16
Jul-1
6
Sep-16
Nov-16
$60
$80
$100
$120
$140
$160
$180
$200
East North Central Mid-Atlantic New EnglandPacific South Atlantic South Central
$/M
Wh
Average 2016 Commercial Rates Compared to 2015:
East North Atlantic: +0.8%Mid-Atlantic: +1.7%New England: +8.8%Pacific: +3.0%South Atlantic: +1.9%South Central: +1.3%
PJM CAPACITY PERFORMANCEPJM - September 2015
PJM’s goal is to strengthen grid
performance, but that will likely lead to increased costs for consumers.
Restructuring of PJM’s capacity market due to deteriorating resource performance and ongoing change in generation mix
Stems from the poor generator performance during the price spikes in January 2014
Phased In, but initially effective June 2016, with transitional auctions for planning years 2016/2017 and 2017/2018. Base auction for 2018/2019 to include
2016/2017 transitional auction results showed increases between 23%-63% from base auction (still below 2015/2016)
Budget Impact: Increased capacity prices from June 2016 to May 2017.
CLEAN POWER PLANEIA – 3 August 2015
Implementation of the Clean Power Plan will cause natural gas and
renewables to become a much bigger part of the
U.S. generation mix.
Clean Power Plan goal to reduce carbon dioxide emissions from power plants
Carbon pollution from power sector set to be 32% below 2005 levels by 2030. (An increase of 2% from last year’s proposal)
States must submit initial plans to EPA on how they will meet the standards by Sept 2016 and final complete plan by Sept 2018
Must meet progressive goals starting 2022 through 2029. (Two year delay to start of program, originally 2020)
Coal expected to fall to 27% of generation mix by 2030, while renewables expected to double to 28%
2016 ENERGY BUDGET PLANNING TIPS
#1: START WITH SITE SPECIFIC BASELINES− Energy market influencers can vary quite a bit by region. Know the potential risks in each
market and tailor your energy procurement buying strategy to meet your budget needs. #2: ENGAGE STAKEHOLDERS EARLY AND OFTEN
− Communicating the fundamental factors affecting regional energy markets can help reduce surprises when they occur (i.e. extreme winter of 2013/2014). It also develops further communication around energy procurement strategy, potential building enhancements, and cost-cutting initiatives.
#3: TRACK VARIANCES FOR COST AND USAGE− By tracking variances in cost and usage, you can better understand what’s driving the
variance. Also analyze multiple levels (portfolio, regional/division, site) to identify trends or isolate poor performers.
#4: ADJUST AND COMMUNICATE AS NEEDED− The energy markets are in a constant state of change. Identify fundamental shifts in the
market to evaluate whether the current strategy needs to be adjusted.
NATURAL GAS AND WHOLESALE ELECTRICITY ARE NEAR THEIR LOWEST LEVEL SINCE 2012.
Strong natural gas production weighing heavily on wholesale natural gas and electricity prices
POWER SECTOR DEMAND FOR NATURAL GAS TO INCREASE With around 14,000 MW of coal-plant retirements scheduled for 2015, gas-fired generation will
continue to grow and potentially introduce more volatility.
EL NIÑO STRENGTHENING INTO WINTER El Niño typically brings warmer/drier conditions to the major gas consuming North during
winter, which could reduce pipeline constraint related volatility in New York and New England
NATURAL GAS PRICE FORECAST Wholesale natural gas prices are expected to slowly rise into 2016. At this point, upside risk is
more likely than further downside moves
MAJOR TAKEAWAYS
NEW! Energy Market Watch NewsletterSubscribe today: http://www.ecova.com/news-media/energy-price-hub.aspxWeekly energy price outlooks and market trends delivered to your inbox
UPCOMING WEBINARS
INSIDE ENERGY & SUSTAINABILITY How to Reduce Food Waste– October 8th, 2015
at 11a PST
Thank you!
