Case Study on Using Analytics to Save Money for Ratepayers

Case Study on Using Analytics to Save Money for Ratepayers

The origin of Power Market Analysis (PMA) was for power trading.  However given my experience in all facets at one of the largest utility in N. America – American Electric Power – I knew the use of the knowledge of the power markets extended beyond enriching power traders.  With the growth of deregulation and development of regional transmission organization (RTO), the power market has evolved as a legitimate option for power generation versus self-generation for utilities, municipals, Co-op, energy providers, and large consumers.

The power market is fascinating to me as compared to the stock market or other commodity markets as it offers a market that is pure.   The power market has limited storage opportunities producing a fundamental convergence immediately not many months from now.   The ability to manipulate the markets has situated from the rules of the market not the market itself.

Many utilities have only touch the surface of the power markets as they still largely depend on their own generation.   This is changing as many baseload plants will be retiring over the next several years.  In addition, dependence on renewable generation will lead to greater market reliance as intermittent issues are real.  I have put together this case study to demonstrate and calculate a real dollar impact to the ratepayer if one can better account for the risk in the future market power prices.   PMA cannot forecast the future in terms of weather, commodity prices, outages, etc… but it can let you know how much each of those variables can impact the market.    This knowledge allows an informed decision on evaluating the option of using the future power market as part of your generation mix.   In addition, this analysis gives you a firm and reasonable support for your decision making removing the stress from Monday morning quarterbacks.  Many people understand there is much uncertainty in future events; however one should not leave decisions to chance or just assume futures markets represent reality – we can do better than a flip of a coin.

Please enjoy the case study and I look forward to your comments.  CLICK HERE TO DOWNLOAD CASE STUDY – Case Study on Using Analytics to Save Money for Ratepayers – Beyond a Flip of a Coin

Your Energy Analyst Looking to Help You Succeed,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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Renewable Cost Dropping – Impact to Resource Planning

Renewable Cost Dropping – Impact to Resource Planning

A very good report on renewable cost is supplied by IRENA – Renewable Power Generation Costs in 2014.  The absolute price numbers presented are hard to confirm, but the trends are likely undeniable.  Most of the report is based on Levelized Cost of Electricity (LCOE).  I have noted LCOE is not the best metric given the structure of the electricity market per my old article in 2012 (which, by the way, is the most popular page on my website for the last few months – not sure why, but it is).   IRENA did note the issue with LCOE in their report.

The results from this report lead to implications that go beyond the obvious that renewable cost are coming down and potentially being very competitive with fossil generation.  The first implication is the fact a report like this will lead to significant second guessing and planning work by resource planners.

Price discovery and the realities of renewable projects should be made transparent.   IRENA report notes cost is very dependent on location.  In states or local areas with renewable mandates with incentives, an open platform for project submissions should be created given ratepayer subsidies.  Developers, ratepayers, utilities, and government officials  should be able to access this site.   I noted this in my article with my concerns to Senate Bill 310 in Ohio.   There was an advance energy requirement in SB 221 which was removed per reasoning that there was a lack of projects under the guidelines of advance energy.  My main concern with SB221 was the failure of the legislation to enable the commission to regulate and enforced the targets set forth.   An enabler could have been budgeting and creating an open bidding platform promoted and managed by the state for advance energy projects.  The platform would remove the concerns of pricing and the availability of advanced energy projects.  This is beneficial to all parties. The utility removes the second guessing of the market place.  Ratepayers and the commission know the project premiums and the depth of projects available.   The cloak of the “evil” utilities preventing renewables will be removed with an open bid platform for advance energy.  Cost produced from reports like IRENA will quickly be confirmed or denied.  There is no need for commercial secrecy and competitive advantage when the ratepayer is willing to subsidize and potentially pay a premium.

The second implication from this report is to realize utility scale projects saves money.   The report shows utility scale vs. residential PV produces a savings of over 50%.   This savings not only comes in scale of projects, but by the utility cost of capital and other business intrinsic properties.  Utilities should move into the PV space as Tucson Electric Power has done.  There is no doubt a utility can drive more installation than a private company given the correct leadership and vision.

The third implication is the need to revisit biomass opportunities.   Biomass generation’s ability to operate more closely to traditional resources offers significant operational advantages over wind and solar.  The cost from this report indicate the premium for biomass is in line if not more favorable than many wind and solar projects.  Many coal plants are making the conversion to gas.   However given the trends and technology improvements in biomass a serious option to consider is the conversion from coal to biomass or even co-firing.  The initial biomass projects in the US were a disaster in many cases.  However, as with anything new, sometimes it takes a few failures to become a great success.  The ratepayers should be equally willing to pay a premium for biomass as they do for solar and wind.

A final implication I will discuss is the subsidies applied to renewable generation.   According to the IRENA report all their numbers represented cost without subsidies.   Perhaps subsidies need to be removed from the most developed forms of renewables (e.g. wind) and the subsidies rolled down to other advanced energy forms.  Advanced energy initiatives can be consider as insurance to the unknown of the future.   As a society, we should be able to realize paying an insurance premium at a certain level is reasonable.   Legislatures and commissions need to work to establish that reasonable level.   Progress from anything new will come with some failures, but we must learn from these failures and move forward.  The trend in falling prices from renewables was stimulated from government mandates.  As generally a libertarian, this claim is hard for me to make, but being a realistic libertarian one realizes the system is not free to begin with therefore ideal principles cannot always work in an unideal environment.   Utilities in their design are quasi-governments with limited competition.   Stimulating the renewable investments from government mandates were likely necessary to achieve the fall in prices being observed.  Much credit still must be given to the market players who took advantage of the mandates and delivered the cost improvements.  It is my hope that at some point the subsidies and mandates will not be needed and we will have the capability to remove them.  History is not our friend on subsidy removal.   The agriculture industry still sees subsidies developed from the great depression.   Even though our economy has shifted from agriculture, we continue with huge subsidies for farms no longer owned by families, but large corporations.  Common in today’s political climate, we accept corporate welfare much easier than we accept social welfare.  The reason for this is likely the effective capability of recycling corporate welfare dollars to the political process.  I guess corporations are people to – right (Citizens United vs. Federal Election Commission)?

All Energy Consulting examines all the areas involved in energy and works hard to be open minded to the changing landscape.  Please do consider us for your consulting needs as we are here for your success and have a proven track record of successfully identifying the paradigm shifts.

Your Continually Advancing Energy Analyst,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

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Oil price drop impacts beyond the obvious – Part 1

Oil price drop impacts beyond the obvious – Part 1

I am analyzing many areas as a result of the oil price drop.  There are a ton of discussions of oil price drop and the impact it will have on oil production and economy.  However there are impacts at the secondary level which can have billions of dollars of impact on the market.

The oil market drop will impact the Renewable Fuel Standard (RFS).  EPA suspiciously delayed the  release of the Renewable Volume Obligations (RVO) for 2014 twice.   With the latest oil price drop, I suspect they will have support for revising and recalculating gasoline demand expectations, which will then thwart any attempts to modify the RFS.   Most of the support for revising the RFS requirements was due to falling US gasoline demand and the theoretical limit of the amount of ethanol allowed in the market – aka “blend wall”.   This is based on gasoline with greater than 10% ethanol will impact the mechanical aspect of the existing auto fleet.  I will not argue the point surrounding this and save that discussion for another time.   Given this conclusion, I do anticipate you will see renewable identification number (RIN) prices move up once they do finalize the 2014 and 2015 volumes in the spring.

What are RIN?

For those not involved in the power markets, you will be slightly lost.  For those who have gone through the trials and tribulations of the Clean Air Act (CAA) and the emissions markets the government created in order to create an “optimal” path to emissions reductions – it is very similar.   Very similar to SO2 and NOx markets, the government assigns a target of volume and produces a certification for each unit of volume.   The only difference this time is rather than wanting the volume to be reduced, they want the volumes to grow.   Instead of assigning an emission credit, they assign a production credit.  As a producer of gasoline or diesel, you are required to obtain a set amount of RIN for each volume produced.   One can do this by physical blending and/or purchasing a RIN.  Another difference is instead of assigning a multi-year level of commitment ahead of time as they did in the CAA, the EPA is supposed to assign it each year in the spring.   The market does have a general idea given the RFS does state targets, but as a fuel producer you don’t know your specific requirements.   The brilliance of this design, and at the same time the most confusing, is the banking system which is very similar to the CAA construct.

The RFS includes the magical banking system.   They have learned from the initial CAA markets and have adopted the banking restriction similar to the NOx markets, but actually slightly easier to follow as they limited the banking system to 20% of the total RVO for each year.  There is no decline in values on vintage basis.   The vintages from each bank can be carried into future years. The banking system is the greatest invention since slice bread for those into Operations Research and Game Theory – my two favorite subjects.   I have spent much time in the analysis of emissions banking and game theory, and I presented to AEP management the relationship between the CAA emission markets and the Nash Equilibriums which can be generated.   Funny enough Dr. Nash grew up near one of AEP power plants, which I believed is pictured in the movie – Brilliant Mind.   There are fixed outcomes for these types of systems.   They are equilibrium points when all market participants achieve a certain goal.

I was the lead proponent in AEP to sell the emissions credit heading into the newly created NOx market in 2005.   The NOx market once introduced and, upon an extreme winter, decided to go crazy.   The prices of NOx went over $5500/ton.  This far exceeded any of the equilibrium points.    The other nuance you need to realize in markets which turn in a credit on a fixed date is the cost of a credit in a given time is somewhat irrelevant since the only real value of a credit is when you turn it in.   If you want to make money on a system like this you had better spend time on the end market vs. what the market is now.   Starting the NOX season with a huge rise in price was pointless, and one could run 50+ simulations and show even the hottest summer could not generate a demand level of NOX that would necessitate the price above the highest market equilibrium point.   In the end, after a few years, the market achieved one of the lowest equilibrium points – variable cost of running the control equipment.

The other unique aspect of the RFS is the three levels of targets – Conventional, Biodiesel, and Advance.   In theory, and so far in practice, this is the order of greater complexity and cost.   The order also represents the highest volume targets to the lowest.   The rules do allow one to use a credit from the more complex target into the simpler target not vice versa e.g. Biodiesel RIN can be used for Conventional RIN.

RIN Future

With the lower oil prices and the market structure with banking, I don’t see how one anticipates the modification of RFS with lower goals.   The main argument of “blend wall” will succumb to greater oil demand as consumers not only drive more, but consume more.   The US will not likely save more given the design of our system and culture.   The very act of consuming more whether food or services increases petroleum demand.  The banking ability of 20% gives much room to buffer the changing weather from crop issues to the changing economy from driving.

The low oil prices will impact the economics of many ethanol plants, particularly those that have not been built.   On a sunk cost analysis, the economics should allow them to continue to produce ethanol.   This situation only leads to even greater value for RIN.   The trading and risk mitigation of RIN need serious consideration for those producing transportation petroleum for the US or for those making the RIN.  At All Energy Consulting, we can take our knowledge in the emissions and petroleum market to help you weather the storms of the RIN market.

Other topics to come due to the drop in crude oil prices – Condensate Value …Octane Value…..

Your Energy Analyst Thinking Beyond the Obvious for Your Success,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

Sign Up to AEC Free Energy Market Insights Newsletter

Whitepaper – Key Pieces to Modeling Power Effectively

Whitepaper – Key Pieces to Modeling Power Effectively

As noted in the beginning of the year for 2015, we will work on producing a clear message to our readers, clients, and prospective clients about our commitments and value proposition.   We are committed to adding insights to energy markets for your success – today and for years to come.

As part of the commitment, we begin with knowledge sharing by introducing a whitepaper on power modeling.   Understanding the key pieces of modeling power will allow you to begin your endeavor in this challenging but very rewarding effort.  This whitepaper will outline the areas of focus and also make a few high level points.  We hope this will help you in your efforts, and as always, we hope you consider All Energy Consulting as an option for assisting in implementation or potentially using our PMA platform as an introduction into your power modeling efforts.

Please Click Here to Download the Whitepaper – Key Pieces to Modeling Power Effectively

AEC realizes you have many options in the markets when it comes to energy consultants.   I want to state now – no other consulting company will be more committed to sharing knowledge – not just information – for your success than All Energy Consulting.   We are not hesitant to empower you and your team to the point where our consulting role may be limited  in the future – we treat this as a success.

Your Very Willing to Share Energy Analyst,

David

David K. Bellman
Founder/Principal
All Energy Consulting LLC- “Adding insights to the energy markets for your success.”
614-356-0484
dkb@allenergyconsulting.com
@AECDKB

Sign Up to AEC Free Energy Market Insights Newsletter

Year of Model Building 2014

Year of Model Building 2014

2014 Modeling Efforts

At All Energy Consulting, we specialize in modeling the energy markets.   To give you a sense of our capabilities, below are the list of models built in 2014.
Reviewing the list, it reminds me of the saying :

“People who love what they do wear themselves down doing it, they even forget to wash or eat….When they’re really possessed by what they do, they’d rather stop eating and sleeping than give up practicing their arts.” Marcus Aurelius, Meditations

Please do consider All Energy Consulting for your energy modeling needs.  I truly enjoy what I do and it will show in my work and commitment to you – Thanks for 2014.

David

dkb@allenergyconsulting.com
614-356-0484

Oil & Gas

  • Built a USGC refinery model in various configurations – Hydroskimming, Cracking, and Coking

  • Discounted Cash Flow Model for Refinery Acquisition and Refurbishment

  • USGC and Caribbean petroleum pricing model

  • Modeled the US Natural Gas Deliveries to Electric Power Consumers by State

  • Modeled and Calculated the discount value for Eagle Ford Condensate

  • Built World Supply/Demand Balance Model for Crude Oil and Petroleum Products

Power

  • Assisted Platte River Power Authority (PRPA) in deployment (setup, build, and operate) of a power model used for their Integrated Resource Plan

  • Several Discounted Cash Flow Model for Power Generation Asset – 800 MW CC to 1MW Reciprocating Engine including the associated power modeling work

  • Worked with the University of Texas Center for Energy Economic on modeling and publishing papers regarding ERCOT

  • Modeled EPA Clean Power Plan and published paper in Fortnightly

  • Modeled and produced a risk analysis for a set of generating assets

  • Long-term Power Modeling along with integrating GCPM gas pipeline model

  • Built and Operate Power Market Analysis (PMA) Platform – includes integrated trade screeners to integrated natural gas storage models.

  • Built an interactive load model for 118 load zones representing N. America

  • Built a coal pricing model to deliver and price coal to all 1000+ coal units in N. America

  • Discounted Cash Flow Model for an Integrated Desalination Plant with Associated Power Generation and Recycle Facility for Waste Water from Fracking

Models are only as good as the inputs and the ability to decipher the outputs to business solutions.  More information on modeling and other services can be found on our website.

Best of Market Insights 2014

Best of Market Insights 2014

To my readers, clients, and prospective clients,

I appreciate your feedback throughout 2014. The year 2014 will be remembered as the year of discovery for All Energy Consulting (AEC).   An identity for AEC had to be discovered – better late than never. I know I had to work more on delivering my value proposition to you.  I have spent so much time on developing products/services plus analyzing markets I lost sight of delivering this message.   You will see an enlightened AEC moving into 2015.  Our value proposition to my readers and prospects will be clear.  I want to share the current thoughts on this in our Branding Positioning Statement:

“For those who need forecasted energy commodity prices, we are experienced market analysts who assist in the navigation of uncertain energy markets with a proven process and methodology, and a collaborative approach in consulting that yields clarity, transparency and empowers decision-making.”

You will see a change in 2015 with a clear direction to support the statement above.

Below are the best of market insights in 2014 rated based on web statistics – page views and downloads.

Your Very Grateful More Focused Energy Analyst – Happy New Years!,

 

David

dkb@allenergyconsulting.com

614-356-0484

 

Best of Market Insights 2014:

- With the most page views (60K+) -Peak Energy – Are we there in the US?  This is very surprising.  Perhaps this is a result of peak oil conspirators or just an error in the web stats.  The article uncovers the decoupling of the economy with load in several areas in the US.

Excellent Returns Were Produced From PMA Summer Model Predictions This article highlights the performance of the generic PMA model for the summer.   PMA correctly highlighted the hype from Polar Vortex bleed into the summer forwards.  Also should read theBest Winter Trade which yielded 30%.

Ready for March Gas Demand?  Duke’s Merchant Coal Plant Value  This article demonstrated PMA flexibility to not only help create risk-adjusted forward curves but also calculate natural gas demand and do specific power plant analysis.  We also highlighted our agility with the ability to deliver results within 24 hours.

US Refining Margins Outlook Sept. 2012 - Wow. An oldie had nearly 20K page views.   This article highlighted that condensate production was going to change the markets and that US refining margins will be robust for years to come.   Well it was an UNDERSTATEMENT – even though I was probably one of the few analyst mentioning the significance of condensate in 2012 the production of condensate blew past my  old outlook.  US Refining margins were and will be robust! See 2014 US Refining Outlook

- Most downloaded (403 downloads) - Summer of 2014 Analysis - I threw the kitchen sink and all into this analysis.   If you took the time to really digest all of the information in the report you would have been prepared for what transpired in summer 2014.