Over 90 graphs and 79 pages of hard-hitting analysis. This report does not regurgitate what you already know. Executive summary along with some graphs are presented below.
Though the report is 79 pages, it is still only a small fraction of what we could present. We are able to build off this analysis to produce any custom view or further analysis that is directly your concern. The power markets touch many, from traders, energy managers, fuel buyers, plant operators, government officials to fuel producers and many more. We have the ability to help you better understand the market by explaining what has happened and how the future can unfold and what you can do to prepare for that future.
The report is free to PMA Prime Members. Power Market Analysis (PMA) is a compelling product that provides subscribers a dynamic new approach to interpreting and explaining market fundamentals affecting North America’s power markets and their impact on the coal and gas industry. PMA Prime members can expect to get 4 quality in-depth reports a year along with other smaller insight reports each month. As an introductory price we are offering the report for $10K or $5K for one section.
A free version is available. Given our introduction into the market, the difference in the free version is limited. Free version is lower resolution and some parts are redacted.
Thoroughly analyzing the power markets can offer something for everyone given how much power touches everyone’s life. As demonstration of breadth, in the Summer 2014 report, we created a company fleet view. This would add valuable insights to investors in the utility industry.
Your Inspired Energy Consultant,
David K. Bellman
Founder & Principal
All Energy Consulting LLC
“Independent analysis and opinions without a bias.”
Summer of 2014 will differ from previous years as a result of one of the coldest winters in decades. The weather will continue to play a key role in how the summer unfolds. An in-depth and rigorous analysis is done on fuel consumption, power prices, and the top 10 utilities generation fleet. Power Market Analysis (PMA) processed 19 different potential sensitivities that could impact the power markets and presents key findings from those runs.
Gas demand is the most sensitive variable being easily impacted by elements such as changing commodity prices to weather. With the current forward curve of Henry Hub, prices this year will increase +23%, relative to 2013. This price change will significantly reduce gas demand in the power sector, assuming normal weather. Coincidently, the base case is showing a 23% drop in summer power gas demand compared to the four year average. The recent EIA Short Term Energy Outlook (STEO) is not anticipating much drop in power demand in 2014 relative to 2013. In order for that to happen, there are several changes in key variables needed, in some cases by themselves or in combination with other variables, to mitigate the gas demand drop in the power sector compared to 2013. An unusually warm span of weather can make up for the drop in gas, but this would have to be even warmer than the record setting summers of recent. The Western drought could impact the gas demand in the sector by almost 7% if the drought was similar to that in 2001. A price drop of almost $1/MMbtu could produce no drop in demand from the power sector. In addition, a further decline in negative basis could also add to gas demand. All this is displayed in the analysis below.
Power prices across the US will perform differently depending on the existing infrastructure and current generation fleet. There are areas which are very sensitive and can easily experience significant prices spikes – NY and ERCOT. Many areas are directly tied to natural gas prices. Other areas are showing little impact to power prices even if gas prices were to fall. There are usually trading arbitrages in power markets as the ability for the market to efficiently compute all possible changes is limited. Power market analysis requires a platitude of skill sets which then must be combined and deciphered to produce a cohesive picture. Many times, by the time the process is complete, the market has moved on. PMA subscribers get fresh daily runs, so whenever the market shifts, PMA is there with a snapshot of possible scenarios. The various power markets have their own characteristics. This can be seen in the analysis below.
The top ten utilities fleet, by size of generation capacity, was reviewed under the various 19 cases. A proxy calculation was made on how the fleet could be impacted from the base case. Some fleets were much less risk averse to changes in the market. Whereas others could see a devastating profitability change if certain sensitivities come to fruition. All fleets would like to see a warmer than usual summer, but NRG and Calpine fleet can hit the lottery if this were to happen. There are many business strategies that can be designed once the knowledge is made on what makes the fleet “tick”. More company fleets are available upon request.
The Summer 2014 PMA analysis demonstrates the vastness of analytical capability and information available if power market analysis is well thought out and performed. PMA is designed for flexibility to offer multi-faceted views of the power market. There is so much more available in terms of reporting. If you would like additional information from these runs please contact us at email@example.com or at 614-356-0484. Also customized cases can be done for a fee.
As I review my last year’s thoughts on refining with updated data, it has caused me to be more bullish on the outlook for refining – which historically is very hard to do. US refining may be entering another golden age – or perhaps it never left, but just took a nap. There will be refiners who benefit more than others. However, the overall market should see additional boost.
What is new or more reaffirming from last year’s review:
- Continued liquids production from the shale plays.
- Crude imports are coming whether we like it or not by rail or by pipeline.
- Continued growth in developing countries.
Shale production continues to beat expectations. I researched over a dozen papers reviewing and analyzing shale decline curves and initial production rates. The amazing outcome is not the technology acceleration, but the ability to learn to use and adapt existing technology is accelerating. Each shale play is unique with an initial set of known. Applying the techniques done in one play to another play generally does not optimize the production. The ability to be creative with the tools and resources available has clearly shown an increase in production. Data is available showing initial production rates to decline curves are improving at wells within existing plays. In addition, the newer plays are seeing even a more accelerated path of improvements than the Bakken.
It is our belief, this will continue leading to more oil production in the US. And this oil production is of the sweet and light crude oil. This very fact is causing the US producers to want to lift the ban on exporting crude oil from the US. As discussed in my previous refining outlook discussion, the US refiners outsmarted themselves and built the wrong refining configuration. All is not lost; they just don’t value the sweet crude as much as the outside world might. At some discount, the oil will be processed and changes will be made in the US refining complex. This discount is driving producers mad and so the hope is with the ability to export. They could find better buyers across the ocean. In the meantime, without the lift in crude oil exports, we should continue to see a feedstock price discount to several refiners. This will cause a drop in finished product prices in the US for the consumer. However, I anticipate the drop in finished product prices to not be as low as the drop in feedstock prices given the export outlet for finished products.
Crude imports are coming no matter what you are hearing about the Keystone pipeline issue. The Keystone pipeline encompasses a greater plan which is shown on this website. The project is actually three parts with 2 of three pushing forward as the main Keystone Pipeline still is being debated. Right now, we have 180,000 barrels/day of crude oil moving by rail from Canada to the US. The debate perhaps is really the rail industry supporting the ban on Keystone, because the oil will come, it’s really just how you want it to come here, assuming we still want to maintain free trade with our Canadian friends. This crude oil is more to the liking of the US refining sector. I suspect logic will prevail and the pipeline will move forward and pressure on the US crude oil markets relative to the foreign markets will maintain itself. The forward curve as of 02/06/14 continues to show a very stout spread between Brent – WTI of $14/bbl. Overtime, I suspect that to come back down to perhaps the $5/bbl range. However, I think gone is the convention that on annual basis they will trade in parity.
Non-OECD Oil Demand Growth
Over the last 8 years the OECD region demand dropped nearly 5 million b/d. The US represented nearly half of this drop with half of that drop coming from the push on alternatives fuels mainly ethanol. Ethanol production now stands at 0.9 million b/d. Biodiesel adds another 0.1 million b/d. Even though much is talked about renewable in the power space that there is now significant volumes to be discusses in the petroleum space. As I indicated in the power space reaching a peak consumption one can conclude the same in the oil space for US consumers.
With the entire demand decline in OECD region, one would think prices should have declined versus rising 70% in the US gasoline markets. However, Non-OECD demand grew 9.7 million b/d over that same time period OECD was declining. There is so much more room to grow for non-OECD region. BP shows a graphical view of oil consumption per capita across the world. Even though the US observed a great drop in demand there is still a large gap between the US and the majority of the world.
With those three outlooks solidified, I am optimistic on US refining. Within the sector, there will be winners and losers. I can help the refining sector by offering crude oil evaluation to strategic planning to optimize the above concerns. A fundamental view of crude oil prices and refined products are available.
By the way I do have an opportunity for those interested in a 80,000 bpd condensate refinery in the Caribbean. A detailed cost study along with an economic analysis was done showing an investment need of around $600 million producing 20+% IRR. To build a brand new refinery of this scale would be around $1.2-$1.8 Billion. Please contact me if there is interest in this investment.
Your Continually Refining Energy Consultant,
Peak energy can be related to many things from Peak Demand, Peak Oil, etc… Let me clarify my discussion. Peak energy in my context is the electric energy being consumed by the end user each hour and averaged. Therefore, the unit of peak energy is Megawatt Average (MWa). This is much different than the peak demand Megawatt (MW) which occurs in one hour.
I am writing about this topic as I have just analyzed 118 Load Zones across the N. American continent. Statistical analysis was done on those areas incorporating 26 variables, which included 9 weather zones (CDD & HDD) and 8 economic regions starting with data back to 2009. This was an arduous and complex task as each individual zone needed its own menu of variables to optimize the analysis. AEC is about to launch a new online product – Power Market Analysis (PMA). PMA will be an online product with annual subscription access to power prices projections across the country and fuel consumption forecast of coal and gas in the power sector for the next two years – More information on PMA to come. Load represents a fundamental input in analyzing the power markets, so the task had to be done.
The results of the analysis are very eye opening. The R squared (indication of how well data points fits to the variables analyzed with – ranges from 0 to 1, poor to perfect fit) across all 118 load zones averaged 0.92. There were several regions which have now begun to decouple from GDP. The economic well-being of several regions is no longer driving the growth of power. At this point, I can hear grumblings and concerns at investor held utilities since the load growth is the main mechanism on shareholder returns. Don’t stop reading, it’s not all gloom or doom for all utilities. There are two main reasons for this decoupling of GDP. First is the increase spending in Demand Side Management programs across the country to a tune of $9 Billion. Second, we may have reached a peak point in energy consumption per capita. As you look around, how many more devices can you obtain? Each new device is incorporating better and improved efficiency. At some point, we will hit a limit to the energy consumption each of us can do. We are clearly seeing this in this analysis in certain large metropolitan areas when you strip out the weather component. However. I am only seeing this in certain regions.
The EIA put out a briefing on March 22, 2013 alluding to this. The graph below does not seem to be weather normalized. This can lead to a skew vision of what has gone on recently.
Weather has been a large factor over the recent years. If you look at the GDP from 2010 to 2013 the growth is close to 4%/yr. If you look at electricity consumption without normalized weather the picture will show an annual decline of 1%/yr. However, if you strip out the weather component, the load growth is closer to 2.3%/yr. 2010 was an extremely warm year with cooling degree days across the country 21% greater than a normal year.
Weather variations will lead to consumption change as we have become quite temperate in our ability to adapt to various climates. The weather piece will need to be stripped out of the discussion when it concerns understanding the relationship between power consumption and the economy. Peak energy discussions cannot include a conclusion on the basis of extreme weather events. Based on our analysis we still project a rather robust growth in power consumption of 1.9%/yr for N. America based on normal weather and GDP growth around 3%. Areas that are seeing significant growth are related to the Oil & Gas areas such as Texas, Alberta, Louisiana, and even pockets in the Midwest with shale development.
PMA will offer a daily view of the next two years with three different scenarios – base, high power price, and low power price. The changes between the cases will be weather, GDP, and gas prices. In addition subscribers to PMA will be presented monthly with scenario and sensitivities which delve into the greater market dynamics seen in the power space. PMA will be valuable to those in the Oil & Gas, Coal, and Power industry. For the Oil, Gas, and Coal companies the focus will be on better understanding on fuel consumption in the power sector. The power industry the fuel and power prices will be available. In terms of functions within an organization, expect value to be given to Trading, Fundamentals, Budgeting, Fuel Contracts, and Policy groups.
There is more to come on PMA as we expect a product launch sometime in February.
Your Tireless Analyzing Energy Consultant,
In several energy conferences I have attended, many people are dismayed on how we fail to have a national energy policy in the United States. At the same time, many people are actually very grateful for that fact. This is typically coming from those who are very cynical of government action and ability to appropriately execute. An in-depth national energy policy for the United States is likely infeasible due to the geographical diversity of the US to use various energy forms and the complexity of energy. The only energy policy I could see from a US federal perspective would be a generic focus on allowing inter-state energy transfer no matter what form of energy, a focus on maintaining some level of energy security through technology, storage, and trade, and finally a push to use energy productively.
Energy is a means to many ends. Having energy does nothing useful without an objective of using the energy. The discussion of energy in the public space is typically done with a bias to favor one form of energy to another even though they may not even be directly related. Energy is so broad making it very complex. The complexity allows the energy discussion to be manipulated to the public. This manipulation is sometimes intentional and sometimes out of ignorance.
The two broad forms of energy is potential and kinetic energy. Kinetic energy is the useable form of energy. The potential form of energy is eventually converted to kinetic for final use to achieve an end goal. An example of end goal could be heating your house to traveling from point A to point B. The usable forms of kinetic energy are radiant, thermal, motion, sound, and electrical. To produce those forms of energy, a medium is needed. These can be Oil, Natural Gas, Wind, Sun, Coal, Earth (Geothermal), Hydro, Atoms (Nuclear), etc… Within each of these forms and mediums, people have dedicated their lives to them generating multiple academic and business people. Only a few actually involve themselves across the various forms of kinetic energy and the mediums.
I was fortunate only because of my career path and my desire to continue to learn. Most of my colleagues and friends in the energy space are dedicated to one medium and one form of kinetic energy. This highlights the complexity of the space and the desire for individuals to bias a certain form and medium of energy. My Oil and Gas colleagues would not be interested in understanding the Demand Response call option value compared to the tariff rates structured, just as my Utility colleagues would not be interested in understanding the light-heavy relationships in petroleum products and its impact on crude oil valuations. At some level each of the groups will be “fighting” to support his or her industry. Therefore just as Eisenhower was concerned about the military-industrial complex, I would be concerned about an energy policy driven by one of the energy forms complex versus generating a generic goal of using energy productively and securely.
Having a clear discussion on energy is near to impossible because of the generic “energy” concepts. Energy discussions are littered with ignorant or bias agenda. Case in point, many articles will point to the renewable initiatives leading to a reduction of petroleum products (gasoline, diesel, jet fuel, etc…). However, this is not genuine since the renewables mediums are generally focused on the electric form of kinetic energy whereas the petroleum medium is focused on the thermal form of kinetic energy. Therefore, significant transformation to renewables will not displace the petroleum uses without a mass change in vehicles which in itself will take decades.
State energy policy focused on specific mediums would make more sense than federal. If federal policy were to take a medium stance this would immediately favor certain states over other states. However, keeping it on a state basis allows the state to excel their mediums and create a competitive landscape. The evolution of civilization to use one form of medium to another is typically not altruistic, but of natural evolution of necessity. People always point out the vast nuclear usage of the French as a potential ideal goal for a carbon free world. The French did not set out to do this for the sake of carbon, but because France lacked the abundance of oil and coal. If France was sitting on the Powder River Basin or Barnett Shale, France’s nuclear fleet would be much smaller. The same can be said of the US distribution of energy medium uses in the various states. There is an abundance of hydro plants in the North West and coal plants in the Appalachian area because of the resources there. If there were significant coal in Washington and huge hydro opportunities in West Virginia, they would be promoting each other’s current concerns. A national energy policy would have to be careful to not pick winners, but to support the individual states and a national goal of energy security.
Energy is too generic and covers too many topics for too many people. A discussion on a particular medium and form is required for people to understand the topic. However, the fact is a global market for thermal uses have grown. The domestic surpluses of the electric form of energy have been consumed. US society is slowly changing from a thermal to electric form of energy. This is seen in electric vehicle to telecommunicating. The growing abundance of our gadgets from laptops to tablets to phones has increased our dependence on electricity vs. thermal.
In addition, the mediums of energy are being used in different forms of energy versus historical norms. Natural gas typically was used in thermal form of energy, but is now being more used in its electric form. Coal to liquids could become an option as coal plants are being shunned. Renewables offer a competitive option to not only substitute electric mediums, but could be used to substitute thermal forms of energy. In order to use energy productively we need to cross over the various forms and mediums to develop an optimal path. More people who have experience and knowledge in multi-energy forms and mediums need to be developed.
The cross overs are very hard. I have consulted with Oil & Gas companies to let them know the future of their largest demand source, but several don’t like to understand the regulatory nuances. I have tried to discuss with utilities the dynamics of the gas business, but several don’t like the market risk and the need to change. I have also consulted with renewables institutions and companies. I did serve on the National Renewable Energy Laboratories (NREL) technical advisory team. The issue I saw at NREL is the limited commercialization focus and the limited appreciation of the other fuels. They did a wonderful job in the technical world for renewable, but to see how it was going to enter the market space you have to understand the current investments.
In the end, the convergence will be made and those standing in resistance or blissfully ignorant will likely be left behind. A convergence in the various forms of energy and the mediums has become inevitable. A larger holistic approach to energy planning is needed not just on a national and state basis, but in individual companies. Companies who consider themselves an Oil & Gas or Electric Company should rethink their models and their plans.
Energy is a means to many ends. The energy sector serves society not the other way around. If we do develop a national energy policy, let us hope the developers remember that. States with abundant mediums of energy should think about using the energy. To export the energy medium to only buy back the medium in another form of energy is not optimal for the state economy. Optimal economic benefits occur from productive uses of energy not exporting energy mediums. This is one reason Nations (e.g. Venezuela, Libya, Mexico, etc..) with huge oil resources fail to progress as they do not come up with productive uses of energy and in the end purchase back their own energy mediums, but in more expensive forms.
Let me end with a Thank You! I am grateful for my past in order to have the current moment. I wish each and everyone a wonderful and enlightening 2014.
Your very grateful and humble Energy consultant,
David K. Bellman
Taking a break on the various issues of utilities from my previous blogs, I was inspired by this article to take on a macro issues of energy involving Shale gas and carbon issues - Is shale gas our future or should we look at other sources of energy? (Molten Consulting).
The title is opened ended… how far is future? And whose future? Shale gas does not and will not make up the majority of energy usage worldwide. It is a substantial portion for the US oil and gas balance. Before there were shale expectations, the theme to balance the energy market was to use all sources of energy including improvement in efficiencies. Supply and demand always meet, it is just a matter of convergence with price as the critical variable to impact supply and demand.
- LNG imports were going to save the US from sustained $8+/mmbtu prices.
- Imports of crude with a large dependency from Canadian tar sands were going to fill in to maintain oil markets while we slowly convert the US auto fleet to alternative fuels.
- Advance coal would even play a part.
- Nuclear plants were going to easily be relicensed.
- Wind and solar cost would come down in cost and the cross intersection with gas prices at $8+/mmbtu would allow the elimination of subsidies in a few years.
However, shale has allowed this delay as it came with a bonus of liquids production. Middle East LNG and Canadian heavy oil are still there. Both coal and nuclear are actually being hampered because of the shale gas producing poor economics, therefore a significant decline is likely in the US. Renewables will likely continue to require subsidies, and the ability to transform quickly is hampered by the fact that there are physically known recoverable sources of energy to be used if shale gas drops off whether heavy oil, LNG, or even coal.
Technology breakthrough in energy is extremely tough given the capital intensity in the industry. New technology cannot plan or wish for peak oil to produce higher prices to enable their technology. Shale gas has pushed the peak curve much farther out than any of these peak oil theorists would ever imagined. Mr. Shaw brings up the carbon issue as a critical path. Once again, as much new technology cannot plan for peak oil, they probably should not plan on significant carbon prices to make their technology viable. Carbon is not going away, but when countries and individuals cannot even balance their check books, can we really plan beyond 10 years much less 100 years which many of the impacts of climate change will be felt? Debt is no different than carbon, it is kicking the can for the next generation. Therefore, to see any government put in a sustained economic penalty for benefits not seen in decades does not seem likely.
The stretch goal for all new technology in the energy space try to compete with prices now, not on a dependence on something in the future. Just as shale gas came into the picture, other sources of technology have the same opportunity.
Your Optimistic Energy Consultant,
In this blog, I am moving forward into the ScottMadden Energy Industry update from the previous posting on the Executive Summary. As I noted many times, the real meat of the discussion is in the details. ScottMadden brings up much meat to generate insights.
Coal & Capacity Markets
In terms of the coal retirement story, two fascinating things bring to mind that were not discussed in the update. The first one is the PJM capacity auction which is and should be in serious flux, given the required must run (RMR) status put on First Energy Hatfields Ferry Power Station. A moral hazard has been created probably without intention.
In July, after the capacity auctions dropped from the last auction, First Energy announces the retirement of the plant. In theory, the capacity auction should be high enough to keep the necessary units running. Hatsfield Ferry already has SO2 controls and some mercury mitigation which they recently spent $650 million. It is quite peculiar they announce a retirement for such a plant. Nonetheless, with an RMR designation, First Energy is in the driver seat for this plant. They can in effect “guarantee” a return for the plant regardless of the market condition – low load or low gas prices. This may be quite unintentional but perhaps other utilities should follow and announce retirements.
There is no real mandate one has to follow through with an announcement – similar to announcing a new power plant. (Tidbit of fact if you look at new power plant announcement only around 10-20% get built). One could at least see if they can get their plant to be guaranteed for some time. If not decide later to retire or not retire.
Another point worth discussing, coal in areas of significant wind development (e.g. MISO), how can you not mention the interplay with wind. The big debate is how much wind can be attributed to capacity. When you need capacity in times of high load typically wind is not blowing. The most obvious occasions are the very hot days. However, even on very cold days there is a good chance there is too much ice buildup on the blades to obtain any electricity. Therefore, the wind capacity is generally discounted for capacity value. At the same time a trend you can see to the angst of coal units in markets with large wind is the intermittent availability. The coal plants cannot cycle without significant risk of increase maintenance. This has led some coal units to just turn off versus trying to chase the wind.
To capacity market or to not is the question of many market organizers. ScottMadden presents the grand experiment in ERCOT with an energy only market. Discussing capacity markets are as contentious as religion as noted in my Regulation vs. De-regulation blog. In hopes of taking out some of the religious fever on the topic I like to discuss it on a math basis. A market with regulation typically gets a return on investment between 8-12%. If the market is free to compete, the risk is increased. Therefore, the reward needs to increase above the regulated return requirements. This increase leads to boom bust cycles as rewards are large and eventually attract many suppliers.
Not all the suppliers are smart and so herd mentality is likely leading to a market bust when in a boom and market boom when in bust. A boom bust cycle is okay for goods such as beanie babies to cars to cell phones etc… However, power and water have become essentials for society and producing boom and bust cycles will likely lead to very instable society. The spread between the current regulated framework of 8-12% return to now 15+% rate of return, I contend is too great for society. I do agree the potential for a more efficient market is very possible with an open market, but society is not willing to take the means needed to achieve the ends of a more efficient market.
Outside ERCOT, many are trying to rectify the de-regulation imbalance with the security of regulation by offering a capacity value to incentive build before the energy only market induces a build. I believe that there needs to be a more creative way to reduce risk, thereby reduces rewards requirements. As an example, one source of reducing risk is to offer pre-designated projects with permitting and locational issues cleared by the RTO. The RTO can then auction off these locations.
We are now at the half way point of the ScottMadden Energy Update. As you can see the update is more valuable in not just the facts they present, but from those facts the ability to stimulate alternative ideas and potential concerns – insights as like to call it. I will continue on with this in my next blog.
In the meantime, please do consider All Energy Consulting for your consulting needs as I can help you see beyond the facts to find issues impacting your business directly.
Your Energy Consultant,