Best Winter Power Trade
I have been asked many times what the best trade is for this winter based on our product Power Market Analysis Near-Term (PMA-NT). PMA-NT, unlike other consulting products, is designed to have a business partnership relationship vs. typical vendor product relationship. We work with our clients to design and build custom forecasts to the point they feel PMA-NT is an augmentation of their analytical department. The product is designed to be customized by allowing clients to feed in their own weather forecast to commodity prices. Essentially, any input into the power model can be overwritten in order for you to have a smooth transition from what you are doing now. In addition, the output can also be customized.
The initial setup for PMA-NT does hold significant value as a trading and hedging tool. It was designed based on the 12+ years of power modeling experiences from utility trading and planning perspective to hedge fund trading of power and gas perspective. However it takes a holistic approach in dealing with risk. For many, this will be fine. For those of you focused in a particular region, you will likely not want an extreme weather case for N. America, but an extreme case for your region of interest. Every region in the US holds unique characteristics. Power trading in the west will likely want to have hydro sensitivities as part of their high and low cases. Those in the East will want basis sensitivities. The initial setup does neither of these as it takes a generic view, but the capability is clearly possible. Our Outlook runs (50+) do incorporate these risk factors, but the day to day running of the initial setup of PMA-NT does not since the goal is to get an overall understanding on the markets with weather, gas prices, and outages being the prime drivers. Once again, PMA-NT is designed for you so you can have a day to day run with your focused area with your data feed. When you succeed, we succeed. That is the core of PMA-NT. We believe in our working relationship model so much we are willing to offer a no-cost solution to a few candidates as long as we get to share in the profitability of the trade book.
With that being said, the initial setup best trade for winter from my perspective is to buy the December On-Peak spread of AD-Hub minus NYJ (Buy AD-Hub and sell NY-J). I prefer spreads as spreads mitigate some risk and I am not as risk averse as perhaps others are. I prefer spreads as spreads mitigate some risk and I am not as risk averse as perhaps others are. My criteria for the best was the trade with the most to gain with limited risk.
Justification: Last winter’s extreme weather seems to be priced into December – NYJ power prices (Dec13= $73/MWh vs. Forwards Dec14(10/08/2014)Avg=$88/MWh vs 2010-2013 Dec Avg=$63/MWh). Whereas AEP-Hub prices seem to be less weather impacted from last year (Dec13 Avg= $41/MWh vs. Forwards Dec14(10/08/2014)Avg=$44/MWh vs 2010-2013 Avg=$40/MWh). The extreme cold from last winter was more apparent in month January-March, which is surprising to see so much strength in NY-J this December. From 2010 to 2013 December spread between AD-HUB minus NY-J went as wide as $-39/MWh in 2010. If December does get cold, there is much more run-up room for AD-Hub than NY-J. Therefore, the spread will improve from its current $-44/MWh. However, if the winter is more normal, or even mild, expect NY-J to collapse more than AD-Hub – once again the spread will gain. There are areas to investigate, such as the possibility of operations at power plants this winter being better than it was last winter – as discussed in my previous article. This would act against the spread play, given PJM has more diversity of plants to improve upon the cold weather operations compared to New York. Entergy’s Vermont Yankee nuclear plant will not be available this winter as it is being decommissioned. This is in our initial setup, but the retirement is not expected till after the end of this year. The model does not have a sell on NY-J going into Jan perhaps because of this issue. From the winter outlook (50+sensitivities) only the basis moving up another 50% would get near the forward markets spread. Before setting forth to buy the spread, I suggest running a few more sensitivities, such as an earlier retirement of Vermont Yankee, and having a dialogue about all the factors that could lead to further widening of the spread. This is the working relationship I am describing for clients of PMA-NT.
At All Energy Consulting we understand supplying you with forecasts is only one step of the process and may even be the smallest value of the process. The real value comes from the interaction with us and the willingness to explain the process and have frank discussions on the results. We believe no other consulting product will offer this unparalleled experience. You will work directly with me, an experienced analyst from one of the top energy consulting company (Purvin & Gertz / now IHS, Deloitte) and one of the largest utilities in the industry (American Electric Power (AEP)). PMA-NT is not just a product, but more of a service. We want to work with you in understanding the volatile power markets.
This also applies to our long-term service PMA-LT. We can work with you to understand the impacts of various policies and develop a cohesive resource plan.
Please contact us at your earliest convenience. We look forward to beginning the conversation.
Your Willing to Work with You Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
What are the risk factors for AEP, CPN, D, SO, EXC, NEE, DUK, NRG, TVC, ETR, and more this winter?
Going into the winter, the key variables that drive the profitability of a generation portfolio will be the price of Henry Hub, Basis, and Weather. Our Winter Power Outlook dispatches the entire N. America power system. Every asset is modeled. We have pulled together the top 10 generating portfolios under our 50+ cases to show you the impact of those variables. The information is not perfect in the sense that we do not know exactly what they have hedged or not hedge – nor do we adjust for any potential bi-lateral deal. However, the output represents the free market performance which will indicate key risk factors in how their portfolio will perform. If you have a particular set of assets or just one unit you are interested in, we can pull that information for you.
Expectations on Henry Hub are narrowed around $4/mmbtu. However, last winter, we saw Henry Hub climb to over $6/mmbtu in the winter. Running over 28 simulations of Henry Hub, the redacted (sign up to receive the Winter Power Outlook to get all the data behind each figure) figure below shows the impact of the 10 generation portfolios.
The most sensitive to the price of Henry Hub is NRG followed by AEP. NRG could potentially see an upside of almost 100% if Henry Hub prices move to our higher end range. The least impacted by changing Henry Hub are NextEra and Calpine fleet. The Calpine slope is interesting as it seems somewhat counterintuitive. Examining Calpine fleet shows that they have the lowest gas heat rate (efficiency of plant – low HR= highest efficiency) fleet ~7.8 mmbtu/MW. In addition, their fleet is 90+% gas compared to the next highest at 60%. The combination does not help them if gas prices were to stay low. Their units do generate more as the gas prices go down, but this does not lead to greater profitability – see figure below. The good news for the generating assets is the slope of profitability is asymmetrical – more upside than downside. This logic has supported some lack of action to hedge power. However, there is always a point where some hedging would be logical particularly for regulated assets and those trying to manage earnings expectations. AEC can help identify those points.
Reviewing the basis impact shows the risk reward as being much more symmetrical. The redacted figure below shows Dominion generating portfolio seeing the most impact if basis were going to change followed by Entergy. This makes sense for both given their exposure to the east basis. The least impacted by basis change are TVA and Exelon. Given this knowledge, Dominion and Entergy should be trading/hedging themselves for basis risk.
In terms of weather risk, we ran the last 12 years weather pattern in our models and compared it to the 10 year average. The following redacted figure was produced. In terms of weather risk, it is also very asymmetrical as in Henry Hub. In general, there is more upside on a cold winter than downside on a warm winter. However, in AEP’s case, that difference is very narrow given the historical weather pattern. They almost have as much to lose on a warm winter as they can gain on a cold winter. Calpine can produce the greatest gain if weather were to duplicate last year’s pattern. The fleet with the smallest standard deviation from the 10 year average weather pattern was Southern. This makes sense given the geographical location.
Subscribing to the Winter Power Outlook can get you all this analysis. All this analysis is available to you for only $3000. We will also supply a free 1 month access to PMA-NT. Plus if you are the first five customers you can get a custom scenario based on the permutations already used. You can create your very own extreme case (e.g. Basis up 30%, 2013-2014 Weather, Plus Henry at $5.5/mmbtu, double forced outage rates). There is no other place to get so much information for so little. The report will be even larger and more comprehensive than the Summer Outlook we produced this year. If you take the time to review and understand the report, you will be fully prepared to understand the risk and key variables driving the power markets this winter.
The above analysis can be customized for you. If you want to understand how a generation portfolio may be impacted by weather, price, load, environmental policy, hydro generation, nuclear outages, etc…we can process it through our PMA models to get you your portfolio outcome. Output can range from profitability, fuel consumption, generation by month. The time period can be as little as one month to as long as 20 years.
Please call or email to sign up for the Winter Power Outlook, PMA-NT , PMA-LT or a custom run. [email protected] or 614-356-0484.
Your Grateful Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
Winter Power Fuels Consumption Sensitivities (Gas & Coal)
As noted in my previous write up, we could see a record amount of natural gas demand in the power sector if certain stars align. One of the major drivers is the price of natural gas. The two price components for natural gas is the benchmark location of Henry Hub price and the basis (price differential to Henry Hub). In this Winter Power Outlook report, we ran over 50 cases. Our gas price sensitivities included changing Henry Hub (28 sensitivities) and then just changing basis prices (10 sensitivities). The below figure is a redacted output from the report.
For this winter, the correlation with Henry Hub price and power natural gas demand is very linear. With the purchase of this report for only $3000, you will get the data and the associated linear equation. This will give you grounds to estimate the power markets natural gas demand as a function of your expectations of Henry Hub.
Changing the price of Henry Hub also altered the coal demand. The redacted figure below shows the relationship of coal demand and Henry Hub. As in the natural gas demand figure, the coal demand outlook is very linear with the changing Henry Hub price.
Changing basis by a set percentage from 50% to 150% did not significantly alter the gas demand. The basis impact altered gas demand by +/-2%. However, power prices did significantly change. In the Nepool region, the basis sensitivities produced nearly a +/-30% swing in on-peak power prices – see below figure. The winter report will contain price output for all major power hubs in N. America with the associated simulations.
A common mechanism used in the industry to estimate natural gas demand is the usage of a relationship with Heating Degree Day (HDD). However, in the power sector, that relationship is very fragile as location and price relationships can cause a non-linear relationship. The figure below demonstrates this with simulations of each weather year between 2003 and 2013.
For only $3000, our Winter Power Outlook report will have enough information for you so there will be no guessing to what the power markets will do for gas and coal consumption under various scenarios, whether it be price, weather, or unit performance. The first 5 subscribers will also be able to create their own custom outlook run. You can select and combine various weather years, change henry, and/or change basis price. We will run your custom case and give you all the output from that case. In addition, to the report you will get access to PMA-NT for one month. PMA-NT updates daily, therefore you will always have an updated third-party view of the near term market (2-3 years). PMA-NT can be used for hedging or trading as demonstrated in our previous articles – Effective Power Hedging and Excellent Returns.
A new product is coming. PMA-LT will be released soon. PMA LT is a monthly forecast out to 2035 produced quarterly. Given the long-term outlook, a fundamental gas view point was developed in coordination with RBAC the makers of the GPCM® Natural Gas Market Model. The quarterly outlook will present monthly prices for all major N. American power hubs. In addition, a report will be included to support the outlook. Description of retirement and expected new builds will be detailed in the report. PMA LT subscribers can get access to gas pricing and a report supporting the gas fundamental outlook. Customization of long-term outlook (e.g. Carbon policy) is also available to subscribers.
Please call or email to sign up for the Winter Power Outlook Report or PMA-NT or PMA-LT [email protected] or 614-356-0484.
Your Grateful Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
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Winter Power Price Outlook – Not as Bullish as Last Year
The forward curve is shaped to expect last year’s historic cold winter – see graph below. However last year was very atypical and back to back winter extremes are not common. The power prices being extreme multiple years in a row are nearly impossible to find. This is because generators take action based on last year’s results more often than relying on statistical or analytical process to account for potential variations.
The largest issue in 2013-2014 winter was not directly the result of weather, but 2012 and 2013 market conditions. Due to poor market conditions in 2013, many coal plants before winter did not prepare for winter as they typically would do. Many plants were likely not allocated their standard fixed cost budget to prepare for winter given such poor market conditions for plants in 2012 and 2013. As a result 70% of the forced outages were not from increased gas demand due to weather as some may think, but from plants not prepared for so much demand and the colder than normal operation requirements. This does show the importance of maintaining and operating base load units. Without base load units,we can expect to have price run-ups much more frequently resulting in historically high wholesale power prices. Given this behavior pattern of generators, I strongly anticipate outages this winter to be very close to the average forced outage levels if not the best in years regardless of winter conditions. This will limit the price rise.
We have almost finished our winter outlook report using our advance product line Power Market Analysis Near Term (PMA-NT) (Click to Get Presentation on PMA-NT). For this winter analysis, we ran over 50 permutations simulating all the various conditions. These cases included changing henry hub in 10 cents increments from $3.5/mmbtu to $6/mmbtu to understand how natural gas price can change power prices. We also ran a range of natural gas basis price changes to better understand the natural gas price impact. For a better understanding of weather impacts to power price, we ran each weather year from 2003 to 2014 – including the 2013-2014 winter. In addition, we ran our standard high and low power prices which take a combination of the 50 permutations to produce a realistic high and low case.
A sneak preview of the analysis below shows the concern I have with the forward curve being bias to last year. If you look at the historic data for PJM-West, the former highest winter monthly power price was in December of 2005 at $101/MWh. The graph shows all the permutations we have produced. Based on the forward curve, if I wanted to be bullish this winter I would be more interested in the December than January contract.
All this analysis is available to you for only $3000 in our Winter Power Outlook Report. We will also supply a free 1 month access to PMA-NT (Click to Get Presentation on PMA-NT). Plus if you are the first five customers for this offer you can get a custom scenario based on the permutations already used. You can create your very own extreme case (e.g. Basis up 30%, 2013-2014 Weather, Plus Henry at $5.5/mmbtu, double forced outage rates). There is no other place to get so much information for so little. The report will be even larger and more comprehensive than the Summer Outlook we produced this year. If you take the time to review and understand the report, you will be fully prepared to understand the risk and key variables driving the power markets this winter. Call 614-356-0484 or email [email protected] to get this limited offer.
Your Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
2014-2015 Winter Natural Gas Demand Expectations
Given the current forward markets and expected shift in generation resources this winter, natural gas demand in the power sector will likely come back down from the highs generated last year given 10 year average winter. However in our high gas demand case where weather is colder than normal and gas-coal spreads move in by 50 cents we can see record winter power gas consumption of 22.5 bcf/d (Dec-Mar) – see figure below.
Figure from Downloadable Excel File for Subscribers of Power Market Analysis (PMA)
The new revolutionary product by All Energy Consulting’s (AEC), Power Market Analysis (PMA), is also designed to help those better understand the natural gas demand picture (Click for example of Power Trading and Hedging). Natural gas delivered to the ultimate end customer is made out of the following categories: Residential, Commercial, Industrial, Vehicles, and Power. The figure below displays the breakout by category by volume over time.
In a short time, gas usage has changed quite drastically with Power now being the largest demand portion for natural gas – see figure below.
Unlike residential & commercial markets, the ability to forecast industrial and power gas demands go beyond the simple understanding of weather and the economy. The industrial picture is a data mining process of keeping track of plant closing and starts. The power demand is much more complex as there are significant inter-dependencies in the power market space. Gas demand in power is not just about price if that was the case demand would not have gone up over 4% a year from 2002 to 2008 while gas prices rose 15% a year. The reason for this rise had to do with required balancing of the market and the past market decisions – more discussed in our long-term gas outlook. The power market has a policy fundamental piece which causes certain technology to be retired (e.g. coal) and others to be built (e.g. renewable). In addition, the competing fuel price can cause significant demand swings (coal-gas switching).
PMA is going to take the guess-work out for you in understanding the potential gas demand in the power sector. Our model is based on 20+ years of industry experience and took thousands of man-hours and hundreds of runs to develop and perfect. The underlying dispatch model used in PMA is AuroraXMP by EPIS. We can help those looking to implement AuroraXMP. The following results are historical runs with the actual loads and actual natural gas and coal prices depicted in the model. All other nuances, from outage and bidding logic, are the same as presented in the current PMA forecast models. The deviation from 2010-2012 averaged less than 4%.
Gas Consumption Power Sector Validation:
PMA will produce 5 cases of 2 year monthly projections incorporating all the risk in gas demand in the power sector from weather, economy, policy, and inter-fuel dynamics (coal-gas switching). Our model will run daily, incorporating the latest viewpoints from the forward gas and coal markets. The base model will also use AEC’s proprietary load forecasting model to project normal weather conditions. There are two gas sensitivities that will be generated along with the base case – high gas and low gas demand cases. The high gas demand uses historical weather on a monthly basis that drives the highest gas demand, plus it reduces the Henry Hub forwards will by 50 cents per MMbtu. The low case is the inverse of the high case with Henry hub forward adding 50 cents. These three cases will give you a good perspective on the high and low expectations of natural gas demand in the power sector. In addition, these cases can be customized to present even a broader range by incorporating nuclear outages to hydro capabilities.
PMA’s output is daily. Online visual displays are available. In addition, the gas consumptions are presented by month by state in an excel file which is in similar design to that published by the EIA. This format can be feed into leading natural gas analytical models such as GCPM by RBAC.
Texas Natural Gas Demand for Electric Power Excel Based View
Please email me at [email protected] or call me (614-356-0484) if you’re interested in learning more about our new PMA service or would like to discuss a consulting project. Interested parties will receive a free sample output file along with documentation supporting the validation of our modeling efforts.
Your Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
