Energy Insider Blog

Every year the Energy Information Administration (EIA) provides an updated Energy Outlook that projects future supply and demand trends.  In their latest outlook, released between April 15–May 2, 2013, the findings on natural gas were particularly instructive, especially for energy risk management professionals.  While the Outlook goes through 2040, the confidence level in the projections obviously decreases over time.  Following is a high level summary of the reports’ projections related to natural gas and some thoughts on the impact these trends could have on energy risk management strategies going forward.

While the general framework for electric restructuring is relatively set in most states with retail choice, legislative action continues as interest groups from generators to consumers to suppliers attempt to enhance the market structure.  Following is a list of selected proposed legislation dealing with electric restructuring in California, Maryland, Michigan, New York, Pennsylvania, and Texas.

The constant evolution of retail energy markets puts the burden of energy procurement and energy risk management on end uses. Such practices are typically not the core business of energy end users, so it is unlikely to find the in-house expertise necessary to effectively manage energy solutions. Areas of energy management include: product structuring, contract negotiation, market intelligence, fundamental and technical analysis trends, and the potential impact of regulatory and/or legal changes.  One way for an end user to mitigate energy risk and implement effective energy risk management strategies is through the retention of an advisor who is an unbiased energy expert.

As we head into this summer, concerns about resource adequacy (tight operating reserves) continue to plague the ERCOT market.  From an energy risk management perspective, end users exposed to Real-Time (RT) or Day-Ahead (DA) prices, should consider locking a Heat Rate Product or a Fixed Price product. Even though heat rates rallied after this release, we recommend end users to be hedged at a minimum in July and August to avoid exposures with either of these products. The reward of not being hedged during these months is not worth the risk. 

Legislation proposed in Michigan for 2012 would have increased the ability of customers to choose an alternative energy provider, enabling Michigan businesses to use strategies to manage energy risks  and remain competitive on a regional and national level.  Nevertheless, this legislation failed to make it out of committee, a sign that Michigan’s failed attempt at deregulation will continue to damage the competitiveness of businesses in the state.

Rising concerns about the impact of greenhouse gas (GHG) emissions on the environment have led to the creation of cap and trade programs in areas such as the European Union, Australia and even South Korea.  While the U.S. has not, at this point, implemented a national cap and trade program, emissions trading programs are in place in the Northeast and Mid-Atlantic.  The goals of these programs are to place a value on GHG emissions through an auction based system of allowance of emissions, essentially creating a value for releasing GHGs in to the atmosphere and imposing penalties if a source of emissions exceeds its allowances.  Ultimately, the goal is to reduce overall emission by making it cost prohibitive to emit excess pollutants. 

The first part of this 2 part series addressed 3 factors that will impact natural gas and electricity prices in 2013 and beyond.  Part 2 explores the challenges faced by the power sector in terms of future grid reliability, summer weather outlook and the impact of continued drought conditions on power prices.

Energy risk management strategies vary in complexity and success, but those which deliver the highest value tend to look at the entire energy management picture.  A holistic energy risk management strategy comprises:

(Part I) 

Retail electricity customers face a host of challenges heading in to the summer of 2013.  Part 1 of this 2 part series addresses factors impacting natural gas prices and the impact these will have on electricity prices during this summer and beyond.  Part 2 will focus on two more drivers: energy reliability opportunities in electricity markets and weather.  Understanding the impact that these 5 drivers have on energy prices is critical for risk management purposes.

During the run-up and actual campaign for the Presidency in 2012, the Obama administration was cited for conducting a “war on coal” through various Environmental Protection Agency (EPA) actions, including but not limited to: