Energy Insider Blog

Typically, discussions about drought conditions center on the impact a lack of rain has on agriculture; however, water and drought conditions have a significant impact on the energy sector as water is used for cooling purposes in power plants and the lack of water can negatively impact generation, creating stress on the electric grid during periods of high demand.  While the impact of water on power plant output has been understood for years, the explosion in fracking has added another pressure point on the water supply.

According to the National Oceanic and Atmospheric Association (NOAA), summer 2013 will be above average in West Texas and in the Mid-Atlantic states.  The outlook both in terms of temperatures (left hand side) and projected rainfall (right hand side) is summarized in the following set of four maps, with the top maps being the outlook for June and the bottom ones the outlook for the entire summer (June-August).

According to the National Oceanic and Atmosphere Administration (NOAA), the 2013 Hurricane Season is predicted to be more active than normal.  In its forecast released on May 23^rd, NOAA anticipates 13-20 named storms, with 7-11 of those becoming hurricanes and 3 to 6 of those being Category 3 or higher hurricanes.  The averages call for only 12 named storms, 6 hurricanes and only 3 of those becoming major storms.  Given this outlook, the question becomes how will this impact natural gas prices?

In looking at energy management risks, it is rare to find a scenario where both the supplier and the end user can benefit.  However, with the expansion of demand response programs to include what is called “economic demand response” offers a rare situation where not only do the supplier and end user benefit, but so does society as a whole.

In the 1960s, the Jetson’s was a Saturday morning cartoon staple that included a robot butler, flying cars, and an automated house.  Some fifty years later, flying cars and robot butlers are not quite here, but the ability to fully automate a house is coming to fruition as a result of machine to machine (M2M) technology relying on the vast mobile network which has sprung up in the U.S. and around the world. 

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.