LuthINformed- Issue 6, Natural Gas Storage

Published to LuthINformed, Issue 6 (July 6, 2016)

In this issue, we offer a look at natural gas storage and its correlation to prices. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…


The Impact of Storage on Natural Gas Prices…

As we’ve discussed in previous newsletters, weather, economic growth and other factors all impact natural gas price trends. However, short-term prices often react most quickly to the EIA Storage Report announced each Thursday at 10:30am. There are three primary supply-side factors that affect natural gas prices:

  • Variations in the amount of natural gas being produced
  • The volume of natural gas being imported and exported
  • The amount of gas in storage facilities

Price volatility often peaks when the EIA announces unexpected storage levels versus the five-year average level. That is to say, the rate at which storage levels move away from prior levels plays a role in creating periods of high volatility. Of course, weather extremes dramatically impact storage. Our last issue on the 2014 Polar Vortex made this relationship very clear. However, storage operators have the ability to vary their rate of injections during the summer to address imbalances – and to maximize their financial positions. They typically inject at a slower pace in order to meet summer cooling demand, but they must also inject to sufficiently meet next winter’s heating demand.

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Storage vs. NYMEX Settlement…

A commonly asked question is whether storage levels are correlated to NYMEX prices. The chart above illustrates the inverse correlation between natural gas storage levels and historical NYMEX settlement prices over the past three and a half years. During the polar vortex of 2014, storage levels fell to their lowest while prices reached highs. Last winter (2015-2016) was one of the warmest on record – storage levels peaked and prices have fallen. Over the past few months, volatility has lessened and is similar to that seen during the spring of 2012 – the last time inventories were near current storage highs. Add to this picture a general winter warming trend as the chart below demonstrates. This, in addition to recent high production levels, may lead to higher storage levels as we move into the winter heating season.

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How the EIA Gathers Storage Data…

The U.S. Energy Information Administration (EIA) collects data on end-of-week working gas in storage at the company and regional level from a sample of all underground natural gas storage operators. Data is also published at a state level in Natural Gas Monthly which includes tabulations of base gas, total inventories, total storage capacity, injections, and withdrawals at state and regional levels.

How is Natural Gas Actually Stored?

Natural gas is primarily stored underground and most commonly held under pressure in three types of facilities: depleted gas reservoirs, aquifers, and salt caverns. The principal operators of underground storage facilities are interstate pipeline companies, intrastate pipeline companies, local distribution companies (LDCs), and independent storage service providers. About 120 entities currently operate the nearly 400 active underground storage facilities in the Lower 48 states.

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Outlook

The latest inventory report (above) shows a net increase of 37 Bcf vs. the previous week. Stocks were 582 Bcf higher than this time last year and 627 Bcf above the five-year average. Immediately following the release of the report, the futures curve rose. The build was less than anticipated, and traders considered the report bullish. Current strip prices are listed below:

12 month strip = $3.053

24 month strip = $3.075

Cal Year 2017 = $3.154

Cal Year 2018 = $3.022

(all prices NYMEX only; A/O 7/5/16)

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information

 

 

 

LuthINformed- Issue 5, Post Polar Vortex Prices (Continued)

Published to LuthINformed, Issue 5 (June 17, 2016)

Winter Price Spikes…

The extreme winter weather in January 2014 resulted in seven out of the 10 biggest demand days on record for the U.S. The EIA attributed natural gas price volatility in the northeast to pipeline constraints heading into New York and New England from the west and south.

The Long Decline…

Natural gas prices have fallen dramatically since the beginning of 2014 when prices spiked during the polar vortex. The average NYMEX settlement price for 2014 was $4.415/Dth. The average, thus far, for 2016 is $2.022, 54% lower. The NYMEX settlement price has fallen 183% through June 2016.

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Time to act?

The June 2016 settlement price was 183% lower than the highest monthly settle of 2014 which occurred in February. As we approach the summer cooling season, the NYMEX NG contract for July has continually exceeded Henry Hub spot prices, perhaps reflecting expectations for higher summer demand. On its first trading day, the July contract closed more than $0.20/Dth higher than the expired June contract – an unusually high change for a contract rollover at this time of year. NYMEX futures prices have risen 13% in early June. Against this backdrop, an increasingly bullish picture may be emerging. Consider full or partial hedging as a way to capture recent lows and mitigate the potential for further increases…

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The chart on the above, developed by the EIA, projects an overall increasing price trend. It also shows that the potential for substantially higher prices is currently greater than the possibility for lower prices.

Source: EIA, Short Term Eenergy Outlook. Dated: June 7, 2016

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Outlook

The latest inventory report (above) shows a net increase of 69 Bcf vs. the previous week. Stocks were 633 Bcf higher than last year at this time and 704 Bcf above the five-year average. Immediately following the release of the report, the futures curve dipped. The build was more than anticipated, and traders considered the report slightly bearish. The 12 month strip (prompt July) lost 1.1 cents to close at $2.911/dth.

12 month strip = $2.911

24 month strip = $3.029

Cal Year 2017 = $3.044

Cal Year 2018 = $2.989

(all prices NYMEX only; A/O 6/16/16)

Natural gas inventories continue to set year-over-year highs. Strip prices have turned mixed with CY’17 above $3 and CY’18 now back under that level. The market charts below illustrate recent trends.

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

 

LuthINformed- Issue 5, Post Polar Vortex Prices…

Published to LuthINformed, Issue 5 (June 17, 2016)

In this issue, we offer a look at natural gas prices since the Polar Vortex of January 2014. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…

The January 2014 Polar Vortex…

The January 2014 polar vortex caused America to shiver like never before. Temperatures throughout the Northeast were lower than the South Pole, leading to unprecedented energy demand and posing safety risks. Throughout the region transit systems and schools were shut down. As demand skyrocketed, energy markets heated up. In the Northeast, where more than 50% of homes use natural gas as their primary heating fuel, several pipelines issued critical notices and operational flow orders (OFOs) to prevent system imbalances. Natural gas supplies were disrupted and prices reached all-time highs.

The vortex, which also threatened electric reliability, took its initial hold over two brutal days. On January 6, temperatures in in the Northeast fell to an average of -10°F, with a wind chill of -33 °F. On January 7, daytime temperatures bottomed out at 4°F in Central Park and -16°F in Chicago. Let’s further explore these impacts, see where prices have since been, and where they may be headed…

Bandwidths and “Mark to Market”…

In previous issues, we’ve discussed how certain ESCO contracts contain usage bandwidths that give suppliers the option to “mark to market” excess usage – and “pass through” higher market costs to customers. During the polar vortex, natural-gas demand averaged 102 billion cubic feet a day, nearly 8 bcf a day higher than the previous maximum monthly average demand and, all told, 241 bcf more natural gas consumption than any other month on record. Customers whose contracts had bandwidth provisions, and no weather protection clauses, had usage outside their contract allowances. Suppliers charged these customers market prices for the excess – at a time when prices reached their highest levels. How high? On January 6th, the Transco Zone 6 NYC spot price reached $90/Dth. On the 22nd it reached $120. On January 7th, as cold weather and supply constraints continued, the Henry Hub spot price was 39% higher than the year prior (see charts below). Exposure to prices at these levels can lead to immediate, and devastating budget implications. Clearly, a risk analysis and thorough contract review should be performed before entering any competitive supply agreement. An educated, informed decision process requires an understanding of potential risks.

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Next time we will continue with the discussion of post polar vortex prices in relation to winter price spikes and the long decline…


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

LuthINformed- Issue 4, Load Factor & Demand Response Programs…

Published to LuthINformed, Issue 4 (June 3, 2016)

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What is Load Factor?

There is a relationship between kilowatt-hours used and kilowatts of demand called the load factor. That is, the load factor is an expression of the energy used in relation to the maximum rate at which energy is used. A simple way to think of this is “how consistently your energy is used.”

Generally, the higher the load factor, the more attractive of a customer you are to an ESCO. This is because the majority of retail customers use more energy during On-Peak periods than Off-Peak. A higher load factor indicates more consistent, around the clock usage, which is consistent with how ESCOs typically buy the power – in blocks – which they then resell to their customers.

How is Load Factor Calculated?

The formula to calculate the load factor is: total kilowatt-hours (kwhrs) in the billing period divided by the result of multiplying the number of days in the billing period times 24 hours times the maximum demand (kW) in the billing period (see above). For example, if the customer used electricity at the maximum rate for each and every 30-minute period in the billing period, the resulting load factor would be 100%. If, on the other hand, the maximum demand is used for only half of the billing period, the load factor would be 50%. “Normal” load factors range from 25% to 60%.

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Demand Response Programs

There are several voluntary demand response programs currently available that compensate end-use (retail) customers for reducing their electricity use (load) during periods of high power prices or when the reliability of the grid is threatened. These customers receive payments from Curtailment Service Providers. A future issue will be devoted to these programs, however, it is important to know that any ESCO supply contract must be tailored to account for any Demand Response Program you may be currently enrolled in.

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Outlook

The latest inventory report (above) shows a net increase of 82 Bcf vs. the previous week. Stocks were 712 Bcf higher than last year at this time and 753 Bcf above the five-year average. Immediately following the release of the report, the futures curve moved higher. The build was less than anticipated, and traders considered the report bullish for short term prices. The 12 month strip rose 2.6 cents to close at $2.826 dth.

12 month strip = $2.826

24 month strip = $2.937

Cal Year 2017 = $3.017

Cal Year 2018 = $3.033

(all prices NYMEX only; A/O 6/2/16)

Natural gas inventories continue to set year-over-year highs. Overall, market prices have moved off recent lows with CY’17 and CY’18 now over $3. As prices begin moving higher, a long term fixed price supply agreement may be attractive. The following market charts illustrate recent trends.

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005


DISCLAIMER
Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

LuthINformed- Issue 4, Indexed Price & Hybrid Product…

Published to LuthINformed, Issue 4 (June 3, 2016)

To continue with our discussion of power supply options we will review an indexed price agreement and hybrid product. Furthermore, we will evaluate the risk associated with these options.


Indexed Price…

An Indexed Price agreement is a contract that ties your cost of power to a market index. Such a structure provides some level of risk mitigation since cost components such as capacity and ancillaries are typically fixed. An ESCO in New York can offer an energy price based upon any of these market price mechanisms; the Day Ahead, Hour Ahead and Real Time Markets. For example, the Day Ahead Market discloses on Monday what the electric prices will be for any given hour on Tuesday. Some ESCOs offer an Index product tied to a utility rate as well. One of the advantages of an Index product is that it allows the buyer to float with the current market until a decision can be reached regarding long term trends.

These deals, if structured correctly, should allow you to move into a Fixed Price contract should market prices decline. It is important that you negotiate into your supply contract the ability to convert to a fixed price deal. Obviously, an Index agreement has more risk than a Fixed Price deal because, should market conditions trend upwards, your price increases. The flexibility of getting out of an upward cycle by locking in a fixed price can control this risk.

Hybrid Product…

An increasingly utilized supply option is a Hybrid Product. This structure provides some of the components of both the Fixed and Index contracts. Customers and their energy providers or consultants will identify some level of a base load which can be fixed in the market. The base load is a block of electric power that will always be used by your facility during any given time. Implementing an energy block hedging approach is a proven strategy that mitigates the risks associated with market timing and eliminates the premiums associated with less transparent structures.

By employing this strategy, customers manage price risk by 1) paying a fixed price for a base load “around-the-clock” block and 2) paying hourly market prices for the power consumed above the block. Generally speaking, customers with high load factors fare best under hourly pricing because they use more power during off peak periods when prices are lowest. Energy blocks can be shaped either seasonally or based upon On/Off Peak times to mitigate risk exposure. A block supply strategy produces good results because the buyer gains price transparency and avoids the risk premiums associated with conventional fixed price supply structures.

This strategy also allows an organization to take advantage of downward price trends for that portion of their load that is not on the fixed price. Contractually, the customer should also be able to convert this structure to a fixed price should the market price increases.
Any customer considering either Index or Hybrid supply should insist the ESCO supply a Value At Risk (VAR) analysis that can be developed to show their best/worst case scenarios using historical prices.

More…

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Supply Contracts and Risk…

The assignment and transfer of risk is the basic function of any supply contract. If the energy supplier’s risk is reduced – while your risk increases – the supplier should charge a lower premium. Experience has taught us the myriad ways in which contract language plays a major role in a customers’ final energy cost. Know what your agreement really says..

Next time we will continue or discussion with load factor calculation and demand response programs…


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

LuthINformed- Issue 4, Power Supply Options & Fixed Price Supply Agreement

Published to LuthINformed, Issue 4 (June 3, 2016)

This is the last of four issues in which we present a broad overview of power and natural gas markets and deal structures. Going forward, we will delve much deeper into the nuances of the energy issues affecting us all. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…


Power Supply Options…

As you probably know, deregulation has not provided price stability. Many retail energy customers are exposed to market fluctuations. For example, any Con Edison full-service customer with a demand over 500kW is subject to Mandatory Hourly Pricing, or MHP (NYISO Day Ahead hourly pricing). So retail customers seeking price protection, or budget certainty, turn to an Energy Supply Company (ESCO) that can offer some form of “price insurance”. Generally speaking, the less risk, the higher the premium. And while ESCOs typically offer many various supply options, the three most common structures our clients use are Fixed Price, Indexed Price, or a Hybrid of the two.

Supply agreements are initially presented as “boilerplates”, but should be negotiated to meet your specific requirements. Be sure to understand any scenarios under which your supplier may be allowed “pass throughs”, since these will affect your final cost. Also, the more complex the structure, the more “active management’ and monitoring is required. An analysis of your Load Profile and Load Factor (below) is essential to determining the product most likely to minimize risk and maximize savings. Load analysis can also be used to apply your historical, hourly profile to historical index prices to establish a cost baseline and benchmark against future performance.

Fixed Price Supply Agreement…

The simplest, and most common, supply agreement is a Fixed Price contract. In this type of agreement, the customer agrees to a fixed price per KWh for an agreed period of time – typically one to three years. This product best suits a customer with a low tolerance for risk because it places most of the risk on the supplier. It also satisfies an organization’s need for budget certainty. However, most fixed price supply contracts carry a certain level of “load risk” since they typically contain usage bandwidths. These bandwidths can be thought of as “buffer zones” which provide a cushion for unexpected usage variations. For example, if your contract allows suppliers to pass on weather related fluctuations, extremely hot weather may push usage outside the buffer, allowing the supplier to charge market prices for the differential – often at a time when prices are highest. A Fixed Price offers protection from upward price swings – but it will also keep you from fully participating in any downward price movement. The benefit of a sustained downward price trend can be partially realized for Fixed Price contracts through a “Blend and Extend” process.

A Blend and Extend agreement is a contract that most suppliers will offer to their clients. If the market moves lower, after you have already agreed to a higher fixed price, the supplier may extend your contract out another year or two allowing you to take advantage of the lower prices. To accomplish this, the ESCO blends the cheaper future rates with your current rate for a new contract that reflects an overall lower price.

Next time we will continue our discussion of supply options with an Indexed Price agreement and Hybrid Product.


DISCLAIMER

Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

LuthINformed- Issue 3, ICAP and Ancillary Services

Published to LuthINformed, Issue 3 (May 20, 2016)

Previously, we discussed the New York power market design in terms of regulations and policy. Additionally, we review the concept of transmission and delivery. To conclude our discussion of market design, we will discuss New York City Installed Capacity (ICAP) and ancillary services.

ICAP

NYC ICAP Cost vs. Rest Of State

NYC customers must purchase 83.5% of their capacity from NYC. Therefore a 100 kW customer would pay 83.5 kW x $15.99 or $1,335. The rest of their capacity, 33.5 kW (i.e. to meet their 117% requirement) can be purchased in the Rest of State (ROS) market at $10.99 or $368. The total cost would be $1,703. An upstate customer that purchases all of their capacity at the ROS rate would purchase 117 kW at $10.99 for a capacity cost of $1,286. The NYC customer would pay 32% more to meet their capacity requirements – expensive –  but also a good opportunity to be in a demand response program.

Other than energy, the second largest price component is Installed Generation Capacity, or ICAP. To ensure power reliability and availability, the NYISO requires that Con Edison and retail marketers have reserve sources of ICAP available as protection against generation outages. Each supplier must procure sufficient ICAP to equal 117% of its peak day load, purchasing 83.5% of peak load from in-city sources. As the example in the box above illustrates, NYC ICAP costs are significantly higher than the rest of the state.

What Are Ancillary Services?

It’s important to understand the various components that make up your supply price. The NYISO requires that various ancillary services be provided at either fixed rates or market prices. Ancillary services is a catch-all term that many don’t really understand – so here we go:

Voltage Support – These services must be purchased from the ISO and will be priced at a fixed rate. Voltage support services are closely coordinated with the individual Transmission Operators who are responsible for determining the means by which additional voltage support services will be provided when asked to do so by the NYISO.

Operating Reserve – There are three types of reserves: 10-minute spinning reserve, 10-minute non-spinning reserve, and 30-minute reserve. Operating reserves insure that there will be sufficient capacity in the event of the loss of the largest supply source on the system, and are auction priced. Recently, the NYISO has begun allowing demand side resource aggregations to provide operating reserves.
Regulation and Frequency Response – This is the real-time, second-to-second operation of the bulk power system. It includes balancing of load with generation and the maintenance of a constant system frequency of 60 Hz. This service must be paid for by all internal New York loads (exports and wheel-throughs are exempt) and cannot be self-provided. They are priced by auction.
Black Start – The NYISO purchases “black start” capability at fixed cost rates from those generators with the ability to start up without the benefit of an outside power source. These resources would be used in the event of a total or partial system collapse to bring the grid back up one piece at a time.

Black Start

Outlook

The latest inventory report (above) shows a net increase of 73 Bcf vs. the previous week. Stocks were 791 Bcf higher than last year at this time and 795 Bcf above the five-year average. Immediately following the release of the report, the futures curve moved lower. Traders considered the report bullish for short term prices and the 12 month strip rose 6.5 cents to close at $2.60.

12 month strip = $2.535

24 month strip = $2.709

Cal Year 2017 = $2.836

Cal Year 2018 = $2.884

(all prices NYMEX only; A/O 5/18/16)

Storage levels remain high – as is domestic production. Natural gas inventories continue to set year-over-year highs. Overall, market prices remain near recent lows with CY’17 and CY’18 back under $3. Against this backdrop, a long term fixed price supply agreement is certainly attractive. The following market charts illustrate trends.

More…

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For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.

Luthin Associates

732-774-0005

DISCLAIMER
Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Luthin Associates, Inc. (Luthin) assumes no responsibility therefore. The user of the information agrees that the information is subject to change without notice. Luthin assumes no responsibility for the consequences of use of such information, nor for any infringement of third party intellectual property rights which may result from its use. In no event shall Luthin be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.