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From the upside down market view of Houston Chronicle columnist Loren Steffy

May 22, 2012

Michael Giberson

Loren Steffy, business columnist at the Houston Chronicle, is frequently a sensible guy. But his writing gig seems to require him to announce the sky is falling on a regular basis, so you have got to be a little careful when reading him. What else can you say about a column that cites a day (May 9, 2012) during which ERCOT wholesale power prices rose from $23 MWh around midnight to about $32 MWh as an omen of ill things to come? He says unnamed traders are “seeing suspicious activity in the spot markets.” Unnamed traders also “worry that the volatility will get worse.”

Really?

For just a little historical context, consider prices during May 2010: on average prices began about $26 MWh, dropped below $20 in the early going, but ran up to an average of $75 MWh during the afternoon peak.

Or how about May 2009? The first hour of the day the price averaged $35 MWh, dropped to $15 in the early morning hours and rose to $55 MWh at the afternoon peak.

These price patterns are even more extreme than the numbers Steffy is worried about. So maybe Steffy’s message is that the whole market has been tangled up in suspicious activity for years – why else would he say “we can only conclude that deregulation has become expensive nonsense.”

Only, if I want to buy into Steffy’s expensive nonsense story, I have got to ignore a bit of reality: average prices in ERCOT have been falling.  Prices in 2004 averaged about $45 MWh.  Power prices followed natural gas prices up in 2005, down a little for a few years then way up in 2008, down again in 2009, and back a little higher in 2010. In 2011 the average price in ERCOT was around $40 MWh.

Now here we are in 2012, years of “suspicious activity” later, and low natural gas prices continue to provide low electric power prices. By the way if you understand how the ERCOT market is supposed to work, and you realize the role natural gas-fired generation plays in Texas, then all of this makes a good deal of sense.

“Suspicious activity”? “Deregulation has become expensive nonsense”?

Before I buy Steffy’s conclusion that the sky is falling, I think I’ll get a second opinion from Henny Penny or maybe Goosey Loosey. I would ask the Unnamed Traders for a quote, but I don’t think those guys have done their homework.

NOTES: My beginning prices are an unweighted average of the four interval prices in the balancing energy market from midnight to 1 AM for each of the four geographic zones in ERCOT in 2009 and 2010. The other prices noted are similarly averages for all four zones over an hour. The market design has changed since May 2010 in ways that don’t much matter at the level of aggregation we’re talking about here, though it makes exact comparisons trickier.

I’m not quite sure how Steffy’s price numbers were calculated – he reports getting them from a trader. When I look at ERCOT real-time market settlement point prices from May 9, 2012  (http://www.ercot.com/content/cdr/html/20120509_real_time_spp) it looks like my May 2009 or 2010 numbers. Averaging the HB_HUB_AVG price for each hour: prices start the day about $16 MWh, peak at $55 MWh about 5 PM, and drop back to $18 MWh at the end of the day.

Posted in Electricity, Energy markets | Leave a Comment »

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New Jersey solar installers seek “Endless Summer” at ratepayer expense

May 20, 2012

Michael Giberson

A crisis is coming for the New Jersey solar power installation industry. Stringent solar power purchase requirements imposed on electric utilities (i.e. on electric utility ratepayers) has turned the state into the nation’s second largest for solar power capacity installed, behind only sunny California.

But now that installed capacity is sufficient to meet current requirements, the installation business is expected to drop way off.  (The purchase requirements actually increase each year through 2021, but the rate of growth is slowing.) That expected drop off has lobbyists for both the solar power industry and unionized solar installers descending on the state capital, pleading for imposition of still higher purchase requirements on electric power consumers. The rallying cry has been to “save the jobs” created by the solar power purchase mandate.

Here is one report, “NJ looking to rescue ailing solar industry“:

New Jersey has long been known as the Garden State, but during the last five years, it could have easily been known as the Solar State from all the sunlight-absorbing panels that have cropped up nearly everywhere.

They’re on the roofs of schools, churches, municipal buildings and sewage treatment plants. They’re in farm fields and attached to utility poles. Even one of New Jersey’s trademark diners recently went green and installed panels.

But all is not well with New Jersey’s once-thriving solar industry, which has grown so big, so fast, that it’s now in danger of collapsing on top of itself.

The industry’s future could hinge on the work of the state Legislature during the next several months as lawmakers look to craft a bailout bill that rescues the solar market and the thousands of jobs it created.

A bailout bill was approved by the Senate Environment and Energy Committee on Thursday, but Bill S 1925’s chances of becoming law are far from certain as it relies largely on making power companies buy more electricity from solar generators.

Critics warn that doing so could mean higher bills for the state’s ratepayers. Supporters say without government help the entire industry will likely collapse.

“We have a crisis, and the crisis is this: If the market stays the way it is, there will be no new projects in the future, and the ones out there now will fail,” Sen. Robert Smith, D-17th of Piscataway, said Thursday at the onset of the lengthy hearing on the bill, which drew hundreds to the Statehouse, many of them union members who work in the industry.

At issue is the market for the electricity that solar panels produce, which has crashed during the last year because of an oversupply of solar development.

Under state law, utilities must obtain part of their electricity from solar generation. To do so, most must buy solar renewable energy credits, or SRECs, from solar panel owners.

The market for the credits originally boomed and helped New Jersey become the nation’s second-largest solar power producer behind California. All that development caused a glut in the market that has seen SREC prices decline from $650 or more in 2010 to less than $100 at times this year.

“We’ve become a victim of our own success,” Smith said. “We’ve had so much solar built in New Jersey that the market for SRECs has crashed.”

Historical SREC values are charted at the Flett Exchange.

The crash in the value of an SREC has cut into revenues projected for private businesses and public schools that have had solar panels installed. Banks have become less willing to loan for solar projects as subsidy revenues have dropped off.

A bill circulating to bail out the industry would both increase the mandated purchases, cap the size of solar projects built, and require projects gain approval from state regulators before they are built. The bill has failed, or at least stalled, on the issue of regulator review – the industry wants all existing projects exempted from regulatory review while the Governor’s office and some others insisted on no exemption.

All hope is not lost for the industry, even should the legislature fail to raise the cost imposed on ratepayers in order to bail out the New Jersey solar industry. The chairman of the New Jersey Board of Public Utilities has said if legislators don’t act then the BPU might simply impose a higher solar mandate on its own authority.

BACKGROUND: For an extended assessment of solar power incentives in state Renewable Portfolio Standards see Ryan Wiser, Galen Barbose, and Edward Holt, “Supporting Solar Power in Renewable Portfolio Standards: Experience from the United States,” Lawrence Berkeley National Laboratory, Berkeley CA, October 2010. LBNL-3984E.

Posted in Electricity, Energy markets, Environmental policy, Regulation | Tagged , , | 5 Comments »

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Virginia Postrel on Delta’s refinery purchase

May 3, 2012

Lynne Kiesling

Just a quick note to accompany the discussion in the comments on Mike’s post about Southwest Airlines, Delta Airlines, and fuel price hedging: a couple of weeks ago Virginia Postrel had a very good analysis of the reasons why the Delta-Conoco transaction is not a good idea, in her regular column at Bloomberg View. Virginia’s analysis emphasizes the extent to which vertical integration is only profitable when transaction costs make markets and contracting more expensive ways to accomplish the transaction. In this case, markets do not have substantial transaction costs.

But what about fuel price risk? Here Virginia quotes friend of Knowledge Problem Craig Pirrong:

The proposed purchase “doesn’t make a huge amount of economic sense — in fact quite the opposite,” says Craig Pirrong, a finance professor and director of the Global Energy Management Institute at the University of Houston’s Bauer College of Business.

You might think that owning a refinery would at least protect the airline from price fluctuations. But, Pirrong notes, crude oil prices affect the profits of airlines and oil refineries exactly the same way. When oil prices go up, their profits go down. Owning a refinery would simply magnify the effect. “If anything,” he says, “it increases the risk exposure that has bedeviled the airline industry for years.” …

Delta simply seems to be falling for the great fallacy of vertical integration: the belief that the inputs you get from an in-house supplier are cheaper than those you buy in the open market. There’s no markup. You’ve cut out the middle man!

But this story misses the real cost of those inputs.

Basically, if fuel prices are high, Delta will still not fly those costly half-full flights, but will instead sell their fuel in the low-transaction-cost markets. So what’s the point of owning the refinery when it’s not their comparative advantage and refining is such a low-margin business?

Posted in Economics, Energy markets, Transportation | Tagged , , , , | 2 Comments »

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Southwest Airlines’s hedges

May 2, 2012

Michael Giberson

“We don’t know where the price of crude is going to be,” says [Southwest Airlines's Chris] Monroe. But, he adds, “I think we have to be generally bullish just because we’re trying to protect against an increase … So we have a little bit of a bias that prices may go higher.”

He chuckles that he and [former SW treasurer Scott] Topping, longtime colleagues and friends, used to describe themselves as the “most conflicted” managers in the building — although low fuel prices would benefit Southwest overall, it would mean their carefully crafted hedging strategy wouldn’t pay off as well….

Still, “In my heart, I would love lower prices,” says Monroe. “Lower prices are good for everybody in our country, and especially good for an airline.”

From, “The ‘Fixer’ at Southwest Airlines,” CNBC.

Notice that Southwest trades crude oil options and other derivatives even though they are not in the physical crude oil market. Proposals that aim to limit trading to parties with “true” commercial interests in the underlying commodity could inadvertently trip up quite reasonable hedging strategies such as pursued by Southwest. (Presumably they find the liquidity available in the much more heavily traded crude oil markets attractive compared to trading in the less liquid jet fuel markets even though the crude oil price is an inexact proxy for the price of jet fuel.)

In related news, Delta Air Lines is buying a refineryfrom the Phillips 66 unit being spun off of ConocoPhillips. According to Dana Blankenhorn at SeekingAlpha, “Delta Refinery Deal All About Southwest.”

(I’m still with the skeptics on this deal. Is is really going to be cheaper for Delta to own a refinery and make jet fuel than just buy jet fuel in a reasonably competitive market? Another way of asking the question, why does Delta think it can do a better job of running the refinery than ConocoPhillips did? Surely contract-based cost management as practiced by Southwest will be more flexible and adaptable to changing conditions than Delta’s ownership of an aging refinery near Philadelphia.)

Posted in Energy markets, Transportation | Tagged , , | 6 Comments »

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Austin Energy wants an electric power rate hike

April 30, 2012

Michael Giberson

Deep in the heart of the competitive wholesale and retail electric power market that is (the ERCOT system in) Texas lies a little island of small-scale socialism: the municipal electric utility called Austin Energy. While power prices are dropping all around the state due to low natural gas prices, in the Texas state capital Austin Energy is seeking a rate increase.*

Austin has long been a bit out of step with the rest of the state, so this could serve as just another opportunity for “real Texans” to poke fun at the aging hippies that have taken control of the capital’s city government.

Instead, however, you should read Martin Toohey’s excellent article in the Austin American-Statesman, “As natural gas prices dip, Austin Energy rates still to increase.” For many years the city utility has pursued a policy of fuel-source diversification. As the article explains, it is easier to see the value of a diversification plan when natural gas prices spike, and harder to see the value when natural gas prices drop sharply.

*Note that the link goes to a live (i.e. periodically updated) price chart which shows the average prices of one-year fixed rate prices in the Houston area. Similar price effects are present elsewhere in the state. Currently the price chart shows a drop from just over 10 cents/kwh during most of 2011 to about 9.5 cents/kwh in April 2012.

Posted in Electricity, Energy markets | Tagged , , , | Comments Off

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The energy price version of “this time it’s different”

April 26, 2012

Michael Giberson

David Wessel’s economics column at the Wall Street Journal takes a look at an IMF analysis of commodities prices since 1973. In the process, he makes an odd claim about energy prices.

CHART: Commodity prices since 1973 from the IMF World Economic Outlook

Commodity prices since 1973 from the IMF World Economic Outlook.

Wessel writes:

To help distinguish temporary trends from long-lasting ones, International Monetary Fund economists recently charted the inflation-adjusted prices of four baskets of commodities—energy, metals, food and agricultural raw materials (such as logs, cotton, rubber, wool and others) since the 1970s. For what it’s worth, the IMF’s bottom line: “The weak global economic outlook suggests that commodity prices are unlikely to increase at the pace of the last decade.”

But the IMF charts illuminate a bigger story.

• Something significant did happen in the 2000s: a sea change in what had been a downward drift in prices of commodities (other than energy) for decades. The consensus explanation: Demand from China, India and other emerging markets grew very rapidly as these big economies sprang to life….

• Energy prices are truly different. For one thing, they are much more volatile than other commodity prices for all sorts of reasons, including recurring geopolitical risks that oil supplies will be disrupted. For another, they are clearly rising—up 163% over the past four decades. The consensus explanation of energy’s exceptionalism: Rising oil prices depress economic growth and that depresses prices of other commodities.

• Metals prices have risen significantly in the past several years, as the IMF chart shows… Still, metals prices are roughly where they were in 1973, a clear contrast to the price of energy, which appears unlikely to ever be as cheap as it was then.

• Over the past several decades, the price of food is down substantially—despite the growth in the world’s population and the well-discussed change in the diets of the increasingly prosperous Chinese, and even after the uptick of the late 2000s. Food prices are roughly half what they were in 1973. Half. That long-lived trend is likely to continue.

Why should we believe “this time it’s different” about energy prices?

It seems an especially odd claim given the near two-decade period from about 1985-2003 during which energy prices were essentially the same as in 1973. That can’t happen again?

Maybe we’ve reached the global limits on energy-resource productive capability, but I doubt it. Instead I think we’ve seen significant growth in energy demand over the last decade or so, more or less exhausting any excess capacity (or, in economics jargon, the energy demand curve is now intersecting with a relatively inelastic portion of the energy supply curve). Energy supply has been increasing in response, but the effort is slow-moving, so we get higher and more volatile prices in the meantime.

My guess is that we will see inflation-adjusted oil prices back at 1973 levels within the next five years.

RELATED: The recent IMF World Economic Outlook analysis that inspired Wessel’s column.

Posted in Energy markets | Tagged , , | 3 Comments »

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Natural gas reserves may rapidly disappear (and later reappear)

April 26, 2012

Michael Giberson

At Toronto’s The Globe and Mail, Nathan Vanderklippe reported, “Low natural gas price casts doubt on ‘proven’ reserves.”

He explains how rapidly falling natural gas prices can cause reserves to disappear. And, by the way, with higher prices reserves can just as quickly reappear. It isn’t magic. But the nature of oil and gas reserves is not well understood, often not even within the energy policy community, so it is worth looking at this relationship between prices and reserves.

Frequently in public policy discussions of oil and gas, reserve amounts get talked about as if they are estimates of all of the remaining oil and gas that will be developed. Reserves are actually just estimates of the currently discovered petroleum resource that is technically recoverable using current technology and anticipated to be profitable to develop at expected prices.

It is the last part of the description – “anticipated to be profitable to develop at expected prices” – that may be responsible for the disappearance of natural gas reserves this Spring. As Vanderklippe discusses, prices expected for this year and the next few were somewhat higher last year while reserve reports were being prepared (in the $3.50 to $4 range). Looking at the same set of resources at today’s much lower price (current futures prices for May are just over $2 an mmBTU) and a perhaps sizable fraction of reserves reported last year may no longer be profitable to develop. And if some of today’s reserves are no longer profitable to develop, the natural gas is no longer countable as a reserve. Experts quoted in the article suggest drops of from 20 percent to 40 percent of proved reserves due to lower prices.

But of course the natural gas resource doesn’t disappear when the reserve numbers fall, the gas just gets reclassified into a sub-commercial category, “contingent resources.” When prices rise again (or the cost of developing resources falls), the natural gas resource can just as suddenly reappear as a reserve.

One other reserve definition note: the reserve numbers most frequently mentioned in policy reports and news articles are “proved reserves.” As described in the Petroleum Resources Management System, the industry standard reserves definitions, proved reserves are a  fairly conservative estimate of the discovered resource anticipated to be profitable to develop at expected prices. Nine times out of ten you actually expect to produce more than the proved reserve estimate.

(Note that Vanderklippe’s article refers to Canadian reserve reporting practices, in the United States the Securities and Exchange Commission determines reserve reporting requirements which may vary from Canadian practice.)

Posted in Energy markets | Tagged | Comments Off

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If you must subsidize energy, subsidize wisely

April 25, 2012

Michael Giberson

Earth Track has dedicated itself to uncovering the government policies that it finds harmful to the environment, with a particular focus on the effects of energy subsidies. From various quotes in the press from Earth Track founder Doug Koplow, I gather I may not always agree with his views of public policy and the world. But a casual review of the extensive work Earth Track has done on subsidies suggests that its work is, as it aims to be, pretty thorough and reasonably unbiased.

Koplow, noted for his criticism of energy subsidies, reports being asked which kinds of energy subsidies he does favor. His response – “So which forms of energy should we subsidize?” – notes that while he is not opposed to energy subsidies in principle, in practice there are many reasons to be cautious.

The realism exhibited with respect to the ways policymaking actually works is refreshing.

Posted in Energy markets, Environmental policy, Politics | Tagged , | Comments Off

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Pat Wood: The Texas Tribune Interview

April 23, 2012

Michael Giberson

Pat Wood, the former FERC chairman and former Texas PUC chairman, was interviewed recently by The Texas Tribune. Wood is surely one of KP‘s favorite ex-regulators, so of course we’re linking to the interview. Here’s just one bit:

Wood: … There is also a lot that can be done, particularly on the energy demand side. By that I mean more aggressive conservation programs where you let market signals encourage customers that have the ability to shut down for a certain small amount of hours in the day to get paid to do so.

TT: Do you mean even individual consumers can potentially do more — or be helped to do more — to save energy?

Wood: They could, but if you went from the current penetration we have today, which is focused on the largest customers, to then focus on the medium-sized customers  — and by that I mean grocery stores, shopping centers, Target, customers like that — you can pick up a whole lot more responsive load before you need to get to the residential customer. The residential customers comprise about 40 percent of the [electrical] load at peak. Industrial and commercial are each about 30 percent. That’s a lot of lower-hanging fruit to pick before you get to residential.

And in discussing this, I’m not saying that Target would have to bid to shut down a store to get paid; it would maybe curtail 20 percent of its demand from 4 to 6 pm [when electricity usage peaks].

This capacity tightening may force that day to come sooner rather than later, which I think is a great thing for Texas, to latch onto this smart-grid investment that we’ve been making statewide over the past couple of years into a level of demand responsiveness that really moves our grid to 21st century capability well ahead of the other states.

Wood also addresses the lack of incentives to build new plants in Texas, the prospects for wind and solar in the state, energy storage, and among other things the role of the Public Utility Commission after the state “moved the dial from 10 to 4 in terms of regulation.”

Posted in Electricity, Energy markets, Environmental policy, Regulation | Tagged , , , , , | Comments Off

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Oil speculator witch hunt, 2012 edition

April 18, 2012

Michael Giberson

Steve Mufson at the Washington Post reports:

President Obama proposed measures Tuesday to step up oversight of energy markets and boost by tenfold the penalties for market manipulation, in an effort to blunt political pressure over the 20 percent increase in gasoline prices since the beginning of the year. [Links in source.]

Not that the administration has turned up any evidence of problems in the market:

A senior administration official said the president wants to increase the number of “cops on the beat” to stop illegal speculation and market ma­nipu­la­tion…. But neither Obama nor his aides pointed to any examples of such illegal activity or to any evidence that oil speculators had, in fact, been responsible for raising prices recently. The senior official said that oil prices have been rising mainly because of growing global demand and political uncertainty in the Persian Gulf. Obama cited “global trends” in his announcement. Lawmakers on both sides of the political divide have alleged that “speculation” is partly responsible for the jump in oil prices over the past year, but they have not offered any examples, either.

See also: the Wall Street Journal‘s article; the New York Times on the topic; and from The Nation, “Obama Announces Empty Crackdown on Oil Speculation.”

The Nation‘s piece is interesting, essentially claiming that the President is right on the merit of his proposals, but just pandering to the public with symbolic gestures since five out of six of his proposals require Congressional action the President knows he won’t get, and the President refuses to do the one thing he can do that would work (in the author’s view): telling the attorney general to start subpoenaing oil traders and begin actually uncovering oil market manipulation.

Of course you may recall that a year ago the President did tell his attorney general to constitute an Oil and Gas Price Fraud Working Group. Last month the Attorney General reported on its many great successes.

Just kidding, they’ve got nothing. Here is what the Attorney General actually said on March 9, 2012:

Since last April – when I established a new part of the Task Force known as the Oil and Gas Price Fraud Working Group – we’ve also been focused on identifying civil or criminal violations in the oil and gasoline markets, and ensuring that American consumers are not harmed by unlawful conduct.   This Working Group’s latest meeting was held at the Justice Department just this morning – and its members discussed a variety of topics, including the role of speculators in the market; recent reports and enforcement matters by various Working Group members – such as the FTC and the New York State Attorney General’s Office; as well as ways to improve information sharing between Working Group members and partners; and where we go from here.

I can also report that one of the Working Group’s members – the Federal Trade Commission – is currently conducting an investigation, with assistance from other Working Group members, into whether gas prices have been affected by any antitrust violation or market manipulation by refiners, oil producers, transporters, marketers, physical or financial traders, or others.  Working Group members stand ready to act if the FTC learns anything that implicates the laws they enforce.

So in short, they’ve held meetings, talked about stuff, and are working on better “information sharing” (always a popular task for interagency task forces because you get to have new processes requiring new paperwork so you can justify new staff to handle the added work load). Oh yeah, the FTC is conducting an investigation. (Which has been known since at least last December and so far no results. More from McClatchy on the OGPFWG. A blogger at Think Progress is seriously disappointed in the administration’s lack of commitment to rooting out oil market manipulators.)

Like before, a shameful, pandering witch hunt in search of short-term political advantage. (And by the way, the GOP is no better in their beating of the political drums trying to pin high gasoline prices on the President’s failure to approve the Keystone XL pipeline and reductions of oil output from federal lands.)

Posted in Energy markets, Politics, Regulation | Tagged , , | 3 Comments »

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