HomeMy WebLinkAbout2020-09-14 City Council Agendas (12)
City of Palo Alto (ID # 11008)
City Council Staff Report
Report Type: Informational Report Meeting Date: 9/14/2020
City of Palo Alto Page 1
Summary Title: Energy Risk Management First Half (First and Second
Quarters) of FY 2020
Title: City of Palo Alto's Energy Risk Management Report for the First Half of
Fiscal Year 2020
From: City Manager
Lead Department: Administrative Services
Recommendation
This is an informational report and no City Council action is required.
Executive Summary
Staff continues to purchase electricity and gas in compliance with the City’s Energy Risk
Management Policies, Guidelines, and Procedures. This report is based on market prices and
load and supply data as of December 31, 2019, the end of the first half of Fiscal Year (FY) 2020.
The projected cost of the City’s fixed-price electricity purchases is $0.83 million lower than the
market value of that electricity as of December 31, 2019 for the 12-month period beginning
January 1, 2020. In the first half of FY 2020 (July 1, 2019 through December 31, 2019) the City’s
credit exposure to fixed price contracts is minimal. The projected Electric Supply Operations
Reserve is above the FY 2020 minimum guideline reserve level and the projected gas reserve is
also above the FY 2020 guideline reserve level range.
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures
during the first half of FY 2020.
City of Palo Alto Page 2
Background
The purpose of this report is to inform the Council about the status of the City’s energy
portfolio and transactions executed with energy suppliers as of the end of the first half of FY
2020. The City’s Energy Risk Management Policy requires that staff report on a quarterly basis
but due to lower trading activity levels the Utility Risk Oversight Coordinating Committee
(UROCC) has approved providing this report on a semi-annual basis to Council on: 1) the City’s
energy portfolio; 2) the City’s credit and market risk profile; 3) portfolio performance; and 4)
other key market and risk information.
The City’s Energy Risk Management Policy describes the management organization, authority,
and processes to monitor, measure, and control market risks. “Market risks” include price and
counterparty credit risk. These are risks that the City is exposed to on a regular basis in
procuring electric supplies, and to a lesser extent for gas supplies which are purchased at
market rates via a monthly index price. The energy risk management section is located in the
Treasury Division of the Administrative Services Department. Its role is to monitor and mitigate
these risks.
This first half of FY 2020 energy risk management report contains information on the following:
• Electric Supplies
• Hydroelectricity
• Fixed-Price Forward Electricity Purchases
• Gas Supplies
• Credit Risk
• Electric Forward Mark-to-Market Values
• Electric and Gas Supply Operations Reserves Adequacy
• Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
Discussion
Electric Supplies
In order to serve the City’s electric supply demands, the City obtains electricity from:
hydroelectric resources (from Western and Calaveras Hydroelectric Projects); long-term
renewable energy contracts (from landfill gas converted to electricity, wind, and solar projects);
wholesale purchases which are carried out via fixed-priced forward market purchase contracts;
and the electric spot market.
Figure 1 below illustrates the projected sources and expected purchases of electricity supplies
by month for the 36 months from January 1, 2020 to December 31, 2022, in megawatt-hours
(MWh). The negative bars represent sales of excess power on the wholesale market.
City of Palo Alto Page 3
Hydroelectricity
The cost of hydroelectricity received from Western over the 12-month period ending
December 31, 2019 is lower than the market value of electricity by $0.5 million. Hydroelectric
power from Calaveras was expected to cost $9.1 million (as of December 31, 2019) more than
the market value of electricity. Note that Calaveras provides benefits not reflected in the mark-
to-market (MTM) calculation, including, for example, ancillary services (e.g., the ability to
regulate energy output when the electric grid needs change), and that much of the above-
market costs are related to debt service on the cost of constructing the dam. The MTM is
defined in the following section. This debt is due to be retired in 2032, and retirement will
substantially improve the value of the project relative to the market price of electricity.
City of Palo Alto Page 4
Fixed-Price Forward Electricity Purchases
The City, as of December 31, 2019, has purchased and sold fixed-priced supplies of electricity
for the next 12 months totaling 63,873 MWh with an average price of $39.05 per MWh and
totaling 181,200 with an average price of $37.36, respectively. The City contracted for these
purchases with four of its approved counterparties: SENA (Shell Energy North America), Exelon,
BP, and NextEra Energy Resources. The 12-month MTM value of the City’s forward transactions
for wholesale power was $0.83 million at the end of the first half of FY 2020. In other words,
the purchase cost (contract price) for these transactions was lower than the market value as of
December 31, 2019. The City tracks the mark to market value of its forward contracts to
measure the value that would be lost due to a counterparty failing to deliver on its contractual
commitments, forcing the City to purchase replacement electricity in the market. The exposure
listed above is well within risk management guidelines and presents little risk to the City’s
financial outlook.
The figures below represent the electric forward volumes (Figure 2) and MTM positions (Figure
3) for each electric supplier by month of delivery for all forward fixed-price electricity contracts
over the 12-month period ending December 30, 2020.
-60,000
-50,000
-40,000
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
01
/
3
1
/
2
0
02
/
2
9
/
2
0
03
/
3
1
/
2
0
04
/
3
0
/
2
0
05
/
3
1
/
2
0
06
/
3
0
/
2
0
07
/
3
1
/
2
0
08
/
3
1
/
2
0
09
/
3
0
/
2
0
10
/
3
1
/
2
0
11
/
3
0
/
2
0
12
/
3
1
/
2
0
Me
g
a
w
a
t
t
H
o
u
r
s
Figure 2 -Electric Forward Volumes as of 12/31/19
BP SENA Exelon NextEra Energy Resources
City of Palo Alto Page 5
(2,000,000)
(1,500,000)
(1,000,000)
(500,000)
-
500,000
1,000,000
1,500,000
Ja
n
-
2
0
Fe
b
-
2
0
Ma
r
-
2
0
Ap
r
-
2
0
Ma
y
-
2
0
Ju
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-
2
0
Ju
l
-
2
0
Au
g
-
2
0
Se
p
-
2
0
Oc
t
-
2
0
No
v
-
2
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De
c
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MT
M
D
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r
A
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Figure 3 -Electric Mark-to-Market Values as of 12/31/2019
BP
SENA
Exelon
NextEra Energy Resources
Gas Supplies
In order to serve the City’s natural gas needs, the City purchases gas on the monthly and daily
spot markets. The City purchases all of its forecasted gas needs for the month ahead at a price
based on the published monthly spot market index price for that month. Within the month, the
City’s gas operator buys and sells gas to match the City’s daily needs if the actual daily usage is
different from the forecasted daily usage. Those daily transactions are made at an average price
based on the published daily spot market index. These costs are passed through directly to
customers using a monthly rate adjustment mechanism, leaving the City with little or no price
risk or counterparty risk exposure for the gas utility.
City of Palo Alto Page 6
Credit Risk
Staff monitors and reports on counterparty credit risk based on the major credit rating agencies
(S&P and Moody’s) scores, Ameresco has a 0.25 percent Expected Default Frequency (EDF)
which is higher than the recommended EDF level. The EDF has improved, the prior year it was
0.43 percent and, as of writing of this report, (August 7, 2020), the EDF is 0.22 percent. Staff is
continuing to monitor Ameresco’s EDF and will continue to report to City Council in this semi-
annual report. Table 1 below shows the EDF values for the City’s renewable energy
counterparties. Table 2 below shows the EDF values and credit exposure for the City’s electric
suppliers. There is virtually no credit exposure to the City’s gas suppliers since the supplies are
purchased on a short-term basis.
Table 1 - Renewable Counterparties Credit Ratings and EDFs as of 12/31/19
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Ameresco 0.25%Ba1
0.18%Aa3
Source: CreditEdge website
Renewable Counterparty
Avangrid (fomerly Iberdrola)
Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 12/31/19
Electric
Counterparty
Cost of
Transaction
Market Value
of Transaction
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Exelon 527,842$ 455,732$ 0.20%A1
NextEra 1,519,893 1,439,780 0.01%Aaa
SENA (6,584,496) (5,900,028) 0.01%Baa2
BP 262,080 272,970
Totals (4,274,682)$ (3,731,546)$
(8) (80,112)
(825,800)$ (219)$
Cost vs.
Market to
Market
(MTM) Value
S
&
P
C
r
e
Expected Loss
(MTM x
Expected
Default
Frequency)
(684,468) AA-(68)
10,890 -
A-
(72,109)$ BBB (142)$
Electric Forward Market-to-Market Values
It is important to note that, for renewable energy companies, Council waived the investment
grade credit rating requirement of Section 2.30.340(d) of the Palo Alto Municipal Code, which
applies to energy companies that do business with the City. This is because the City does not
pay for renewable energy until it is received, thereby reducing risk.
An EDF of 0.08% or below indicate supplier’s current expected default frequency falls within the
investment grade range. An EDF above 0.08% indicates the supplier may have financial issues
that require monitoring.
City of Palo Alto Page 7
Electric and Gas Supply Operations Reserves Adequacy
As shown in Table 3 below, the Electric Supply Operations reserve’s audited balance as of June
30, 2019 is $45.2 million, which is $22.0 million above the minimum reserve guideline level. The
audited Gas Operations reserve balance is $10.0 million, which is $4.6 million above the
minimum reserve guideline level.
Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2020
Fund
Reserve for
Operations
Balance as
of 07/01/2018
($ Millions)
Changes
to the
Reserves
for
Operations
($ Millions)
Audited Reserve for
Operations Balance as
of 06/30/19
($ Millions)
Minimum
Guideline
Reserve
Level
($ Millions)
Maximum
Guideline
Reserve
Level
($ Millions)
Electric $19.9 $25.3 $45.2 $23.2 $46.5
Gas $8.6 $1.3 $10.0 $5.4 $10.8
FY 2020
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures
to report during the first half of FY 2020.