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HomeMy WebLinkAboutStaff Report 7920 City of Palo Alto (ID # 7920) City Council Staff Report Report Type: Informational Report Meeting Date: 4/17/2017 City of Palo Alto Page 1 Summary Title: Energy Risk Management Report Title: City of Palo Alto's Energy Risk Management Report for the First and Second Quarters of Fiscal Year 2017 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, 2016, the end of the first and second quarters of Fiscal Year (FY) 2017. The projected cost of the City’s fixed-price electricity purchases is $0.08 million higher than the market value of that electricity as of December 31, 2016 for the 36-month period beginning January 1, 2017. In the first and second quarters of FY 2017 (July 1, 2016 through December 31, 2016) the City’s credit exposure to fixed price contracts is minimal. The projected Electric Supply Operations Reserve is just below the FY 2017 minimum guideline reserve level and the projected gas reserve is within the FY 2017 guideline reserve level range. There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to report during the first and second quarters of FY 2017. 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 and second quarters of FY 2017. The City’s Energy Risk Management Policy requires that staff report on a quarterly 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. City of Palo Alto Page 2 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 now 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. These first and second quarters of FY 2017 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 2017 to December 2019, in megawatt-hours (MWh). City of Palo Alto Page 3 Hydroelectricity The projected cost of hydroelectric energy received from Western over the 12-month period ending December 2017 was higher than its market value by $2.4 million as of December 31, 2016. However, significant rainfall in early calendar year 2017 changed this, and as of March 2018 the projected cost of this energy is now lower than its market value by $1.9 million. Hydroelectric power from Calaveras was expected to cost $8.0 million (as of Dec. 2016) and now is $5.3 million (as of March 2017) 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. This debt is due to be retired in 2032, and retirement would substantially improve the value of the project relative to the market price of electricity. Fixed-Price Forward Electricity Purchases The City, as of December 31, 2016, has purchased fixed-priced supplies of electricity totaling 131,450 MWh for delivery in FY 2017 with an average price of $36.39 per MWh. The City contracted for these purchases with three of its approved counterparties: NextEra, Exelon, and Shell Energy North America (SENA). The 12-month MTM value of the City’s forward transactions for wholesale power was negative $0.23 million at the end of the quarter. In other words, the purchase cost (contract price) for these transactions was higher than the market value as of December 31, 2016. The figures below represent the electric forward volumes (Figure 2) and City of Palo Alto Page 4 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 31, 2017. On a month-ahead basis, when the City expects projected generation to be greatly above load, the City may execute fixed-price forward sales. In FY 2017, there were fixed-price forward sales totaling 36,600 MWh with an average price of $28.60 per MWh. With greater availability of cheaper hydroelectric power, the average price per MWh has declined as evidenced by the lower sales per MWh price. City of Palo Alto Page 5 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 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. 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 1.72 current Expected Default Frequency (EDF) which is above the recommended EDF level but lower than the high point in May 2016 of 2.80. Staff is continuing to monitor Avangrid’s (formerly Ameresco’s) EDF and will continue to report back to City Council in future quarterly reports on the status of Ameresco’s EDF. 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. City of Palo Alto Page 6 Table 1 - Renewable Counterparties Credit Ratings and EDFs as of 12/31/16 S&P Credit Rating Current Expected Default Frequency S&P (EDF) Implied Rating Ameresco n/a 1.72%B- BBB+0.01%AAA Renewable Counterparty Avangrid (fomerly Iberdrola) Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 12/31/16 Electric Counterparty Cost of Transaction Market Value of Transaction Current Expected Default Frequency S&P (EDF) Implied Rating NextEra $0 $0 A-0.03%A- SENA $522,816 $446,094 0.11%Ba2 Totals $522,816 $446,094 $0$0 ($76,722)$0 Cost vs. Market to Market (MTM) Value S&P Credit Rating Expected Loss (MTM x Expected Default Frequency) ($76,722)A $0 Electric Forward Mark-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. In addition, the City does not pay for renewable energy until it is received thereby reducing risk. An EDF of 0.08% or below indicates 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. Electric and Gas Supply Operations Reserves Adequacy As shown in Table 3 below, the Electric Supply Operations reserve’s unaudited balance as of December 31, 2016 is $11.4 million, which is $5.0 million above the minimum reserve guideline level. This balance, however, is above the immediate 12-month credit, hydro, and other risks that have been identified, and are estimated at $3.1 million. The unaudited Gas Operations reserve balance as of December 31, 2016 is $6.9 million, which is $1.0 million above the minimum reserve guideline level. City of Palo Alto Page 7 Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2017 (Preliminary unaudited figures from City’s Financial System) FY 2017 Fund Reserve for Operations Balance as of 07/01/2016 ($ Millions) Changes to the Reserves for Operations ($ Millions) Unaudited Projected Reserve for Operations Balance as of 12/31/16 * ($ Millions) Minimum Guideline Reserve Level ($ Millions) Maximum Guideline Reserve Level ($ Millions) Electric $15.6 ($4.2) $11.4 $6.4 $12.8 Gas $9.5 ($2.7) $6.9 $5.9 $11.8 * The accounting activity to date reflects what has been booked into the City’s financial system. These figures are preliminary until outside auditors have completed their review and the Comprehensive Annual Financial Report is produced. There could be significant changes to the supply operation reserve balances based on year-end adjustments that have not been booked yet. 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 and second quarters of FY 2017.