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HomeMy WebLinkAboutStaff Report 6906 City of Palo Alto (ID # 6906) City Council Staff Report Report Type: Informational Report Meeting Date: 5/16/2016 City of Palo Alto Page 1 Summary Title: Energy Risk Management Report, FY 2016 1st & 2nd Qtr Title: City of Palo Alto's Energy Risk Management Report for the First and Second Quarters of Fiscal Year 2016 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, 2015, the end of the first and second quarters of Fiscal Year (FY) 2016. The projected cost of the City’s fixed-price electricity purchases is $0.94 million higher than the market value of that electricity as of December 31, 2015 for the 36-month period beginning January 1, 2016. In the first and second quarters of FY 2016 (July 1, 2015 through December 31, 2015) the City’s credit exposure to fixed price contracts is minimal. The projected Electric Supply Operations Reserve is above the FY 2016 minimum guideline reserve level and the projected Gas Operations Reserve is within the FY 2016 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 2016. 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 2016. 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. Due to staffing City of Palo Alto Page 2 transitions, this report covers activity for two quarters, in the future; the quarterly reports will be for a single quarter. 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. This energy risk management report for the first and second quarters of FY 2016 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 load and electricity supply resources by month for the 36 months from January 2016 to December 2018, in megawatt-hours (MWh). City of Palo Alto Page 3 Hydroelectricity The projected cost of hydroelectricity received from Western over the 12-month period ending December 2016 is higher than the market value of the electricity generated by $5.4 million. Hydroelectric power from Calaveras is expected to cost $9.6 million more than the market value of electricity for the same period. Note that Calaveras provides benefits not reflected in the mark-to-market (MTM) calculation, including, for example, ancillary services (e.g., improved reliability due to the ability to regulate energy output to the electric grid). Fixed-Price Forward Electricity Purchases As of December 31, 2015, the City has purchased fixed-priced supplies of electricity totaling 135,400 MWh for delivery between January 1, 2016 and December 31, 2016. The average price for all of the fixed-price purchases is $33.42 per MWh. The City contracted for these purchases with three of its approved counterparties: Powerex, NextEra, and Shell Energy North America (SENA). The 12-month MTM value of the City’s forward transactions for wholesale power was negative $0.94 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, 2015. 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 31, 2016. City of Palo Alto Page 4 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 City of Palo Alto Page 5 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 0.87 current Expected Default Frequency (EDF) which is above the recommended EDF level. Staff is continuing to monitor 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. Table 1 - Renewable Counterparties Credit Ratings and EDFs as of 12/31/15 Renewable Counterparty S&P Credit Rating Current Expected Default Frequency S&P Implied Rating Ameresco -0.87%B3 Iberdrola BBB 0.02%Aa1 Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 12/31/15 Electric Counterparty Cost of Transaction Market Value of Transaction Powerex $1,197,248 $681,037 NextEra $795,767 $681,037 A-0.02% SENA $774,576 $613,300 Totals $2,767,591 $1,975,374 ($792,217)$0 ($161,276)AA-0.09%$0 ($516,211)AAA 0.01%$0 $0($114,730) Cost vs. Market to Market (MTM) Value S&P Credit Rating Current Expected Default Frequency Expected Loss (MTM x Expected Default Frequency) 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. City of Palo Alto Page 6 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, 2015 is $10.4 million, which is above the minimum reserve guideline level. This balance, however, is above the immediate 12-month credit, hydro, and other risks that have been identified which are estimated at $4.0 million. The unaudited Gas Operations Reserve balance as of December 31, 2015 is $6.2 million, which is $0.3 million above the minimum reserve guideline level. Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2016 (Preliminary unaudited figures from City’s Financial System) Fund Reserve Balance as of 07/01/2015 ($ Millions) Changes to the Reserves ($ Millions) Unaudited Projected Reserve Balance as of 12/31/15 for FY 2016* ($ Millions) Minimum Guideline Reserve Level ($ Millions) Maximum Guideline Reserve Level ($ Millions) Electric $16.0 ($5.6)$10.4 $6.4 $12.8 Gas $10.8 ($4.6)$6.2 $5.9 $11.8 FY 2016 * 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 2016.