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HomeMy WebLinkAboutStaff Report 3403 City of Palo Alto (ID # 3403) City Council Staff Report Report Type: Informational Report Meeting Date: 2/4/2013 City of Palo Alto Page 1 Summary Title: City of Palo Alto Energy Risk Management Report First Quarter, FY 2013 Title: City of Palo Alto Energy Risk Management Report for the First Quarter, Fiscal Year 2013 From: City Manager Lead Department: Administrative Services This is an informational report and no City Council action is required. Executive Summary Staff has continued to purchase electricity and gas in compliance with the City’s Energy Risk Management Policies and Procedures. This report is based on market prices and load and supply data as of September 30, 2012. The 36-month mark-to-market (MTM) value of the City’s fixed price electricity purchases is $1.1 million higher than current market prices (negative MTM). The MTM value represents the difference between the current market price and the contract price. The cost of the City’s gas fixed-price purchases was $1.5 million higher than the market value as of September 30, 2012. The cost of renewable power purchases is $7.1 million more than the cost of brown energy over the 12-month period ending September 2013, but $2.8 million less than the average price of the latest renewable RFP. The cost of Western’s hydroelectricity over the 12-month period ending September 2013 is less than its market value by a positive $4.8 million. This means the cost was less than its market value. Calaveras had a negative $7.3 million hydroelectricity cost which means the cost is much higher than its market value. There were no exceptions to Energy Risk Management Policies, Guidelines, or Procedures to report during this period. City of Palo Alto Page 2 Background The purpose of this report is to inform the City Council of the status of the City’s energy portfolio and transactions executed with energy suppliers as of the end of the first quarter of Fiscal Year 2013. 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. Discussion To meet the expected load demands, the City obtains electricity from: hydroelectric resources (referred to as Western and Calaveras); renewable landfill gas converted to energy; wind generation contracts; and fixed priced forward market purchase contracts. Staff projects that carbon neutral resources, including hydroelectric, will be 88% of the load over the next 12 months. Figure 1 below illustrates the sources of electricity supplies by month for the next 36 months in terms of megawatt hours (MWh). Fixed Price Forward Electricity Purchases The City currently has purchased supplies of electricity totaling 269,920 MWh for delivery between October 1, 2012 and December, 2013. The average price for all of the fixed-price purchases is $37.43 per MWh. The City contracted with six approved counterparties: Shell Energy North America (SENA), Powerex, British Petroleum Energy (BP), JP Morgan Chase, Sumitomo, and ConocoPhillips. City of Palo Alto Page 3 The 12-month mark-to-market (MTM) value of the City’s forward transactions for wholesale power was a negative $1.1 million at the end of the quarter. In other words, the contract price was higher than the market price. Figures 2 and 3 represent the Electric forward volumes and MTM positions for each electric supplier by month of delivery for all forward fixed price electricity contracts. The data is shown by delivery month for all forward fixed price electricity contracts. Fixed Price Forward Natural Gas The City has purchased gas supplies totaling 795,798 MMBtu for delivery between October 1, 2012 and October 2013. The average price for these fixed-price purchases is $4.61 per MMBtu. The forward purchases have been transacted with three approved counterparties: SENA (Shell Energy), Powerex, and JP Morgan Chase. The gas forward volumes are shown in Figure 4 and the gas MTM values of all fixed price forward natural gas contracts by month and by counterparty are presented in Figure 5. The last fixed price contract expires in October 2013 and at that time the City’s MTM will approach zero. Charts City of Palo Alto Page 4 City of Palo Alto Page 5 Renewable Portfolio Standard The City of Palo Alto renewable portfolio currently consists of power purchase agreements for landfill gas, wind renewable, and solar photovoltaic resources to meet the City’s renewable portfolio standard of 33% by 2015. The 12-month MTM value of the City’s forward positions for existing, committed landfill gas and wind renewable power is positive $2.8 million when marked against staff estimates on a long-term forward price for renewables. The forward price is based on the most attractive proposals the Electric Fund receives when it issues a request for proposals (RFP). Trina Solar Last year, a Renewable RFP was issued and a solar project by Brannon Solar, LLC, was selected. The City negotiated a 25-year agreement with Brannon Solar that was executed in November 2012. This project is expected to generate 5% of the City’s electric needs. Trina Solar LTD (Trina) is the parent company of Brannon Solar. Recently (January 2013), an article was published on a financial website suggesting that Trina’s poor financial condition may cause it to file for bankruptcy protection within the next six months. (Trina strongly disputes the article’s claims.) Staff has been monitoring Trina’s financial status closely. Using a Moody’s credit evaluation tool, Trina Solar has a high Expected Default Frequency (EDF) of 21%. This translates to a below City of Palo Alto Page 6 investment grade credit rating of CC. In addition, the City’s outside credit consultant reports that Trina had operating losses of $30 million, $92 million, and $57 million in quarters 1, 2 and 3 of (CY or FY) 2012, respectively. In addition, Trina’s expense growth is outpacing revenue growth. It is critical to note that while the City has a Power Purchase Agreement (PPA) with Brannon Solar, the project is not expected to be online until late 2014. Under the contract, the City will not pay for energy until after it is delivered. Moreover, Brannon Solar has funded a $400,000 Letter of Credit in the City’s favor with Wells Fargo to cover any damages the City may suffer if the project is not built in accordance with the contract. In addition, the Letter of Credit is an irrevocable, stand-alone document that is not affected by the financial stability of either Trina or Brannon Solar. The major downside of a Trina bankruptcy is that the City would have to replace this source of renewable energy to meet its RPS goals, and by the time the City goes out to purchase the replacement energy market prices may be higher than they were when it signed the Brannon Solar contract. Given the newness of renewable energy firms and projects, it has been expected that situations like Trina’s would arise. In reviewing responses to several renewable RFPs, staff has noted the lack of financial track records and resources of these firms. Competition in the solar field, for example, is fierce and it is to be anticipated that firms will fail. The ride to meeting renewable goals will likely be bumpy, but the City has instituted contractual terms that will prevent direct financial loss and mitigate any adverse impacts incurred through projects that fail to come online. Hydroelectricity The 12-month MTM is positive at $4.8 million for Western and is negative $7.3 million for Calaveras. Note that the Calaveras project provides benefits not reflected in the MTM calculation. This includes, for example, the ancillary service of increasing energy output if the grid needs additional energy and additional revenue for the City when excess power is available. Credit Risk Staff monitors and reports on credit risk using the major credit rating agencies (S&P and Moody’s) scores. The “expected default frequency” (EDF) is an analytical tool from Moody’s and can be found in KMV CreditEdge Plus© or calculated in RiskCalc© using the counterparty’s audited financial statements. The EDF is an estimated probability established by combining information from the equity markets along with the company’s debt structure as reported on their financial statements. This provides information on the probability of a counterparty City of Palo Alto Page 7 defaulting in the next 12 months. CreditEdge Plus© also provides frequent updates along with early warnings of changes in credit quality. The City has Electric Master Agreements signed with six counterparties: Sumitomo, JP Morgan Chase, ConocoPhillips, SENA, Powerex, and BP. Of this group, the City currently has outstanding contracts with three counterparties, as listed in Table 1 below. In addition, the City has renewable electricity contracts with Iberdrola Renewables, LLC, Ameresco, and Trina Solar. Electricity and Gas City of Palo Alto Utilities’ electric and gas supplier counterparty credit exposure and supplier credit ratings are presented in Tables 1 and 2 on the next page. Table 1. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 9/30/12 Table 2. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of 9/30/12 Supply Rate Stabilization Reserve Adequacy The Electric and Gas Supply Rate Stabilization Reserves help to mitigate risks associated with serving the gas and electric customers. Table 3 below summarizes the current, unaudited supply rate stabilization reserve levels for electricity and gas as of September 30, 2012 based on the City’s SAP financial system. City of Palo Alto Page 8 Table 3. Supply Rate Stabilization Reserve Levels for Electric and Gas for FY 2013 (Preliminary unaudited figures from City’s Financial System) * 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 RSR balances based on year end adjustments that have not been booked yet. The Electric Supply Rate Stabilization reserve’s unaudited balance at 9/30/12 is $65.0 million, which is $2.0 million above the FY 2013 reserve maximum guideline level. The City Auditor’s recommendation regarding how the rate stabilization reserve balances are determined by the Utilities Department will be discussed by staff in future reports. The current estimated reserve balance is well above the immediate 12 month credit, hydro, and other risks that have been identified and which are estimated at $3.0 million. The unaudited Gas Supply Rate Stabilization reserve balance at 9/30/12 is $3.1 million which is $1.0 million below the FY 2013 reserve minimum guideline level. Exceptions There are no exceptions or violations to the Energy Risk Management Policies, Guidelines, or Procedures to report during this period.