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HomeMy WebLinkAboutStaff Report 3842 City of Palo Alto (ID # 3842) City Council Staff Report Report Type: Informational Report Meeting Date: 6/3/2013 City of Palo Alto Page 1 Summary Title: City of Palo Alto Energy Risk Management Report Second Quarter, FY 2013 Title: City of Palo Alto Energy Risk Management Report for Second 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 December 31, 2012. The cost of the City’s fixed-price electricity purchases is $1.2 million higher than current market prices for the 36-month period beginning January 2013. The cost of the City’s gas fixed-price purchases is $0.622 million higher than the market value as of December 31, 2012. No new fixed-price purchases of natural gas are being made and the delivery of the existing fixed-price purchases will end in October 2013. The cost of renewable power purchases is $6.2 million more than the cost of brown energy over the 12-month period ending December 2013, but $3.9 million less than the average price of the latest renewable request for proposals (RFP). The cost of hydroelectricity from the Western Area Power Administration over the 12-month period ending December 2013 is less than its market value by $4.0 million. Hydro power from the Calaveras Hydroelectric Project cost $5.6 million more than its market value for the 12- month period ending December 2013. There were no exceptions to Energy Risk Management Policies, Guidelines, or Procedures to report during the quarter ending December 31, 2012. 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 the City’s energy suppliers as of the end of the second quarter of Fiscal Year (FY) 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 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, credit, and operational risks. These are risks that the City is exposed to on a regular basis when managing the gas and electric utilities. The energy risk management section’s role is to monitor and mitigate these risks. This second quarter FY 2013 energy risk management report contains information on the following:  Electric and Gas Loads  Fixed price forward electric and natural gas purchases  Electric and Gas forward mark-to-market values  Renewable Portfolio Standard mark-to-market  Hydroelectricity  Credit Risk  Electric and Gas Supply Rate Stabilization Reserves Adequacy  Exceptions To meet the City’s electric needs, the City obtains electricity from: hydroelectric resources (referred to as Western and Calaveras); geothermal resources; renewable landfill-gas-to-energy projects; wind generation contracts; solar projects, and fixed-priced forward market purchase contracts. Staff projects that carbon neutral resources, including hydroelectric, will generate 72% of the City’s electric needs 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). City of Palo Alto Page 3 Fixed Price Forward Electricity Purchases The City currently has purchased supplies of electricity totaling 195,865 MWh for delivery between January 1, 2013 and January 2014. The average price for all of the fixed-price purchases is $38.82 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. The 12-month mark-to-market (MTM) value of the City’s forward transactions for wholesale power was a positive $0.67 million at the end of the quarter. In other words, the contract price was lower than the market price since MTM represents the difference between the current market value and fixed-price agreed to in the transactions. 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. City of Palo Alto Page 4 City of Palo Alto Page 5 Fixed-Price Forward Natural Gas The City has purchased gas supplies totaling 522,400 MMBtu for delivery between January 1, 2013 and October 2013. The average price for these fixed-price purchases is $3.34 per MMBtu. The forward purchases have been transacted with three approved counterparties: SENA (Shell Energy), Powerex, and JP Morgan Chase. Figure 4 shows the natural gas load for 2011 and 2012. The gas forward volumes are shown in Figure 5 and the gas MTM values of all fixed price forward natural gas contracts by month and by counterparty are presented in Figure 6. The last fixed-price contract expires in October 2013 and at that time the City’s MTM will be zero. Figure 4. Natural Gas Actual Metered Load over 2 Years City of Palo Alto Page 6 City of Palo Alto Page 7 Renewable Portfolio Standard The City’s renewable energy portfolio currently consists of power purchase agreements for landfill gas, small hydro, and wind resources to meet the City’s renewable portfolio standard of 33% by 2015. In addition, the City has contracts for geothermal and solar photovoltaic resources, but deliveries have not yet started from these sources. The 12-month MTM value of the City’s forward positions for existing landfill gas and wind renewable power is positive $3.9 million when marked against staff estimates of a long-term forward price for renewables. The forward price is based on the most attractive proposals the City received when it issued an RFP in the fall of 2012. Hydroelectricity The 12-month MTM is positive at $4.0 million for Western and is negative $5.6 million for Calaveras. Note that the Calaveras project provides benefits not reflected in the MTM calculation, including the provision of “ancillary services” such as increasing energy output if the grid needs additional energy. These ancillary services provide additional revenue for the City. 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. The EDF is an estimated probability established by combining information from the equity markets and data from the company’s financial statements. The EDF calculation indicates the probability of a counterparty defaulting in the next 12 months. CreditEdge Plus© also provides frequent updates along with early warnings of changes in credit quality. The investment grade level is BBB- or above with an EDF of 0.15 or lower. 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 transactions with three counterparties, as listed in Table 2 below. In addition, the City has renewable electricity power purchase agreements (PPAs) with Iberdrola Renewables, Ameresco, and Trina Solar as shown in Table 1 below. It is important to note that these renewable companies received Council-approved waivers from 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. City of Palo Alto Page 8 Table 1. Renewable Counterparties Credit Ratings and EDFs Electricity and Gas City of Palo Alto Utilities’ electric and gas supplier counterparty credit exposure and supplier credit ratings are presented in Tables 2 and 3. Table 2. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 12/31/12 Table 3. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of 12/31/12 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 4 below summarizes the current, unaudited supply rate stabilization reserve levels for electricity and gas as of December 31, 2012 based on the City’s SAP financial system. City of Palo Alto Page 9 Table 4. 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 12/31/12 is $66.6 million, which is $3.6 million above the FY 2013 maximum reserve 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 above the immediate 12month credit, hydro, and other risks that have been identified, which are estimated at $5.0 million. The unaudited Gas Supply Rate Stabilization reserve balance at 12/31/12 is $4.5 million which is within the FY 2013 guideline reserve level. Exceptions There are no exceptions or violations to the Energy Risk Management Policies, Guidelines, or Procedures to report during the quarter ended December 31, 2012.