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HomeMy WebLinkAboutStaff Report 4231 City of Palo Alto (ID # 4231) City Council Staff Report Report Type: Informational Report Meeting Date: 12/2/2013 City of Palo Alto Page 1 Summary Title: Energy Risk Management Quarterly Report Q4, FY 2013 Title: City of Palo Alto’s Energy Risk Management Report for the Fourth Quarter of 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 June 30, 2013. The projected cost of the City’s fixed-price electricity purchases is $0.6 million higher than the market value of that electricity as of June 30, 2013 for the 36-month period beginning July 2013. The cost of renewable power purchases is projected to be $5.9 million more than the cost of wholesale non-renewable “brown” energy over the 12-month period beginning July 2013, based on market prices and renewable energy generation forecasts as of June 30, 2013. The cost of hydroelectricity received from the Western Area Power Administration over the 12- month period ending June 30, 2013 was less than its market value by $2.9 million. Hydro power from the Calaveras Hydroelectric Project cost $6.0 million more than its market value for that same 12-month period. City of Palo Alto Page 2 The cost of the City’s gas fixed-price purchases is $0.1 million higher than the market value of that gas as of June 30, 2013. 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. During the fourth quarter of FY 2013, (March 1, 2013 through June 30, 2013), there was little to no market risk to report during the fourth quarter of FY 2013. 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 fourth quarter of 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. 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 when managing the supply resources of the gas and electric utilities. The energy risk management section’s role, as middle office, is to monitor and mitigate these risks. This fourth quarter FY 2013 energy risk management report contains information on the following:  Electric and gas loads  Fixed price forward electric and gas purchases  Electric and gas forward mark-to-market values  Renewable portfolio standard hydroelectricity  Credit risk  Electric and gas supply rate stabilization reserves adequacy  Exceptions to energy risk management policies, guidelines or procedures City of Palo Alto Page 3 Discussion Electricity Supply and Resource Balance To serve the City’s electric supply demands, the City obtains electricity from: hydroelectric resources (referred to as Western and Calaveras), renewable landfill gas converted to electricity, wind, wholesale purchases which are fixed-priced forward market purchase contracts, and the spot electric market. Staff projects that carbon neutral resources, including hydroelectric, will be 61.5% of the load over the next 12 months as of June 30, 2013. Figure 1 below illustrates the projected sources of electricity supplies by month for the 36 months beginning July 2013 in terms of megawatt hours (MWh) per month as of June 30, 2013. Fixed-Price Forward Electricity Purchases The City currently has purchased fixed-priced supplies of electricity totaling 177,780 MWh for delivery between July 1, 2013 and June 2014. The average price for all of the fixed-price purchases is $42.92 per MWh. The City contracted for these purchases with three of its approved counterparties: Shell Energy North America, Powerex Corporation, and BP after seeking price indicatives from all nine of its pre-approved counterparties. The 12-month mark-to-market (MTM) value of the City’s forward transactions for wholesale power was a positive $0.6 million at the end of the quarter. In other words, the purchase cost for these transactions was lower than the market value as of July 2013. The figures below represent the Electric forward volumes (Figure 2) and MTM positions (Figure 3) for each electric City of Palo Alto Page 4 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. Electric Renewable Portfolio Standard Palo Alto’s renewable electricity portfolio currently consists of power purchase agreements for landfill gas, wind, and solar photovoltaic resources to meet the City’s renewable portfolio City of Palo Alto Page 5 standard of 33% by 2015. Energy deliveries have not commenced from the four solar photovoltaic projects under contract. Hydroelectricity The 12-month MTM is positive $2.9 million for Western and negative $6.0 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 electric grid needs additional energy. Fixed-Price Forward Natural Gas The City has contracted for gas supplies totaling 237,700 million British Thermal Units MMBtu for delivery between August 1, 2013 and October 1, 2013. The average price for these fixed- price transactions is $4.97 per MMBtu. The forward purchases have been transacted with Powerex Corporation, an approved counterparty. Figure 4 shows the natural gas load for CY 2012 and CY 2013. 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 approach zero. City of Palo Alto Page 6 Figure 4. Natural Gas Actual Metered Load for CY 2012 and CY 2013 City of Palo Alto Page 7 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 City has Electric Master Agreements signed with nine counterparties: BP, SENA, Powerex, ConocoPhillips, Cargill, NextEra Energy, Turlock Irrigation District, and Iberdrola Renewables. In addition, the City has renewable electricity power purchase agreement (PPA) contracts with Iberdrola Renewables, LLC, Ameresco, Trina Solar, Atlantic Power, and Martifer 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 as of 6/30/13 Electricity and Gas Palo Alto’s electric and gas counterparty credit exposure and credit ratings are presented in Tables 2 and 3. Tables 1, 2 and 3 show the counterparties’ current EDF. EDFs range from 0.01 to 35.00. The lower the EDF, the less risk of the counterparty defaulting. For example, Powerex’s EDF is 0.01, which means their risk of default is 1/10 of 1 percent in a year. Trina Solar has a 26.31 EDF which is more worrisome and this is a company to monitor closely. Investment grade is around 0.15 and lower. Table 2. Credit Exposure and Expected Default Frequency of Electric Suppliers as of 6/30/13 Table 3. Credit Exposure and Expected Default Frequency of Natural Gas Suppliers as of 6/30/13 City of Palo Alto Page 9 Supply Rate Stabilization Reserve Adequacy The Electric and Gas Supply Rate Stabilization Reserves help to manage risks associated with serving the City’s gas and electric customers. Table 4 below summarizes the current, unaudited supply rate stabilization reserve levels for electricity and gas as of June 30, 2013 based on data from the City’s SAP financial system. 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 as of June 30, 2013 is $65.3 million, which is $1.9 million above the FY 2013 maximum reserve guideline level. The City Auditor’s recommendation regarding clarifying how the rate stabilization reserve balances are determined by the Utilities Department is currently being addressed by Utilities. The current estimated reserve balance is above the immediate 12-month credit, hydro, and other risks that have been identified, and which are estimated at $5.0 million. The unaudited Gas Supply Rate Stabilization reserve balance as of June 30, 2013 is $6.3 million which is $1.8 million below the FY 2013 maximum reserve guideline level.