HomeMy WebLinkAboutStaff Report 12392
City of Palo Alto (ID # 12392)
City Council Staff Report
Meeting Date: 1/24/2022 Report Type: Information Reports
City of Palo Alto Page 1
Title: City of Palo Alto's Energy Risk Management Report for the Second Half
of Fiscal Year 2021 (January 1, 2021-June 30, 2021)
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 June 30, 2021, the end of the second half of Fiscal Year (FY) 2021.
The projected cost of the City’s fixed-price electricity purchases is $0.66 million higher than the
market value of that electricity as of June 30, 2021 for the 12-month period beginning July 1,
2021. In the second half of FY 2021 (January 1, 2021 through June 30, 2021) the City’s credit
exposure to fixed price contracts is minimal. The projected Electric Supply Operations Reserve
is above the FY 2021 minimum guideline reserve level and the projected gas reserve is also
above the FY 2021 guideline reserve level range.
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures
during the second half of FY 2021.
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 second half of FY
2021. The City’s Energy Risk Management Policy requires that staff report on a quarterly basis
but due to lower trading activity levels the Utility Risk Oversight Coordinating Committee
(UROCC) has approved providing this report on a semi-annual 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
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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 at
market rates via a monthly index price. The Treasury Division of the Administrative Department
manages the City’s Energy Risk Management function; their role is to monitor and mitigate the
City’s exposure to market risks.
This second half of FY 2021 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 July 1, 2021 to June 30, 2024, in megawatt-hours (MWh). The
negative bars represent sales of excess power on the wholesale market.
City of Palo Alto Page 3
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Ju
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2
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1
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3
Ma
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Ma
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4
Ma
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4
Ma
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4
Me
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a
w
a
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H
o
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Figure 1 -Electric Balance Wind
Wholesale
Western
Solar
Landfill
Calaveras
Total Load
Hydroelectricity
The cost of hydroelectricity received from Western over the 12-month period ending June 30,
2021 is more than the market value of electricity by $1.0 million. Hydroelectric power from
Calaveras was expected to cost $2.7 million (as of June 30, 2021) more than the market value of
electricity. Note that Calaveras provides benefits not reflected in the mark-to-market (MTM,
defined in the following section) 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 will substantially improve the value of the project
relative to the market price of electricity.
Fixed-Price Forward Electricity Purchases
The City, as of June 30, 2021, has purchased and sold fixed-priced supplies of electricity for the
next 12 months totaling 31,200 MWh with an average price of $43.72 per MWh and totaling
54,080 MWh with an average price of $39.23 per MWh, respectively. The City contracted for
these purchases with three of its approved counterparties: SENA (Shell Energy North America),
EDF, and NextEra Energy Resources. The 12-month MTM value of the City’s forward
transactions for wholesale power was $0.66 million at the end of the second half of FY 2021. A
positive MTM means that the sales price for these transactions was lower than the market
value as of June 30, 2021. The City tracks the mark to market value of its forward contracts to
measure the value that would be lost due to a counterparty failing to deliver on its contractual
commitments, forcing the City to purchase replacement electricity in the market. The exposure
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listed above is well within risk management guidelines and presents little risk to the City’s
financial outlook.
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 June 30, 2022.
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
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Me
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a
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Figure 2 -Electric Forward Volumes ending as of 06/30/21
EDF
SENA
NextEra Energy Resources
(2,000,000)
(1,500,000)
(1,000,000)
(500,000)
-
500,000
1,000,000
Ju
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2
1
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Figure 3 -Electric Mark-to-Market Values ending as of 06/30/21
EDF
SENA
NextEra Energy Resources
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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 average daily usage. Those daily transactions are made at an
average price based on the published daily spot market index. These costs are passed through
directly to customers using a monthly rate adjustment mechanism, leaving the City with little or
no price risk or counterparty risk exposure for the gas utility.
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 0.22 percent Expected Default Frequency (EDF)
which is higher than the recommended EDF level of 0.08 percent. The EDF has improved, the
prior year it was 0.24 percent and, as of writing of this report, (December 14, 2021), the EDF is
0.16 percent. Staff is continuing to monitor Ameresco’s EDF and will continue to report to City
Council in this semi-annual report. 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 06/30/21
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Ameresco 0.22%Ba1
0.03%Aa3
Source: CreditEdge website
Renewable Counterparty
Avangrid (fomerly Iberdrola)
Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 06/30/21
Electric
Counterparty
Cost of
Transaction
Market Value
of Transaction
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Exelon -$ -$
NextEra 591,008 714,079 0.012%Aa1
SENA (918,096) (1,653,555) 0.051%Aa2
EDF (430,560) (632,646) n/a Baa2
Totals (757,648)$ (1,572,122)$
(202,086) -
A-
-$ BBB -$
- 123,071
656,443$ -$
Cost vs.
Market
(MTM) Value
S
&
P
C
r
e
Expected Loss
(MTM x
Expected
Default
Frequency)
735,459 AA--
City of Palo Alto Page 6
Electric Forward Mark-to-Market Values
It is important to note that, for contracts with 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 percent or below indicate supplier’s current expected default frequency falls
within the investment grade range. An EDF above 0.08 percent 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 audited balance as of June
30, 2021 is $29.9 million, which is $4.7 million above the minimum reserve guideline level. The
audited Gas Operations reserve balance is $12.0 million, which is $6.1 million above the
minimum reserve guideline level.
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Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2021
Fund
Audited
Reserve for
Operations
Balance as
of 06/30/2021
($ Millions)
Changes
to the
Reserves
for
Operations
($ Millions)
Unaudited Reserve for
Operations Balance as
of 06/30/21
($ Millions)
Minimum
Guideline
Reserve
Level
($ Millions)
Maximum
Guideline
Reserve
Level
($ Millions)
Electric $29.9 $0.0 $29.9 $25.2 $46.9
Gas $12.0 $0.0 $12.0 $5.8 $11.7
FY 2021
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 second half of FY 2021.