HomeMy WebLinkAboutStaff Report 2301-0758CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, January 23, 2023
Council Chambers & Hybrid
5:00 PM
AGENDA ITEM COVER PAGE
15.City of Palo Alto's Energy Risk Management Report for the Second Half of Fiscal Year
2022 (January 1, 2022-June 30, 2022)
CITY COUNCIL
STAFF REPORT
From: City Manager
Report Type: INFORMATIONAL REPORT
Lead Department: Administrative Services
Meeting Date: January 23, 2023
TITLE
City of Palo Alto's Energy Risk Management Report for the Second Half of Fiscal Year 2022 (July
1, 2021-June 30, 2022)
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, 2022, the end of the annual report of Fiscal Year (FY) 2022.
The projected cost of the City’s fixed-price electricity purchases is $3.81 million lower than the
market value of that electricity as of June 30, 2022 for the 12-month period beginning July 1,
2022. In the annual report of FY 2022 (July 1, 2021 through June 30, 2022) the City’s credit
exposure to fixed price contracts is minimal. The projected Electric Supply Operations Reserve
is above the FY 2022 minimum guideline reserve level and the projected gas reserve is also
above the FY 2022 guideline reserve level range.
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures
during the annual report of FY 2022.
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 for FY 2022. The City’s Energy Risk Management
Policy requires that staff 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. This report covers both semi-annual reports for FY 2022.
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 at
market rates via a monthly index price. The City’s Energy Risk Management staff are located in
the Treasury Division of the Administrative Services Department. Their role is to monitor and
mitigate these risks.
This annual report of FY 2022 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
ANALYSIS
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, 2022 to June 30, 2025, in megawatt-hours (MWh). The
negative bars represent sales of excess power on the wholesale market.
Hydroelectricity
The cost of hydroelectricity received from Western over the 12-month period ending
June 30, 2022 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, 2022) 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, 2022, 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 with an average price of $39.23 , respectively. The City contracted for these purchases
with three of its approved counterparties: SENA (Shell Energy North America), Électricité de
France (EDF), and NextEra Energy Resources. The 12-month MTM value of the City’s forward
transactions for wholesale power was $3.81 million at the end of the annual report of FY 2022.
A positive MTM means that the sales price for these transactions was lower than the market
value as of June 30, 2022. 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
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jul-22
Sep-22
Nov-22
Jan-23
Mar-23
May-23
Jul-23
Sep-23
Nov-23
Jan-24
Mar-24
May-24
Jul-24
Sep-24
Nov-24
Jan-25
Mar-25
May-25
Megawatt Hours
Figure 1 -Electric Balance Wind
Wholesale
Western
Solar
Landfill
Calaveras
Total Load
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, 2023.
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
07/01/22
08/01/22
09/01/22
10/01/22
11/01/22
12/01/22
01/01/23
02/01/23
03/01/23
04/01/23
05/01/23
06/01/23
Megawatt Hours
Figure 2 -Electric Forward Volumes ending as of 06/30/23
EDF
SENA
NextEra Energy Resources
(2,000,000)
(1,500,000)
(1,000,000)
(500,000)
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
Jul-22
Aug-22
Sep-22
Oct-22
Nov-22
Dec-22
Jan-23
Feb-23
Mar-23
Apr-23
May-23
Jun-23MTM Dollar Amount
Figure 3 -Electric Mark-to-Market Values ending as of 06/30/23
EDF
SENA
NextEra Energy Resources
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 of 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 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 1.79% Expected Default Frequency (EDF) which is
higher than the recommended EDF level of 0.08%. 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 06/30/22
Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 06/30/22
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Ameresco 1.79%B3
0.03%A2
Source: CreditEdge website
Renewable Counterparty
Avangrid (fomerly Iberdrola)
Electric
Counterparty
Cost
of Transaction
Market Value
of Transaction
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
NextEra 3,671,537$ 318,564$ 0.026%Aa3
SENA 507,600 273,660 0.524%Baa1
EDF (1,312,800)(1,531,066)n/a n/a
Totals 2,866,337$ (938,841)$
(872)(3,352,973)$
(3,805,178)$ (2,098)$
Cost vs.
Market
(MTM) Value
S
&
P
C
r
e
Expected Loss
(MTM x
Expected
Default
Frequency)
(233,940)AA-(1,226)
(218,266)-
A-
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% or below indicate 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.
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, 2022 is $30.1 million, which is $12.1 million above the minimum reserve guideline level. The
audited Gas Operations reserve balance is $12.1 million, which is $5.6 million above the minimum
reserve guideline level.
Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2022
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to
report during the annual report of FY 2022.
FISCAL/RESOURCE IMPACT
This is an information report so will have no resource impact.
STAKEHOLDER ENGAGEMENT
Staff works internally with the Utilities Department to prepare this report.
ENVIRONMENTAL REVIEW
This informational report does not require Council action and therefore is not a project as
defined by the California Environmental Quality Act (CEQA).CEQA Guidelines Section 15378).
This report is for informational purposes only with no action required by the Council
Fund
Audited
Reserve for
Operations
Balance as
of 06/30/2021
($ Millions)
Changes
to the
Reserves
for
Operations
($ Millions)
Audited
Reserve for
Operations
Balance as
of 06/30/22
($ Millions)
Minimum
Guideline
Reserve
Level
($ Millions)
Maximum
Guideline
Reserve
Level
($ Millions)
Electric $29.9 $0.2 $30.1 $18.0 $36.0
Gas $12.0 $0.1 $12.1 $6.5 $13.0
FY 2022
ATTACHMENTS
None
APPROVED BY:
Kiely Nose, Administrative Services Director
Report #: 2301-0758