HomeMy WebLinkAboutStaff Report 2311-2235CITY OF PALO ALTO
CITY COUNCIL
Special Meeting
Monday, September 23, 2024
Council Chambers & Hybrid
5:30 PM
Agenda Item
12.City of Palo Alto's Energy Risk Management Report for the first half of Fiscal Year 2024
(July 1, 2023-December 31, 2023).
City Council
Staff Report
From: City Manager
Report Type: INFORMATION REPORTS
Lead Department: Administrative Services
Meeting Date: September 23, 2024
Report #:2311-2235
TITLE
City of Palo Alto's Energy Risk Management Report for the first half of Fiscal Year 2024 (July 1,
2023-December 31, 2023).
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 December 31, 2023, the first half of Fiscal Year (FY) 2024.
The projected cost of the City’s fixed-price electricity purchases is $0.2 million lower than the
market value of that electricity as of December 31, 2023 for the 12-month period beginning
January 1, 2024. During the first half of FY 2024 (July 1, 2023 through December 31, 2023) the
City’s credit exposure to fixed price contracts is minimal. The projected Electric Supply
Operations Reserve is above the FY 2024 minimum guideline reserve level and the projected
gas reserve is within the FY 2024 guideline reserve level range.
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures
during this reporting period.
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 the first half of FY 2024. The City’s Energy
Risk Management Policy requires that staff report on a semi-annual basis 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 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 function, whose role is to monitor and mitigate these energy market risks, is a part
of the Treasury Division of the Administrative Services Department. This semi-annual of FY 2024
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 January 1, 2024 to December 31, 2026, 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
December 31, 2023 is lower than the market value of electricity by $5.7 million. Hydroelectric
power from Calaveras was expected to cost $8.4 million (as of December 31, 2023) 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 December 31, 2023, has purchased and sold fixed-priced supplies of electricity for
the next 12 months totaling 41,790 MWh with an average price of $87.59 per MWh and totaling
69,280 with an average price of $47.08, respectively. The City contracted for these purchases
with one of its approved counterparties: NextEra Energy Resources. The 12-month MTM value
of the City’s forward transactions for wholesale power were $0.2 million for calendar year 2024;
a positive MTM means that the sales price for these transactions was lower than the market
value as of December 31, 2023. 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
listed above is well within risk management guidelines and presents little risk to the City’s
financial outlook.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Jan-24
Mar-24
May-24
Jul-24
Sep-24
Nov-24
Jan-25
Mar-25
May-25
Jul-25
Sep-25
Nov-25
Jan-26
Mar-26
May-26
Jul-26
Sep-26
Nov-26
Megawatt Hours
Figure 1 -Electric Balance Geothermal &
WholesaleWind
Western
Solar
Landfill
Calaveras
Total Load
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 December 31, 2024.
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
-20,000
-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
01/01/24
02/01/24
03/03/24
04/02/24
05/03/24
06/02/24
07/03/24
08/03/24
09/01/24
10/02/24
11/01/24
12/02/24Megawatt Hours
Figure 2 -Electric Forward Volumes ending as of 12/31/24
NextEra Energy Resources
(1,000,000)
(500,000)
-
500,000
1,000,000
1,500,000
2,000,000
Jan-24
Feb-24
Mar-24
Apr-24
May-24
Jun-24
Jul-24
Aug-24
Sep-24
Oct-24
Nov-24
Dec-24
MTM Dollar Amount
Figure 3 -Electric Mark-to-Market Values ending as of 12/31/24
NextEra Energy Resources
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 6.93 percent 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 12/31/23
Table 2 - Credit Exposure and Expected Default Frequency of Electric Suppliers as of 12/31/23
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.
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
Ameresco 6.93%Ca
0.01%Baa3
Source: Moody's CreditEdge website
Avangrid (fomerly Iberdrola)
Renewable Counterparty
Electric
Counterparty
Cost
of Transaction
Market Value
of Transaction
Current
Expected
Default
Frequency
Moody's
(EDF)
Implied
Rating
NextEra 2,439,365$ 2,237,891$ 0.042%A3
Totals 2,439,365$ 2,237,891$
(85)$ (201,474)$
(201,474)$ (85)$
Cost vs.
Market
(MTM) Value
S
&
P
C
r
Expected Loss
(MTM x
Expected
Default
Frequency)
A-
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 unaudited balance as of
December 30, 2023 is $60.6 million, which is $40.7 million above the minimum reserve guideline
level. Contributing to this higher reserve are related to a favorable litigation settlement of the
Central Valley Project Improvement Act (CVPIA) operated by the U.S. Bureau of Reclamation and
an increase in wholesale revenues. The plan is to transfer the excess reserves to other reserves
(e.g., Special Projects, CIP, etc.). The audited Gas Operations reserve balance is $9.8 million,
which is at the minimum reserve guideline level.
Table 3 - Electric Supply Operations and Gas Operations Reserve Levels for FY 2024
Exceptions to Energy Risk Management Policies, Guidelines, or Procedures
There were no exceptions to the Energy Risk Management Policies, Guidelines, or Procedures to
report during the semi-annual of FY 2024.
FISCAL/RESOURCE IMPACT
This is an information report; no Council action required.
STAKEHOLDER ENGAGEMENT
ASD staff works internally with the Utilities Department to prepare this report.
ENVIRONMENTAL REVIEW
This Council informational report is not a project under California Environmental Quality Act
(CEQA) as defined in CEQA Guidelines, section 15378, because it has no potential for resulting
in either a direct or reasonably foreseeable indirect physical change in the environment.
APPROVED BY: Lauren Lai, Director of Administrative Services
Fund
Audited
Reserve for
Operations
Balance as of
06/30/2023 ($
Millions)
Changes to
the
Reserves
for
Operations
($ Millions)
Unaudited
Reserve for
Operations
Balance as of
12/31/23
($ Millions)
Minimum
Guideline
Reserve
Level
($ Millions)
Maximum
Guideline
Reserve
Level
($ Millions)
Electric $38.88 $21.72 $60.60 $19.90 $39.80
Gas $14.44 ($4.64)$9.80 $9.76 $19.52
FY 2024