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Electricity, meet Rock

For several years, the U.S. Geological Survey (USGS) has been investigating the potential effects of intense geomagnetic storms on electric utility infrastructure.  In 2016 they concluded,

“A severe geomagnetic storm could disrupt the nation’s power grid for months, potentially leading to widespread blackouts.  Resulting damage and disruption from such an event could cost more than $1 trillion, with a full recovery time taking months to years.” (1)

Bloomberg recently noted that in an upcoming report, the USGS more specifically identifies a stretch of the Interstate 95 corridor as particularly at risk of power outages related to geomagnetic storms.

This corridor is largely underlain by Paleozoic (very old) crystalline rock that acts as an insulator, reflecting back incoming energy from the sun, thus giving that energy a second chance to damage utility infrastructure.  Damaged electrical infrastructure, particularly utility transformers, can take many months to replace.

“Through a stroke of bad luck, the worst of these rocks basically traces the path of I-95 from Richmond, Virginia, to Portland, Maine, passing through Washington, New York and Boston along the way.” (2)

Putting aside for the moment the notion that rocks can be inherently good or bad, concerning how this connection between electricity and rocks may impact the electric grid, solutions are not simple.  Some may look to off-grid self-generation and battery storage for protection.  But, if a geomagnetic storm is strong enough to impact the grid, it also may impact the electric infrastructure at individual customers’ sites.

Faraday cages are a potential solution.  Faraday cages also may provide protection against EMPs (electromagnetic pulses).  More on this in the weeks ahead.

References:

Evelyn Teel, Ralph Russell and Jeff Dowdell contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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NCAC – 22nd Annual Washington Energy Policy Conference

ONE WEEK FROM TODAY

Secure your spot here: https://www.ncac-usaee.org/event-2845352

Energy Technologies and Innovations: A Disturbance in the [Market] Force

Thursday, April 12, 2018, 8:30 AM to 6:00 PM

The George Washington University

Keynote speakers:

Mark P. Mills, Senior Fellow, Manhattan Institute

Gil Quiniones, President and CEO, New York Power Authority

In addition to these keynote speakers, the following panels will be held:

PANEL 1: The Grid Awakens: Electricity Generation and Demand
Phil Jones, Executive Director, Alliance for Transportation Electrification
Bryce Smith, Founder and CEO, LevelTen Energy
John Zahurancik, COO, Fluence
Barney Rush, Board Member ISO New England, Rush Energy Consulting (moderator)

PANEL 2: Hydrocarbons Strike Back: Innovations to Maintain the Status Quo

John Eichberger, Executive Director, Fuels Institute
Sid Green, President, Enhanced Production Inc.
Mike Trammel, Vice President for Government, Environmental, and Regulatory Affairs, Excelerate
Rita Beale, CEO and President, Energy Unlimited (moderator)

PANEL 3: Innovation: A New Hope in Energy

Bill Farris, Associate Laboratory Director for Innovation, Partnering, and Outreach, National Renewable Energy Laboratory
Elisabeth Olson, Economist, Office of Energy Policy & Innovation, FERC
Christopher Peoples, Managing Partner, Peoples Partners and Associates
Devin Hartman, Electricity Policy Manager, R Street Institute (moderator)

PANEL 4: Return of Energy Policy

Adele Morris, Policy Director for Climate and Energy Economics, Brookings
Jason Stanek, Senior Counsel, House Energy & Commerce Committee, Subcommittee on Energy
Pat Wood, Chairman, Dynegy
Kevin Book, Managing Partner, ClearView Energy Partners (moderator)

Note: Chatham House Rules apply.

Full Agenda and to register –> http://www.ncac-usaee.org/events.php#event151

RSVP: Required

Conference Information:

Organizer: Michael Ratner, NCAC-USAEE Vice President (mratner@crs.loc.gov) / 202-707-9529
Venue: The George Washington University, The Marvin Center, 3rd floor, Continental Ballroom, 800 21st Street, NW, Washington, DC 20052

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Balancing Congestion

The Federal Energy Regulatory Commission approved a change in PJM’s (the Mid-Atlantic grid operator) tariff, allowing them to shift what are called “balancing congestion” costs to load serving entities.  FERC approved PJM’s tariff revision with an effective date of June 1.  Suppliers have indicated that they intend to pass through these charges.  Suppliers include a change of law or regulation provision in their agreements.  Basically, they commit to a fixed price, but allow for pass-throughs when there is a change in law or regulation.  Please email or call to discuss the potential impact of these charges to you.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2017 by Avalon Energy® Services LLC

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Maryland Renewable Energy Portfolio Standard (RPS) – Veto Override

Last week, the Maryland House and Senate voted to override Governor Larry Hogan’s 2016 veto of the 2016 Clean Energy Jobs bill.  As a result, Maryland’s Renewable Energy Portfolio Standard (RPS) will increase from 20% in 2022 to 25% in 2020.  The graph below shows the effect of the original RPS rule in blue overlaid with the newly amended rule in red.

Maryland’s solar “carve out” will increase as well as shown below.

Regulatory guidance is that customers with executed retail electric contracts in place prior to the effective date of the override are grandfathered from the additional RPS costs until the expiration of the grandfathered contract.

This is a good time to consider extending your electricity supply contracts to year 2021.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2017 by Avalon Energy® Services LLC

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In The News – Avalon Energy Services, LLC

In his year-end review titled, “Gas Industry Looks Optimistically at 2017,” PointLogic author Kevin Adler quotes our COO, Jim McDonnell.  Scroll down to the bottom of the report which you can find here.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, email us at info@avalonenergy.us, or call us at 888-484-8096.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2017 by Avalon Energy® Services LLC

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Separate Paths – Part 2

By Ana Rasmussen, Intern

Our last blog post Separate Paths – Part 1 looked at how electricity distribution costs have been rising since 2008 and many of our readers have had questions about just why this is happening.  In order to explore this, and to try to get some answers, I dove in and analyzed seven years’ worth of Pepco electric bills from a representative home in Pepco’s Maryland service territory.  Before sharing my findings, I want to acknowledge that my base data is just from one household, which can be problematic for making generalizations.  However, the kWh rates for individual charges should be representative and similar for other residences in the area over these years.  I cannot account for differences in usage from one household to the next, but I believe this can shed some light on the larger shifts taking place within the utility cost structure.

First, once all of the data was collected and organized I looked at the percentages of the total bills that were from electricity distribution, transmission and generation.  As you can see in the charts below, a drastic transformation has taken place.  In 2009 distribution charges accounted for 24.6% of the total bill, but by 2015 it makes up 41.7% of it. The portion of the bill coming from transmission charges also more than doubles during this period resulting in generation’s share to fall to just over 50% of the total bill.  While generation’s portion of the bill has been falling, transmission and distribution have been on the rise since 2009.

Next, I decided to focus on distribution and breakdown the individual rates and charges included under distribution on the Pepco bills.  The four most important components of the distribution charge, and the way in which they are charged, are as follows:

Please note Pepco’s distribution energy charges are different from their generation energy charges.  Generation energy charges represent the cost of procuring energy for customers.  Distribution energy charges represent the cost of providing electricity delivery services to customers.  These distribution energy charges are billed on a kilowatt-hour usage basis.  So, while they are referred to as “energy charges,” they do not relate to the procurement of energy, only to the delivery of energy.

The customer charge is a flat rate charged once a month. Over this period, the charge has gradually risen from $6.65 to $7.39 a month. In the chart below you can see the yearly average rate for the other three primary components of distribution.  Although the Montgomery Country Energy Tax has fallen slightly since 2009, both distribution energy charge and Empower MD charge have risen.

Throughout this time period the average yearly distribution energy charge has been increasing, but to get a better understanding of it on a unit rates basis, I charted them by month. Below you can see how the rate falls in the winter months and rises during the summer months. Over the seven year period, the distribution energy charge has increased, on average, about 6.8% per year.  Also notable is the growing distance from peak to trough each year.

After an in depth look at seven years’ worth of residential Pepco electric utility bills, the shifts in generation, transmission and especially distribution have become more clear. Although far from perfect due to a lack of access a broader set of data, I hope that this analysis has been able to provide some insight on current trends and answer some of your questions.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2016 by Avalon Energy® Services LLC.

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Separate Paths – Part 1

By Ana Rasmussen, Intern

Since the shale boom began in earnest during 2008, natural gas prices in the US wholesale market have fallen dramatically. Prices have hovered within the 2 to 6 dollar per million Btu (mmBtu) range over the last few years, with the prompt month NYMEX natural gas contract trading at a remarkably low $1.70 mmbtu today. As we have been reporting for some time, wholesale electricity prices have also experienced a similarly dramatic decline, although that relationship has been weakening in recent months (see Natural Gas and Electricity Are Parting Ways – Part 1 and Natural Gas and Electricity Are Parting Ways – Part 2).  Given the decline in wholesale electricity prices, many of our readers have asked us why they have not seen a similar decline in their home electricity bills.

To answer this question we examined electric utility bills from a typical Maryland residence from the last 10 years and broken down the different charges included in the total cost. First, if you single out generation and transmission (G&T) charges during this time period, you can see in the graph below that they have been more or less in decline since the end of 2008. G&T charges represent the costs of producing electricity and of moving high voltage electricity from generation facilities to distribution lines.

However, this does not give us the whole picture. Our electricity bills are not only based on G&T, but distribution costs as well. As you can see below, while generation and transmission have been declining, distribution charges have actually been rising. Distribution charges include the costs of maintaining, expanding and improving the electric system to deliver electricity from high voltage transmission system to customers, homes and businesses, as well as the utility’s depreciation expense and return on rate base.  Other components of distribution costs include, but are not limited to, grid resiliency, environmental surcharges and county energy taxes.

Ultimately, simultaneously falling G&T charges and rising distribution charges are to blame for the lack of change in our electric utility bills at home, even with wholesale prices so low. In the final graph you can see the total utility bill charges have remained relatively stable as a result of this gradual cost shift from G&T to distribution over the last few years.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2016 by Avalon Energy® Services LLC.Blog 058 - image 04

 

 

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Natural Gas and Electricity Are Parting Ways – Part 2

In our last article, Natural Gas and Electricity Are Parting Ways – Part 1, we explored the weakening correlation between wholesale natural gas prices and electricity prices in the Mid-Atlantic.  While natural gas prices have fallen dramatically over the past seven years, and electricity prices have fallen as well, electricity prices have not fallen as far.  We discussed how this weakening relationship is, in part, a result of natural gas-fired generating units more and more often being dispatched before coal-fired units.  In this article, we look at the influence of capacity prices.

Capacity

The cost of energy delivered by a competitive supplier consists of several elements—generation, capacity, transmission, and ancillary services.  Costs to suppliers resulting from PJM’s energy auctions are reflected in competitive suppliers’ generation charges.  Competitive suppliers are also required to own or to reserve generation capacity.  PJM runs separate capacity auctions to place a price on this capacity.  These auctions establish capacity prices for each of the three consecutive future planning years.

Polar Vortex 

During the depths of the Polar Vortex of January 2014 (see What Does Volatility Look Like?), there were times when more than 20% of generation capacity in PJM was unable to respond when dispatched by the grid operator.  The grid operator then had to call upon non-economic (meaning more costly) resources to fill in, some of which also were unable to respond.  The grid came within a few thousand megawatts of brownouts, and prices soared to more than $2,600 per megawatt hour during some hours.

Capacity Performance

Clearly more reliable generation capacity was required.  PJM proposed, and the Federal Energy Regulatory Commission (FERC) approved, a change in regulation creating a new Capacity Performance product.  With Capacity Performance, PJM established new, more stringent requirements for generation regardless of weather conditions and system conditions, and also established onerous penalties in the event that generation does not respond when called.  Most generators bid their capacity again during two Transitional Auctions, for the planning years 2016/2017 and 2017/2018. As a result, due to this change in regulation, capacity prices have been reset higher for each of these two planning year periods.

The table above presents, for the 2016/2017 and 2017/2018 planning years, capacity prices that were originally established as part of Base Residual Auctions (BRA) and the new prices established as part of Capacity Performance (CP) Transition Auctions.

Additional investment was clearly needed in order to improve system reliability.  PJM’s strategy with Capacity Performance is, on the one hand, to provide generators “resources to invest in improvements in such areas as dual-fuel capability, securing firmer natural gas supplies and upgrading plant equipment,” while, on the other hand, imposing substantial penalties for non-performance.

These increased costs associated with Capacity Performance, which will be reflected in electricity prices, are unassociated with changes in natural gas prices and are another driver of the decline in correlation between electricity prices and natural gas prices.

Notes:

– Evelyn Teel contributed to this article

– Capacity prices and quote from PJM website

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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Natural Gas and Electricity Are Parting Ways – Part 1

In recent articles, we have explored the dramatic decline in natural gas prices over the past seven years.  See These Are Days To Remember and 10,000 Maniacs Were Right.

In the US Mid-Atlantic, natural gas and electricity prices have, over time, tended to move together.  While there has by no means been a perfect correlation between the two, the relationship has been strong.

Over the past 15 years, the coefficient of determination (R2) has averaged about 67% (see yellow line).  In other words, over this time period, 2/3 of the change in electricity prices can be explained by changes in natural gas prices.  More recently, however, the strength of this relationship has weakened and continues to weaken further (see red line).  Electricity prices have declined but not as precipitously as those of natural gas.

Why has this relationship weakened?  Two significant drivers relate to (i) dispatch order and (ii) capacity prices.

Dispatch Order

In scheduling energy to serve electricity users, the grid operator, PJM, utilizes a least-cost dispatch model.  PJM develops an expectation of projected system load on an hourly basis and then seeks bids from generators to supply energy to serve this load.  After bids have been submitted, for each hour, PJM accepts the lowest cost offers first and then works their way through higher price offers until sufficient supply has been cleared to match the projected load.  (There are a number of system constraints and complications that must be incorporated into the process, but this pretty much captures it.)  For each hour, the price at which the last megawatt-hour (MWh) clears sets the price for all the supply offers that clear in that hour.

For many years, the last generating units cleared were generally natural gas-fired units.  As a result, it has been these natural gas units that have set the price for electricity, leading to the strong link between natural gas prices and electricity prices.  A common understanding was that “as natural gas prices go, so go electricity prices.”

But now, low natural gas prices are leading to lower and lower supply bids by natural gas-fired generators, causing them to more frequently fall down the dispatch order and clear before coal-fired units.  Because of this, coal fired units are now more often becoming the marginal, or price-setting, units.  And, as a result, falling natural gas prices have not driven down electricity prices to the extent they once would have.

In addition to procuring energy, electricity wholesale suppliers must also own or procure capacity.  In our next article, we will look at how capacity costs influence electricity prices.

Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

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Natural Gas Market Update

The above graph looks at natural gas prices going back to January 1997.

Natural gas prices have retreated from the Polar Vortex bump and remain relatively low by historical standards.

The prices plotted above are not adjusted for inflation.  If they were in 2014 dollars, the left side of the curve would be more elevated.  In real dollars, today’s prices are lower than they appear on the graph.

Looking to the futures market, the effects of the Polar Vortex lingered into the summer over concern about whether or not there was sufficient supply of natural gas to refill storage after the dramatic drawdowns during January and February.

This is highlighted on the left side of the blue line above which plots the 36 month futures curve as of 4/29/14.  This curve is backwardated, meaning the months close in time were priced above the months further out in time.

The near dated months have since retreated as concerns about storage refill have diminished because of (a) greater natural gas production than expected, and (b) unusually mild summer weather reducing summer time electricity load and the related reduced demand for natural gas.

This is highlighted on the red line above which plots the 36 month futures curve as of 10/24/14.  The months closer in time have declined significantly with the December ’14 contract down $1.26/mmBtu or 25%.  The entire curve has declined as well, though to a lesser extent.   The futures curve is no longer backwardated.

The table above shows the simple average of the monthly prices of the 36 and 48 month forward curves as of 4/29 and 10/24.

Overall, the 36 month futures curve is down 14.7% while the 48 month curve is down 12.7%.

The graph above looks further ahead at the 60 month futures curve which indicates that the market expects prices to rise.

While the curve is upward sloping, five years into the future, natural gas is trading well below $5/mmBtu.

Summary:

Over the past six months, market sentiment has swung from concerns that natural gas supply cannot keep up with storage injections – and upcoming winter demand – to the reverse.  Now the talk is more about an oversupplied market.  While there is low correlation between crude oil and natural gas prices, the recent decline in crude oil prices has contributed to overall bearish sentiment.  Generally, the best time to go long is when the market sentiment is most negative.  We may be approaching that point for natural gas.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

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Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2014 by Avalon Energy® Services LLC