Managing Utility Price Risk Preserving Capital Budgets in Today
Transcript of Managing Utility Price Risk Preserving Capital Budgets in Today
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Managing Utility Price Riskand
Preserving Capital Budgets in Today’s Volatile Energy Market
Presented By:
Larry Myers, PE, CEM ∗ Mike Mumper, CPMM ∗ Sherri Crawford
Sales Representatives - TAC Energy Solutions4431 North Front Street, Suite 100
Harrisburg, PA 17110Office: (717) 232-8182
May 2, 2006
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2Agen
da
Volatility in Today’s Utility Market• Natural Gas & Electricity• Transitioning Away From Rate Caps Within Semi-
Deregulated Energy Markets• PA PUC’s Implementation of an Electric Market Portfolio
Standard• Energy Rate Escalations / Locking in Today’s Rate
Minimizing Risk Exposure via Conservation• Typical Approaches to Implementing Utility
Conservation Measures• Pros / Cons of Each Approach
Questions and Answers
Agenda
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Volatility in Today’s Utility Market
Natural GasNatural Gas
Fully Deregulated, Mature MarketFully Deregulated, Mature Market
Many suppliers can provide natural gas commodity to Many suppliers can provide natural gas commodity to meet your facilities needs. meet your facilities needs.
Large Commercial AccountsLarge Commercial Accounts: Daily reconciliation : Daily reconciliation General Commercial AccountsGeneral Commercial Accounts: Monthly reconciliation: Monthly reconciliation
Volatile Energy Markets Cause Headaches
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What Happened To Predictability?
Variability In Weather Conditionshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf
Katrina
Rita
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Variability In Substitute Fuel Costshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf
Variability In External Conditionshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf
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Variability In Market Expectationshttp://www.ferc.gov/legal/staff-reports/eng-mkt-update.pdf
Volatility in Today’s Utility Market
ElectricityElectricity
Semi Semi ––DeregulatedDeregulatedRate Caps in PlaceRate Caps in Place
1998: Deregulation initiated by PA Legislature & PUC 1998: Deregulation initiated by PA Legislature & PUC 2000: Wholesale prices exceed Price 2000: Wholesale prices exceed Price –– to to –– CompareCompare2002: Practically no retail shopping of accounts2002: Practically no retail shopping of accounts2004: Alternative Energy Portfolio Standard2004: Alternative Energy Portfolio Standard
Electric Utilities begin phase out of rate capsElectric Utilities begin phase out of rate caps2012: Full Deregulation of all Electric Utility Companies2012: Full Deregulation of all Electric Utility Companies
Total Energy Costs Industrial Users in Pennsylvania
4,000
4,200
4,400
4,600
4,800
5,000
5,200
5,400
5,600
5,800
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
$1,0
00,0
00
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Variability In Usage PatternsYour Buildings Are Dynamic
Facility's Actual Electric Use Per Day
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
12:00 1:0
02:0
03:0
04:0
05:0
06:0
07:0
08:0
09:0
010:
0011:
0012:
00 1:00
2:00
3:00
4:00
5:00
6:00
7:00
8:00
9:00
10:00
11:00
Time of Day
Ele
ctri
c D
eman
d (
KW
)
Peak Energy Needs Can Be Costly
Facility's Electiricity Need
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
0% 5% 10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Occurance Rate
Act
ual
Dem
and
(K
W)
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Direct kW charge$12.09 per kW
Indirect kW chargeBut, the billing demand (kW)
affects the size of each kwh block in the tiered
rate structure.
Variability & Complexity In Rates
kWh
$ p
er k
Wh
Tier 1Tier 2
Remaining kWhNew Tier 1New Tier 2
New Remainder of kWh
Example: 20,000 KW reduced to 19,000 KW
300 KWh / KW x 1,000 KW = 300,000 KWh
300,000 KWh x $0.026 / KWh = $7,800 / month
Example: 20,000 KW reduced to 19,000 KW
150 KWh / KW x 1,000 KW = 150,000 KWh
150,000 KWh x $0.026 / KWh = $3,900 / month
$12,090 + $11,700 Savings Per Month
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Electric Supplier’s Manage Costs
Facility's Actual Electric Use Per Day
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
12:00 1:0
02:0
03:0
04:0
05:0
06:0
07:0
08:0
09:0
010:
0011:
0012:
00 1:00
2:00
3:00
4:00
5:00
6:00
7:00
8:00
9:00
10:00
11:00
Time of Day
Ele
ctri
c D
eman
d (
KW
)
Base Electric Need(Long Term Contract)
Seasonal Daily Need
Spot Market Buy Spot Market Sell
Variability In Market Prices
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Variability In Market Prices
Henry Hub Historical and Future Price Expectations
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
1/1/20
04
4/1/20
04
7/1/20
04
9/30/2
004
12/31
/2004
4/1/20
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7/1/20
05
10/1/2
005
12/31
/2005
4/1/20
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7/2/20
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10/1/
2006
12/31
/2006
4/2/20
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7/2/20
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10/1/
2007
1/1/20
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4/1/20
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7/1/20
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10/1/2
008
12/31
/2008
Wh
ole
sale
Nat
ura
l Gas
( $
/ mm
Btu
)
Average NYMEX Henry Hub NGSettle Price
NYMEX Futures Henry Hub NGPrice
Variability In Market Prices
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Variability In Market Prices
PJM Historical and Future Price Expectations
$30
$40
$50
$60
$70
$80
$90
$100
$110
1/1/20
04
4/1/20
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7/1/20
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9/30/2
004
12/31
/2004
4/1/20
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7/1/20
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10/1/2
005
12/31
/2005
4/1/20
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7/2/20
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10/1/2
006
12/31
/2006
4/2/20
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7/2/20
07
10/1/2
0071/1
/2008
4/1/20
08
7/1/20
08
10/1/2
008
12/31
/2008
Wh
ole
sale
Ele
ctri
city
( $
/ MW
h )
Average PJM Hourly PriceNYMEX Futures PJM Price
Variability In Market Prices – All Energy
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Projected Energy Costs with Inflation
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
BaseYear
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years Looking Forward
To
tal
En
erg
y C
ost
s
Status Quo
Proactive Approach
Return To Energy Costs of Six Years AgoHow do you make it happen?
So where does this leave us?
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The Ugly Truth – This is Where We Are
Ø Infrastructure is aging
ØGrowth is challenging capacity
ØFunding is decreasing
ØExpectations are increasing
ØSystems are more complex
Are we doomed to fail?
Does this happen in your budget meetings?
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Financial Impact of Implementation
En
erg
y B
ill
Now Yr6 Yr12
Lost Funding OpportunityLost Funding Opportunity
Financial impact of implementing ECMsover time
Ene
rgy
Bill
Now Yr6 Yr12
Wouldn’t this scenario be better?
Full Funding PotentialFull Funding Potential
Financial Impact of Implementation
Financial impact of implementing ECMsover time
Projected Energy Costs with Inflation
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
BaseYear
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years Looking Forward
To
tal
En
erg
y C
ost
s
Status QuoTraditional
Proactive Approach
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• Selection based on best qualified proposed design
• Single point of responsibility
• Eliminates “finger pointing” between GC and A/E
• Time and growth costs minimized
• Shorter design/ construction phase
• Selection based on reputation, quality of work and past performance
• CM works with architect to evaluate materials, building systems, costs and schedules during design
• CM reviews drawings early in process to minimize conflicts and change orders during construction
• CM provides a bonded, guaranteed price for work
• Lowest long-term cost
Typical Construction Delivery Methods
• Lowest initial price
• Potential for change orders and claims very high
• No contractor involvement in design phase
• Final price unknown
• Staff extension of owner
• PM can be involved in operations, design, construction and maintenance
• PM has no liability for cost and schedule control
• PM has no control over trade contractors
Performance Contracting Benefits
PiecemealConsistent Approach
Funding Must Be ObtainedSelf-funding Project, Guaranteed
Low Bid ContractingBest Value Contracting
Increased Deferred Maint.Reduced Deferred Maint.
Future Construction PricesToday’s Construction Prices
Ene
rgy
Bill
Now Yr6 Yr12
Ene
rgy
Bill
Now Yr6 Yr12
Performance Contracting vs. Traditional ImprovementsPerformance Contracting vs. Traditional Improvements
Lost Funding OpportunityLost Funding Opportunity
Full Funding PotentialFull Funding Potential
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Where does Performance Contracting fit?
versus
What is Performance Contracting (PC)?
A procurement method used to obtain facility improvements without the requirement of up-front capital.
Project (maximum of 15 years) is funded through GUARANTEED energy savings.
Guaranteed Energy Savings Act: Act 77 of 2004Guaranteed Energy Savings Act: Act 77 of 2004
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++
LightingLighting
Speed DrivesSpeed Drives
Energy ManagementEnergy Management
Major HVACMajor HVAC
Building EnvelopeBuilding Envelope
Power SystemsPower Systems
PC: What?Energy Related Improvements
$Annual Bill
Utilities
ESCO
Inve
stm
ent
Gra
de
Audit
Inefficient Uses
Inefficient Costs
Utility CompaniesUtility CompaniesElectricElectric
Natural GasNatural Gas
Water & SewerWater & Sewer
PC: What?Project Implementation
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$Annual Bill
Utilities
ESCO
Impro
vem
ents
, plu
sIn
tegra
ted D
esi
gn
Const
& P
roje
ct M
gm
tTra
inin
gW
arr
anty
Up-Front Cost
Third-party funding- Secured against Improvements & Savings
- Paid on Schedule of Values
$$
Inefficient Costs are SAVED!
Utility CompaniesUtility CompaniesElectricElectric
Natural GasNatural Gas
Water & SewerWater & Sewer
PC: What?Project Implementation
$Annual Bill
Utilities
ESCO
Impro
vem
ents
, plu
sIn
tegra
ted D
esi
gn
Const
& P
roje
ct M
gm
tTra
inin
gW
arr
anty
Paym
ent
Guarantee >
Payment
Guara
nte
e
Utility CompaniesUtility CompaniesElectricElectric
Natural GasNatural Gas
Water & SewerWater & Sewer
PC: What?Project Implementation
$$
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PC Overview
There is hope!
Ø Leverage inefficiencies(create money out of your problems)
Ø Long-term performance guaranteed
Ø Long-term savings guaranteed
Ø Single-point of accountability for project performance
Ø Funded with O&M savings
Ø Guaranteed energy savings projects are being implemented throughout facilities in Pennsylvania
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Conclusion
Single Most Important Factor in the Success of a Project is Selecting the Right Partner!
Selecting The Right Partner
Ø Independent and objective
Ø Solution focused
Ø Comprehensive long-term approach
Ø Organizational depth/expertise
Ø Financially stable:require bonding reference
Ø Professional disciplines on staff
Ø Similar experience
Ø Can you maintain a relationship over time
Ø Commitment to Pennsylvania
References validate selection criteria.