Energy Markets Update
Weekly natural gas inventories
The U.S. Energy Information Administration reported last week that natural gas in storage decreased by 206 Bcf. The five-year average withdrawal for January is about 158 Bcf. Total U.S. natural gas in storage stood at 2,810 Bcf last week, 7.4% less than last year and 1.2% higher than the five-year average.
Temperature and Price Correlation
NOAA has recently updated its seasonal temperature outlook and maintains guidance on a warmer than average remainder of the winter for the Northeast. The short term forecast in place for the remainder or January however, indicates colder than average temperatures for the region. This will likely prolong a sustained high price environment in New England, where a recent trend is demonstrating a discorrelation with temperature. Typically when average temperatures dip below 25 degrees in New England, gas supplies into the region are constrained and we tend to see sharply higher gas prices. The more recent trend of sustained gas prices that are +$10 per MMBtu higher than in New York, despite temperatures in the high 30s, has caught many analysts by surprise. Prices in New York have traded more predictably. This new trend will not be welcomed by New England bears or customers with market exposure. It may be an early indication of a much more volatile winter market than we’ve become accustomed to over the past 5 years.
On average, temperatures in the region have been warming. Last summer in Boston was the warmest ever, which was followed by the second hottest recorded September. Adding to this narrative, a report this week from a Maine science center concluded that a body of water off of New England and Canada had its warmest surface temperatures on record last year.
Constellation Spins Off
Constellation Energy Corp., will soon be a publicly-traded stand-alone retail and generation business, following the spinoff of Exelon Generation Co. LLC and retail business Constellation Energy Resources LLC from the parent company, Exelon Corp.
Constellation’s management team said they will center on preserving their investment-grade credit ratings, managing a 10% annual growth for their $180 million dividends, and returning excess cash to shareholders.
Executives keyed in on their 22,000 MW nuclear fleet, indicating nuclear power can be utilized as a key “part of the climate solution”. The company plans to seek 20-year renewal operating licenses to extend the lives of their power plants to a potential of 80 years.
Constellation may also move towards acquiring more nuclear and carbon-free portfolios. Daniel Eggers, the CFO of the company, said nearly 90% of capital investments over the next 3 years will be dedicated to carbon-free initiatives.
In addition to its nuclear capacity, the company will operate natural gas, oil, hydro, wind, and solar sources.
Constellation Energy Resources is one of the largest retail suppliers in North America. Setting itself apart from the parent company could bolster its ability to work on carbon free offerings but may also come with added credit risk associated with the generation business, which will no longer be backstopped by Exelon’s utility rate base.
California's Big Green Bond Fund
Three community choice aggregators known as CCAs have issued the first-ever Clean Energy Project Revenue Bonds via the newly created California Community Choice Financing Authority (CCCFA). East Bay Community Energy, MCE, and Silicon Valley Clean Energy issued two separate bonds. Together, the bonds are valued at $2 billion for thirty-year terms and support a clean electricity purchase that will serve over 2.5 million companies and residences across both the Bay Area and Central Valley.
A Clean Energy Project Revenue Bond is a wholesale electricity prepayment with three legs. A tax-exempt public electricity supplier (the CCA), a taxable energy supplier, and a municipal bond issuer work together to form a long-term power supply agreement for clean electricity. In this scenario, the CCCFA – issues tax-exempt bonds to pay for energy delivered over thirty years. The supplier uses the bond funds and gives a discount to the CCA based on the difference between the taxable and tax-exempt rates. The discount treads in the range of 8 - 12%.
In its simplest form, this a way for municipalities to make large tax exempt investments in renewable energy. However, long term contracts financed through community choice aggregation are not without considerable risk. Bad contracts have plagued many of these programs over the years and led some into bankruptcy, most recently with Western Community Energy last year.
The CCCFA says the project will provide enough power for 163,000 homes and reduce 765,000 metric tons of greenhouse gas emissions per year. It is also expected to reduce power costs for renewables by 7 million each year for the first 5-10 years. Municipalities have used a prepaid structure before, but this is the first time the idea has been converted for the purchase of clean electricity.
The first bond was issued to the benefit of East Bay Community Energy and Silicon Valley Clean Energy. It was underwritten by Morgan Stanley and generated 1.5 billion in proceeds. The second was issued to the MCE, and was underwritten by Goldman Sachs. The bond produced around 700 million in sales.
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