The Winter That Wasn't

Energy Markets Update 

Weekly natural gas inventories

The U.S. Energy Information Administration reported last week that natural gas in storage decreased by 71 Bcf. The five-year average withdrawal for February is about 162 Bcf. Total U.S. natural gas in storage stood at 2,195 Bcf last week, 21.9% higher than last year and 15.2% higher than the five-year average.

US power & gas update

• Stick a fork in it. Winter is done! Unseasonably mild weather continues to batter gas and power spot prices. The NOAA 2-week outlook continues to reinforce above average temps for most of the east and mid-continent, with colder temperatures in the west.

• The March contract for NYMEX gas is currently priced at ~$2.30 per MMBtu, its lowest level since September 2020.

• One of the trends we are watching closely is what appears to be a stagnating level of gas production. Production actually increased in Q4 2022, but has since levelled off and remained at ~98 Bcf/d for three months. If this trend continues, the dip we are seeing now could be rather short lived, and may give way to support 8+ months out. Weather aside, gas demand has remained quite strong.
• While markets certainly carried a frothy risk premium for much of 2022, exceptionally mild weather has been the real difference maker in the recent price collapse.
• Heating degree days across the east were down 20-23% below normal for the month of January.
  
  
• The heat dome effect has also influenced climate on the European continent. Europe logged its 3^rd warmest January since composite record keeping began in 1979, approximately 2.2 C (~4 F) above normal. As one might expect, European natural gas prices (landed LNG spot cargoes) have also reached 12 month lows as the continent looks to exit the heating season with record high gas storage levels.
• According to Eurostat, EU gas consumption was down 19.3% against the five-year average over Aug-Jan.
  
• This has been a consequential stroke of good fortune as it gives Europe some time to plan for a more permanent and sustained pivot away from Russian gas. And Europe has responded in a huge way. The rollout of wind, solar, and batteries in 2022 has been staggering.
  
  
• Back in the US, FERC has approved PJM’s request to retroactively adjust the clearing price of its latest capacity auction (2024/2025), the results of which were being held up due to a minor design flaw that created an anomalous result in Maryland and Delaware. PJM will publish the results of the auction, which are expected to be quite low, on Feb 27. This has been a highly anticipated auction given numerous auction delays that have introduced significant uncertainty into the market. 
  
  

FERC approves new winterization standards in response to Texas grid freeze

• On Feb. 16th The Federal Energy Regulatory Commission approved new grid reliability standards developed in response to February 2021’s hurricane Uri. The severe cold weather event knocked out power for millions of customers in Texas, causing widespread damage and massive electricity bills.
• FERC also directed the North American Electric Realizability Corp. to revise the standards to address concerns about implementation timelines and ensure the measures apply to all power generators needed to keep the lights on in sub-freezing temperatures.

• A November 2021 report produced by FERC and NERC outlined 28 different recommendations for avoiding a repeat disaster similar to what was seen with  hurricane Uri. Recommendations included modifying load-shedding procedures to ensure natural gas supply facilities do not automatically lose power when generation shortfalls occur and implementing a range of freeze protection measures at existing power plants that would be expected to perform in peak winter conditions.

• In October 2022, NERC submitted two separate standards for FERC’s approval:
  • EOP-011-3, requires transmission operators to minimize any overlap between circuits that serve critical loads such as gas supply facilities and other circuits used to conduct rotating customer blackouts.
  • EOP-012-1, requires generators needed for winter reliability to undertake freeze protection measures based on specific extreme cold weather temperatures. FERC approved the standard, but the agency directed NERC to submit revisions within 12 months that respond to several key concerns.

• FERC dismissed concerns raised by regional grid operators about the way in which generators must plan for extreme low temperatures. A coalition of grid operators worried that NERC's proposed methodology fails to account for the extreme temperatures actually experienced over the last few decades. In the past, this lack of preparedness has led to power generation failures even worse than ERCOT’s worst-case scenario predictions.

• ERCOT has traditionally relied on scarcity pricing alone to send market signals that guide decisions to invest in new generation capacity. In January, Texas utility regulators recommended creating a credit mechanism that would retroactively reward power plants that perform during times of scarcity.
  
  

Batteries prepare for IRA boost but questions loom around scaling

• Demand for grid-scale energy storage will rise tremendously as fossil fuel usage declines in coming years. Storage is key to firming up the intermittency of solar and wind assets. Installations to date have primarily centeredaround lithium-ion (Li-ion) battery storage solutions to achieve ambitious energy transition targets.

• To decarbonize electricity globally, worldwide energy storage capacity must increase 40x by 2030 – to around 700 GW.

• Currently ~6 GW of the U.S.’s power storage capacity is being supplied by Li-ion batteries. In the next five years, ~40 MW is planned to come online at 400 new and existing power plants. The market for Li-ion battery storage solutions is expected to grow ~20% by 2030.
  
  
  
• Lucrative incentives put forth by the Inflation Reduction Act have amplified the push toward increased energy storage capacity, particularly at retired gas/coal facilities;
  • $250 billion in DOE loan authority is being allotted to replace old infrastructure at fossil fuel plants that have ceased operation. The IRA also features a 10% bonus incentive on top of investment and production tax credits for qualifying locations.
  • Dubbed “energy communities,” these retired power generation facilities provide an ideal spot for storage as they are already embedded near/within the middle of a load center.
  • Two of SCE’s largest standalone storage agreements involve battery arrays at a retired General Electric gas plant in Riverside County, CA.
    
• Battery storage systems can be standalone or colocated. Colocated systems combine battery storage with a supplementary form of power generation, namely solar. By contrast, standalone systems charge entirely from the power grid. Between 2021-2024, ~63% of planned battery storage coming online will be co-located with a solar PV plant.
  
  
  
  
  
• But is Li-ion technology scalable? Some considerations:
  • Cobalt is a key component of Li-ion batteries, which limits Li-ion scalability supply-wise and sustainability-wise. Increased demand for backup generators and electric car batteries will limit overall cobalt availability, and in addition, cobalt extraction is highly pollutive in itself.
  • The IMF has warned that metals prices “would reach historic peaks, for an unprecedented, sustained period under a net-zero emissions by 2050 scenario.” Materials such as copper, nickel, cobalt, and lithium are expected to come under some of the most fierce pricing pressures. 
  • Li-ion batteries are damage-prone with a shorter lifespan of ~10 years, making them difficult to use at grid-scale without dependable alternatives.
  • Worldwide investment into energy storage companies is currently $9 billion annually; to achieve 700GW capacity by 2030 (at the current cost of $2,000/kW), Li-ion batteries would become a $200 billion/year market.
  • Investment must increase exponentially in order to reach ambitious 2030 goals.

• While the market for Li-ion battery storage solutions is expected to grow ~20% by 2023, questions around supply chain and scalability remain a concern as grid-scale energy storage becomes more and more critical.
  
  

Focus on FERC - Phillips looks ahead; ROEs continue key role in rate proceedings

• Recently appointed chairman of the Federal Energy Regulatory Commission (FERC), Willie Phillips, has started his term strong.

• The commission is characterized by a 2-2 Democrat/Republican split, which has slowed momentum and made unanimous consensus on larger issues - i.e. updating out-of-date regulatory frameworks - difficult to achieve.

• Even so, Phillips has entered his term promising to move the needle on key issues in the next three months, placing grid reliability, transmission reforms, and environmental justice at the forefront of his agenda.

• Despite previously staying out of the political limelight, political friction within the commission is alluded to be at fault for former chairman Richard Glick’s resignation.

• Chairman Phillip’s has been characterized by insiders as a consensus builder who is unlikely to go out of his way to rock the boat.

• Recent notable developments at FERC include; 

  • Two proposed settlements by subsidiaries of FirstEnergy Corp. that would decrease the companies’ ROE by 90 basis points.

  • Resolution of a case against El Paso Natural Gas Co. LLC, a subsidiary of Kinder Morgan, who had been under investigation for their silence around ROE.

  • Now, the commission is looking to revise its certificate policy for new gas pipeline projects and settle uncertainty around electric utility returns that can be earned on transmission lines, following August’s federal appeals court ruling that has given FERC the opportunity to establish durable transmission ROEs.

Update on state clean energy goals

• Many states around the country are implementing or speeding up their clean energy goals. Some notable updates are summarized below.

• Governor Janet Mills of Maine made an announcement on February 14th that she is going to propose a bill requiring 100% of the state’s retail electricity to come from clean energy by 2040.

• Currently, 48% of Maine’s retail electricity comes from clean energy, with it expected to increase to 53% by the end of 2023,  but Mills wants to accelerate the increase.

• Mills proclaimed that this change will reduce the cost for Maine residents and add more jobs, strengthening the economy.

• Mills also signed legislation in May 2022 to reduce the state’s greenhouse gas emissions by 80% by 2050.

Source: Maine Department of Environmental Protection

• In New Jersey, Governor Phil Murphy signed an executive order on February 15th to accelerate the state’s transition to clean energy.
• The previous goal was 100% of retail electricity to come from clean energy sources by 2050, but Governor Murphy moved the target to 2035.
• This executive order also included goals for the electrification of the state’s building sector and requiring all cars sold starting in 2035 to be zero emissions vehicles.

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