Oil prices continue to rise. Price volatility becomes a central issue.

ENERGY MARKET REPORT

In its April edition of the Short-Term Energy Outlook, the U.S. Energy Information Administration (EIA) concluded that the oil market would remain fundamentally tight as we enter the second quarter of 2008, despite a slowing of energy consumption in the U.S. The EIA indicated that global oil consumption is still increasing because of continued growth in China, India, Russia, and the Middle East oil-exporting countries.

The EIA projects that WTI crude oil prices –  which averaged $72.32 per barrel in 2007 –  will average $101 per barrel in 2008, and then come down to $92.50 per barrel in 2009. A key factor affecting these projections is price volatility, which the last few months have clearly illustrated. Between mid-November 2007 and early December, the spot price of WTI crude oil fell by almost $12 per barrel from $99.16 per barrel on November 20 to a low of $87.45 per barrel on December 5. Prices then rebounded by January 2 back up to $99.64 per barrel.  But by early February, the WTI price was again back down to $87.16. It then rose again, this time reaching over $110 per barrel on March 13.  The monthly average WTI price for March 2008 was $105.46 per barrel, and it is expected to average near $100 per barrel through the rest of this year. According to the EIA, disturbances to petroleum demand and supply, including weather events, could cause similarly volatile fluctuations in the future price of oil. At press time, the price of oil had reached $118 per barrel.

On the natural gas front, the EIA expects limited growth in residential and commercial demand in 2008, given its assumption of normal weather for the year. Economic conditions are expected to limit the growth in the industrial sector.  Milder summer temperatures, which are anticipated for this year, are expected to leave natural gas consumption for electricity generation unchanged in 2008, after an increase of more than 10 percent in 2007.  Henry Hub spot price averaged $9.74 Mcf in March, nearly $1.00 per Mcf more than the average spot price in February. On an annual basis, the Henry Hub spot price is expected to average about $8.59 per Mcf in 2008 and $8.32 per Mcf in 2009.

Meanwhile, total electricity consumption is expected to grow by only 0.4 percent in 2008, and then return to a growth rate of 1.5 percent in 2009. Growth in natural-gas-fired generation is expected to be relatively modest this year, based again on the assumption that summer temperatures will fall back to near-normal levels. 

As always, EnerNOC encourages all organizations to assess their current and future exposure to energy markets to determine if now is an intelligent time to extend contracts or develop forward looking strategies. Regardless of one’s view on whether energy prices will rise or fall, organizations should assess their current positions to determine if there is an opportunity to save money and/or mitigate risk.

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New rates are set to take effect in several regions.

UPDATE ON RATES AND RATE FILINGS

Update on the Con Edison Rate Case Filing

The new Con Edison delivery rates take effect this month.  The rate increase is well below the original request.  The impact will equate to about 10% of the delivery portion of the bill or about 3% of the total electric expense for typical commercial office buildings in New York City.  The expectation is that the rate structure will be reviewed in the near future; there is a strong possibility of an additional rate increase in April 2008.

New Rates Released in NJ, DC, and CT

New Standard Offer Service (SOS) rates will take effect in June in the DC area.  The new rates offer a minor reduction of about 1.5% from the expiring rates.  In a departure from previous SOS rates, the new rates do not provide discounted rates for Off Peak usage, as all three metering periods will now receive the same pricing.  The new rates for the most common commercial rate classes average just below 12.5 cents per kWh for the period commencing in June 2008 and terminating in May 2009. 

New Jersey has announced the results from its latest Basic Generation Service (BGS) auction.  The resulting rates will be in effect from June 2008 through May 2009.  BGS rates are paid by customers with demand of less than 1,000 kW.  Consumers can expect supply rates to increase between 10% and 15%, depending on account specifics.  Since the new rates are a weighted average of this auction and the auctions from the prior two years, currently there is not an opportunity from the competitive markets to beat the new rates.  However, New Jersey consumers who have a demand larger than 1,000 kW, and that are subject to real-time hourly pricing, can find more attractive pricing options in the competitive markets. 

CL&P also recently published Supplier of Last Resort (SOLR) rates for the second quarter of 2008.  SOLR rates are paid by consumers with more than 500 kW of demand.  The rates average about 10.5 cents and are flat when compared to the same period in 2007.

Please contact your EnerNOC representative if you would like a specific analysis of your account, and to better understand what the competitive markets have to offer as an alternative.

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In this era of price volatility, energy users may wish to consider a Block and Index product.

A REVIEW OF CURRENT MARKET CONDITIONS

As discussed in the energy market report above (as well as in past newsletters), the electric and natural gas markets have steadily risen during the 1st quarter of the year. Markets are now about 35% higher than the middle of December 2007, and have reached levels previously seen only in the months following hurricanes Katrina and Rita in the fall of 2005.  Energy users who bought fixed price contracts in the fall of 2005 –  fearing that the pricing would further escalate during the winter demand season – ended up paying a stiff premium, as prices fell starting in January 2006, due to an extremely mild winter that allowed natural gas storage to return to normal levels due to weak demand.  Prices fell even further when the summer turned out to be not only hurricane-free, but extremely mild as well.

Organizations that now find themselves with expiring energy contracts are faced with the decision of either fixing their costs, or choosing to float the market in the hopes that it will adjust downward. Both approaches bear risk: a hot summer or intensive hurricane season will push prices even higher, while a mild summer or a recession could lead to lower prices. This market is different than the 2005-2006 market, in the sense that the high pricing levels we have experienced lately have been achieved without a natural disaster that acutely affected supply. In this new ear of price volatility, what is the best choice?

The answer probably lies in a middle-of-the-road approach.  EnerNOC is encouraging customers who find themselves caught in this market to consider partial hedges, or a product commonly referred to in the electricity market as a Block and Index.  Block and Index products can be tailored to fit any level of upside avoidance, or to leave open an appropriate possibility of downside participation.  This approach does require more effort, but it can soften the impact of bad market timing, and also reduces the pressure of needing to outsmart the market.  From that perspective, this approach can be attractive in any market, but it is especially attractive now.

In order to be effective, the Block and Index approach requires the upfront planning of strike points for additional purchases, along with the timing of drop-dead decision dates.  It is important to develop a sound strategy, and then work the plan in order to achieve the desired results.  It is also prudent to have regular discussions to tweak the strategy as market conditions change.  It may even require making additional purchases at higher price points than originally established, if the market fails to respond.

Due to the complexity of the Block and Index product, and the large amount of variations possible, EnerNOC recommends a consultative session with one of our representative to fully understand this approach. Please contact EnerNOC if you would like to further explore the Block and Index product.

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A summary of other relevant news affecting the energy markets.

IN OTHER NEWS

Jeffries and Co. Hikes 2008 Gas Price Forecast by 18%

Analysts at investment bank Jefferies and Co. raised their 2008 natural gas price

estimate by 18% to $8.25/Mcf on Friday, calculating that declining imports from Canada and a sharp drop in liquefied natural gas imports will offset increases in supply from US onshore plays. Adding to the equation will be a 1.5% increase in gas demand in 2008 – or nearly 1 Bcf/d – driven in large part by increased demand from power generators in the cooling season.

Kansas Governor Rejects Two Coal-Fired Power Plants

On March 21, Kansas Governor Kathleen Sebelius vetoed legislation that would have overturned a decision of her administration to deny a permit application to build two new coal-fired power plants, because of the greenhouse gases they would have produced. The measure passed without a veto-proof majority of state legislators.

AEP SWEPCO Receives Approval to Build 600-MW Coal-Fueled Plant

The Louisiana Public Service Commission (LPSC) has approved a request by Southwestern Electric Power Company (SWEPCO), a unit of American Electric Power (AEP), to construct a 600-megawatt coal-fueled power plant in Hempstead County in southwest Arkansas. The five-member Commission unanimously approved the request for certification on March 19.

FERC blocks PJM Bid to Raise Capacity Reference Prices

On April 4, The Federal Energy Regulatory Commission told the PJM Interconnection that it cannot abruptly raise reference prices in its forward capacity market. FERC indicated that the regional transmission organization is bound by the rules of the settlement agreement that created the capacity market.

Connecticut fights FERC capacity approval

On April 11, the Connecticut Department of Public Utility Control (DPUC) contested the Federal Energy Regulatory Commission’s approval of ISO-NE’s installed capacity requirement for the 2008-09 capability period.

RGGI sets first CO2 allowance auction for September 10

States participating in the Regional Greenhouse Gas Initiative (RGGI), an agreement among the Governors of ten Northeastern and Mid-Atlantic states to reduce greenhouse gases from power plants, announced today that the first ever CO2 allowance auction in the nation for a mandatory emissions reduction program will take place on September 10, 2008. Representing only the power generating sector, the total annual emissions budget to be auctioned amounts to 188 million short tons of CO2. The states involved in RGGI include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

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Click on each chart to view the full page version.

RECENT MARKET TRENDS

Illinois Competitive Historical Rates

New England Competitive Historical Rates

Maryland Competitive Historical Rates

New York Zone J Competitive Historical Rates

Natural Gas Rates

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