The New York Public Service Commission put in major overhauls and rule changes to the NY retail power and gas markets. Going forward, ESCOs will only be able to offer 3 products, one of which will be difficult for the majority of ESCO participants to comply with. The other two products are difficult to offer, and put significant market volatility risk back onto the ESCO provider, which is exactly where it should be. That being said, these rule changes will make it very difficult for ESCOs to be compensated for the risks they are being asked to take, so many will likely exit the market. Here are the three products which can be offered to retail and small / medium usage C&I customers going forward.
- A variable rate, commodity-only product that guarantees savings in comparison to relevant utility commodity service At the inception of retail choice, there was headroom (sometimes significant headroom) in the price that ESCO companies could offer retail power and gas supply under the utility default rate. This was real value that an ESCO could offer a customer. Overtime, this headroom has come way down. Cheap natural gas is one of the fundamental reasons for this. Another reason is the limited barriers to entry into the market, which has flooded the market with independent ESCO competitors. Whatever the reason, guaranteed savings off of the incumbent utility is a tough product to offer.
- A fixed rate product that is limited in price to a 12-month trailing average utility supply rate plus a 5% premium. This forces the ESCO to take significant weather risk. Predicting what the wholesale market pricing will be for a forward looking 12 months is a risk that no ESCO wants to take without having an asset such as a power generator to hedge that risk. ESCOs are just not set up to own power generation. Sure, some do but that number is limited in the ESCO landscape. Balance sheets are simply not that big.
- A renewable electric commodity that is at least 50% greater than the minimum renewable obligation of the LSE, and which meets locational, deliverability and other requirements that will be delineated in the PSC's order. Let’s be clear, everyone knows that solar and wind generation assets are not sited close to the meter. You need too much land to build these capital-intensive infrastructure projects and the loan pockets are not in close proximity. Sure, there are technologies that do not take up that amount of space, but good luck in finding a renewable asset capable of serving a market like NYISO Zone J. Until offshore wind projects get built, scalable renewable projects will not be coming to the Zone J marketplace. There is a big 300 mw battery planned, but questions will remain as to if it can qualify. The power you take to charge the battery comes from the same natural gas and heavy fuel oil that continues to dominate Zone J power supply. Lots of wind in NYISO Zone A, so it all depends on where your meter is located. Regardless, this is going to be another very difficult product to offer. Simply buying a solar and wind rec and bundling it with power from the grid will not get ESCOs into compliance with this product.
Prompt month natural gas contract settled slightly down\ for the week at $2.30 / MMBtu. The 12, 24, and 36-month contracts were flat for the week, settling at $2.29; $2.37; and $2.40 / MMBtu respectively. This is for the liquid Henry Hub delivery point. Expect weather driven volatility to come into your local delivery market causing price spikes in both power and gas rates. The curve signifies a great time to lock in your retail power and gas rates for longer stretches of time. Those customers on variable price plans will see the volatility in their unhedged power and gas prices. Take risk off the table with the low term spread environment. Allow your ESCO supply company to work for your business or residence, and manage market volatility with fixed price contracts for term length. Variable rate contracts do not offer price protection (or value) in my own opinion.
New gas storage levels came out on December 12, 2019 for the week ending December 6, 2019. The overall storage level ended the week at 3,518 / MMBtu, a decrease in the system of 73 MMBtu. Natural gas storage levels are 0.4% below the 5-year average, and 20.3% above where they were 12 months ago. Keep in mind that this is storage in the system. There are still ample supplies of natural gas in the ground that has yet to be tapped by producers. Expect to see similar natural gas storage withdrawals as customers need heating fuels for their residences and businesses. This will constrain supplies and drive prices higher as power plants compete for fuel to generate electricity at the wholesale level.
Variable rate plans are meant to be pegged to an index (keep these market movements in mind when evaluating comparable billing periods!). While pass through components such as capacity and ancillary services costs have come up, the commodity itself remains in check. As a customer, you have the choice to decide who holds the price volatility risk. Protect yourselves with fixed price contracts. Those customers who elect a variable rate plan are 100% exposed to price volatility driven by weather and other market conditions. Allow your supply company to do their job and manage the volatility by offering you a fixed price contract.
Attractive opportunities are in the market for customers to hedge out price volatility. Keep the risk where it belongs, with your well-seasoned energy supply partner. Winter season is arguably the high point of wholesale natural gas and power price volatility. This is not a risk that customers should be exposed to.
Heating Degree Days represent the average weekly temperatures netted against 65 degrees. They are an indication of heating fuel demand. The more heating degree days cities such as NYC display, the higher the demand for fuels such as natural gas, and the higher prices go for natural gas, and electricity. We benchmark the weekly heating degree days against the 5-year comparable weekly statistic. It is a great indication of price volatility that customers on variable rate supply plans expose themselves to. The start of winter 2019 – 2020 has been a cold one relative to prior years. If this trend continues, customers on variable rate electricity and natural gas plans will be completely unhedged to the biggest volatility driver in the market which is weather. A review of the LTM natural gas price market will show that this time last year there was a shock in the curve, and customers on variable rate plans likely saw their commodity rates shoot up. Allow your ESCO to manage this price risk on your behalf with fixed price electricity and natural gas supply contracts.