Our April Energy Market Outlook Webinar, focused on several topics, including:
- Summer Outlook: Will a warm winter lead to a hotter-than-normal summer?
- Supply and Demand: Storage and production outlook for the remainder of 2017.
- Forward Prices versus Historical Index Averages: Forward prices are at an all-time low.
- Exelon Generation Portfolio Management
- Guest Speaker Mike Dalla Valle, Exelon Generation Portfolio Manager, reviewed Exelon’s approach to portfolio management of its generation fleet and what customers can apply to their organizations.
The webinar, which you can access by clicking here, inspired a few questions from some of our guests. We answer them below with input from principals in our Commodities Management Group.
Q: On this slide, the middle chart shows exponential profit changes, but a linear hedge percentage. Is that accurate? Is there an exponential estimate of profit (high end/low end) based on a linear hedge percentage?
A: The middle chart is for illustrative purposes only. It demonstrates that hedging ratably over time limits the upside and downside to potential profits.
Q: Why do you only hedge the generation three years into the future? Are there market conditions where you could consider five- or seven-year (or longer) hedges?
A: The three-year tenor aligns well with customer preferences and market liquidity, broadly speaking.
Q: Can you comment on how the uncertainty is measured and calculated in 2018 and 2019 for your generation price risk exposure?
A: The gross margin upside/ risk ranges represent an approximate range of expected gross margin. This takes into account hedges in place, between the 5th and 95th percent confidence levels, assuming all unhedged supply is sold into the spot market. Approximate gross margin ranges are based upon an internal simulation model and are subject to change based upon market inputs, future transactions and potential modeling changes.
These ranges of approximate gross margin in 2018 and 2019 do not represent earnings guidance or a forecast of future results as Exelon has not completed its planning or optimization processes for those years. The price distributions that generate this range are calibrated to market quotes for power, fuel, load-following products and options as of a particular publication date.
Q: What does Exelon's generation stack look like (i.e., gas, nuclear, coal and renewables percentages)?
A: Exelon’s generation is comprised of the following fuel mix.
Q: You talked about the California power market; could the same fundamentals also apply to the Mid-Columbia market?
A: Yes, many of the same fundamentals that are impacting California, between a record hydro season and continued growth in renewables, will impact the Mid-Columbia market. As the map below shows, Western hydro, including Pacific Northwest and California, is well above the normal snow water equivalent, which is the liquid water equivalent of the snowpack, expressed in terms of depth. California is even showing 200% above normal.
Q: What does having a warmer-than-normal summer mean for pricing?
A: It may be tough to see more Cooling Degree Days (CDDs) than last year on a nationwide basis. Last year (June – August) accumulated the most CDDs ever, at almost 1040 CDDs. A lot of the warmth last year was due to extremely warm overnight temperatures, rather than extremely daytime high temperatures. Also, the heat was widespread across the nation, rather than concentrated over one region or independent system operator (ISO). Heat this year may be more concentrated in spots, which may cause more price action in certain ISOs.
In terms of pricing, a warmer-than-normal summer could imply greater gas-fired generation demand to meet A/C cooling load in July and August. If gas power burns are higher than average and end up reducing the weekly injection levels of gas into storage (come in below year-ago levels), that would be supportive of gas prices. Less gas would be available to start the 2017/2018 winter season, all other factors being equal.
We understand that these are in-depth questions and answers. If you’d like to learn more or have additional questions, please reach out to your Business Development Manager or reach out to us here!