Tuesday, September 14, 2010

US Electricity Industry Impact Report

Pearl Street/Pearl Street Liquidity Advisors Presents
US Electricity Industry Impact Report
August 2010

Political

• Federal legislators are moving away from a renewable portfolio standard (RPS) and toward a clean energy (or no carbon) portfolio standard (a more bi-partisan approach politically), which would include nuclear power.


Electricity Generation and Storage

• At least four utilities and independent power producers – Tennessee Valley Authority, Xcel Energy, First Energy, and Edison International – have announced that they will retire or idle thousands of megawatts of older, smaller coal-fired power stations. This will eventually raise electricity prices to consumers and increase utility revenues.
• The North American Electric Reliability Corporation (NERC) has drafted a report regarding the integration of variable energy resources (wind and solar) and its impact on the reliability and security of the nation’s electricity supply. The report recommends to grid managers that they, “consider adjusting market and non-market rules and procedures “that limit technically capable resources from providing flexibility needed to support specific reliability functions….”
• AES Corp is positioning itself to be a leader in energy storage project development. The company announced in early August that it will deploy 44 MW of lithium-ion battery “smart grid stabilization system” (SGSS) modules made by A123 Systems.
• According to the Wind Turbine Price Index, published by Bloomberg New Energy Finance, the decline for turbines delivered in the last half of 2010 and the first half of 2011 is 15%. However, wind project power purchase agreement (PPA) prices, according to a separate report, have fallen below the level at which wind projects can make an adequate return on investment. PPA prices today are $40-50/MWh compared to $60-90/MWh just a few years ago.
• Two thirds of the massive shale gas resources can be developed in the U.S. at wellhead gas prices of $6/million Btu or less, thus potentially placing a ceiling on the long-term price of natural gas for many years to come.

Economy

• Unemployment increased from 9.4% to 9.6% in August
• The U.S. economy is “stuck” in an uncomfortable position between the end of the direct stimulus allocations by the government, slowness spending what has been allocated, and the beginning of robust consumer spending.
• Sales of new homes fell 12.4% in July from the previous month, existing home sales plummeted by more than 27%, home sales prices fell, and average home prices are 30% below their peak in 2006.
• U.S. exports contracted by 1.3%, probably reflecting the declines in manufacturing noted above, and imports increased by 3.1%.
• Even China revealed its first monthly contraction in manufacturing since early 2009.

Forecast

• Pearl Street believes that there is a more positive scenario that analysts are not paying attention to, a contrarian opinion that at least deserves consideration.
• There are indications that the natural gas industry has regained strength politically and this, combined with favorable price-supply scenarios well into the future, means that gas-fired power stations will be the “option to beat” going forward in electricity generation.
• There is clear evidence that, since utilities are not investing for growth and to earn a rate of return on that investment, given with all this legislative uncertainty, they intend to grow through M&A, or at least position themselves for higher growth in the future.
• Pearl Street believes that turbine pricing may get much worse before it improves and that it will be difficult for any supplier not already established to sell turbines without putting substantial project equity at risk.

Monday, August 09, 2010

US Electricity Industry Impact Report

Pearl Street/Pearl Street Liquidity Advisors Presents
US Electricity Industry Impact Report
July 2010


Political

•Carbon cap and trade (and anything else related to carbon emissions, such as a tax) and a federal renewable portfolio standard (RPS) have been removed from recent Senate energy legislation (but could possibly be re-inserted).

•The energy storage investment tax credit (ITC) is still included in both the Senate and House versions of the bill, although the benefits to the storage community have been greatly reduced.

•BP’s catastrophic oil spill in the Gulf of Mexico has escalated the impact of environmental regulatory risk on all energy industries in the U.S.

•The Midwest Independent System Operator (MISO) has proposed to FERC a new category of transmission project that is helpful in integrating wind facilities.

•The latest Clean Air Interstate Rules require additional reductions of sulfur dioxide and nitrogen oxides from 900 fossil-fuel boilers in the eastern part of the country. These rules will make coal-fired electricity more expensive.

Electricity Generation

•A looming challenge for utilities involves the ever-present tension between federal authority and state government. For example, the billions of dollars handed out to utilities for Smart Grid projects are imperiled because state PUCs and government must approve the cost-share portion of the projects.
•San Diego Gas & Electric Co is including an energy storage component in its next rate case before the Public Utility Commission.

Economy

•Deflation has occurred for 3 straight months, making economists nervous about a long period of low growth or the onset of another recession. Deflation numbers show that consumers may be starting to hold cash back in anticipation of even lower prices.
•Unemployment has stabilized but appears to have leveled off at 9.5%. As long as employment remains stagnant, strong economic growth won’t materialize.

•Consumer confidence decreased to 50.4 in July; it takes a reading of 90 to indicate that consumers believe the economy to be healthy.

•The U.S. saw the second weakest rate of new homes sold in June. Weakness in housing leads to weakness in retail sales (e.g., furniture, appliances, etc.), building and construction materials, and all goods and services required for a new home.

Forecast

•Pearl Street’s analysis shows that, over the next several years, the U.S. will be moving towards an integrated national industrial and energy policy, regardless of who gets elected. Individual states will then implement this policy. This policy will be based on invigorating manufacturing employment and boosting exports, with generous, direct government involvement.

•When the forward pricing curves for natural gas began to look favorable well into the future, new regulations or restrictions may either prevent this new source of gas from getting to market or make it significantly more expensive to do so.

•Pearl Street continues to believe that all the political and electricity industry forces converge on a massive build-out of wind facilities.