Transcript Name of Presentation - University of California, Davis

Understanding Financial Instruments and
Carbon Price
Presented by: Steven Messner - SAIC
Carbon Counting 2008
Chicago, IL
July 15, 2008
Introduction
SAIC’s Consulting Work in Climate Change Policy
Vision: Policy consulting supports efficiency and engineering
projects for large commercial, industrial, and government clients
Energy Modeling
and Analysis
• Forecast energy
and allowance
prices
• Understand local
market conditions
•
• Inventory corporate
emissions
• Forecast emissions
• Seek offset project
opportunities
Emission
Abatement Cost
Curves and Plans
DOE 1605(b) Program
EPA Climate Leaders
California Energy Commission
California Climate Action Registry
The Climate Registry
NASA
State of Maryland
National Intelligence Council
Energy Efficiency
and Engineering
Projects
• Seek short-term project
opportunities
• Seek capital
opportunities
• Integrate allowance
prices into curve
•
Public Sector Clients
•
•
•
•
•
•
•
•
2
Emissions
Accounting
and Forecasting
Emission Offset
Procurement
and Auctions
• Serve both large scale
buyers and sellers
• Position for multibillion
dollar federal auction
Commercial Clients
•
•
•
•
•
•
•
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Sacramento Municipal Utility District
Nebraska Public Power District
ConocoPhillips
Siemens AG
Bank of America
Chevron Texaco
Natural gas associations (INGA, AGA)
American Council for Capital Formation
Energy | Environment | National Security | Health | Critical Infrastructure
Overview
1. Understanding price fundamentals as the key to
carbon finance
2. Recent US Developments
3. Key Elements of Proposed Federal Legislation
4. Forecasted Impacts of Proposed Legislation on
Energy Markets
a) Analytic Approach
b) Results
c) Cost Drivers & Conclusions
5. Incorporating price into financial decisions
Energy | Environment | National Security | Health | Critical Infrastructure
CO2 price
• Understanding CO2 price fundamentals allows
use of any and all financial instrument
approaches
• Futures
• Derivatives
• Indexed approaches
• Also becoming a key factor in future investment
analysis
4
Energy | Environment | National Security | Health | Critical Infrastructure
Recent U.S. Federal Policy Developments
•
Push for climate change legislation in Congress
•
8 proposed emissions trading bills
• Lieberman-Warner bill debated on Senate floor – 1st week of June
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Private sector pushing for federal legislation to avoid patchwork of state
laws
–
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2 proposals for carbon tax
1 bill proposes inventory of CO2 storage sites
Creation of House Select Committee on Energy Independence and Global
Warming
Weekly hearings on climate change
House Energy and Commerce Committee and Senate Committee on
Environment and Public Works soliciting comments from public
Others, including proactive states, oppose Federal preemption
Energy | Environment | National Security | Health | Critical Infrastructure
Proposed Federal GHG Legislation
6
Energy | Environment | National Security | Health | Critical Infrastructure
Proposed Federal GHG Legislation
7
Energy | Environment | National Security | Health | Critical Infrastructure
Modeling Approach
SAIC uses National Energy Modeling System (NEMS)
We help clients to:
1. Understand the potential impacts of GHG legislation on their business.
• SAIC runs NEMS in conjunction with commercial models to provide more specific
analysis by state or facility
• SAIC alters assumptions to reflect those of the client on specific components (e.g.
offset availability, energy efficiency, natural gas supply)
2. Provide an analytical basis to enhance their discussions with Congress on pending
and alternative policies in legislation
NEMS has been used by SAIC clients to analyze the McCain-Lieberman, WarnerLieberman, and Bingaman bills.
Energy | Environment | National Security | Health | Critical Infrastructure
NEMS Overview
NEMS: A Truly Integrated Energy Modeling Tool
NEMS integrates the North American energy market across industry segments
as well as the economy
Energy | Environment | National Security | Health | Critical Infrastructure
Modeling Approach – Benefits of NEMS
Benefits in using NEMS for analysis of GHG legislation
•
•
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NEMS was designed to address energy and emissions issues
Same analytical tool used by Congress and others in government
Provides insights into the analysis provided by EIA to Congress
Allows analysis under alternative assumptions
Narrows the debate to merits of different policy choices and
assumptions
– Rather than models deployed or methodologies used
• Provides an “apples to apples” comparison of GHG initiatives
• Identifies potential solution paths
Energy | Environment | National Security | Health | Critical Infrastructure
Overview of CO2 price fundamentals
No.
Factor Increase
Variability
CO2 Price Impact
Low
-
1
CO2 Emission Cap
2
Fuel Prices - Gas to Coal Spread
Large
+
3
Offset/Banking/Borrowing Provisions
Large
+, -
4
Technology Upgrading Cost
Large
+
6
Weather - Winter Temperature
Large (In Northern States)
-
7
Weather - Rainfall
Large (In certain hydro
power regions)
-
8
Economic Growth
Medium
+
9
Energy Demand Growth
Medium
+
Energy | Environment | National Security | Health | Critical Infrastructure
Major Results of Analyses
• Results of analyses of Lieberman-Warner and
other bills are driven by assumptions
• Major cost drivers
• New nuclear
• CO2 capture & storage
• Renewables
• Offsets
Energy | Environment | National Security | Health | Critical Infrastructure
SAIC-NEMS Conclusions
• Legislation would severely limit use of fossil fuels in power
generation, unless:
– Carbon offsets,
– Carbon allowances, and
– Technologies such as CCS are employed
• Particularly sensitive to assumptions about available offsets, choice
of technologies, and the use of carbon allowances
• Under the Natural Gas Council assumptions, natural gas will play a
more prominent role in GHG emission reduction than projected in the
EIA “Core Case” analysis.
Energy | Environment | National Security | Health | Critical Infrastructure
Lieberman-Warner Bill
Impacts — Potential Allowance Prices
Source: National Energy Modeling System runs S2191.D031708A, S2191HC.D031708A, S219BIV.D031608A, S2191NOINT, D032508A,
S2191BIVNOI.D033108A, and S1766_08.D031508A.
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Energy | Environment | National Security | Health | Critical Infrastructure
Lieberman-Warner Bill
Impacts – Changes in Electric Power Sector
Source: EPA Analysis of S. 2191
Scenario 2 (ADAGE)
http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf
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Energy | Environment | National Security | Health | Critical Infrastructure
Integrating CO2 price forecast with CO2 allowance finance
Reference Price Case
Low Price Case
High Price Case
CO2 Allowance Price
(Euro/tCO2)
40
35
History Forecast
Opportunity to Sell
30
25
Hedging
Boundary
20
15
10
5
Opportunity to Buy
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Energy | Environment | National Security | Health | Critical Infrastructure
4/11/2015
4/11/2014
4/11/2013
4/11/2012
Source: EPA Analysis of S. 2191
Scenario 2 (ADAGE)
http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf
4/11/2011
4/11/2010
4/11/2009
4/11/2008
4/11/2007
4/11/2006
4/11/2005
4/11/2004
4/11/2003
0
SAIC’s Comprehensive Suite of Energy Management Services
Facility Assessments
Project Management
Facility Modeling
Quality Assurance
Education and Training
Metering and Verification
Sustainability
Systems Integration
Climate Change
Demand Response
Efficient Operations
Green IT
AMI and Smart Grid
Clean Technologies
LEED® Certification
Risk Management
DesignBuildsm
Energy Procurement
Performance Contracting
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Modeling and Forecasting
Energy | Environment | National Security | Health | Critical Infrastructure
Characterize Energy Price Risk
Credit
Energy
Prices
Measure Risk
• VaR
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–
–
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Investment
Strategy
Regulation
Delta (Variance Covariance)
Monte Carlo
Econometric (historical)
Expected Shortfall
Time Evolution of Risk
For new parameter (CO2), Monte
Carlo approach often used
CO2 costs
Characterize the statistical properties of risks, their inter-relationships and
the way they impact the Investment Metrics.
Energy | Environment | National Security | Health | Critical Infrastructure
Simulate and Stress Test
Forecast: Natural Gas
Sensitivity Chart
1,000 T rials
T arget Forecast: NPV
*
Long T erm Natural Gas Av er age ($/MM Btu)
91.6%
*
Long T erm Natural Gas Prices ($/M W h)
7.9%
*
J an On-Peak D em and (KW )
0.2%
*
J an Off-Peak Energy (KW h)
0.1%
*
J an On-Peak E nergy (KW h)
0.1%
* - Correlated as sumption
100%
50%
0%
50%
100%
Frequency Chart
985 Displayed
.029
29
.022
21.75
.015
14.5
.007
7.25
.000
0
$4.9725
$6.7175
M easured by Contribution to Varianc e
$8.4625
$10.2075
$11.9525
$/MM Btu
SAIC
Traditional
Distribution
of
Outcomes
Cases
Simulate and stress-test entire distribution of inputs, correlations to yield
entire distributions of potential outcomes
Energy | Environment | National Security | Health | Critical Infrastructure
Measure and Report
Optimum
Hedge
60%-70%
50%-60%
40%-50%
20%-30%
$7.00
10%-20%
$8.00
0%-10%
$9.00
70%
$10.00
60%
$11.00
50%
$12.00
40%
$13.00
30%
20%
$14.00
10%
$15.00
$16.00
Dec-09
Mar-09
Jun-09
Sep-09
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
0%
Natural Gas Budget ($/MMbtu)
30%-40%
Strategy
• Monitor exposure of investment or
procurement metrics
• Identify the breaking points
affected by assumptions
• Identify market/contractual
mechanisms to protect investment
metrics and assumptions
Result
• Assure performance of
investment
Results are executive-level summary of measurements, assumptions and
distribution of outcomes.
Energy | Environment | National Security | Health | Critical Infrastructure
Investment at Risk (“IaR”) - Illustrative
Strategy and Protocols to Protect NPV of Approved Investment
Distribution for TZ6NY ($/MMBtu)
•
Established strategy and protocols
around Natural Gas Prices and Power
Prices to protect against undesirable
levels of NPV. Now updated to factor
CO2 pricing.
Investor is able to analyze robustness
of NPV and guarantee that it will
materialize.
80%
60%
40%
Negative
NPV
Above
$8.50
MMBtu
Best NPV
below
$8.00
MMBtu
20%
0%
$7.60
$7.90
$8.20
$8.50
$8.80
Distribution for NPV ($ millions)
Net Present Value
100%
Cummulative Probability
•
Evaluated NPV of 100MW generator in
the Northeast and identified critical
assumptions affecting the Net Present
Value used to approve the investment.
Minimum
Acceptable
NPV to
Defend
80%
60%
40%
NPV Associated
with Approved
Investment
20%
0%
$220
Cummulative Probability
•
Cummulative Probability
Gas Prices
100%
100%
$226
$239
Distribution
for$233
NYJP ($/MWh)
$245
Power Prices
80%
60%
40%
Minimum
Pow er
Price
Acceptable
Best
Case
Pow er
Price
20%
0%
$103.50
Energy | Environment | National Security | Health | Critical Infrastructure
$104.38
$105.25
$106.13
$107.00
Thank you
Please contact
Steven Messner
Western Region Manager – Climate
Change Services
Ph: 858-220-6079
E-mail: [email protected]
Learn how SAIC’s energy and climate
change teams can help you.
22
Energy | Environment | National Security | Health | Critical Infrastructure
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