Renewable resources have been promoted in California since the early 1980s. After the passage of PURPA and the advent of Qualifying Facilities, an number of hydro, wind, geothermal, and biomass projects were constructed in California. Today, most of these projects have reached or are nearing the end of their original contracts. And in many cases the only contract option available to these projects is a “QF legacy contact”. Pay close attention, the bulk of the price paid under these legacy contracts is determine either directly by gas prices via a heatrate, or indirectly via the western US power market with is dominated by combined cycle generation. Draw your own conclusions from the graph below on whether California is encouraging legacy renewables:
I’ve been busy so I haven’t updated the underlying company data since 5/28. So when I ran a few queries today to perform an update I found a large number of OTC companies were now valued under $1 million USD and had sunk into un-traded status. With the blush off the sustainable energy business I don’t think many, if any, of these small OTC companies will develop. As a result I’ve pruned my database of these firms and I’m now tracking 303 companies. So after years of development, the sustainable energy business, in the aggregate, represents 27% of the market value of Exxon Mobil.
Why do I say the blush is off the sustainable energy business? Here are a couple of quick reasons:
- shale gas in the US is providing a clean, low cost energy supply that is directly competing with renewable electric generation. One location where I generate electricity had the “Short run avoided cost” electric price for May set at less than $20/MWh! This super low prices stems from cheap gas, tons of efficient combined cycle generation in the western US, and locational marginal pricing penalizing a rural location. Try to generate anything, much less solar or wind, at that price level.
- budget problems everywhere are affecting subsidies and subsidies are what have gotten the sustainable energy business rolling, and
- the growing realization that no progress is being made, or frankly is likely to be made, on green house gas emission reductions is leading to diminished support for the subsidies supporting higher cost low-carbon sources. The subsidies aren’t just high tariff rates but also RPS programs and cap-and-trade programs monetizing RECs.
That said, there has been a lot of progress made, particularly in the electric generation arena. Wind and solar are now more efficient and lower cost then ever before. And of all the renewables they have proven to be scale-able to a meaningful size. It also possible that EVs will able to improve their competitive position against gasoline / diesel internal combustion engines. EVs work, it just a matter of cost. And sustainable energy has real value as a hedge against the inevitable price excursions in the fossil markets.
Yesterday the 10 year TIPS closed at an all time low of -0.33%. The flight to safety due to the Greek crisis pushes TIPS down because 10 year exceptions of inflation are not really being affected by Greece. ( TIPS + inflation expectation = Nominal treasury yield ). Fixed income investors are going to have to tolerate an “extended period” of low returns. If you want to see this data in a nice convenient form look under the fixed income > historic yields tab and select TIPS.
The records keep falling … the oil/gas price ratio hit another all time high on the 19th at 9.29 (Cushing closed at $102.58/bbl and Henry gas closed at $1.90/mmBtu). The gas price is the equivalent of oil at $11.02/bbl.
Meanwhile, low gas prices are driving the price paid to older renewable producer in California to near record low levels. In PG&E the April price for “Short Run Avoided Cost” is 2.7 cents/kWh. IMO prices this low will cause some renewable facilities to shut in, unable to recover operating costs, much less insurance or property taxes. It’s ironic for a state that is imposing a 33% RPS standard and implementing a cap and trade system to have a pricing mechanism that will force some production to, effectively, be flared.
For the first time the price of crude at Cushing Oklahoma is over 8 times (on an energy basis) the price of natural gas at Henry Louisiana. And Cushing is below world markets as measured by Brent. Small wonder that automakers are starting to produce duel fueled gasoline / natural gas vehicles. With this wide a price differential it should be possible to get natural gas to the tank for a savings over gasoline.
Since 2005 California’s Public Utilities Commission has been publishing a Market Price Referent (MPR) based on a 500 MW combined cycle plant. The MPR serves as a benchmark for renewable projects and has been used since 2007 as the basis of contracts offered pursuant to the Feed In Tarriff (FIT) program. Predictably, since the MPR is based on a gas plant the price moves up with the outlook for gas and also moves down with the outlook for gas. The chart below illustrates this relationship:
Note that the CPUC didn’t update the MPR in 2010 as gas prices were falling creating the “plateau” in 2009/2010. If the MPR were updated now I would expect another drop for the simple reason the gas prices used in 2011 are unrealistic. The 2011 NYMEX monthly contracts averaged to yield a 2012 price of $4.84/mmBtu. As of today, the Mar – Dec 2012 contracts averaged $3.05 and the monthly contract didn’t exceed $4.84 until Dec 2016.
So why does this matter if California has mandated 33% RPS and FERC has allowed avoided cost to be set based on tranches of RPS requirements?
Further highlighting the high risk nature of investing in OTC BB companies, four firm’s listings have migrated to the Pink Sheets. CCGY, SESI, GMTI, and GGRN are now on the first (or last) rung of public listing in the United States.
TIPS yields plunged to new record lows today. The 5 year closed at -1.14% real return and the 10 year closed at -0.24%. Just think, with virtually no risk you can lose 0.24% real for a full ten years.
Today’s records were set due to a small uptick in inflation expectations, not decreases in Treasury yields. In an effort to stimulate the economy US policy makers continue to operate fixed income markets at an historic low yield point. If the theory is that low cost money will stimulate borrowing and hence economic expansion, the evidence of the last few years is, IMO, weak. If the theory is that low yields will make equities look more attractive leading to higher equity markets this seems to have happened post 2008 crash. Does this cause me to change my key FI/Equity allocation? No.
The Crude / Natural Gas energy price ratio hit a new all time high yesterday of 6.3 driven by the continued decline in the front month contract for natural gas at the Henry Hub (which closed today at $2.72/mmBtu for February delivery). When you review the chart of the ratio from 1994 to the present it’s hard to miss the structural change in the market that started in the 2008 – 2009 time frame when shale gas has started to flow in quantity.