OPEC production/dollar weaken crude as Administration shows coal love

 Reuters say that U.S. coal-fired and nuclear power producers have complained that the combination of cheap natural gas and growing output from wind and solar power has depressed power market prices.  Power prices are now so low in some markets that many coal-fired and nuclear power plants are struggling to cover their long-term costs and are opting to close rather than pay for expensive maintenance and upgrades.  Perry noted 531 coal-fired units representing around 59 gigawatts (GW) of generating capacity had closed between 2002 and 2016 with another 12.7 GW scheduled to retire through 2020. Nuclear generators announced the retirement of 4.7 GW of capacity between 2002 and 2016 and have announced a further 7.2 GW of retirements since 2016.

Power markets already regulate and pay power producers for providing a mix of output (GW) and ancillary services.  Ancillary services typically include frequency regulation, voltage control, reactive power, stand-by generation and black start capability, all of which contribute to the reliability and resilience of the grid.  But for the most part markets compensate power producers for actual generation, with only relatively minor payments for ancillary services and resiliency.  Perry wants FERC to order ISOs and RTOs to identify and compensate ancillary services contributing to reliability more explicitly and likely at a higher level.

“There is a growing recognition that ... markets do not necessarily pay generators for all the attributes that they provide to the grid, including resiliency.”  The stipulation that “eligible units” must have 90 days of fuel stored on site makes clear that the rule is intended to benefit coal-fired and nuclear generating units.

Solar and wind farms do not store fuel and gas-fired power plants do not stockpile anything like 90 days of gas on site, relying instead on pipeline deliveries.  “Supply chain disruptions can impact many generators during a widespread fuel shortage event,” according to a recent study written by Department of Energy staff.

“Nuclear and coal plants have advantages associated with onsite fuel storage”, the study noted (“Staff Report to the Secretary on Electricity Markets and Reliability”, DOE, Aug 2017).

Perry has intervened in a long-running debate about how best to safeguard the reliability and resiliency of the grid at a time of rapid change when coal and nuclear are being replaced by renewables and gas. In contrast to the intermittent generation from wind and solar farms, coal-fired and nuclear power plants provide generation that can be controlled and scheduled (despatchable power).

Grid managers have been grappling with this problem of increasing intermittency for almost a decade as wind and solar farms provide an increasing share of generation on the grid (and behind-the-meter at customers’ own premises).

One solution has been to couple wind and solar farms with more generation from natural gas to act as a back-up in case of a drop in renewable output. Like coal and nuclear, gas generation is despatchable. In fact, gas is even more valuable for grid controllers because output can be ramped up and down very quickly. Other solutions to intermittency include more long-distance power transmission capacity, more grid-scale electricity storage, and more flexibility in both supply and demand from capacity markets. Coal and nuclear traditionally provided baseload power on the grid but it is not clear whether this concept remains relevant in a grid with growing wind, solar and gas generation.

But the increasing share of gas-fired generation on the grid has led to concerns about the increasing integration of the nation’s gas and electricity systems and their vulnerability to a combined disruption.

In the event of a major supply or demand disruption to the country’s gas supplies, there could be a knock-on effect on electricity production. A must read in Reuters. This could be a negative to natural gas. This could bring down the winter strips if passed. It may also impact natural gas drilling. 

 OPEC loses discipline?  

Reuters also reported Friday that in its September survey indicates output from the 13 OPEC members originally part of the deal rose by 60,000 barrel-per-day from August. Supply from the 11 members with production targets under the original accord increased by 40,000 bpd. Compared with the levels from which they agreed to cut, in most cases their October 2016 production, the 11 members have reduced output by 998,000 bpd of the pledged 1.164 million bpd. That equates to 86% compliance, down from 89% in August.

August's total was revised down by 20,000 bpd after a change to the Libyan estimate. Oilprice.com reports that “Gazprom dethroned ExxonMobil as the top energy company in the world, according to the 2017 S&P Global Platts Top 250 Global Energy Company Rankings. The rankings measure the financial performance of energy firms on four key metrics: Asset worth, revenues, profits and return on invested capital. The list only includes companies that have assets greater than $5.5 billion. For 12 years, ExxonMobil was second to none. But that changed this year – Exxon was ejected from the top spot, and fell all the way to ninth place."

Oil is under pressure because of the dollar. Talk of a more hawkish replacement for Janet Yellen is one reason for recent dollar strength.  Yet it really is too early to be speculating on that. Look to use weakness to buy some long-term calls.

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