2 min read

The EPA’s New Climate Rule – Déjà vu All Over Again

By 5 on May 18, 2023

On May 11, 2023, the U.S. Environmental Protection Agency (EPA) proposed new rules designed to limit emissions from existing and new coal and natural gas fired power plants. This is the EPA’s third swing at regulating CO2 emissions from power plants. Its first at-bat dates back to 2015 when the Obama Administration’s EPA introduced the Clean Power Plan (CPP). The CPP proposed state-by-state emissions limits. These limits were quickly challenged by numerous states, particularly those with significant amounts of coal-fired generation. While these legal challenges were ongoing, President Trump was elected. Trump scrapped the CPP and introduced the Affordable Clean Energy Rule (ACE), which overrode the CPP and gave the states more power to set their own emission limits. The ACE also faced challenges in the courts.

In June 2022, the Supreme Court issued a ruling in West Virginia v. EPA that significantly limited the ability of the EPA to regulate emissions without a clear mandate from Congress. This ruling assures that the EPA’s new proposed rules, if finalized, are likely to face a lengthy legal battle.

The latest EPA plan sets out aggressive emission reductions and is likely to further accelerate the retirement of fossil fuel generation units. By 2030, the EPA plan requires any coal plant that intends to operate past 2040 to use a carbon capture and storage (CCS) system to eliminate 90% of its CO2 emissions. Large natural gas generation units will also be required to install a CCS that captures 90% of their carbon emissions by 2035 or operate on clean hydrogen by 2038. While there are different restrictions for smaller generation units, the EPA’s rules lean heavily on carbon capture, clean hydrogen and in some instances, use of dual-fueled gas plants with both natural gas and green hydrogen. At the same time, the EPA has acknowledged that CCS and clean hydrogen are not yet in widespread commercial use.

As filed last week, the EPA plan is a proposed rule, and the EPA will need another year or so to issue a final version. Once the final version is issued, states will have another two years to submit plans to comply with the regulations. This timetable will be delayed further by the inevitable legal challenges. West Virginia Senator Shelley Moore Capito and Attorney General Patrick Morrisey have already vowed to lead congressional and legal efforts to kill the rule.

A few things are clear. First, if the rules are adopted, the cost of generating electricity from coal and natural gas plants will increase dramatically. Second, even if the prospects for the EPA’s new rule are limited by various challenges, the proposed rules will cast a shadow over new investments in existing and new fossil fuel generation. Testifying before FERC on May 4, 2023, a bipartisan panel of FERC commissioners (2 Democrats and 2 Republicans) raised their shared concern that the reliability of our electricity grid is challenged by the fact that we continue to see fossil plants retire at a rate far faster than they are replaced by new emission-free generation. Of course, we will continue to monitor this important regulation on behalf of our clients.

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Topics: Markets Natural Gas Sustainability Renewables Resiliency
3 min read

Natural Gas market Alert - February 2023

By 5 on February 22, 2023

Earlier this month, the weather sage, Punxsutawney Phil, saw his shadow, retreated into his burrow and proclaimed six more weeks of winter. The problem is that Phil doesn’t seem very plugged into the latest meteorological observations or forecasts. Natural gas markets aren’t listening to Phil either. In fact, just looking at natural gas prices, one might guess that winter either never arrived or ended when the Astros won the World Series in the first week of November. Figure 1 shows how natural gas prices for the calendar year 2023 (blue line), 2024 (black line) and 2025 (green line) have traded since January 2021. This chart clearly shows that prices have dramatically fallen across those three calendar years over the last six months. On September 1, natural gas for 2023 was trading at $6.69/Dth. Today, it has lost 60% of its value and is trading at $2.70/Dth. Prices for 2024 and 2025 have fallen by similar amounts. This natural gas correction is being driven by a very mild winter and warmer than average temperatures.

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Topics: Markets Natural Gas
12 min read

February 2023 - Energy Market Letter

By Jon Moore on February 22, 2023

On behalf of the team at 5, I am pleased to forward our February market letter. This letter discusses: (i) the recent fall in natural gas prices and increasing natural gas price volatility, (ii) the 188th Congress and the potential impact of the election on Federal and State energy policy in 2023, and (iii) how the electricity grid held up during Winter Storm Elliott and the February cold snap.

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Topics: Markets Natural Gas NYISO ERCOT Sustainability Newsletters Education Renewables
3 min read

Cold Turkeys Boost Gas Prices

By 5 on November 29, 2022

What a difference three months make in the constantly changing landscape of the natural gas market in the US. Last September, the December delivery contract for NYMEX’s Henry Hub, was trading at approximately $9.50/MMBtu, while natural gas prices in Europe were trading near $90/MMBtu. On November 28, the December contract settled for the last time at a final price of $6.65/MMBtu, a drop of almost $3.00 from the August high, while major European trading hubs are now near $30/MMBtu.

There were several factors that moved future prices for this winter’s gas delivery down from its late-summer highs. However, many of those bearish influences have started to change and reverse direction.

First, inventory levels of US natural gas in storage grew through the months of September through November at a pace that was significantly higher than expected. In late August, the market consensus was that the US would have about 3,400 Bcf of natural gas placed into underground storage facilities. That belief was dramatically changed when more than 100 Bcf of gas went into storage for six of the next seven weeks. The 1,004 Bcf of injections between weeks ending September 2 and November 11 was almost twice as much as in 2020, and the largest of the last decade.

Those injections came to a dramatic reversal on the Wednesday before Thanksgiving when the EIA reported the first withdrawal of the season of 80 Bcf, with an even stronger withdrawal expected for Thursday, December 1. Figure 1 shows that the gap between gas in storage and the five-year average was reduced from 10.5% in late August to 0.4% on November 11. Last week’s 80 Bcf withdrawal was enough to open that gap to 3.3%.

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Topics: Markets Natural Gas
10 min read

November 2022 - Energy Market Letter

By Jon Moore on November 2, 2022

On behalf of the team at 5, I am pleased to forward our November market letter. This letter discusses: (i) the upcoming Mid-Term Elections, and how the results could impact energy policy; and (ii) the challenges facing grid system operators in Texas, New England and New York as they work to integrate large volumes of intermittent resources into the grid mix.

The Mid-Term Elections

Recent polls favor Republicans to take control of the House and perhaps the Senate as well. As a result, several clients have asked what such a change in Washington could mean for energy policy. The question is particularly interesting because the landmark Inflation Reduction Act (IRA), which allocated some $369 billion to the energy sector, was passed by the Senate and the House without a single Republican vote.

The Inflation Reduction Act: The short answer is that the election results will probably have little effect on energy policy. While a change in control of the House or the shift of a single Senate seat would have doomed passage of this legislation, since it was passed and signed into law by President Biden, it will be difficult to repeal it. Even if the House and Senate pass legislation to repeal or amend portions of the IRA, President Biden has veto power, and overriding a veto requires a vote of two-thirds of the members in the House and Senate. This is good news for developers of renewable power, energy storage, electrical vehicle manufacturers and others that will benefit from the incentives found in the IRA. But this does not mean that the IRA and its various energy incentives are immune from challenges in the courts.

There are some interesting parallels between the IRA and the Affordable Care Act (ACA). Like the IRA, the Democrats used budget reconciliation to get the ACA approved by the Senate, and all Republicans in the House and Senate opposed the ACA. President Obama signed the ACA in March 2010, and in the November 2010 mid-term elections, the Democrats lost control of the House, in part, because of opposition to the ACA. The new congress did not reverse or upend the ACA, in part because politicians have little appetite for taking benefits away from voters. Yet the law became the subject of extensive legal challenges, one of which ended up in the Supreme Court.

While there is considerable opposition to the IRA, and it will undoubtedly face legal challenges, even though the law does not appear to be subject to the same serious constitutional challenges (for example, the constitutionality of the insurance mandate) that faced the ACA. In addition, as in the case of the ACA, we expect that in the two years remaining in the Biden Administration, a significant amount of the benefits will be granted to various energy projects. Once grants are made, it will be difficult if not impossible to reverse them.

Congressional Oversight: While the IRA may be safe from legal challenges, we expect that a Republican controlled house will use its oversight powers to review almost all aspects of the IRA and other programs that address climate change. This could certainly cause some delays in the implementation of the IRA’s programs and slow or halt other efforts to address climate change such as the SEC’s plan to require ESG reporting. For example, comments from Rep. Garland “Andy” Barr of Kentucky, a member of the House Financial Services Committee, indicated that ESG principles, “will be one of the major focuses of oversight of a Republican majority” adding that “My view is that ESG investing is a cancer within our capital markets,” Barr said. “It is a fraud on American investors.”

On the state level, we have already seen several states, pushing back against BlackRock and other investment firms that prioritize ESG principles. Texas has passed legislation that restricts the state’s retirement and investment funds from doing business with firms that “boycott” the oil and gas sector. Echoing this approach, Louisiana Treasurer John Schroder recently pulled $794 billion in pension fund money from BlackRock funds due to their use of ESG criteria in making investment decisions. “Your blatantly anti-fossil fuel policies would destroy Louisiana’s economy,” Schroder said. “In my opinion, your support of ESG investing is inconsistent with the best economic interests and values of Louisiana,” Schroder said.

Other than some minor changes to the approval process to FERC commissioners, we cannot think of other ways that a change in House or Senate leadership will impact federal energy policy – but as noted above, there is no shortage of ways in which the House and Senate can investigate the energy industry.

Looking past the mid-terms, if a Republican candidate is elected President in 2024, we might see an effort to pass legislation repealing the IRA. When President Donald Trump was elected in November 2016, Vice President Mike Pence stated, “President elect Donald Trump will prioritize repealing President Barack Obama’s landmark health care law right ‘out of the gate’ once he takes office.”

But as I expect will be the case with the IRA, once the energy community is offered the $369 billion in incentives, it will be very difficult for a future administration to repeal these benefits.

Permitting Reform: While repealing the IRA may be top of mind, the fate of Sen. Manchin’s effort to expedite permitting of critical energy infrastructure is equally important. In the run up to passage of the IRA, Senate Majority Leader Schumer agreed to support Manchin’s permitting bill (which included a requirement that Federal Agencies approve the controversial Mountain Valley Pipeline that Manchin supports) in exchange for Manchin’s support of the IRA. The bill seemed to be a good compromise, angering both Republicans who said it did not do enough for the fossil fuel industry and Democrats who said it did too much.

After the mid-term elections, it will be interesting to see if the Manchin bill can form the basis of bipartisan legislation that addresses the need to upgrade the nation’s energy infrastructure. As we note in the last section of this letter, there is a growing consensus among all participants that the grid envisioned by the energy transition does not yet exist. A recent Washington Post story is emblematic of the issue faced by new generation and transmission projects across the nation.

In this case, nearly ten years into the permitting process, a geo-thermal company had started construction of a plant that would provide carbon free energy to California residents. Late into this process, developers found out that: (i) the warm water drawn from the earth to power generation may threaten a rare toad, and (ii) the project’s location impinges on a sacred healing place for the Shoshone Tribe. The U.S. Fish and Wildlife Service has ordered the project stopped, while the Bureau of Land Management has pointed to the project as one of the ways the Biden administration is successfully confronting the climate crisis. This is just the kind of permitting delay that the Manchin bill was designed to address.

Intermittent Resources and The Energy Transition

Intermittent resources are generating assets that are not continuously available such as electricity that comes from wind farms and solar arrays. The growth of intermittent generation continues to challenge system operators who are responsible for ensuring a reliable supply of electricity. In the balance of this letter, we discuss ways in which intermittent supplies are challenging three markets, ERCOT, the New England ISO (NEISO) and New York ISO (NYISO).[1]

ERCOT: In ERCOT, the state in the country with the highest volume of wind and solar generation, we are clearly seeing the challenge that intermittent generation places on the system operators responsible for managing the reliability of the grid. As shown in Figure 1, on one day in Mid-October, wind resources generated approximately 18,000 MWs in the morning and only 1,200 MWs in the afternoon. The variation of solar output is equally dramatic. The chart below shows the combined hourly output of wind and solar over the last several weeks.

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Topics: Markets Natural Gas NYISO ERCOT Sustainability Newsletters Education Renewables
4 min read

When Crude Goes Down, Gas Goes Up

By 5 on September 29, 2022

Often in commodity trading, it isn’t always the straight-forward market drivers that catch the market off guard. Rather it’s the counter-intuitive things that seem to side-swipe a market. Lately, there has been a negative correlation between the price of crude oil and the price of natural gas. This summer, a decrease in the price of crude oil has coincided with a rally in natural gas prices. This month, the inverse relationship between these two commodities will be examined in more detail.

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Topics: Markets Natural Gas
5 min read

The European Energy Crisis

By 5 on September 29, 2022

Imagine the reaction of a modest homeowner in America who received an invoice from their electric utility that was more than $1,000 per month, or a monthly natural gas bill that exceeded $500. While these figures may seem outrageous, this is the situation that many in Europe are facing as they head into the fall and winter heating season. Anyone who has shopped for natural gas or electricity knows that prices have consistently increased over the last 18 months. Many homes and businesses are seeing electricity and natural gas rates that are between three and five times higher than previous contracted rates. And while there is no question that this is painful, the situation in the United States is not nearly as desperate as it is in Europe. The chart in Figure 1 shows that the price of natural gas for January delivery at the Dutch TTF trading hub peaked in late August at over $100/MMBtu. Domestically, on August 23, that same contract hit its maximum value of $9.77/MMBtu, making the European price of natural gas ten times more expensive than in the United States for that October contract. Circumstances are similar in Europe’s electricity markets. In late August, wholesale electricity prices in France were more than five times the wholesale price of electricity in New York City. As Figure 1 shows, the price of that January contract has fallen in Europe (and domestically) over the last month, but it also illustrates the dramatic difference in energy prices on both sides of the Atlantic Ocean.

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Topics: Markets Natural Gas
3 min read

A Fundamentally Different Market

By 5 on August 31, 2022

Earlier this year, we wrote an article describing the rapid acceleration of price volatility in the natural gas markets, with a chart that showed daily price movement at the Henry Hub, the national benchmark trading hub for natural gas. In this chart, shown in Figure 1, the y-axis is the daily price change in natural gas prices over the last ten years. A negative number means the price went down and a positive number means the prices increased during that day’s trading session. This chart shows that since the summer of 2021, there is a higher degree of scatter among the data points, indicating that gas prices have become increasingly volatile over the past 12 months. One interesting feature that this data shows is this volatility has not been predominantly in one direction, or skewed to either the upside or downside, rather, it has been evenly distributed around the mean.

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Topics: Markets Natural Gas
3 min read

Pushing the Volatility Envelope

By 5 on July 28, 2022

What is Driving the Extreme Volatility in the Natural Gas Market?

The NYMEX Henry Hub prompt month future contract continued to push the volatility envelope this past month, with the daily change for August delivery exceeding $0.37/MMBtu. This is significant because the average daily change over the previous twelve July’s average was approximately $0.05, with a maximum average daily change of $0.08 back in 2012 (See Figure 1). Last month, we wrote about the explosion at the Freeport LNG plant south of Houston, Texas, and how it affected both international and domestic prices for natural gas.

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Topics: Markets Natural Gas
8 min read

July 2022- Quarterly Market Letter

By Jon Moore on July 26, 2022

On behalf of the team at 5, I am pleased to forward our market letter for the second quarter of 2022. The dramatic increase in the price of electricity and natural gas noted in our Q1 letter continued its upward climb in Q2, fueled primarily by the war in Ukraine and its impact on the price of LNG. This dramatic increase is shown in Figure 1.

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Topics: Markets Natural Gas Sustainability Newsletters Education Renewables
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