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Energy Markets: Is Electricity The Next Black Swan?

Author: Brynne Kelly 6/26/2022

Problems with power grids across the US, and other countries are a potential catalyst for chaos in energy markets that are underappreciated. High profile markets like motor gasoline receive much media attention as their price point is readily available. Regional disparities in retail gasoline prices (versus benchmark futures) can be attributed to local taxes, transportation costs and refining capacity.

This is not the case in electricity markets. The lack of liquid benchmark futures and understanding of utility rate structures shrouds electricity markets under a veil of mystery. Yet, power supply is one of the largest systemic risks yet to be exposed in this energy price saga. We are simply not paying enough attention to it, but it is a potential problem just beneath the surface.

Simply stated, crude oil does not actually make electricity in today's environment (see power generation by fuel source here). However, power is needed to make oil. Said another way, a failing power grid COULD BE the next oil chain supply problem.

One only has to look back a little over a year ago at the events that unfolded during winter storm Uri in Texas to understand this. During that storm in 2021, we saw how interconnected the energy complex is (detailed analysis of this event in a prior post can be found here). In that post, we stated that:

Texas, the energy hub of the US, came to a grinding halt this week when the ERCOT power grid crumbled under the weight of cold weather. A state rich with energy production as far as the eye can see, was suddenly unable to continue operations without electricity and the dominos began to fall one by one.

Imagine an event like this happening on a larger scale than it did. Without power supply, multiple systems that support the running of the economy were unable to function.

The modern world increasingly relies on electricity at it's core. Multiple systems depend on the reliability of each other, yet these systems are largely managed and regulated independently from one another. Cold weather led to failures across the energy system in Texas, and this was exacerbated by failures in the ERCOT power grid. The loss of basic electricity services in Texas cascaded down to the production of energy, transportation systems, water distribution and the performance of telecommunications.

As the summer cooling season kicks off across much of the country, concerns over electric grid reliability are heating up (no pun intended). A recent assessment of summer electric grid reliability by the US Chamber of Commerce shows the clean energy transition may be getting ahead of the technologies available to keep the grid reliable.

A power grid failure on any scale larger than a local one like we saw in Texas, would be, and could be potentially catastrophic. The potential problem with power grids would be a catalyst for chaos in energy in general and oil specifically. The problem is systemic, but the solution is not. There appears to be no plan in place. The power grid, therefore may be the soft underbelly of the entire economy.

It doesn't come as much of a shock then that electricity futures have more than tripled across the country since the beginning of the year. Like other commodity futures, electricity futures represent the wholesale price of electricity. The price before additional costs like transportation, taxes and other production costs are assigned.

Below we see the futures curve shift for two prominent regions in the electricity market. The chart on the left represents those of the Pennsylvania/New Jersey/Maryland power grid and the chart on the right represents those of the Texas power grid known as ERCOT.

In both markets, we see an unprecedented move higher this year in futures prices. If this was a chart of gasoline prices the average retail consumer would immediately understand the severity of the situation. But since the public has little access to retail power market pricing across the US, these moves go largely under-reported until stories of consumers unable to pay their power bill make the news. The problem exists, but is not digestible to the average buyer. Therefore, it doesn't make the news.

Regardless, it IS a problem. All of the concern about securing enough supply for crucial heating and cooling season is borne out in the structure of the futures curves shown above.

A recent report by the US Chamber of Commerce shines a spotlight on this issue.

The U.S. Chamber strongly supports the transition of our electric generation fleet and the overall economy to cleaner, less carbon-intensive energy sources. Recognizing that pretty much everything we make, sell, or do depends upon a reliable and affordable supply of electricity, we have also been clear that this transition must occur consistent with the pace of innovation so that American competitiveness can continue to flourish during this necessary evolution. Unfortunately, a recent analysis by the official watchdog of America’s electric grid indicates that the electric power transition may be getting out over its metaphorical skis. While we certainly hope for the best this summer, the stunning proliferation of orange and red across NERC’s summer risk assessment map is undeniably cause for concern.

To drive the point home, they included a nice visual of the key risk areas across the country.

John Moura, NERC’s Director of Reliability Assessment and Performance Analysis, summed up their conclusions rather succinctly:

“It’s a sobering report.” Moura went on to say, “It’s clear the risks are spreading…and the pace of our grid transformation is a bit out of sync with the underlying realities and the physics of the system.”

Uri was a sneak peak of what could happen to the red and orange areas above in the face of constraints. Ironically, even though Texas experienced a catastrophic event a little over a year ago, they are still in the 'Elevated' category. Leaving us to wonder if any of the measures implemented postmortem in Texas really made any difference.

How We Got Here - The US Power Grid Has a History of Regulatory Purgatory

In 2015, President Obama unveiled the final Clean Power Plan, setting the first-ever national limits on carbon pollution from power plants — then the nation's largest source of these emissions. In this historic announcement, the United States said that it is no longer acceptable to put unlimited amounts of climate pollution into our air.

The Clean Power Plan cuts significant amounts of power plant carbon pollution and the pollutants that cause the soot and smog that harm health, while advancing clean energy innovation, development and deployment, and laying the foundation for the long-term strategy needed to tackle the threat of climate change. By providing states and utilities ample flexibility and the time needed to achieve these pollution cuts, the Clean Power Plan offers the power sector the ability to optimize pollution reductions while maintaining a reliable and affordable supply of electricity for ratepayers and businesses. The final rule has several features that reflect EPA’s commitment to ensuring that compliance with the final rule does not interfere with the industry’s ability to maintain the reliability of the nation’s electricity supply

President Trump signed a final rule doing away with the Clean Power Plan and replaced it with the Affordable Clean Energy rule:

On June 19, 2019, EPA issued the final Affordable Clean Energy rule (ACE) – replacing the prior administration’s overreaching Clean Power Plan with a rule that restores rule of law, empowers states, and supports energy diversity. The ACE rule establishes emission guidelines for states to use when developing plans to limit carbon dioxide (CO2) at their coal-fired electric generating units (EGUs). In this notice, EPA also repealed the CPP, and issued new implementing regulations for ACE and future rules under section 111(d).

Recently we have seen governments stepping back from environmental concerns in order to get enough supply for winter. Over the weekend, however, US President Biden stated that "We will not back down from any climate pledges because of inflation." So, which is it???

This isn't just an isolated issue the US faces. In fact, the US is probably faring better at the moment than other countries. Here are but a few of the eye-catching scenes playing out across the world as electric grids continue to come under strain:

  • Japan: A city in eastern Japan logged the country's highest temperature for a June day on Saturday (Jun 25), breaking above 40 degrees Celsius, the weather bureau said. The heatwave, which the Japan Meteorological Agency (JMA) expects to persist throughout the summer, came as the government called on households and businesses to save electricity to avoid possible power crunch until September. In its latest three-month weather forecast released this week, JMA said this summer will be hotter than regular years in northern, eastern and western Japan, due to factors such as the global warming and La Nina. The forecast adds a concern for the country, which faces tighter energy supply due to the slow restart of nuclear power, thermal plant shutdowns and geopolitical risks heightened after Russia's invasion of Ukraine.

  • Sri Lanka: people queue for miles to fill a tank of fuel. In Bangladesh, shops shut at 8 p.m. to conserve energy. In India and Pakistan, power outages force schools to shut, businesses to close and residents to swelter without air conditioning through deadly heat waves in which temperatures top 100 degrees Fahrenheit (37 degrees Celsius).

  • Australia: Even in comparatively rich countries, such as Australia, economic concerns are beginning to emerge as consumers feel the pinch of higher energy bills. Wholesale electricity prices in the first quarter of 2022 were up 141% from last year; households are being urged to cut down usage and on June 15 -- for the first time -- the Australian government suspended indefinitely the national electricity market in a bid to bring prices down, ease pressure on the energy supply chain and prevent blackouts.

  • United Kingdom: RWE Warns UK Tax On Electricity Generators Would Risk £15Bln Investment In Renewables - FT

  • India: But it is the experience of India, where power demand recently hit record highs, that illustrates most clearly why this is a global — rather than regional — crisis. Having suffered through widespread outages amid record temperatures, the world's third-largest carbon emitter announced on May 28 that state-run Coal India will import coal for the first time since 2015 to generate electricity.

As of Saturday morning there are new fears that Moscow could entirely halt all NatGas flowing through Nord Stream within weeks, which would cause energy chaos in Germany and across the continent.

Describing the worst-case scenario [shuttering of Nord Stream] to Der Spiegel, Habeck said, "companies [will] have to cease their production, their workers [will] be laid off, supply chains will be collapsing; people are going to [go] into debt to pay their heating bills; people will be getting poorer and frustration will engulf the nation."

It's becoming more and more clear that electrical grids across the world are under strain and fears of not being able to secure primary energy sources to provide enough electricity during crucial demand periods are becoming real.


Electricity Usage in the US

Users of electricity can be placed in to 3 main categories: Residential, Commercial and Industrial. While electric vehicles get all the headlines, they account for a minuscule portion of the power we depend on.

The mix between the top three consuming sectors has been fairly constant over the last decade. When comparing the combined demand from these 3 sectors, the demand from the transportation sector can barely be made out in the chart (yellow line above). It's a bit concerning to put in to context the expected growth of electricity demand from the transportation industry given where we sit now.

Food for thought: Beyond the general stability of the grid that we've highlighted, there is immense expectation on the future growth of electric vehicles. A user segment of the power grid that is basically non-existent at the moment.

The US and other countries have unleashed unprecedented measures to keep a lid on oil prices. They have even begun to acknowledge the refining bottleneck and opened dialogue with key refiners. We have yet to see any concrete solutions to the issues, but at least they are being noted.

The same cannot be said for the electric utility industry. The last serious discussion surrounding supply issues on this front was over a year ago after winter storm Uri and even that was a regional discussion. It was taken as a one-off issue in Texas and not a template for the broader industry. Which, sadly means that it will take another chaotic disruption of power supply to push the issue into the forefront.

Meanwhile, the problem looms large in the background.

Market Impact

Considering that the fundamental structure of the petroleum complex has broader legs than simple supply and demand as laid out above, we review moves in key oil spreads over the last two weeks in that light. Adding the nuances of the power market allows us to view volatility in petroleum prices under a new lens

While there is no current easily measurable impact to handicap these risks from, if they should come to pass the consequences could be significant. If the fallout from Uri in Texas and Oklahoma were any indication, natural gas and oil pricing could be affected by power failures due to heat, storms or some other unplanned event. We are not predicting or sounding alarms, but the risk is poorly quantified. It won't matter until it matters, unfortunately.

Calendar Spreads

We believe that calendar spreads in oil and product markets have begun not only to hone in on a specific pain point in oil supply and demand, but also the inherent risks to the power grid in key heating and cooling periods. We invite you to view them under a different lens given the discussion about power markets.

Does this spread represent the culmination of tensions as noted in last week's report, or is there something more to it? Does this represent a broader fear in markets about energy supply in general this fall?

Crack Spreads

Refining cracks continue to move higher. Specifically those that are related to heating demand. The whole world is laser-focused on the winter pain-point. This is because winter is a time when resources simply MUST be there.

The actual clearing price of refining heating oil this winter is unknown. What is known, however is the fear surrounding our ability to do so. Markets with obvious seasonal demand are being targeted as pain points. The instability of power grids exacerbates this.

Crude Arbs

The market is telling us at the moment that crude is crude is crude. Meaning that it is not willing to reveal anything via the WTI/Brent spread. Instead, it has meandered around uneventful levels. Meaning, there isn't anything specific being acknowledged in this spread other than daily market dislocations and money flow.

Bottom Line

Oil, Gasoline, Heating Oil, Coal, and Natural Gas are all markets with little room for supply-side error right now due to war, sanctions, and other supply chain impediments. Power isn't even mentioned. Electrical power is assumed even while the inputs that generate it trade at multi year highs and are constrained on several fronts. Power grid reliability is taken for granted. We have had a problem on almost every segment of the energy supply chain these past 6 months. So far there have not been problems at the last stop on the chain, power generation and transmission. Regardless, the supply chain is vulnerable.


EIA Inventory Recap - Week Ending 6/17/2022

****The most closely watched oil data in the world -- the US government’s Weekly Petroleum Status Report --

won’t be released as planned this week because of system issues stemming from a power problem. The Energy Information Administration has delayed the release of all but its Weekly Natural Gas Inventory report planned this week after electricity issues caused an unspecified hardware failure. “We aren’t releasing any more data this week,” spokesman Chris Higginbotham said.

Weekly Changes

(none to report)

YTD Changes

(none to report)

Inventory Levels

(none to report)


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