California Energy Commission

Natural Gas Burner Tip Price ModelDocumented in the report: Estimating Natural Gas Burner Tip Prices

for California and the Western United States (CEC-200-2014-008)

IEPR Commissioner Workshop on

Preliminary Natural Gas OutlookCalifornia Energy Commission

1516 Ninth Street

First Floor, Art Rosenfeld Hearing Room

Sacramento, California 95814

Thursday, May 21, 2015

Peter Puglia

Supply Analysis Office

Energy Assessments Division

Peter.Puglia@energy.ca.gov / (916) 654-4746

California Energy Commission

Purpose of Burner Tip Price Model• NAMGas Model does not estimate burner tip prices

• NAMGas Model provides multi-sector prices of gas at regional hubs, not at the power plant burner tip

• Burner Tip Price Model provides plausible estimates of proprietary natural gas prices paid by electric generators; assuming future conditions in 2015 IEPR Common Case scenarios

• Natural gas prices are critical for modeling electric resources dispatch in PLEXOS ® or other grid simulation models

• PLEXOS ® relies on exogenously derived natural gas prices

• The Burner Tip Price Model represents a “bridge” between the NAMGas and PLEXOS ® models

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California Energy Commission

Burner Tip Price Model: “Bridge” Between the NAMGas and PLEXOS ® Models

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NAMGas Model

• Estimates regional natural gas prices

Burner Tip Price Model

• Estimates natural gas prices at power plant burner tip

PLEXOS ®• Simulates

electric resources dispatch

California Energy Commission

Data: Sources and Uses• Annual natural gas commodity price

– Source: North American Market Gas-trade (NAMGas) Model

• Computable general equilibrium model reconciles supply, demand and prices at 359 price hubs in U.S., Canada, Mexico

• Includes Malin, PG&E Citygate, Topock, SoCalGas Citygate, and other California price hubs

• Prices for 3 Common Cases in the 2015 IEPR

– Use: NAMGas Model estimates cost to produce gas from well, process and transport it to price hub near power plant under Common Case scenario assumptions

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Burner Tip Price Model Assumptions• Generators buy gas on contract; price indexed to

liquid, low-volatility price hub• Generators buy firm and interruptible pipeline

capacity; most capacity bought at interruptible transportation rate

• Transportation rates assumed flat through forecast horizon; no historical rate pattern for any pipeline

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California Energy Commission

Burner Tip Price Model Assumptions (cont.)• Henry Hub best choice to calculate seasonal factors;

it is the pricing point for NYMEX gas futures contracts and ICE OTC swaps• Staff tested seasonal factors using prices at five WECC

price hubs and showed that Henry Hub seasonal factors not statistically different from WECC seasonal factors

• June-to-May interpolation factors provide better backcast than January-to-December factors• January-to-December factors yield large discontinuities at

January/December threshold• June seasonal factor is closest to one (June price = average

annual price) for all historical baselines evaluated

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California Energy Commission

Algorithm for October Burner Tip Price

BTOct = SFOct (NAMt1 + IFOctJM) + PPL

The equation’s variables are defined as follows:

• BTOct is the October estimated burner tip final price

• SFOct is the October seasonal factor

– SFOct = NGIOct09-14m ⁄ NGI09-14a

– NGIOct09-14m is the median of six October 2009-to-2014 NGI Bidweek Henry Hub prices

– NGI09-14a is the average 2009-to-2014 NGI Bidweek Henry Hub price

• NAMt1 is the NAMGas Model first-year price, converted from 2010 dolllars to nominal dollars per million British thermal units (MMBtu) with Moody’s Analytics GDP deflator

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California Energy Commission

Algorithm for October Burner Tip Price (cont.)

BTOct = SFOct (NAMt1 + IFOctJM) + PPL• IFOctJM is the October interpolation factor for the Burner Tip

Model’s June-to-May year

– IFOctJM = 1/12 x (NAMt2 – NAMt1) x 5

– The factor “1/12” accounts for the 12 months in one year

– NAMt2 is the NAMGas Model second-year price, converted from 2010 dollars to nominal dollars per MMBtu with Moody’s Analytics GDP deflator

– The factor “5” accounts for the fact that October is the 5th month in the Burner Tip Model’s June-to-May year

• PPL is the pipeline transportation rate from pipeline utility tariffs, in nominal dollars per MMBtu

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California Energy Commission

Example: October 2020 SoCalGas (Hub Topock/Needles) Burner Tip Price

BTOct = SFOct (NAMt1 + IFOctJM) + PPL

$6.06 = 0.9304($6.04 + $0.11) + $0.34

SFOct = 0.9304 = median(0.8719, 0.9299, 1.0867, 0.9580, 0.9310, 0.9161)

0.9310 = (Oct 2009 NGI Henry Hub price) ⁄ (1/12)(sum 2009 NGI Henry Hub prices)

1.0867 = (Oct 2012 NGI Henry Hub price) ⁄ (1/12)(sum 2012 NGI Henry Hub prices)

IFOctJM = 1/12 x (NAMt2 – NAMt1) x 5

$0.11 = 1/12 x ($6.042 – $5.776) x 5

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California Energy Commission

Reality Check: Are the Burner Tip Model’s Prices Plausible?

• NAMGas Model: Computable general equilibrium models, when populated with plausible and coherent assumptions, simulate real markets– Econometric models estimate the future, based on the past

• Backcast validation using Ventyx burner tip gas prices

• Evaluation of PLEXOS ® or other system simulation results by experienced power grid modelers using Burner Tip Model prices

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California Energy Commission

Questions or Comments?

Burner Tip Model, plus user’s guide and background in the staff report: Estimating Natural

Gas Burner Tip Prices for California andthe Western United States, at:

http://www.energy.ca.gov/2014publications/CEC-200-2014-008/index.html

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