understanding financial instruments and carbon price presented by: steven messner - saic carbon...
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Understanding Financial Instruments and Carbon Price
Presented by: Steven Messner - SAIC
Carbon Counting 2008Chicago, ILJuly 15, 2008
Energy | Environment | National Security | Health | Critical Infrastructure22
IntroductionSAIC’s Consulting Work in Climate Change Policy
• Public Sector Clients• DOE 1605(b) Program• EPA Climate Leaders• California Energy Commission• California Climate Action Registry• The Climate Registry• NASA• State of Maryland• National Intelligence Council
• Commercial Clients• Sacramento Municipal Utility District• Nebraska Public Power District• ConocoPhillips• Siemens AG• Bank of America• Chevron Texaco• Natural gas associations (INGA, AGA) • American Council for Capital Formation
Energy Modeling and Analysis
Emissions Accounting
and Forecasting
Emission Abatement Cost Curves and Plans
Energy Efficiency and Engineering
Projects
Emission Offset Procurement and Auctions
• Forecast energy and allowance prices
• Understand local market conditions
• Inventory corporate emissions
• Forecast emissions• Seek offset project
opportunities
• Seek short-term project opportunities
• Seek capital opportunities
• Integrate allowance prices into curve
• Serve both large scale buyers and sellers
• Position for multibillion dollar federal auction
Vision: Policy consulting supports efficiency and engineering projects for large commercial, industrial, and government clients
Energy | Environment | National Security | Health | Critical Infrastructure
Overview
1.Understanding price fundamentals as the key to carbon finance
2.Recent US Developments3.Key Elements of Proposed Federal Legislation4.Forecasted Impacts of Proposed Legislation on
Energy Marketsa) Analytic Approachb) Resultsc) Cost Drivers & Conclusions
5. Incorporating price into financial decisions
Energy | Environment | National Security | Health | Critical Infrastructure4
CO2 price
• Understanding CO2 price fundamentals allows use of any and all financial instrument approaches• Futures• Derivatives• Indexed approaches
• Also becoming a key factor in future investment analysis
Energy | Environment | National Security | Health | Critical Infrastructure5
Recent U.S. Federal Policy Developments
• Push for climate change legislation in Congress• 8 proposed emissions trading bills
• Lieberman-Warner bill debated on Senate floor – 1st week of June
• 2 proposals for carbon tax
• 1 bill proposes inventory of CO2 storage sites
• Creation of House Select Committee on Energy Independence and Global Warming
• Weekly hearings on climate change• House Energy and Commerce Committee and Senate Committee on
Environment and Public Works soliciting comments from public
• Private sector pushing for federal legislation to avoid patchwork of state laws
– Others, including proactive states, oppose Federal preemption
Energy | Environment | National Security | Health | Critical Infrastructure66
Proposed Federal GHG Legislation
Energy | Environment | National Security | Health | Critical Infrastructure77
Proposed Federal GHG Legislation
Energy | Environment | National Security | Health | Critical Infrastructure
Modeling Approach
SAIC uses National Energy Modeling System (NEMS)
We help clients to:
1. Understand the potential impacts of GHG legislation on their business. • SAIC runs NEMS in conjunction with commercial models to provide more specific
analysis by state or facility• SAIC alters assumptions to reflect those of the client on specific components (e.g.
offset availability, energy efficiency, natural gas supply)
2. Provide an analytical basis to enhance their discussions with Congress on pending and alternative policies in legislation
NEMS has been used by SAIC clients to analyze the McCain-Lieberman, Warner-Lieberman, and Bingaman bills.
Energy | Environment | National Security | Health | Critical Infrastructure
NEMS Overview NEMS: A Truly Integrated Energy Modeling Tool
NEMS integrates the North American energy market across industry segments as well as the economy
Energy | Environment | National Security | Health | Critical Infrastructure
Modeling Approach – Benefits of NEMS
Benefits in using NEMS for analysis of GHG legislation • NEMS was designed to address energy and emissions issues• Same analytical tool used by Congress and others in government • Provides insights into the analysis provided by EIA to Congress• Allows analysis under alternative assumptions • Narrows the debate to merits of different policy choices and
assumptions– Rather than models deployed or methodologies used
• Provides an “apples to apples” comparison of GHG initiatives• Identifies potential solution paths
Energy | Environment | National Security | Health | Critical Infrastructure
Overview of CO2 price fundamentals
No. Factor Increase Variability CO2 Price Impact
1 CO2 Emission Cap Low -
2 Fuel Prices - Gas to Coal Spread Large +
3 Offset/Banking/Borrowing Provisions Large +, -
4 Technology Upgrading Cost Large +
6 Weather - Winter Temperature Large (In Northern States) -
7 Weather - RainfallLarge (In certain hydro
power regions)-
8 Economic Growth Medium +
9 Energy Demand Growth Medium +
Energy | Environment | National Security | Health | Critical Infrastructure
Major Results of Analyses
• Results of analyses of Lieberman-Warner and other bills are driven by assumptions
• Major cost drivers • New nuclear • CO2 capture & storage• Renewables• Offsets
Energy | Environment | National Security | Health | Critical Infrastructure
SAIC-NEMS Conclusions
• Legislation would severely limit use of fossil fuels in power generation, unless:
– Carbon offsets,– Carbon allowances, and – Technologies such as CCS are employed
• Particularly sensitive to assumptions about available offsets, choice of technologies, and the use of carbon allowances
• Under the Natural Gas Council assumptions, natural gas will play a more prominent role in GHG emission reduction than projected in the EIA “Core Case” analysis.
Energy | Environment | National Security | Health | Critical Infrastructure1414
Lieberman-Warner Bill Impacts — Potential Allowance Prices
Source: National Energy Modeling System runs S2191.D031708A, S2191HC.D031708A, S219BIV.D031608A, S2191NOINT, D032508A, S2191BIVNOI.D033108A, and S1766_08.D031508A.
Energy | Environment | National Security | Health | Critical Infrastructure1515
Lieberman-Warner Bill Impacts – Changes in Electric Power Sector
Source: EPA Analysis of S. 2191 Scenario 2 (ADAGE)http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf
Energy | Environment | National Security | Health | Critical Infrastructure1616
Integrating CO2 price forecast with CO2 allowance finance
Source: EPA Analysis of S. 2191 Scenario 2 (ADAGE)http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf
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CO
2 A
llow
ance
Pric
e (E
uro/
tCO
2)
Reference Price Case Low Price Case High Price Case
Hedging Boundary
Opportunity to Sell
Opportunity to Buy
History Forecast
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uro/
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Reference Price Case Low Price Case High Price Case
Hedging Boundary
Opportunity to Sell
Opportunity to Buy
History Forecast
Energy | Environment | National Security | Health | Critical Infrastructure1717
SAIC’s Comprehensive Suite of Energy Management Services
Efficient Operations
Clean Technologies
Sustainability
Climate Change
Green IT
Risk Management
Energy Procurement
Education and Training
Facility Assessments
Facility Modeling
LEED® Certification
DesignBuildsm
Performance Contracting
Systems Integration
AMI and Smart Grid
Demand Response
Project Management
Quality Assurance
Metering and Verification
Modeling and Forecasting
Energy | Environment | National Security | Health | Critical Infrastructure
Characterize Energy Price Risk
Measure Risk• VaR
– Delta (Variance Covariance)– Monte Carlo– Econometric (historical)
• Expected Shortfall• Time Evolution of Risk• For new parameter (CO2), Monte
Carlo approach often used
Characterize the statistical properties of risks, their inter-relationships and the way they impact the Investment Metrics.
InvestmentStrategy
EnergyPrices
Credit
Regulation CO2 costs
Energy | Environment | National Security | Health | Critical Infrastructure
Simulate and Stress Test
Simulate and stress-test entire distribution of inputs, correlations to yield entire distributions of potential outcomes
Distribution of
Outcomes
Distribution of
OutcomesCasesCases
Traditional
SAIC
Target Forecast: NPV
Long Term Natural Gas Average ($/MMBtu)91.6%*
Long Term Natural Gas Prices ($/MWh) 7.9%*
Jan On-Peak Demand (KW) 0.2%*
Jan Off-Peak Energy (KWh) 0.1%*
Jan On-Peak Energy (KWh) 0.1%*
100% 50% 0% 50% 100%
Measured by Contribution to Variance
* - Correlated assumption
Sensitivity Chart
Frequency Chart
$/MMBtu
.000
.007
.015
.022
.029
0
7.25
14.5
21.75
29
$4.9725 $6.7175 $8.4625 $10.2075 $11.9525
1,000 Trials 985 Displayed
Forecast: Natural Gas
Energy | Environment | National Security | Health | Critical Infrastructure
Measure and Report
Strategy• Monitor exposure of investment or
procurement metrics• Identify the breaking points
affected by assumptions• Identify market/contractual
mechanisms to protect investment metrics and assumptions
Result• Assure performance of investment
Results are executive-level summary of measurements, assumptions and distribution of outcomes.
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
$13.00
$14.00
$15.00
$16.00
Sep
-07
Dec
-07
Mar
-08
Jun-
08S
ep-0
8D
ec-0
8
Mar
-09
Jun-
09S
ep-0
9
Dec
-09
0%
10%
20%
30%
40%
50%
60%
70%
Nat
ura
l Gas
Bu
dg
et ($
/MM
btu
)
60%-70%
50%-60%
40%-50%
30%-40%
20%-30%
10%-20%
0%-10%
OptimumHedge
Energy | Environment | National Security | Health | Critical Infrastructure
Investment at Risk (“IaR”) - IllustrativeStrategy and Protocols to Protect NPV of Approved Investment
• Evaluated NPV of 100MW generator in the Northeast and identified critical assumptions affecting the Net Present Value used to approve the investment.
• Established strategy and protocols around Natural Gas Prices and Power Prices to protect against undesirable levels of NPV. Now updated to factor CO2 pricing.
• Investor is able to analyze robustness of NPV and guarantee that it will materialize.
Distribution for TZ6NY ($/MMBtu)
0%
20%
40%
60%
80%
100%
$7.60 $7.90 $8.20 $8.50 $8.80
Cu
mm
ula
tive
Pro
bab
ility
Negative NPV
Above $8.50 MMBtu
Best NPV below $8.00 MMBtu
0%
20%
40%
60%
80%
100%
$220 $226 $233 $239 $245
Cu
mm
ula
tive
Pro
bab
ilit
y Minimum Acceptable
NPV to Defend
NPV Associated with Approved
Investment
0%
20%
40%
60%
80%
100%
$103.50 $104.38 $105.25 $106.13 $107.00
Cu
mm
ula
tive
Pro
bab
ility
Minimum Pow er Price
Acceptable
Best Case
Pow er Price
Gas Prices
Net Present Value
Power Prices
Energy | Environment | National Security | Health | Critical Infrastructure22
Please contact
Steven MessnerWestern Region Manager – Climate Change ServicesPh: 858-220-6079E-mail: steven.d.messner@saic.com
Learn how SAIC’s energy and climate change teams can help you.
Thank you
SAIC, the SAIC logo, and "From Science to Solutions" are trademarks or registered trademarks of Science Applications International Corporation in the United States and/or other countries.
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