Latest Update: 10/26/2012
By: Michigan Public Service Commission
The Michigan Energy Appraisal is a semiannual assessment of Michigan’s energy markets. The assessment assists in identifying potential supply problems, including adequacy of supply, weaknesses in the distribution system, and energy price changes. The focus of this report is on current events impacting supply, prices, and expected conditions and changes over the next six months.
The scope of the analysis varies by energy source. Michigan’s electricity prices, supply, and availability are largely determined by events in Michigan and the Midwest. Natural gas supplies and prices are more closely tied to national trends. Petroleum product markets in Michigan are affected by international market conditions and events, and regional refinery production. For the appraisal, recent historical balances between Michigan’s energy consumption and supply are analyzed, and consumption and supplies are projected. Actual and expected energy prices are reviewed to identify changes impacting consumer costs. Generally, the fall appraisal focuses on the winter heating season, and the summer appraisal focuses on summer energy use, including peak electricity supply and demand and gasoline for the summer driving season.
This report is prepared by the Management Services Division, the Regulated Energy Division, and the Operations & Wholesale Markets Division of the Michigan Public Service Commission (MPSC), Department of Licensing and Regulatory Affairs, State of Michigan.
|Project Manager||Alex Morese|
|Electric||David Binkley||Raushawn Bodiford|
|Natural Gas||David Binkley||Cindy Creisher||Nora Quilico|
|Database Development||David Binkley|
The Energy Appraisal is available at: http://www.dleg.state.mi.us/mpsc/reports/energy/. This site is linked to other energy-related sites, including the federal Energy Information Administration (EIA) at http://www.eia.doe.gov. The EIA site contains information on a variety of energy sources.
As a cost saving measure, the Michigan Energy Appraisal will no longer be printed and mailed. The latest version of the Michigan Energy Appraisal will be available on the MPSC website at: http://www.dleg.state.mi.us/mpsc/reports/energy/. Comments or questions on this appraisal are welcome and may be directed to Alex Morese, Michigan Public Service Commission, P.O. Box 30221, Lansing, Michigan 48909, phone (517) 241-0292, fax (517) 241-6011, or e-mail email@example.com.
|The Department of Licensing and Regulatory Affairs will not discriminate against any individual or group because of race, sex, religion, age, national origin, color, marital status, disability, or political belief. If you need assistance with reading, writing, hearing, etc., under the Americans with Disabilities Act, you may make your needs known to this agency.|
Energy supplies in Michigan will be adequate to meet anticipated demand this winter. Overall annual demand for natural gas, electricity, distillates and propane is projected to increase, assuming a return to normal weather for the 2012-2013 winter season. Motor gasoline consumption, however, is expected to decrease slightly as a result of higher gasoline prices and market volatility. Assuming normal weather and increased consumption compared to last winter's record warmth, Michigan residents using natural gas are likely to see a slight increase in their average winter heating bills. Higher bills will be due to increased consumption, as the average cost of natural gas to residential customers has decreased by 7 percent.
In 2012, Michigan’s total electricity sales are expected to increase 1.4 percent over 2011 sales. This growth is due to higher consumption among commercial and industrial customers as a result of high summer temperatures and steady industrial production growth. Industrial electricity usage is projected to increase by 3.3 percent, attributed largely to the resurgence of the auto industry. In contrast, overall residential electricity use is expected to remain relatively flat due to the counter balancing effects of a mild winter season and record summer heat.
Assuming a return to normal weather, total natural gas sales in Michigan are projected to increase 9.9 percent to 823 billion cubic feet (Bcf), over 2011 sales. This increase is largely attributable to use for electric power generation which has continued an upward trend for the past three years. Natural gas storage levels are projected to be above the five‐year average and prices are expected to average $9.13 per thousand cubic feet (Mcf) this winter, a 7 percent decrease from last year.
The EIA projects the price of West Texas Intermediate (WTI) to average $93 per barrel and largely remain at this level throughout the rest of the year. This increase is expected to contribute to a decline in U.S. liquid fuel consumption of 280,000 barrels per day (bbl/d) in 2012. Domestic crude oil production is expected to continue its upward trajectory due in part to increased oil‐drilling, specifically explorations in developing shale formations. These production increases have helped to reduce net imports of liquid fuels from 57 percent of total U.S. consumption in 2008 to just 41 percent in 2012.
Gasoline sales in Michigan are projected to decrease by 0.3 percent in 2012 primarily due to higher gasoline prices and market volatility. Higher crude oil prices, refinery outages, infrastructure disruptions, and the impacts of Hurricane Isaac all contributed to higher gasoline prices during the spring and summer. Prices began to decline recently as refiners transitioned from summer‐grade to winter‐grade gasoline specifications. This has continued with reductions to the price of crude oil resulting in lower prices across the US, with the Midwest seeing the largest one‐week decrease in gasoline prices since November 3, 2008. According to AAA, the average price for a gallon of regular unleaded gasoline in Michigan was $3.47, as of October 24, 2012, 43 cents lower than it was a month ago.
Total distillate sales in Michigan are projected to increase by 0.5 percent to 1.04 billion gallons in 2012. Demand has remained relatively flat since 2010, but modest gains are expected to place 2012 levels 8.6 percent above those seen in 2009. Much of the rebound can be attributed to industrial production growth which increased an average of 6.6 percent year‐over‐year for the first two quarters of 2012.
As a result of an unseasonably warm winter in 2011‐2012, propane demand is projected to be 12.9 percent above last year for this heating season, assuming a return to normal weather. Propane prices began the winter heating season almost 20 percent below last year due to higher than average inventories and increased production. In Michigan, about 9 percent of households heat with propane, more than any other state in the country.
Assuming normal weather, it is expected that residential heating bills for natural gas will be slightly higher this winter due to increased consumption counterbalancing the effects of lower prices. Normal weather means increased consumption of heating fuels compared to last winter, which was 20 percent below normal. Customers using propane, however, are likely to see little movement in their heating bills, as a significant drop in prices will offset higher usage. As of October 1, 2012, the average price of residential propane price was $1.97 per gallon, 44 cents below the same time last year.
In 2012, Michigan’s total electricity sales are expected to increase 1.4 percent over 2011 sales. This growth is due to higher consumption among commercial and industrial customers as a result of high summer temperatures and steady industrial production growth. Industrial electricity usage is projected to increase by 3.3 percent, attributed largely to the resurgence of the auto industry. In contrast, overall residential electricity use is expected to remain relatively flat due to the counter balancing effects of a mild winter season and record summer heat which was 45 and 68 percent above normal in June and July. Total electricity demand across all sectors is expected to approach 2008 levels assuming normal weather conditions.
This summer’s combined peak electrical demand 1 for Consumers Energy and Detroit Edison was approximately 20,165 megawatts (MW) occurring on July 17, 2012. Consumers Energy’s peak electric demand was an all‐time company high of 9,006 MW, which also occurred on July 17, 2012. This exceeded the previous high of 8,930 MW set in 2011. Detroit Edison’s peak summer demand was 11,159 MW, which also occurred on July 17, 2012. This peak was below its previous record high of 12,778 MW set in 2006.
Along with record peak loads from extreme summer heat, severe summer storms interrupted service for many as damaged power lines caused widespread outages in Southeast Lower Michigan and throughout the Ohio River Valley and Mid‐Atlantic states. Additional crews from out‐of‐state were brought in to assist with the restoration efforts. On June 29, 2012, a major storm system known as a “Derecho,” moved across Illinois through the Ohio Valley and Mid‐Atlantic States, traveling roughly 600 miles and cutting power to approximately 4.2 million customers across 11 states and the District of Columbia.
No supply shortages or transmission constraints are expected to affect the ability of Michigan utilities to meet winter peak electric demand, which can be up to 25 percent lower than the summer peak. In addition to power that they generate, Michigan utilities can purchase external electricity supply from wholesale markets administered by the Midwest Independent Transmission System Operator (MISO) and PJM Interconnection (PJM) as needed.
Electricity prices have increased for the state’s largest two utility companies in 2012. These increases can be attributed to numerous factors including: a smaller customer base, decreased demand, increased transmission and transportation costs, increased capital investment, environmental compliance costs, and continued high participation in electric choice. Further contributing to higher residential rates is the effects of rate deskewing, or the elimination of historical subsidies that had benefitted the residential sector at the expense of the commercial and industrial sector.
Consumers Energy’s rates include the company’s requested rate increase of $118.4 million and Detroit Edison’s rates reflect an increase of $187.5 million, both of which are recovered through base rates and the Power Supply Cost Recovery (PSCR) mechanism.4 New cases which determine the company’s PSCR related costs are required to be filed by the end of September 2012 and will take effect on January 1, 2013.
Residential Electricity Price Summary
Assuming a return to normal weather, total natural gas sales in Michigan are projected to increase 9.9 percent over 2011 sales to 823 Bcf. This increase is largely attributable to use for electric power generation which has continued an upward trend for the past three years. With the spot price for natural gas staying below $5/Mcf for the past two years, dispatching natural gas combined cycle units has become increasingly competitive with running coal generators. All other sectors are projected to see a decrease in calendar year 2012 as a result of a mild 2011/2012 heating season that was 20 percent below normal and resulted in a significant reduction in natural gas demand. Overall natural gas use in the state is greatest in the residential sector, where 77 percent of Michigan households use it for home heating. Residential use is expected to increase for the 2012/2013 winter heating season assuming a return to normal weather.
Storage levels in Michigan are projected to be around 675 Bcf in October 2012, well above the five‐year average. Levels have been at nearly 75 percent capacity since the end of March, a level not usually seen until late June. This is a direct result of a mild winter which left storage for the end of the heating season at their highest levels since 1983. Michigan has over 10 percent of the total available underground storage capacity for natural gas in the country. Michigan utilities take advantage of this abundant capacity by placing large quantities of natural gas in storage during the summer. In addition to available storage, Michigan supplies close to 18 percent of their natural gas needs through in‐state production wells.
Natural gas prices remained relatively low and stable this summer. The wholesale price for natural gas, which is determined by trading on the New York Mercantile Exchange (NYMEX), averaged approximately $2.60/Mcf this summer, ranging from $2.00/Mcf in April to $3.20/Mcf in July. This lower price range is primarily due to a plentiful domestic supply which provides a buffer to minor supply disruptions and the increased demand for electricity generation. A mild winter and the resulting build in storage also placed downward pressure on prices.
Residential natural gas bills on a dollar per unit basis are expected to be lower this winter. The total residential price of natural gas is comprised of the wholesale cost of gas purchased by Michigan utilities (also known as the Gas Cost Recovery (GCR) factor), the cost of transporting and delivering the gas to customers, the monthly customer charge, and the energy optimization surcharge. The projected weighted average price for residential customers of all regulated utilities (excluding choice customers) in Michigan over the upcoming winter season of November 2012 through March 2013 is currently $9.13/Mcf compared to last year’s average of $9.77/Mcf. This represents a 7 percent decrease in natural gas prices from last year. This cost estimation may vary from projections over the winter months as it is driven primarily by weather and market conditions.
According to the EIA’s October 2012 “Short‐Term Energy Outlook,” world liquid fuels consumption grew by an estimated 1.1 million bbl/d in 2011. 5 This growth is expected to slow slightly to 0.8 million bbl/d in 2012, with China, the Middle East, and Central and South America leading the way. In contrast, total liquid fuels growth among the Organization for Economic Cooperation and Development (OECD) nations is expected to fall, led by declines in consumption from Europe.
The oil market has tightened in recent months as the seasonal increase in global demand exceeded supply in August and unplanned production outages in countries outside of the Organization of the Petroleum Exporting Countries (OPEC) continued. Oil markets are expected to loosen in 2013, however, with non‐OPEC liquid fuels production growing by 1.2 million bbl/d to keep pace with growing demand. OPEC member countries are expected to continue to produce a surplus production capacity averaging 2.2 million bbl/d in 2012 to mitigate the effects of supply disruptions. OPEC members serve as the swing producers in the world market because only OPEC producers possess surplus crude oil production capacity, most of which is in Saudi Arabia.
The possibility of a deteriorating economic situation in the countries of the European Union and slowing growth in China adds significant downward pressure on future prices, though supply disruptions and lower‐than‐expected supply growth could counterbalance these effects. The EIA projects the price of West Texas Intermediate (WTI) to average $93 per barrel and largely remain at this level throughout the year.6 The refiner acquisition cost of crude is expected to average higher at $103 per barrel in 2012 and $99 per barrel in 2013. The refiner acquisition cost is the weighted average of domestic and imported crude oil and includes the cost of transportation and other fees paid by the refiner.
Total liquid fuels consumption fell 230 thousand bbl/d (1.2 percent) in 2011 with motor gasoline consumption accounting for the bulk of the decline. In 2012, total consumption is expected to decrease an additional 280 thousand bbl/d (1.5 percent), primarily constructed of distillate and other fuel reductions resulting from the warm winter at the beginning of 2012. Consumption is expected to rebound in 2013 with the expectation of a return to normal weather as well as increased economic activity resulting in increased freight shipments and industrial usage.
Domestic crude oil production is expected to continue its upward trajectory, averaging 6.3 million bbl/d in 2012, an increase of 740,000 bbl/d from 2011. The last time U.S. quarterly oil production was above 6 million bbl/d was during October‐December 1998. The EIA attributes these increases to expanded oil‐drilling, specifically explorations in the Bakken (North Dakota), Permian basin and Eagle Ford shale formations (Texas). Crude Oil production in North Dakota has surpassed California and Alaska in 2012, making North Dakota the second largest oil producing state. Texas remains the nation’s top producer. Combined, these production increases have helped to reduce net imports of liquid fuels from 57 percent of total U.S. consumption in 2008 to just 41 percent in 2012.
Currently, there are no supply constraints on petroleum products being shipped into the Midwest. Most recently, however, Hurricane Isaac led to the shut‐in of 13 million barrels of crude oil production from August 25 through September 10 in the Gulf of Mexico. It created temporary supply disruptions and price spikes in the Gulf Coast and Midwest regions, but has not produced long term impacts. Experts at Colorado State University and NOAA have predicted a near normal hurricane season, but with a 35 percent chance of above normal activity. Assuming normal weather and absent supply problems caused by late season hurricanes or other natural disasters, pipelines, refineries or crude oil acquisition problems, it is expected that the price and supply of petroleum products should be stable.
Gasoline sale in Michigan are projected to decrease by 0.3 percent in 2012 primarily due to higher gasoline prices and market volatility. The rising cost of crude oil from geopolitical tensions and refinery disruptions in the Gulf Coast and Midwest regions have all contributed to average monthly prices above $3.40/gallon since January. This projection, however, represents a leveling in demand after a 1.6 percent decrease between 2010 and 2011 and has been driven by modest increases in disposable income which have continued since mid‐2010. Increased fuel efficiency and high gas prices, however, have exerted downward pressure on demand and are expected to counterbalance the effects of economic growth over the forecast period. Beginning in 2004, gasoline sales in Michigan have decreased each year excluding 2010. Projected sales for 2012 are 4.26 billion gallons, 12.6 percent lower than the high seen in 2004. Regionally, gasoline sales are expected to decrease by 0.2 percent in 2012.
National gasoline inventories experienced large draws this spring that were broadly consistent with seasonal patterns, but steeper and more prolonged than expected. Levels dropped from a surplus of 7.4 million barrels compared to their five‐year average on January 13, to a deficit of 7.6 million by May 25. A combination of flat refinery inputs and a steep year‐on‐year decline in gasoline imports was primarily responsible for this sharp draw. Inventories tend to peak during January and February and hit their low point during the summer driving season. The price of crude oil, gasoline demand, refinery capacity utilization and production, and trends in the import/export market are all important determinants of inventory levels.
Average refining capacity utilization rates in 2012 reached a peak of 93 percent in July from a low of 82.2 percent in January. In addition, regional refineries are expected to produce an average of 1.8 billion gallons per month, a decrease from 2011, but still well above the fiveyear average. As a result of an increase in U.S. refining capacity, weakening domestic demand and growing demand from Latin America, U.S. exports of motor gasoline exceeded 400 thousand bbl/d in November 2010 for the first time since April 1945 and remained at that level through May of 2012.
According to the AAA, the average price for a gallon of regular unleaded gasoline in Michigan peaked at $4.09 per gallon on March 29, 2012 and settled at a monthly average of $3.90 per gallon in April. Prices then fell for three consecutive months, averaging $3.55 per gallon in July. Higher crude oil prices, refinery outages, a pipeline disruption, and the impacts of Hurricane Isaac all contributed to higher gasoline prices during August where prices once again exceeded $4.00 per gallon.
Prices began to decline recently as refiners transitioned from summer‐grade to winter‐grade gasoline specifications. This has continued with reductions to the price of crude oil resulting in lower prices across the US, with the Midwest seeing the largest one‐week decrease in gasoline prices since November 3, 2008. According to AAA, the average price for a gallon of regular unleaded gasoline in Michigan was $3.47, as of October 24, 2012, 43 cents lower than it was a month ago.
Total distillate sales in Michigan are projected to increase by 0.5 percent to 1.04 billion gallons in 2012. Demand has remained relatively flat since 2010, but modest gains are expected to place 2012 levels 8.6 percent above those seen in 2009. Much of the rebound can be attributed to industrial production growth which increased an average of 6.6 percent year‐overyear for the first two quarters of 2012. Industrial production is an important determinant of sales since the trucking and railroad industries are large consumers of diesel fuel. Diesel fuel accounts for just over 97 percent of the total distillate consumption on average, with the remainder consisting of heating oil, kerosene, and No. 1 distillate.
Regional refineries are expected to produce an average of 761.4 million gallons of distillate fuel oil per month in 2012, an increase of 2.8 percent over 2011. On September 14, 2012, national inventories of distillate oil were 128.2 million barrels, 29.4 million barrels below last year’s levels and slightly below the five‐year average range for this time of year. The trend of higher production can be partially attributed to growing world demand and higher wholesale prices for distillates when compared to prices for other fuels. These factors have encouraged the U.S. export market to reach record levels and contributed to the country’s transition to a net exporter of petroleum products. The U.S. Energy Information Administration (EIA) monthly data for April indicated that net exports of distillate fuels, reached 980,000 barrels per day (bbl/d), the highest volume since monthly U.S. trade data has been recorded. Global demand for distillate fuels has remained especially strong in Latin America and was the destination for 60 percent of exports for the first four months of 2012.
Diesel fuel prices in Michigan averaged $4.16 per gallon on October 24, 2012, about 30 cents higher per gallon than a year ago and 2 cents higher than the price seen a month ago. EIA expects that national on‐highway diesel fuel retail prices will average $3.98 per gallon during the fourth quarter of this year and $3.81 per gallon in 2013.
The principal price driver for No. 2 distillate fuel oil (heating oil) is the refiner acquisition cost of crude, which has remained above $90 a barrel since February, 2011. On October 1, 2012, the price of heating oil was $3.75 per gallon, excluding sales tax. This is 28 cents more per gallon than the same period last year. The price for residential No. 2 Heating Oil for the 2011‐2012 season started at $3.47 per gallon, excluding sales tax and averaged $3.56 per gallon over the course of the season. Other factors affecting price include seasonality of demand from weather conditions, competition in local markets and regional operating costs.
Historically, current heating oil prices heading into winter are lower than those for future delivery which creates an incentive to store fuel for later in the season. This year, however, prices for future delivery are below current prices, resulting in lower inventories and a tighter market. This could place further upward pressure on prices as the season progresses depending on weather conditions.
As a result of an unseasonably warm winter in 2011‐2012, propane demand is projected to be 12.9 percent above last year for this heating season, assuming a return to normal weather.9 According to the EIA, about 6 percent of U.S. households heat with propane, however in Michigan it is estimated to be closer to 9 percent. In recent years, a depressed housing market and declining use per customer resulting from greater energy efficiency has contributed to reduced residential propane sales. This trend is expected to change for the 2012‐2013 heating season with an anticipated return to normal weather.
A unique feature of propane is that it is not produced for its own sake, but is a byproduct of natural gas processing and petroleum refining. Until recently, propane was derived nearly equally from each source, but as the production of shale gas has increased in the U.S., the portion of propane derived from natural gas has risen to approximately 70 percent. Domestic production accounts for about 85 percent of total U.S. demand, with propane imports accounting for the remaining 15 percent. Regional propane production for the week ending September 21, 2012, was 296,000 bbl/d, up 42,000 bbl/d from the same period last year.
Propane inventories reach their highest levels at the beginning of the heating season in October and are drawn down during the winter months. For the week ending September 21, 2012, Midwest inventories of propane were 28.5 million barrels, 3.3 million barrels above the last year and above the five year average. Storage is used to moderate price and weather fluctuations and is combined with imports to meet consumer demand. Michigan benefits from ample underground storage in the form of rock formations and caverns, similar to what is used for natural gas.
Domestic prices of propane are influenced by regional conditions as well as the international market and are closely tied to the price of crude oil and natural gas. Increased natural gas production and high inventories, however, have placed downward pressure on prices and have contributed to a larger than usual spread between WTI crude and propane spot prices. For the week ending September 21, 2012, the spot price for propane at Mont Belvieu, TX, was 42 percent below prices for the same period last year and 32 percent below the five year average.
At the start of the 2012‐2013 heating season which begins in October, the weighted average residential price of propane in Michigan was $1.97 per gallon, excluding the 4 percent state sales tax. This is 44 cents per gallon lower than the average price at the start of the previous heating season. For the 2011‐12 season, the price of propane over the October to March survey period reached a high of $2.50 on February 20, 2012, but averaged $2.47 per gallon overall. This average price was 20 cents per gallon higher than the survey period in 2010‐2011. Prices typically increase over the heating season as temperatures drop and supplies are drawn down.
The analysis above shows Michigan prices and consumption estimates from natural gas utilities, and propane and heating oil usage is from the EIA’s Residential Consumption Survey. Actual usage for any given home will depend on many factors including the relative energy efficiency of the home.
With an expected return to normal weather, overall usage is expected to increase for all fuel types. This increase in usage will cause residential heating bills for natural gas to be slightly higher this winter despite a reduction in prices. Customers using heating oil are likely to experience the largest increase due to a combination of higher prices and increased consumption. In contrast, propane customers will see their bills remain the same as significantly lower prices are expected to counterbalance increases in usage.
A summary of winter fuel prices used in the above analysis is presented below.