Latest Update: 5/28/2013
By: Michigan Public Service Commission
The Michigan Energy Appraisal is a semi‐annual assessment of Michigan’s energy baseline. The assessment assists in developing a situational awareness of the state’s energy environment including recent events impacting supply and prices, expected conditions, and changes over the next six months. Additionally, it provides the necessary information to enable a reliable assessment of the risk posed by an energy supply disruption.
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 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 Operations & Wholesale Markets Division with assistance from the Regulated Energy 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||Lisa Kindschy|
|Natural Gas||David Binkley||Cindy Creisher||Nora Quilico|
|Petroleum||David Binkley||Alex Morese|
|Database Development||David Binkley|
A major source of data and analysis used in this appraisal is from the federal Energy Information Administration (EIA) at http://www.eia.doe.gov. The EIA collects national, state and international data on energy usage, prices, supply, etc., and provides expert analysis on trends in energy.
The Energy Appraisal is available at: http://www.dleg.state.mi.us/mpsc/reports/energy/.
Comments or questions on this appraisal are welcomed and may be directed to Alex Morese, Michigan Public Service Commission, 4300 W. Saginaw Highway, PO Box 30221, Lansing, Michigan 48909, phone (517) 241‐0292, or email 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.|
The demand for energy in Michigan is projected to be relatively flat overall when compared to previous years, but with modest year‐over‐year changes due to a number of economic and weather related factors. An increase in industrial production is primarily responsible for demand growth in both distillate fuels and electricity. In contrast, natural gas use is expected to decrease as the assumption of a return to normal weather will result in less use in the electric power sector over the summer months. Gasoline consumption is also expected to decline as increased vehicle fuel efficiency and sustained high gasoline prices place downward pressure on demand.
Assuming normal summer temperatures, Michigan’s total electric sales are projected to remain relatively flat with only a slight increase of 0.2 percent in 2013. Increases are expected primarily in the industrial sector as a result of steady growth in manufacturing. Overall consumption is expected to be counterbalanced, however, by slight decreases in commercial sector use. Given the anticipated demand and reserved margins within the MISO and PJM footprints, there should be an adequate supply of electricity over the summer.
Despite colder winter weather for 2013 compared to 2012, total annual natural gas sales in Michigan for 2013 are projected to be 731.7 billion cubic feet (Bcf), a 5 percent decrease from 2012 sales. This decline is based on an expected reduction in the use of natural gas for electricity production in 2013, due to higher natural gas prices and an assumed return to normal summer weather. In contrast, demand among the residential, commercial and industrial sectors are all expected to see modest increases this year, but will not be enough to overcome the decrease in the generation market assuming normal summer weather.
According to the EIA, world liquid fuels consumption grew by 0.7 million barrels per day (bbl/d) in 2012 to reach 89.0 million barrels per day. Growth is expected to be higher over the next two years because of a moderate recovery in global economic growth and increased demand from China and other non‐OECD countries. Compared to past years, the average price of West Texas Intermediate crude in 2013 has remained relatively constant and is expected to drop only slightly to $93 per barrel for the remainder of the year. With significant production increases in Texas and North Dakota, U.S. crude oil production averaged almost 6.5 million barrels per day in September 2012, the highest volume in nearly 15 years. This trend is expected to continue with an average of 7.4 million bbl/d in 2013.
In 2013, gasoline sales in Michigan are expected to decrease about one percent following a decline of 1.7 percent in 2012. Modest increases in annual highway travel, 0.7 percent higher than 2012, are projected to be offset by increases in fleet‐wide fuel efficiency. In addition, sustained gasoline prices above $3 per gallon have continued to put downward pressure on demand. During the April‐through‐September summer driving season, regular gasoline retail prices are forecast to average about $3.53 per gallon according to the EIA.
Distillate sales in Michigan are projected to increase by 0.9 percent to 1,053.1 million gallons in 2013, following a similar increase of 0.5 percent in 2012. This demand increase is due primarily to growth in industrial production as well as an uptick in heating oil usage earlier in the year. Industrial production is an important determinant of sales since the trucking and railroad industries are large consumers of diesel fuel. According to the EIA, on‐highway diesel fuel retail prices, which averaged $3.95 per gallon in 2012, will fall to an average of $3.88 per gallon in 2013.
Assuming normal summer temperatures, Michigan’s total electric sales are projected to remain relatively flat with only a slight increase of 0.2 percent in 2013. Increases are expected primarily in the industrial sector as a result of steady growth in manufacturing. First quarter industrial growth in 2013 was 2.4 percent higher than the same period last year. Overall consumption is expected to be counterbalanced, however, by slight decreases in commercial sector use. Assuming normal weather, a drop in peak demand in commercial buildings is expected to outweigh gains in employment. Although significantly influenced by the economic factors, the weather is still a main driver in commercial electricity use.
The projected combined coincident peak electrical demand for both the Consumers Energy and DTE Electric service areas for this summer is 16,870.2 megawatts (MW), a 4.7 percent decrease from 2012. The in‐state generating capacity for the two utilities, including existing capacity contracts, totals 17,624 MW after accounting for power outages, disruptions and regional transmission losses (ZRC basis). The actual 2012 peak demand for DTE Energy was 12,201 MW, which was recorded on July 17. In 2009, Consumers and DTE Energy accounted for 87 percent of total electricity sales in Michigan.
The total generating and purchased power supply for Consumers and DTE Energy this summer is expected to be approximately 19,303 MW, equivalent to 17,624 MW on a ZRC basis. Both Consumers Energy and DTE Energy plan to purchase the necessary planning resource credits to supplement their capacity in order to comply with Federal Energy Regulatory Commission (FERC) and Midcontinent Independent System Operator (MISO) resource adequacy provisions. DTE Energy will purchase the equivalent of 761 MW (ZRC) as needed to meet its peak demand requirement (forecasted peak demand of 9,527.2 MW plus zonal planning reserve margin of 833.5 (MW) this summer. Consumers Energy will purchase the equivalent of 77 MW (ZRC) to meet its requirement of 8,102 MW (forecasted peak demand of 7,343 MW plus zonal planning reserve margin of 759 MW) this summer. The Commission requires all of Michigan’s electric utilities to provide electric supply reliability plans annually (U‐17178).
Michigan relies partially on power purchased from out of state, so availability of generation in the Midwest is important. The MISO and PJM Interconnection (PJM) each manage wholesale power markets, reliability, and planning in adjoining regions that include Michigan. In its 2010 Long‐Term Assessment, the North American Electric Reliability Corporation (NERC) estimates reserve margins for the next 10 years that are significantly in excess of that required by the MISO and PJM for planning reserves.
Electricity prices have increased for two of the state’s largest utility companies as a result of a smaller customer base, decreasing demand and the need to recover increasing fuel and transmission costs through the Power Supply Cost Recovery (PSCR) mechanism.
Consumers Energy’s rates reflect the MPSC’s approval of an $89 million rate increase outlined in the U‐17087 rate case order. DTE Energy’s rates reflect surcharges applied to customer bills for the reconciliation of PSCR under recovery and for the true‐up of various tracking mechanisms. It is expected, however, that some of the factors driving these increases may be subsiding, namely fuel costs prices reflected in the MISO wholesale market.
Total annual natural gas sales in Michigan for 2013 are projected to be 731.7 billion cubic feet (Bcf), a 5 percent decrease from 2012 sales. This decline is based on an expected reduction in the use of natural gas for electricity production in 2013, due to higher natural gas prices and an assumed return to normal summer weather. In contrast, demand among the residential, commercial and industrial sectors are all expected to see modest increases this year; however these increases will not exceed the expected decrease in the electric generation sector. Higher residential and commercial sector use is the result of cooler than normal temperatures the last half of the heating season, while industrial consumption is expected to be bolstered by increased industrial production.
The graph below shows the relationship between decreasing natural gas demand in the electric power sector and cooling degree days. Summer peaks in July and August are the result of air conditioning use on hot summer days. Temperatures were 37 percent above normal last summer and led to record levels of natural gas electricity generation at peaking plants across the state.
Natural gas volumes in underground storage for the lower 48 states were 1,865 Bcf as of May 3, 2013, which is 5 percent below the five‐year average. Natural gas storage levels are normally built up during the summer months and are at their highest levels before the beginning of the withdrawal season (November – March). Unseasonably cold weather in February and March helped balance out a season that was otherwise warmer than normal. Storage is projected to increase throughout the summer, reaching 612.5 Bcf in October 2013. This will place Michigan’s working gas storage within the five‐year average and reflects normal levels seen at that time of year.
Michigan supplies close to 18 percent of its natural gas needs through substantial but declining production wells. This production is projected to decline by 6 percent to 116.8 Bcf in 2013. Net interstate deliveries are projected to decrease 11 percent to 564.4 Bcf in 2013 as a result of decreased demand and ample storage levels.
Interest has continued in the state’s Utica‐Collingwood Shale for both natural gas and oil production, although depressed natural gas prices have prevented large scale exploration and drilling. The market price of natural gas (Henry Hub spot price $/Mcf) is an important determinant of production levels. As prices drop below $4 per Mcf, natural gas production tends to level off as the construction of new wells becomes less economical. The resilience of production levels, despite low natural gas prices, is in part a result of high crude oil prices, which significantly improve the economics of natural gas plays (“wet gas”) that have high concentrations of crude oil, condensates, or natural gas liquids.
After three months of stagnant prices, unusually cold temperatures in March and April triggered increases in natural gas spot prices, hitting a 20‐month high in recent weeks. Prices continued to rise in April as lingering cold in the Midwest kept the market tight. The Henry Hub Spot price averaged $4.27 per Mcf in April, the highest monthly average price since June 2011 and up 35 cents from the previous month. The EIA expects the Henry Hub price will increase from an average of $2.81 per Mcf in 2012 to $3.89 per Mcf in 2013.
The weighted average gas cost for the four largest gas utilities (commodity price/GCR factor + distribution charge) in Michigan is projected to be $7.30/Mcf from April 2013 through March 2014, with the commodity cost making up 65% of this price. The weighted average monthly customer charge for these same utilities is $10.59 a month. A residential customer’s annual bill for the April 2013‐March 2014 gas year is forecasted to be $830 based on April 2013 billed gas cost recovery (GCR) factors. If prices remain at current levels, this year’s average annual gas bill is expected to be $60 less than last year’s annual bill based on normal consumption, and the lowest in almost ten years.
There are additional factors besides storage levels that may influence the price of natural gas over the summer. A warm summer causes electricity generators to use more natural gas for peak generation. If this summer is significantly warmer than normal, the increased use of natural gas to meet peak electric loads will exert upward pressure on natural gas prices. An active hurricane season in the Gulf of Mexico can drive up prices if significant damage occurs to the natural gas production or distribution infrastructure. However, even if destructive hurricanes materialize, with the emergence of shale gas (natural gas produced from shale) and the Rockies Express Pipeline (REX), Michigan has become less reliant on natural gas from the Gulf of Mexico. In 2000, shale gas only accounted for 1 percent of the nation’s supply mix. That number is up to 20 percent today, and expected to reach over 50 percent by 2030. The increase in supply diversity will also help to keep prices low and stable in Michigan for the upcoming year.
According to the EIA, world liquid fuels consumption grew by an estimated 0.7 million barrels per day (bbl/d) in 2012 to reach 89.0 million bbl/d. This growth is expected to increase as the global economic picture brightens, reaching 0.9 million bbl/d in 2013 and 1.2 million bbl/d in 2014. Non‐OECD countries will account for the majority of this growth, particularly China, as investment expands and new refining capacity comes online. Consumption in OECD countries (largely Europe and Japan) continued to decline, falling by 0.6 million bbl/d in 2012, while consumption of liquid fuels in the United States (US) will be modest or unchanged from 2013‐2014.
Continued production growth from the United States and Canada will contribute significantly to an increase in non‐OPEC liquid fuels production, reaching 1.1 million bbl/d in 2013 and 1.8 million bbl/d in 2014. Production in Central and South America is also expected to contribute as new product reaches market. Liquid fuel supplies from OPEC are expected to remain relatively stable over the same period. The EIA estimates that OPEC surplus capacity averaged 2.7 million bbl/d in the first quarter of 2013 and could increase to as high as 4.6 million bbl/d by the end of 2014. Much of this surplus is concentrated in Saudi Arabia, with Angola and Iraq providing significant surplus in 2014. Availability of adequate surplus capacity in the crude oil market helps weather unexpected supply disruptions and/or fluctuations in demand, providing stability to the commodity market and retail prices.
Average crude oil prices in 2012 were at historically high levels for the second year in a row. Brent crude oil averaged $111.67 per barrel while West Texas Intermediate (WTI) crude averaged $94.05 per barrel in 2012. EIA expects the 2013 average price of Brent crude to decrease to $106 per barrel based on production increases in the North Sea, while WTI is expected to drop only slightly to $93 per barrel for the remainder of the year.
According to the EIA’s “Short Term Energy Outlook,” total U.S. liquid fuels consumption (motor gasoline, jet fuel, distillate fuel, biofuels, etc.) increased by an estimated 190 thousand bbl/d in the first quarter of 2013 from the same period last year. These gains are attributed to greater demand for liquefied petroleum gas and distillate fuels as a result of colder weather. Overall consumption was partially offset by declines in the other major petroleum products, including 90,000 bbl/d drop in gasoline consumption. EIA projects the remainder of 2013 will see modest growth of 0.4 percent or 80,000 bbl/d.
U.S. crude oil production averaged almost 6.5 million barrels per day in September 2012, the highest volume in nearly 15 years. This volume is expected to rise to an average of 7.4 million bbl/d in 2013 and 8.2 million bbl/d in 2014. Since September 2011, U.S. production has increased by more than 900,000 barrels per day. Most of that increase is due to production from oilbearing rocks with very low permeability through the use of horizontal drilling combined with hydraulic fracturing. The states with the largest increases are Texas and North Dakota. In contrast, production from other traditional oil producing states like Alaska and California has been on an overall decline.
As domestic production of light crude oil has increased in the Midcontinent, infrastructure changes have been necessary to move product to refining centers on the Gulf Coast and to relieve storage buildups in Cushing, Oklahoma. In 2012, the Seaway pipeline, which was originally designed to ship crude from the Gulf to Cushing, was reversed and expanded. In addition to the Seaway pipeline, construction also began on the southern portion of the Keystone XL project, which is expected to be in operation by the end of 2013. Major changes are also expected in the refining industry over the next few years in order to process the growing amounts of light sweet crude from domestic production. Many Gulf Coast refineries, and increasingly those in the Midwest and West Coast, have invested in secondary upgrading units to convert heavy sour crudes from Canada into high‐margin petroleum products. This creates the potential of a quality mismatch between domestic light sweet crude supplies and refinery capabilities which have been upgraded to process heavy sour crude from Canada.
Where current pipeline infrastructure is insufficient to keep pace with production, rail transport has increased to fill the gap. Shipments of crude increased dramatically in 2012 compared to 2011. Although rail is generally more costly than pipelines for crude oil transport, railroad loading facilities can often be built quickly and without many regulatory hurdles which can help to narrow the gap between rail and pipeline shipment costs. Rail also can provide greater flexibility in destination points. Despite changes to infrastructure to relieve bottlenecks, national inventories have still remained well above the five year range since early 2012. Inventories were 395.5 million barrels for the week ending May 3, 2013, 4.2 percent above levels from a year ago.
In 2013, gasoline sales in Michigan are expected to decrease about one percent following a decline of 1.7 percent in 2012. Modest increases in annual highway travel, 0.7 percent higher than 2012, are projected to be offset by increases in fleet‐wide fuel efficiency. The combined fuel efficiency for the 2012 model year is now 23.8 miles per gallon, up from 23.4 miles per gallon in 2011. In addition to fuel efficiency, sustained gasoline prices above $3.00 per gallon since December, 2010 have continued to put downward pressure on gasoline demand as well as the economy as a whole. Gasoline demand has been on an overall pattern of decline for the past seven years, with the exception of 2010. Projected sales in Michigan for 2013 are 4,165.6 million gallons which continues this downward trend.
For the week ending April 26th, refineries were operating at 84.4 percent of capacity nationally. This was down from the 86 percent capacity utilization rate seen a year ago at this time. Despite recent national attention on rising domestic production of light sweet crude oil, especially from oil formations in North Dakota, some Midwest refiners are reconfiguring their facilities to process additional heavy crude oil, which will likely come from Canada. As this additional coking capacity comes online, Midwest refiners will be able to significantly increase runs of heavy crude, such as Western Canadian Select (WCS). WCS currently sells at a steep discount to other crude oil benchmarks used in the United States, including West Texas Intermediate, Louisiana Light Sweet, and West Texas Sour, and processing WCS reduces refiner crude oil costs.
Nationally, imports of finished gasoline to the U.S. during the 4th quarter of 2012 were 40 percent below the same period last year. A ramp‐up in crude production from unconventional plays such as the Bakken Shale in North Dakota and the Eagle Ford Shale in South Texas has led to predictions that US crude imports will continue to fall in the coming years. In 2011, the United States shifted to net product exporter status for the first time since 1949.
National gasoline inventories are currently toward the top of the five‐year average range for this time of year, and above levels seen a year ago. For the week ending May 3, U.S. gasoline inventories stood at 215.1 million barrels (25.3 days of supply), 4 percent higher than the same period last year. Projected regional inventories for 2013 are 13.4 percent above levels of a year ago with projections averaging 265.6 barrels per month. This projected build is primarily a result of decreasing demand and increasing production from Midwest refineries.
According to AAA, the average price for a gallon of regular unleaded gasoline in Michigan was $3.94 as of May 23, 2013. This is 15 cents higher than at this time last year and matches the previous high set on February 27, 2013. Gasoline prices the first half of the year were particularly volatile due to not only the cost of crude oil, but recent refinery outages and a high global demand for petroleum products. Other factors, such as preparations for the seasonal switch to summer grade gasoline, may also have contributed to recent short‐term movements in wholesale gasoline prices. Similar factors have also been responsible for recent price spikes during the month of May.
Summer gasoline prices are projected to average 16 cents lower for regular‐grade compared to last summer. The EIA estimates a retail price of $3.53 per gallon for the 2013 summer driving season (April through September). Crude oil prices remain the largest source of uncertainty for gasoline price levels this summer. Major disruptions in crude supply or refining capacity due to geopolitical events or infrastructure failure, along with summer storm activity in the Gulf of Mexico (hurricanes) can have a dramatic impact on supply availability and market prices.
Distillate sales in Michigan are projected to increase by 0.9 percent to 1,053.1 million gallons in 2013, following a similar increase of 0.5 percent in 2012. This demand increase is due primarily to growth in industrial production as well as an uptick in heating oil usage earlier in the year. Industrial production is an important determinant of sales since the trucking and railroad industries are large consumers of diesel fuel. Lower highway diesel prices compared to 2012 have also put upward pressure on demand. First quarter industrial growth in 2013 was 2.4 percent higher than the same period last year. Diesel fuel remains the prime component of distillate demand, over 95 percent, with the majority being used for transportation by highway trucks and by rail.
Nationally, inventories of distillates are at the bottom of the 5‐year range for this time of year, down 6.6 percent from levels in 2012. With strong demand abroad, U.S. refiners have exported their additional distillate production overseas. For the first 10 months of 2012, the United States exported 1.0 million bbl/d of distillate fuel, compared with just over 0.8 million bbl/d during the same period in 2011, a 22‐percent increase. Most of these exports came from refineries on the Gulf Coast and were shipped to Latin America. The incentive to export in the absence of domestic demand has helped keep inventories below their five‐year averages for most of the past year. Inventories are expected to gradually increase as domestic demand recovers.
Continued robust global distillate demand and favorable crack spreads in international markets has also led to increased production. In 2012, U.S. distillate production increased by 1.62 percent over 2011 levels. Regional production grew by 2.4 percent in 2012 and is projected to continue this trend in 2013 with a growth of 0.4 percent.
In the United States, refineries typically optimize production for finished motor gasoline to meet domestic demand, while European refineries tend to produce higher percentages of distillate fuel oils, as diesel is used more broadly there for transportation. Due to crude supply disruptions to European refineries for much of the past couple years, the region has imported more finished products. In 2013, by altering their production mix and increasing runs to maximize output, US refineries consistently set record levels of production in 2012. As domestic distillate demand has picked up in 2013, however, exports have decreased slightly but still remain relatively high.
According to the EIA, on‐highway diesel fuel retail prices, which averaged $3.95 per gallon in 2012, will fall to an average of $3.88 per gallon in 2013. For the week of May 20, the average Midwest price of $3.93 was slightly higher than the U.S. average. According to AAA, the peak price of $4.85 recorded in Michigan was on July 17, 2008.
Michigan residential heating oil prices averaged $3.74 per gallon (excluding sales tax) on March 17, 2013, 4.9 percent higher than last year. The 2012/2013 heating season began with residential heating oil prices at a price of $3.77 per gallon (Oct. 1, 2012) and dropped temporarily to a low of $3.53 per gallon in January due in part to above normal temperatures. Cold weather late in the season, however, contributed to a rebound in prices, reaching a high of $3.90 per gallon in February.
Michigan Public Service Commission
Michigan Energy Appraisal
4300 W. Saginaw Highway
P.O. Box 30221
Lansing, MI 48909