Power Play: Energy Market Developments Tri-State Member Services Meeting October 7, 2010 Eric H. Larson VP - ACES Power Marketing.
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Power Play:Energy Market Developments
Tri-State Member Services Meeting
October 7, 2010Eric H. Larson
VP - ACES Power Marketing
2
Topics• Energy Demand
• Electricity Generation
• Power Prices
• Fuel Prices
• Regulation of Energy Price Hedging
• Natural Gas Supply Developments
• Environmental Issues
3
Energy Demand• 2008 to 2009:
• Recession: 2009 electric energy output Down 3.7% vs. 2008
• Retail Sales of Electricity Down 6.5% July 2009 vs. July 2008
• 2009 to 2010:
• Retail Sales Up 9.5% July 2010 vs. July 2009 (mostly weather – hotter)
• Industrial Retail Sales Up 9.8% Over Same Period (maybe economy?)
“Electric Power Flash.” EIA. 20 Sept. 2010.
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
Residential Commercial Industrial
Th
ou
san
d M
Wh
Jul-09
Jul-10
4
Electricity Generation
“Electric Power Flash.” EIA. 20 Sept. 2010.
Figure 4.1 Trends in Total Net Generation (All Sectors): 2008, 2009, and 2010
270,000
290,000
310,000
330,000
350,000
370,000
390,000
410,000
430,000
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Th
ou
sa
nd
MW
h
2008 2009 2010
•Total generation up 9.2% July 2010
•Coal up 12.4%
•Natural Gas up 11.4%
5
Electricity Generation: Fuel Sources
“Electric Power Flash.” EIA. 20 Sept. 2010.
Fuel Type Jul-10 Jul-09Coal 94 million tons 85 million tons
Natural Gas 30 Bcf/day 26 Bcf/day
Generation Type Jul-09 Jul-10Coal 42.74% 43.97%
Natural Gas 27.29% 27.82%Conventional Hydro 6.16% 5.91%
Nuclear 19.60% 17.69%All Other 4.22% 4.61%
6
Power Prices: Near-term History (“Spot”)
$0
$20
$40
$60
$80
$100
$120
$140
Sep-0
9
Oct-09
Nov-0
9
Dec-0
9
Jan-
10
Feb-1
0
Mar
-10
Apr-1
0
May
-10
Jun-1
0Ju
l-10
Aug-1
0
$/M
Wh
SP15 PJM Ercot Cinergy
$32.50
$31.28
$47.25
$47.50
7
Power Prices: Forward Markets
$30
$35
$40
$45
$50
$55
2010 2011 2012 2013 2014
$ / M
Wh
SP15 PJM West ERCOT NORTH CIN HUB
$44.13
$50.78
$53.81
$53.36
8
Fuel Prices: Crude Oil Spot
$0
$20
$40
$60
$80
$100
$120
$140
$160
Sep-0
2
Mar
-03
Sep-0
3
Mar
-04
Sep-0
4
Mar
-05
Sep-0
5
Mar
-06
Sep-0
6
Mar
-07
Sep-0
7
Mar
-08
Sep-0
8
Mar
-09
Sep-0
9
Mar
-10
Sep-1
0
$ /
ba
rre
l
$145
$76
9
Fuel Prices: Crude Oil Forward
$75
$77
$79
$81
$83
$85
$87
$89
$91
Nov-1
0
Feb-1
1
May
-11
Aug-1
1
Nov-1
1
Feb-1
2
May
-12
Aug-1
2
Nov-1
2
Feb-1
3
May
-13
Aug-1
3
Nov-1
3
Feb-1
4
May
-14
Aug-1
4
Nov-1
4
Feb-1
5
May
-15
Aug-1
5
Nov-1
5
$ /
ba
rre
l
$89
10
Fuel Prices: Coal Spot
$30
$50
$70
$90
$110
$130
$150
Sep-0
7
Nov-0
7
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-0
8
Nov-0
8
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-0
9
Nov-0
9
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-1
0
$ /
ton
$145
$63.83
11
Fuel Prices: Coal Forward
$60
$65
$70
$75
$80
Nov-1
0
Feb-1
1
May
-11
Aug-1
1
Nov-1
1
Feb-1
2
May
-12
Aug-1
2
Nov-1
2
Feb-1
3
May
-13
Aug-1
3
Nov-1
3
Feb-1
4
May
-14
Aug-1
4
Nov-1
4
$ /
ton
$81.10
12
U.S. Coal StocksCoal stocks are falling after rising in the shoulder months due to increased cooling demand and coal production declines.
“Electric Power Flash.” EIA. 20 Sept. 2010.
Figure 6.1 Trend in Coal Stocks (Electric Power Sector): 2008, 2009, and 2010
120,000
130,000
140,000
150,000
160,000
170,000
180,000
190,000
200,000
210,000
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Th
ou
san
d T
on
s
2008 2009 2010
13
Fuel Prices: Natural Gas Spot
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
Sep-0
2
Mar
-03
Sep-0
3
Mar
-04
Sep-0
4
Mar
-05
Sep-0
5
Mar
-06
Sep-0
6
Mar
-07
Sep-0
7
Mar
-08
Sep-0
8
Mar
-09
Sep-0
9
Mar
-10
Sep-1
0
$ /
mm
Btu
$15.38
$3.96
14
Fuel Prices: Natural Gas Forward
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
2010 2011 2012 2013 2014 2015 2016 2017
$ /
mm
Btu
2010 2009
$7.62
$5.93
15
Regulation of Energy Price Hedging: Dodd-Frank is Not Just About Banks
•Devil in the details (Rule Making underway)
•Clearing forced, but with end user exemptions
•Margining of transactions (put up $ during deal)
•Reporting requirements increase
•Transaction costs increase
•Transparency of pricing probably improves
•Banks need to separate proprietary commodity trading
16
Natural Gas Supply: Storage
“Weekly Natural Gas Storage Report.” EIA. 24 Sept. 2010.
500
1,000
1,500
2,000
2,500
3,000
3,500
J F M A M J J A S O N D
Bcf
200920105-Year Max 2005-095-Year Average 2005-095-Year Min 2005-09
Still near the high end of recent inventory ranges
17
Natural Gas Supply: Rigs•
Total Rig Count Up 35% From Beginning of 2010
•Horizontal Rigs Make Up 55.3% vs. 25% in Jan 2008
“Current and historical data.” Baker Hughes. 24 Sept. 2010.
0
500
1,000
1,500
2,000
2,500
9/23
/05
1/23
/06
5/23
/06
9/23
/06
1/23
/07
5/23
/07
9/23
/07
1/23
/08
5/23
/08
9/23
/08
1/23
/09
5/23
/09
9/23
/09
1/23
/10
5/23
/10
Rig
Co
un
t
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
% o
f H
ori
zon
tal
Total Rig Count Horizontal Rig Count % of Horizontal to Total
18
Natural Gas Supply: LNG Imports
“U.S. Natural Gas Imports.” EIA. 30 Aug. 2010.
0
0.5
1
1.5
2
2.5
3
3.5
Jun-06Oct-06
Feb-07Jun-07
Oct-07Feb-08
Jun-08Oct-08
Feb-09Jun-09
Oct-09Feb-10
Jun-10
Bcf
/Day
Liquefied Natural Gas = Foreign Gas Imports
19
Natural Gas Supply: Shale
20
Shale
21
Natural Gas Supply: New Locations
22
Environmental Issues: New Climate Change Legislation (?)
23
Environmental Issues: Re-Regulation of Existing Generation
24
Environmental Issues: Tailoring Rule
EPA released Tailoring Rule on May 13– “Carbon” or Green House Gases (GHGs) will
be regulated from generators based on the Clean Air Act
– Generators will be required to Use Best Available Control Technology (“BACT” - definition to-be-done)
25
Environmental Issues: Transport Rule
EPA released a proposed Transport Rule to replace CAIR on July 6 for comment period– Would require 31 Eastern States and D.C. to Cut Power
Plant Emissions of SO2 and NOx
– Faster and larger cuts in SO2 and NOx than under CAIR– Rule in 2011, with reductions to take effect in 2012– Impacts trading of Emissions Allowances
• Year ago: SO2 = $70 NOx = $1000• CAIR rule challenge: SO2 = $3 NOx = $250• New rule would limit allowance trading
26
Environmental Issues: Bottom Line for Coal
• Tailoring Rule: Coal generation higher capital costs for “BACT”
• Ash: Hazardous waste (?) regulation could be expensive
• Mercury: Rule expected in 2010 or 2011 to force most efficient
technology for removal• Transport Rule:
Many smaller and older coal plants could retire to avoid uneconomic retrofits (some estimates near 50GW)
27
Environmental Issues: Bottom Line for Natural Gas
28
Environmental Issues: Bottom Line for Natural Gas
29
Environmental Issues: Renewable Portfolio Standards
• 29 states with standards, 7 states with goals• In-state and regional generation requirements• State rule change and ambiguity
– California at 33% by 2020 (Legislature votes “no” but CARB adopts 9/23 ??)
– Delaware muni and co-op exemption changed– Missouri 15% by 2021 (sourcing out of state?)– Mass considering GHG limit on biomass– New Jersey special offshore wind provisions
• National RES: Bingaman-Brownback introduce another “bipartisan” Senate bill September 21 for 15% standard by 2021. Graham bill 20% including clean coal, nuclear.
30
EPA/Legislative update
31
Market Summary• Electric demand rebounded somewhat this summer• Coal and gas generation use up this year so far• Power prices and volatility are lower• Fuel prices driving power are lower although not oil• Financial Regulation will impact energy hedging• Natural Gas has entered a new era of “shale” supply• Environmental regulations continue to challenge coal
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