Energy Risk Management Seminar New York April 5, 2001.

Energy Risk Management SeminarNew York April 5, 2001

An Outlook on the Power Markets

Discussion Highlights

• Changing Market Place

• Risk Management versus Hedging

• Physical versus Financial

• Supply and Demand Demographics

• Final Considerations

Changing Market Place

• Managing load without generation– Is index (DAM) the answer?– Is fixed rate tariff the answer?

• Generation bidding strategies– The fight to maintain value/economic dispatch

• Independent System Operators

Changing Market Place

• Open markets– The need for products– The need for liquidity

• The “New Utility Business Model” (Andersen Consulting, CEO Challenges in a competitive Power

Industry, Fall 2000)

– Energy Merchant– Delivery Assets– Retail

Risk Management verses Hedging

• Hedging– identified by reducing a particular risk, i.e.

converting index exposures to fixed price certainty for a period of time

• Risk Management

– the expanded evaluation of all risk, then actively managing the risk under pre-determined corporate risk exposure /appetite.

Physical vs. Financial

DAMBid $

DAMBid $

Electrons

Daily Physical Flow of Power

Electrons

NYISO

Generator

LSE

Physical vs. Financial

Daily Physical Power Monthly Financial Power

DAM Bid $

Fixed $ for 1

Month

For a month the LSE receives index price from the NYISO, swaps it for a financial fixed payment stream from the PSE, thus fixing the price of power for a term.

DAMBid $

DAMBid $

Electrons

Electrons

NYISO

Generator

LSE PSE

Demand Rising

• Physical increase of usageEconomic Growth

• Will the slowing economy have an effect on load growth?The Internet & Information Technology

• From 1993-2000, internet use composed 8% of national power use while computers composed 13% of national use.

• Bear Stearns reported March 28, 2001 that some segments of the Net devices industry will grow between 10 & 15 times in the next few years

Demand side management• Pursue public education efforts to help inform consumers of the

benefits of participating in price-responsive load programs.

Demand Rising

• Weather• Weather is short term view• Climate is long term view• Climate Scientists have confirmed the current 59° is an

10,000 year high• From 1860 to 2000, the Global Temperature increased by

only 1°, the majority of the increase occurring after 1987• Climate Scientists predict a 1° to 8° increase in Global

Temperature within next two decades– 5° increase in temperature would be catastrophic

• Increase probability of hotter weather over the next 20 years

• Was 1998 an anomaly or a sign of things to come?

Demand Rising

• Between 1970 and 1998, national electricity consumption grew by 133 percent and is projected to be 34 percent higher by 2020. Source: The Energy Information Administration.

• In 1990, the North American Electric Reliability Council estimated that demand for electricity would grow 1.8 percent annually. Instead, it rose an average of 3 percent annually -- which is one reason why power supplies are tight this summer. Source: USA Today.

• Beyond weather–related events, the restructuring of the electric industry has also caused concern over the integrity of the electric system. In addition, increased power consumption associated with the rise of economic activity and the increased use of computers and other appliances threatens to outstrip the capacity of existing generation to provide adequate supply.November 2000 Report on the Reliability of New York’s Electric Transmission and Distribution System.

Supply

• What is the condition of NYISO current Supply Portfolio?– The NYISO reports over 700 generation units for a total of

34,000 megawatts of summer capacity– Environmental concerns of existing supply– How many units will be forced into retirement?– What will replace Indian Point 1 & 2?– Largest & most immediate concern is NYC & Long Island

• NYC metropolitan area including Long Island make up 45% of NYISO

– New York Queue reports 83 for some 26,500 megawatts• 9,000 megawatts in NYC• 3,000 megawatts on Long Island

Supply

• Is the Queue strong enough to support the increased demand for generation?– New York City metropolitan area (Est. 45% of NYISO load)

• 2001 Estimated 700 MWs short going into the summer» An estimated 480 new MWs will be on line» This leaves an estimated net short of 220 MWs for this summer» This does not include any planned outages

• 2002 At previous increase rate of 300 MWs per year, NYC predicted to be 520 MWs short

» Unclear view of estimated MW on line.

• 2003 At previous increased rate of 300 MWs, NYC predicted to be 820 MWs short

» First plant to go through Article X is estimated to be the Athens Plant.

» Average estimated construction time to be 24 months (summer ’03)

Supply

• Is the Queue strong enough to support the increased demand for generation?– New York City metropolitan area (Est. 45% of NYISO load)

• 2004 Estimated ranges of demand – 820 to 2000 MWs short» The year of determination / Will units scheduled come on line?» Potential expansion of existing facilities on line» Will environmentalist demand early retirement of some plants?

• 2005 Estimated ranges of demand – 300 to 1000 MWs short» Potential expansion of existing facilities 500 to 100 MWs» Demand / political environment / public opinion unknown

• 2006 First strong indication that supply could exceed 18% capacity reserves

Supply

• Is the Queue strong enough to support the increased demand for generation?– Generation development process extremely slow

• Permitting– Article X– Below 80 MWhrs

• Permitting Risk• Major cost concerns

– Labor– Land

• Environmental Risk• Availability of fuel?

Final Considerations

– The supply of electricity has become so seamless, consumers may have forgotten where power originates.

– Pursue public education efforts to help inform consumers of the benefits to participating in price-responsive load programs.

– New York is very similar to California. The lessons must be learned.

– Imperative clear index market signals must be sent. – As early as Summer 2001, residents of New York are in clear

danger of black-outs. No price caps or regulations can stop it. Demand is simply out running supply.

– This treat could last through 2005 unless something is done quickly.

Questions?