Power Play: Energy Market Developments Tri-State Member Services Meeting October 7, 2010 Eric H. Larson VP - ACES Power Marketing.

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%

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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

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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

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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

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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

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Natural Gas Supply: Shale

20

Shale

21

Natural Gas Supply: New Locations

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Environmental Issues: New Climate Change Legislation (?)

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Environmental Issues: Re-Regulation of Existing Generation

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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)

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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

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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)

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Environmental Issues: Bottom Line for Natural Gas

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Environmental Issues: Bottom Line for Natural Gas

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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.

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EPA/Legislative update

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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