Energy Prices & Market Intelligence: What’s Happening Q3August 15, 2013

Presenters: Jonathan Lee, Senior Energy Procurement ＆ Advanced Analytics Manager, and Denny Pearson, Senior Director, Supply Solutions with Ecova

ENERGY MARKET INTELLIGENCEHere is What We are Going to Tell You:

• Natural gas and electricity prices are more correlated as the nation becomes reliant on gas-fired generation.

Wholesale gas and electric prices have risen significantly (simple annual average is up $0.86/Dth, or nearly 31%) off 10-year lows experienced in 2012. Even with the recent pullback over the past few weeks, we expect to see an impact to the delivered cost of new supply contracts and regulated rates when compared to the delivered cost throughout 2012.

• Fundamental Drivers – Bulls and Bears.

Economy: According to the Federal Reserve, the economy is growing at a “modest pace”. The housing and labor sectors are showing the most improvement, other sectors mixed.

Natural Gas Production, Demand, Storage: Production is at an all-time high in concert with demand continuing to grow. Storage is now above the 5-year average for this time of the injection season, and filling fast with some power burn shifting to coal and nuclear generating sources.

Weather and Water Forecast: Demand-driven market and weather will continue to be one of the major drivers. Below-average reservoirs in the West, resulting in lower hydro output.

• Wholesale Electric Prices: Technical charts show uptrend across all major regions, but the recent pullback has created a decent buying opportunity.

• Hot Spots: Regional factors at play when considering energy procurement strategy.

ENERGY PRICES IN LONGER TERM UPTREND

• After several years of flat to declining prices owing to a nearly “Perfect Storm” of global recession in lockstep with increases in building efficiency investment AND simultaneous dramatic increases in shale gas production . . .

• Retail electric rates are on the rise again EIA outlook is for national average increases of 2-4% ($.003 to .004/kWh) from 2012 to 2013

and again to 2014.

But beyond the gross average, some sites may see as much as $.01 to $.015/kWh 2012 to 2013 annual impact where capacity prices, grid congestion, high use of natural gas for electric generation, deregulated contracts, or increasingly prevalent regulated fuel cost pass-throughs allow retail prices to move more abruptly.

• Natural gas is up, too EIA outlook is for overall national average increases of 5-10% from 2012 to 2013 and again to

2014.

BUT, some sites will see as high as $1 to $1.25 per Dth where regulations or contracting allow for quick pass-through of commodity costs.

No relief in the Northeast until new pipeline projects are completed, which will drive current inordinately high capacity rates downward.

Regional Gas Update: Minimal SoCal/SDG&E headroom via transportation of third-party supply at this current time.

PRICES ARE RISING OFF OF 10 YEAR LOWS IN APRIL 2012

12 month retailcontracts aregenerally below2011 levels, but regional factors still at play

Analysis from8/7/2013

MARKET FUNDAMENTALS 15 August 2013

  Near Term Next 60 Days

Short Term 2 to 6 Months

Medium Term 6 to 12 Months

Long Term 1 to 5 Years

Storage     

Production     

Demand     

Electric Power Sector

 

     

Weather       

Tropical Storms

LNG       

Economy       

Storage

Production

Demand

Electric Power Sector

Weather

Tropical Storms

LNG

Economy

UNITED STATES – SHALE GAS PLAYSEIA

SUMMER TEMPERATURE OUTLOOKNOAA/NWS, EIA; 8 August 2013

EIA projections are showing that Cooling Degree Days will be below last year, at average levels, however NOAA projections are showing the likelihood of warmer-than-normal conditions in some regions

Monthly Outlook - Bearish

LONG RANGE DROUGHT OUTLOOK – DRY WESTNOAA/CPC - 3 month outlooks; 12 August 2013

Persisting drought conditions in the West and Mountain West. Some improvements seen in parts of the South Central.

All of California is now considered in drought. Snowpack, as of May 1, 2013, was listed at 15% of average. For reservoirs, currently the northern half shows below normal (~76%) and the southern half is still holding below normal (~76%) for reservoir levels against the YTD historic average.

HURRICANE OUTLOOK ~ AVG YR, LOWER IMPACT FROM GULFNHC/NOAA; 13 August 2013

Atlantic Hurricane Outlook

June 01 - Nov 30

Average Values

(1981-2010)

Record Values

2013 Projected Values

2013 Actual Values

Mild (Named Tropical Storms)

12 27 (2005)18 (CSU); 13-20 (NOAA

70% confidence)4

Moderate (Hurricane Categories 1-2)

6 15 (2005) 9 (CSU); 7-11 (NOAA) 0

Intense (Hurricane Categories 3-5)

38 (1950); 7 in (2005)

4 (CSU); 3-6 (NOAA) 0

Janu

ary

Febru

ary

Mar

chApr

ilM

ayJu

ne July

Augus

t

Septe

mbe

r

Octob

er

Novem

ber

Decem

ber

0

1

2

3

4

5

6

7

8

9

Historic Maximum Storm Count by Month

NATURAL GAS STORAGE

Short-Term Trend: With more power burn coming from coal compared to last year, (natural gas power sector demand down about 3 Bcf/d vs last year) gas storage injections have been outperforming the norms this year.

GAS POWER BURNS – NORMALIZING A BIT

NUCLEAR OUTAGES TO BE LOW IN AUTUMN – LIKELY TO DISPLACE SOME GAS DEMAND

95118; 97%

2725; 3%

Total Nuclear Capacity (MW)

Total In Service

Total Out Today

Total Out a Year Ago

5-Year Avg Out Total Out Today -

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000 7,151

4,347

2,725

Ou

tag

e (M

W)

NORTHEAST PIPELINES – ON THEIR WAY

2012 was the lowest year in a decade for overall US pipeline expansions, but the second highest year in the Northeast. The industry added 3.2 Bcf/d, representing two-thirds of total capacity additions.

2013 is another huge push as gas from Marcellus tries to find ways into hungry NY City, CT, Massachusetts Markets.

LNG – FROM IMPORT TO EXPORT

LNG export capacity is expected to ramp up from 0 to 9.5 Bcf/Day export capacity from 2016 through 2020 from 5-10 terminals (~10% of US consumption).

3 terminals are conditionally approved with 4-5 year build schedules.

COAL PLANT RETIREMENTS

Total Capacity of U.S. Coal Plants Already Shut: 15,677 MW

Total Capacity of U.S. Coal Plants Scheduled to be Shut: 39,749 MW

44,742

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2011 2012 2013 2014 2015 2016 2017

MW

MW

Coal Retirements (MW) Planned Coal Retirements (MW) Cumulative Retirements (MW)

NATURAL GAS FORWARD CURVE(NYMEX) – 14 August 2013

Sep-1

3

Oct

-13

Nov-1

3

Dec-

13

Jan-1

4

Feb-1

4

Mar-

14

Apr-

14

May-1

4

Jun-1

4

Jul-

14

Aug-1

4

Sep-1

4

Oct

-14

Nov-1

4

Dec-

14

Jan-1

5

Feb-1

5

Mar-

15

Apr-

15

May-1

5

Jun-1

5

Jul-

15

Aug-1

5

Sep-1

5

Oct

-15

Nov-1

5

Dec-

15

$3.00

$3.20

$3.40

$3.60

$3.80

$4.00

$4.20

$4.40

$4.60

$4.80

$5.00

25-Jun

9-Jul

23-Jul

14-Aug

$/M

MB

tu

NATURAL GAS $MMBtu (12-Month Strip) – 14 August 2013 – Short Term Trading Channel

ELECTRIC WHOLESALE PRICESEcova 9 August 2013

TEXAS – 12-MONTH STRIPEcova 9 August 2013

NY ISO ZONE J – 12-MONTH STRIPEcova 9 August 2013

PJM – 12-MONTH STRIPEcova 9 August 2013

NEW ENGLAND– 12-MONTH STRIPEcova 9 August 2013

CALIFORNIA NP15/SP15 – 12-MONTH STRIP Ecova 9 August 2013

ELECTRIC HOT SPOTS

TEXAS – SUMMER RESOURCE ADEQUACY ERCOT raising System Wide Offer Cap (SWOC) to $9,000/MWh in 2015.

NEW YORK/NEW ENGLAND – WINTER PIPELINE CONSTRAINTS Due to high reliance on natural gas fired electric generation, New York and New England

experienced widespread natural gas pipeline constraints during the peak winter heating season. This new phenomenon resulted in large spikes in real-time electric prices during the winter season.

CALIFORNIA – ELECTRIC PRICES ON THE RISE Earlier in 2013, Southern California Edison announced the permanent retirement of the San

Onofre nuclear power plant, which had provided cheap, base load electricity. SCE and SDG&E scrambled to line up additional resources to meet peak summer demand. Coupled with a relatively weak hydro output year, wholesale electric prices are more reliant on gas-fired generation and are subject to grid reliability issues.

PJM ISO – CAPACITY INCREASES IN 2013-2015 With a wave of coal-plant retirements, capacity costs in various regions throughout the PJM ISO

are seeing large year-over-year increases to incentivize new generation construction. Capacity can typically account for 20% of over electric costs.

MAJOR TAKE-AWAYS

NATURAL GAS AND WHOLESALE ELECTRICITY ARE MORE CORRELATED

Even though prices are above 10 year lows experienced in April 2012, the recent pullback has created a decent buying opportunity.

WEATHER-DRIVEN MARKET Despite a heat wave last month, summer temperatures in the Midwest and Northeast have

been generally below-average, which has reduced cooling demand.

AUTUMN NUCLEAR POWER PLANT OUTAGES BELOW-NORMAL Nuclear power plant outages are expected to be near lowest level in 14 years. The increased

amount of available nuclear capacity will displace some gas demand and keep downward pressure on prices this fall.

LONGER TERM FUNDAMENTALS INJECT VOLATILITY INTO MARKETS The wave of coal plant retirements in 2015 and the increased push toward becoming a natural

gas exporting nation will tighten supplies and likely result in higher prices and even more market volatility.

Upcoming Ecova Webinars

INSIDE ENERGY & SUSTAINABILITY Local Energy Audits & Reporting: Is My Company

Impacted? – August 2225

Telecom Strategic Sourcing Secrets - September 25th

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