Energy Pricing & Market Intelligence: What’s Happening Q4November 14, 2013

Presenters: Jonathan Lee, Senior Energy Procurement ＆ Advanced Analytics Manager, and Kristopher Borgert, CEP, Senior Energy Procurement Analyst 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 are steadily climbing 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.

• Winter Weather: Cold temperatures are the main market driver at this time of the year. However, a mixed consensus on the 2013/2014 winter forecast will likely inject volatility.

• Natural Gas Production, Demand, Storage: Production is at an all-time high in concert with demand continuing to grow. Storage has outperformed historical norms, resulting in a comfortable level of gas in storage heading into the withdrawal season.

• Longer-term drivers: A wave of coal plant retirements, LNG exports, and a new round of EPA regulations will boost gas demand in the years to come.

Northeast Natural Gas: The Northeast continues to have the highest spot prices in the country as the region struggles to find enough pipeline capacity to get gas to the hungry market.

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

PRICES ARE STEADILY RISING OFF OF 10-YEAR LOWS IN APRIL 2012

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

Analysis from11/8/2013

MARKET FUNDAMENTALS 14 November 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       

WINTER TEMPERATURE OUTLOOKNOAA/NWS, EIA; 8 November 2013

EIA projections are showing that Heating Degree Days will likely come in very similar to last year and the 10-year average.

Monthly Outlook

WINTER TEMPERATURE OUTLOOKNOAA/NWS, AccuWeather, TWC; 11 November 2013

Winter 2013/2014 forecasts from AccuWeather (below), The Weather Channel (Right), and NOAA (Bottom right) are showing a wide variety of predictions. Uncertainty in the weather drivers could bring significant market volatility.

Winter Outlook – Mixed Consensus

HURRICANE OUTLOOK ~ AVG YR, LOWER IMPACT FROM GULFNHC/NOAA; 14 November 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)12

Moderate (Hurricane Categories 1-2)

6 15 (2005) 9 (CSU); 7-11 (NOAA) 2

Intense (Hurricane Categories 3-5)

38 (1950); 7 in (2005)

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

2012 Atlantic Hurricane Season 2013 Atlantic Hurricane Season

UNITED STATES – SHALE GAS PLAYSEIA

NATURAL GAS PRODUCTION - ON THE RISEEIA

Natural gas production has climbed to record levels despite a steep decline in the natural gas drilling rig count.

In 2011 and 2012, more than half of the new wells produced both oil and natural gas.

NATURAL GAS STORAGE

Short-Term Trend: Robust production, coupled with increased power burn from coal and nuclear compared to last year has caused gas storage injections to outperform the norms this year.

GAS POWER BURNS – NORMALIZING A BITEIA – July 2013 YTD

0

100

200

300

400

500

600

2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013

Central Florida Mid-Atlantic Northeast Southeast Texas West

terawatt

hours

Hydro

Nuclear

Natural Gas

Coal

AUTUMN NUCLEAR OUTAGES WELL BELOW LAST YEAR AND THE FIVE-YEAR AVERAGE

SPRING 2014 OUTAGES EXPECTED TO BE AT A 4-YEAR LOW.

80843; 83%

17000; 17%

Total Nuclear Capacity (MW)

Total In Service

Peak Autumn 2013 Outages

Peak Autumn 2012 5-Year Avg Out Peak Autumn 2013 -

5,000

10,000

15,000

20,000

25,000

30,000

35,000 32,000

21,500

17,000

Ou

tag

e (M

W)

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)

REGULATIONS PLAYING A ROLE IN CHANGING MARKET DYNAMICS

U.S. EPA: Mercury and Air Toxics Standards (MATS) (Dec 2011)

– Sets emission limits on for mercury, particulate matter, sulfur dioxide, nitrogen oxides, and certain metals emitted by coal- and oil-fired plants.

– Existing generating facilities have 4 years to comply.

U.S. EPA: Carbon Pollution Standards Proposal (Sept 2013)

– Limitations on carbon-dioxide emissions from all future coal and gas-fired power plants.

– 1,100 pounds of carbon dioxide per MWh for coal plants (most efficient existing coal plants operate between 1,700 – 1,900 lbs/MWh).

– 1,000 pounds of carbon dioxide per MWh for gas-fired plants.

U.S. EPA will look to propose carbon emission standards on existing power plants by June 2014.

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).

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

NATURAL GAS FORWARD CURVE(NYMEX) – 12 November 2013

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

19-Sep

1-Oct

15-Oct

12-Nov

$/M

MB

tu

NATURAL GAS $MMBtu (12-Month Strip) – 8 November 2013 – Short Term Trading Channel

NORTHEAST NATURAL GAS

Spot Market pricing

Capacity Constraints

Pipeline Expansion in the Northeast

Winter 2013/2014 Expectations

SPOT NATURAL GAS PRICESNortheast Has The Highest Spot Prices In The Nation

CAPACITY CONSTRAINTS DRIVING ELECTRIC AND NATURAL GAS COSTS HIGHER

CANADIAN NATURAL GAS IMPORTS

Imports down nearly 50% this time last year.

Imports from Canada represent 10.5% consumed in the US.

Deep Panuke online. Only operating at 2/3 production. Full production not expected this year.

REDUCED LNG IMPORTS INTO THE REGION

New England has historically depended on imports of LNG for several reasons:

– Lack of local area storage facilities

– High seasonal demand peaks—especially in the winter

– Lack of locally produced natural gas

– Remoteness from the rest of the North American natural gas grid

MARCELLUS PIPELINE PROJECTSome Relief Coming to New York And New Jersey

NORTHEAST WINTER 2013/2014 RECAP

Capacity Expectations– NY and NJ should see some relief

– NE pipelines expected to be at or near capacity

– Limited relief from Canadian imports

– Potential for some increased LNG spot cargo imports

Weather Dependants– Temperatures in the NE

expected to be 3% colder

than last year.

ELECTRIC WHOLESALE PRICESEcova 8 November 2013

REGIONAL ELECTRIC HOT SPOTS:Natural Gas Prices Not The Only Market Driver

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 overall 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, there are still decent buying opportunities in some regional markets.

WEATHER-DRIVEN MARKET• Despite a relatively slow start to the winter heating season, bouts of cold weather in the

Midwest and Northeast this winter will drive electric and natural gas prices higher.

NEW ENGLAND EXPECTED TO SEE ANOTHER VOLATILE WINTER• Although pipeline projects may bring some relief to New York and New Jersey, New England is

likely in for another very volatile winter season.

LONGER TERM FUNDAMENTALS AT PLAY• 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

What’s Your 2014 Energy Resolution? – November 21st at 10am PST

Waste Management: Why You Should Care – December 5th at 11am PST

The Cost of Bad Data: A Case Study – December 10th at 1pm PST

Questions, comments, suggestions? webinars@ecova.com

Q&A Session

Thank you!