1

North American Merchant Power Markets: an Update

February 2014

Jim Guidera, Credit Agricole-CIB

2

Review of US Merchant Power Markets A bearish load growth forecast

* Source: IHS-CERA, December 2013, assuming normal weather

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020700,000

720,000

740,000

760,000

780,000

800,000

820,000

840,000

860,000

880,000

-1.6%-0.7%

+1.4%

+1.9%+2.1%

+1.9%

+1.7%

+1.6%+1.4%

US Summer Peak demand in MW (IHS-CERA)

3

Review of US Merchant Power Markets Gains in efficiency, shift towards services and less energy-intensive manufacturing

Energy Use per capita and per dollar of GDP and emissions per dollar of GDP, 1980-2040 (index: 2005=1)

.

* Source: EIA Annual Energy Outlook 2014 Early Release Overview

4

Review of US Merchant Power Markets The fuel transition continues

Natural Gas slowly but surely overtaking coal to become the first

source of electricity

* Source: EIA Annual Energy Outlook 2014 Early Release Overview

Electricity Generation by Fuel, 1990-2040 (trillion kWh/year)

• Annual growth in electricity generation projected to be +0.9% on average through 2040• Coal to gas switching driven by economic (first) and regulatory (post 2016) reasons• Renewable generation (excluding hydro) accounts for 32% of the overall growth in electricity

generation from 2011 to 2040.

5

Review of Merchant Power Markets Natural Gas Prices forecast through 2020

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

Henry Hub Spot price (in nominal $/MMBtu)

* Source: IHS-CERA, December 2013

6

Review of Merchant Power Markets Could massive exports constitute a threat?

US Natural Gas Imports and Exports (in Tcf) – 2000-2040

* Source: EIA Annual Energy Outlook 2014 Early Release Overview

7

Review of Merchant Power Markets PJM Merchant Power Market – Energy demand characteristics

Source: FEP

X

Peak Load vs. Resources (GW (L), % (R)) Energy Demand (TWh)

Monthly Energy Prices ($/MWh (L), $/MMBtu (R)) Spark Spread and IHR ($/MWh (L), Btu/kWh (R))

0%

5%

10%

15%

20%

25%

30%

35%

-

20

40

60

80

100

120

140

160

180

2005 2008 2011 2014 2017

RENEW OIL GAS COALNUC WAT LOAD RES MARG

-

100

200

300

400

500

600

700

-

50

100

150

200

250

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Residential Commercial Industrial Total (R)

-

2

4

6

8

10

12

14

16

-

20

40

60

80

100

120

140

160

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

PJM EAST TETCO M3

-

5,000

10,000

15,000

20,000

25,000

-

10

20

30

40

50

60

70

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Spark Spread (@ 7 MMBtu/MWh) IHR (Btu/kWh)

8

• Volatility continues, creating uncertainty in the market• Zonal price divergence – with even smaller premium zones splitting up as “premium zones” a

result of transmission constraints (ATSI in Ohio, PSEG in New Jersey) • New transmission within PJM will ultimately lead to price convergence• Demand response has started to come down in past auctions• Renewed merchant Greenfield activity in PJM East• Recent auctions results incorporate new capacity planned (CCGTs) and Imports from MISO• Most of the coal retirements resulting from environmental compliance have occurred in 2012-13• New renewable generation continues

Review of Merchant Power Markets PJM: Capacity historical results and looking ahead

CAPACITY CLEARING PRICES (in $/MW-day) at the BRAs

2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

20

40

60

80

100

120

APS METED BGE AECO DPL JCPL

9

Review of Merchant Power Markets ERCOT Merchant Power Market – Energy demand characteristics

Source: FEP

X

Monthly Energy Prices ($/MWh (L), $/MMBtu (R)) Spark Spread and IHR ($/MWh (L), Btu/kWh (R))

Peak Load vs. Resources (GW (L), % (R)) Energy Demand (TWh)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

10

20

30

40

50

60

70

80

90

2005 2008 2011 2014 2017

RENEW OIL GAS COALNUC WAT LOAD RES MARG

-

50

100

150

200

250

300

350

400

-

25

50

75

100

125

150

175

200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Residential Commercial Industrial Total (R)

-

2

4

6

8

10

12

14

-

50

100

150

200

250

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

ERCOT NORTH Houston Ship Channel

-

10,000

20,000

30,000

40,000

50,000

60,000

-

20

40

60

80

100

120

140

160

180

200

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Spark Spread (@ 7 MMBtu/MWh) IHR (Btu/kWh)

10

• Recession was both short and mild from a load perspective; recovery exceeds the national average. 2013-20 growth forecast is 2.1% p.a. (IHS CERA)

• Market is below the 13.75% reserve margin in 2014 – a situation which has attracted capital for new developments of gas-fired CCGTs starting in 2012, and boosted the valuations of merchant assets in ERCOT

• Scarcity pricing: ERCOT approved another raise in the System Wide Offer Cap for wholesale electric prices, from $5,000/MWh currently to $9,000/MWh kicking in in the summer of 2015

• ERCOT concentrate 17% of the wind capacity nationwide – and is on track to meet its RPS of 5.88GW by 2015. Wind accounted for almost a third of the capacity under development in 2013. Completion of the CREZ lines is an important step to support the renewable effort.

Review of Merchant Power Markets ERCOT continues to heat up

11

Review of Merchant Power Markets NYISO Merchant Power Market – Energy demand characteristics

Source: FEP

X

Peak Load vs. Resources (GW (L), % (R)) Energy Demand (TWh)

Monthly Energy Prices ($/MWh (L), $/MMBtu (R)) Spark Spread and IHR ($/MWh (L), Btu/kWh (R))

-5%

0%

5%

10%

15%

20%

-

5

10

15

20

25

30

35

40

2005 2008 2011 2014 2017

RENEW OIL GAS COALNUC WAT LOAD RES MARG

-

20

40

60

80

100

120

140

160

-

10

20

30

40

50

60

70

80

90

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Residential Commercial Industrial Total (R)

-

2

4

6

8

10

12

14

16

-

20

40

60

80

100

120

140

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

NY Zone F Transco Z6

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

-

5

10

15

20

25

30

35

40

45

50

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Spark Spread (@ 7 MMBtu/MWh) IHR (Btu/kWh)

12

• Load has finally recovered to pre-recession level• Small market with steep demand curve – realized the impact of retirements due to

economics and/or bankruptcies in 2012 and 2013• Creation of the Lower Hudson Valley zone validated by FERC in January• Energy Highway initiative should ease transmission• Demand Curve Reset for the next 3 years is neutral for ROS, but unfavorable for

owner of generations in NYC (Zone J)• High barrier to entries for new generation due to market structure and cost of

developing new generation

Review of Merchant Power MarketsCapacity market has clearly improved; now one the strongest markets in the NE

13

Review of Merchant Power Markets CAISO Merchant Power Market – Energy demand characteristics

Source: FEP

X

Peak Load vs. Resources (GW (L), % (R)) Energy Demand (TWh)

Monthly Energy Prices ($/MWh (L), $/MMBtu (R)) Spark Spread and IHR ($/MWh (L), Btu/kWh (R))

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

-

10

20

30

40

50

60

70

2005 2008 2011 2014 2017

RENEW OIL GAS COALNUC WAT LOAD RES MARG

-

50

100

150

200

250

300

-

25

50

75

100

125

150

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Residential Commercial Industrial Total (R)

-

2

4

6

8

10

12

-

20

40

60

80

100

120

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

SP 15 SoCal

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

(5)

-

5

10

15

20

25

30

35

40

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Spark Spread (@ 7 MMBtu/MWh) IHR (Btu/kWh)

14

• Adequate Supply until 2017– in spite of retirement of SONGS 2 & 3, and impending closure of 14GWs of OTC units by 2020 (expected to be replaced or repowered)

• Renewable projects continue to dominate new construction – 17GW over the 2013-20 period, with solar exceeding wind. In addition, 5.4GW of recent CCGT completed or in construction

• Ambitious RPS – but 75% must be sourced in-state – limiting opportunities for generators in other utility-centric, oversupplied WECC markets

• RFP including 1.3GW of energy storage requirements alongside generation

• Several transmission projects in construction will support renewable generation

• Slowly improving RA market; renewable resources will start selling flexible capacity in 2015, creating opportunities for gas-fired generators to maintain grid stability

• GHG allowances (effective 1/1/13): weaker than forecast start (between $10 and $14), but 2013 was first year of a complex and ambitious Cap & Trade program which will expand beyond generation and could become a model for other markets

Review of Merchant Power Markets CAISO and WECC markets

15

Review of Merchant Power Markets New England Merchant Power Market – Energy demand characteristics

Source: FEP

X

Peak Load vs. Resources (GW (L), % (R)) Energy Demand (TWh)

Monthly Energy Prices ($/MWh (L), $/MMBtu (R)) Spark Spread and IHR ($/MWh (L), Btu/kWh (R))

0%

5%

10%

15%

20%

25%

-

5

10

15

20

25

30

35

2005 2008 2011 2014 2017

RENEW OIL GAS COALNUC WAT LOAD RES MARG

-

20

40

60

80

100

120

140

20

30

40

50

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Residential Commercial Industrial Total (R)

-

2

4

6

8

10

12

14

16

18

-

20

40

60

80

100

120

140

160

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

NE Mass Algonquin

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

-

5

10

15

20

25

30

35

40

45

50

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Spark Spread (@ 7 MMBtu/MWh) Implied Heat Rate Btu/kW

16

• Oversupply persists – in spite of significant potential for retirements, as inefficient oil-fired peakers are kept afloat by capacity market

• As all auctions have cleared at the administrative floor, the elimination of the capacity floor in the 2017/18 FCA should ignite retirement wave

• Transition to a zonal market started with FCA 7 (2016/17), evidencing constraints in the NEMA/Boston area

• New England states participate in RGGI; stricter limits are being implemented in 2014

• Coal to gas displacement – but gas basis causes high energy prices in the winter (and in excess of national average year round)

• Renewables: +2GW of wind over the 2013-20 period

• Will 674MW Salem Harbor happen – and if not, is New England facing a near term shortfall?

Review of Merchant Power Markets New England Power Pool

14

• 57 GW were retired from 2008 to 2013 • 16 GW each in PJM and the

Southeast, 10GW in ERCOT• 30GW of gas and oil; 24 GW of coal

Review of Merchant Power Markets Capacity Retirement by Region

Source: IHS-CERA.

• IHS-CERA anticipates another 60 GW of retirements by 2020 (net of 6MW of conversions):

• 18 GW in PJM, 16GW in the Southeast, 14GW in MISO, and13GW in WECC

• 38 GW of coal; 22 GW of gas