Natural Gas and Power Generation

•Natural Gas and Power: A Look at Prices•Carbon Legislation and Power Generation•The future of Power Generation and the Natural Gas Industry•Conclusions and Discussion

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Natural Gas and Power Prices….a little volatility?

Cinergy Hub vs. Henry Hub Prices

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Futures Cinergy HubHistorical Henry Hub

Futures Henry Hub

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Power Prices and Carbon Legislation: Can Other Fuels Displace Coal?

Midwest Power Generation Capacity

Coal55%

Natural Gas28%

Nuclear8%

Wind6%

Hydro3%

Coal

Natural Gas

Nuclear

Wind

Hydro

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Coal Displacement….Recent Examples Nationally, PIRA estimates September 2009 coal generation

fell 11.8% from September 2008 While power demand only fell 2.6% during the same time

frame??? The disparity between the drop in coal generation and the

drop in power demand indicates a significant amount of “fuel switching” took place

Low cost of spot natural gas resulted in coal-to-natural gas switching, particularly in the Southeast

Wind generation also experienced and increased level of generation during this time frame.

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Where Can Grid Operators Turn If Cost Increases Cause Coal Displacement?

Midwest Capacity Utilization

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Investors View on Carbon Legislation and the Future of Power Generation?

Midwest Planned Capacity Additions

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Noticeable Growth in Renewable Generation Planned

Midwest Generation Capacity - 2009 vs. 2015

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Power Generation After Carbon Legislation….. Carbon tax increases the operating cost of coal-fired

generation Can power price increases be contained by

displacement of coal-fired generation Nuclear licensing/permitting and investment issues are

successfully managed ?? Natural gas price volatility is contained ?? Wind generation becomes easier to forecast ?? Other renewable sources of generation become well

established ?? Energy efficiency programs reduce load growth??

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Can Wind Generation Limit Cost of Generation Increases….or Magnify Volatility? Pros:

Significant growth of installed capacity by wind generators over the last 2 years and projected over the next 5 years….capacity will be there

Near zero incremental cost of generation Short development period (as short as 2 years)

Cons: Variable nature of wind - does not coincide with variations in electricity

demand Non-controllable and non-dispatchable practice by wind farms Sudden Changes in wind generation due to cut-off, wind gusts, etc. Minimum generation events magnified by wind generation production

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Growth of Wind GenerationMidwest Monthly Average Wind Generation Volumes (MW)

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Can Wind Generation Displace Conventional Generation?

Midwest Hourly Wind Gen vs Load

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Natural Gas-Fired Generation: Opportunity for Expansion?? Natural gas-fired generation is the 2nd largest capacity source

for Midwest power generation Capacity usage factors are currently much lower than coal and

nuclear generators Initial Investment costs and licensing/permitting are more

attractive than coal and nuclear Emissions are much lower than coal-fired generation Natural gas-fired generators are much easier to operate than

coal and nuclear generation Start-up and shut-down times are much better

providing much greater flexibility to grid managers

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Natural Gas-Fired Generation: Challenges in Expansion?? Natural gas generators present non-standard

pipeline draws Operation flexibility leads grid managers to rely on natural

gas generators as power demand exceeds forecasts Grid managers reliance on natural gas-fired

generation to offset unpredictable wind generation trickles down to pipelines

Storage is essential to natural gas-fired generation owners…..more generation, more storage demand???

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Time

Cents / kWh

Realignment of asset base, supply constraints through capacity shortages or transmission constraints

Price signals draw in new capacity (construction time-lag 2 -3 years)

Significant capacity additions

Increasing demand, retirements increase price volatility, postponed projects value potential increases

Conclusion: Can Prospect of Economic Recovery and Carbon Legislation Lead the Power Market Higher?

Credit & banking crisis cause economic contraction

Prospect of economic recovery and carbon legislation