Extreme Weather & Other Market Drivers Cause Spike in Energy Prices: Q1 UpdateMarch 11, 2014

Presenters: Jonathan Lee, Senior Energy Procurement & Advanced Analytics Manager and Brad Gawboy, Senior Director, Facility Expense Operations with Ecova

Frigid winter temperatures led to record high natural gas demand, which propelled wholesale gas and electric prices higher

− Wholesale gas and electric prices are becoming more correlated as the nation increases its reliance on natural gas-fired electric generation.

Fundamental Drivers – Bulls and Bears

• Winter Weather: Cold temperatures are the main market driver at this time of the year. The monthly forecast suggests another cold month ahead.

Natural Gas Production, Demand, Storage: Production is at an all-time high in concert with demand continuing to grow. Record storage withdrawals this winter due to extended periods of colder-than-normal temperatures in the major consuming regions have severely depleted supplies inventories, raising concerns over gas storage heading into the winter of 2014/2015.

• 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.

Winter Price Volatility: Record high natural gas demand constrained pipelines and caused a significant spike in wholesale electric prices.

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

ENERGY MARKET INTELLIGENCE

  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

MARKET FUNDAMENTALS 11 March 2014

WINTER 2013/2014

Winter Recap

EIA revealed heating degree days came in higher than the 10-year average for each month during this winter period. March is expected to be in line with the average.

NOAA/NWS, AccuWeather, TWC; March 2014

Winter 2013/2014 ranked among the chilliest in many states over the last 120 years. And it’s not over yet…

NEAR-TERM TEMPERATURE OUTLOOK

Cold winter temperatures are anticipated to last through the month of March in the Midwest and Northeast.

NOAA/NWS, EIA; March 2014

Monthly Outlook

What is a Polar Vortex?Arctic outbreaks typically occur once every 10 years. The last time a far-reaching outbreak occurred was in 1996.

A polar vortex is simply a persistent large swirling air mass at the poles that is made up of very cold dry air.

A meandering jet stream and a high pressure system helped push the cold air mass at the pole downward which led to this extreme drop in temperatures over much of Eastern half of the United States.

Thousands were without power in various states, and index prices spiked based on the increased demand from the cold.

POLAR VORTEX 2014NHC/NOAA; AccuWeather

Potential El Niño patterns forming for late 2014 could help CA hydro next year, and keep the East drier and warmer next winter.

El Niño patterns, as shown below, primarily reach maximums during Dec-Feb and typically persist for 9-12 months.

POTENTIAL EL NIÑO FORMATIONNHC/NOAA; AccuWeather

Short-Term Trend: Gas storage withdrawals during the winter season have reduced the amount of gas in storage to 43.2% below last year and 38.8% below the 5-year average.

NATURAL GAS STORAGE

RECORD WITHDRAWALS THIS WINTER

Winter 2013/2014 had three out of the top ten largest weekly withdrawals in history, two of which rank among the top two.

Week Ending Wk/Wk Chg10-Jan-2014 -28713-Dec-2013 -28525-Jan-2008 -2748-Jan-2010 -266

31-Jan-2014 -26217-Jan-1997 -2609-Feb-2007 -25928-Jan-2000 -25324-Jan-2003 -24715-Jan-2000 -245

-350

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0

Nov-13 Dec-13 Jan-14 Feb-14

Bcf EIA Storage Report, Week/Week Change

UNITED STATES – SHALE GAS PLAYSEIA

Natural gas production averaged 70.2 bcf per day in 2013, up about 1.5% compared to 2012.

Marcellus and Eagle Ford show largest percentage gains over the last two years.

0

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1,000

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U.S. Natural Gas Marketed Production (Bcf)

U.S. Natural Gas Marketed Production (Bcf)

NATURAL GAS PRODUCTION – ON THE RISEEIA

MARCELLUS PIPELINE PROJECTSome Relief Coming to New York & New Jersey, but pipeline constrains remain

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

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2011 2012 2013 2014 2015 2016 2017

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

COAL PLANT RETIREMENTS

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).

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

LNG – FROM IMPORT TO EXPORT

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

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

Jan-1

6

Feb-1

6

Mar-

16

Apr-

16

May-1

6

Jun-1

6

Jul-

16

Aug-1

6

Sep-1

6

Oct

-16

Nov-1

6

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16

$3.00

$3.50

$4.00

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$6.00

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4-Feb

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7-Mar

$/M

MB

tuNATURAL GAS FORWARD CURVE(NYMEX) – 7 March 2014

NATURAL GAS$MMBtu (12-Month Strip) – 7 March 2014 – Short Term Trading Channel

SIGNIFICANT SPIKE DURING THE MONTH OF JANUARY

− New England, New York, and the states within PJM’s territory experienced sharp increases in index prices during January.

FIXED PRICING OPTIONS vs. INDEX PRICING

− Certain timeframes throughout 2013 offered value in fixing energy prices during the winter period.

CONTINUED HIGH PRICING THROUGH FEBRUARY AND MARCH

WHOLESALE ELECTRIC MARKET VOLATILITY

NORTHEAST MARKET VOLATILITY

Fixed Pricing Opportunity Day-Ahead Market

NEW ENGLANDISO-NE ($/MWh) December 2013 – March 2014 Strips

Fixed Pricing Opportunity Day-Ahead Market

NEW YORKNY-ISO ($/MWh) December 2013 – March 2014 Strips

Fixed Pricing Opportunity Day-Ahead Market

IL, OH, PA, NJ, DE, MDPJM ($/MWh) December 2013 – March 2014 Strips

TEXAS – SUMMER RESOURCE ADEQUACY− ERCOT raising System Wide Offer Cap (SWOC) to $7,000/MWh in 2014 and $9,000/MWh in

2015.

CALIFORNIA – ELECTRIC PRICES ON THE RISE− Drought conditions in the state continue to dampen hydroelectric output. Snowpack is

currently running 25% of the normal range. Coupled with the permanent retirement of the San Onofre nuclear power plant, 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.

NEW YORK/NEW ENGLAND – SUMMER DEMAND− Market-based electric rates are susceptible to spikes in the summer period as hot

temperatures cause a surge in air conditioning use.

REGIONAL ELECTRIC HOT SPOTS:Summer 2014 Outlook

NATURAL GAS AND WHOLESALE ELECTRICITY ARE MORE CORRELATED

Market volatility will continue for the foreseeable future as the nation relies more on gas-fired power plants to generate electricity.

WEATHER-DRIVEN MARKET Prolonged and severe winter weather drove natural gas and electric prices to multi-year highs.

NEW ENGLAND/NEW YORK/PJM – SPIKE IN WHOLESALE PRICES Utility and market pricing soared during the month of January as the polar vortex caused a

surge in natural gas demand and constrained pipelines.

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.

CONTINUATION OF MARKET VOLATILITY With the changing energy landscape, increased natural gas and electric market volatility is

here to stay. However, a strategic energy purchasing plan can help mute those spikes that are likely to happen again.

MAJOR TAKEAWAYS

Upcoming Ecova Webinars

INSIDE ENERGY & SUSTAINABILITY SERIES Extreme Weather Causes Spike in Energy Prices – Q1 Update

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3rd at 11am PDT

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