Supply Side Energy Trends

Rakesh ParasuramanLuthin Associates Inc.

March 25, 2015

Cost Drivers

2

Energy CostSupply & Demand

Fundamentals

Geo-Political Landscape

Weather

Regulatory & Environmental

Economy

Generation Diversity

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• Fuel mix impacts price volatility• Generation mix is closely related to

Natural Gas• In NY/NJ, electricity prices are

strongly co-related to natural gas prices

• Less diversification increased volatility

Source: NYISO Power Trends

Economic IndicatorsIndustrial Production

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Source: NES

US

Economic IndicatorsGDP Growth %

5

Source: NES

US

Economic IndicatorsUnemployment Rate

6

LNG Exportation

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Source: NES

• There are environmental regulations on coal from the EPA that go into effect in 2015 that will have an impact on the electric and gas markets.

• Compliance will be met through a combination of : – Retirements– Renewable power generation– Shift generation to favor natural gas instead of coal– Demand side reductions (energy efficiency programs)

Coal

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• Saudi Arabia is pumping near a record of 10 mm bpd• Analysts forecast market surplus to expand from

900,000 bpd to 1.3 mm bpd• Oil prices have ranged between $43 -$54 this year• In 2008, oil prices peaked at $146/barrel; July’14 was

the last time prices were > $100/barrel• A stronger dollar, potential interest rate hike and slow

growth may contribute to prices staying at low 40’s

Oil

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Gas Storage Levels

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Storage levels at 53% higher than a year ago and 13% lower than 5 year average

Weather Update

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Source: NOAA

• NOAA issued spring forecast• Continued colder temperature

forecasts for the East and warmer across the West

• 6-10 day forecast calls for below average temperatures in the Northeast and above average temperatures in the West.

• The 11-15 day forecast predicts moderate temperatures across much of the United States

PJM: Electric Price Trends

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NY Zone J: Electric Price Trends

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Natural Gas Futures PricesApril 2015 – March 2016

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$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16

$ / D

ekat

herm

Forward Month

1/1/11 1/1/12 12/19/14 2/13/15 3/13/15 3/20/15

Natural Gas Futures

Demand Response

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Order 745

• FERC cannot set compensation for demand response at the retail level• Currently, proceedings before the Supreme Court will determine the outcome• A victory by the generators will deflate revenue to DR providers and their

customers• ISO/PJM policies operate at the interstate level and are moderated by FERC.

Utility run programs are moderated by respective PUC’s. • Order may limit customer participation at the ISO and may result in DR offered

only at an utility level• Generators believe no long term increase in capacity costs is anticipated;

however, DR providers disagree

Energy Delivery Issues

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• Declining System Efficiency Concerns (NYS)• During the past decade, annual system load growth in NYS was 2% • NY State load growth is expected to be 0.16% per year thru 2024; Peak

load is estimated to increase at 0.83% per year (Source: NYISO Power Trends 2014)

• Aging infrastructure (30-40 years old)• Expected to drive up T&D costs; Con Ed has filed for an electric rate

increase in Winter 2015 to be effective early 2016

• Reforming the Energy Vision (REV) Proceedings (NYS)• Proceedings managed by NYS PSC; expected to conclude this year• Designed to optimize electric distribution and reliability• Encourages distributed energy resources in lieu of utility distribution

investments• If successfully implemented, can result in lowering utility delivery bills

Energy Purchasing Process

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Risk Profile Analysis

Hedging Strategies

• Level of Market Exposure

• Price Certainty vs. Float

• Client Education

• Identify Market Trends

• Fixed Prices

• Variable Price (Tied to Index)

• Hybrid (Fixed/Shaped) Block

Price

• Portfolio Approach

Energy Purchasing Process

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Block & Index Strategy• Fixed (24 X 7) Base Block• Shaped Blocks

•On/Off Peak Blocks•Summer/Winter Blocks

• Load following block

Recent Deal Structures

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• Fixed Price• 2 to 3 year terms

• Fixed Price Tranches• 100% Portfolio - 1st year• 66% Portfolio - 2nd year• 33% Portfolio - 3rd year

• Load Following Block & Index• 3 year purchase horizon• 1st year - 75% summer/winter block; 25% shoulder• 2nd & 3rd year – 50% summer/winter block; 25% shoulder

Contracts & Market Timing

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Contract Negotiations

Market Timing

• Pre-Bid Contract Scrutiny• Bandwidth / Material Usage

Deviation• Line Losses• Balancing Pool• Uniform T & C’s

• Trend & Technical Analysis –Lifetime Avg., Gas/Oil in Storage

• Production, Capacity Constraints

• Seasonal – Hurricane, Heating Season Demand, etc.

• Email-Based RFP’s with specific expiration date

Procurement Tools

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Post & Respond RFPs

Online Reverse Auctions• Real-Time negotiation between purchaser and pre-qualified suppliers• No charge for supplier participation• Maximize price compression through feedback to suppliers• Auto-Extension functionality – A bid entered within the last two minutes of

an auction will extend the auction by two minutes.

Due to the volatile nature of energy markets, both processes require seller and buyer to be ready to execute contracts upon reaching buyer’s reserve price.

Procurement Tools

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Rakesh Parasuramanrparasuraman@luthin.com

Luthin Associates535 Main St, Allenhurst, NJ - 07711

Telephone:(732) 774-0005

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Questions