Shale Gas One Power Industry Perspective

1
Shale Gas One Power Industry Perspective

• Lauren Quam
• Manager, Market Analytics
• FirstEnergy Solutions

2
Who is FirstEnergy Solutions

• Competitive subsidiary of FirstEnergy Corp.
• Nations largest investor-owned electric utility
  based on serving six million customers
• Ten utilities throughout OH, PA, NJ, MD, VA and
  WVA
• Fourth largest retail supplier of electricity in
  US to CI accounts
• Fifth largest retail supplier to residential
  electric accounts
• FES family of companies owns approximately
  21,000 MW of unregulated generating capacity
• Non-emitting nuclear, scrubbed baseload coal,
  natural gas, pumped-storage hydro and other
  renewables

3
FirstEnergys Unregulated Generating Sources
Ohio Ohio Edison The Illuminating Company Toledo
Edison Pennsylvania Met-Ed Penelec Penn
Power West Penn Power West Virginia/Maryland/Virg
inia Mon Power Potomac Edison New Jersey Jersey
Central Power Light
Coal Gas/Oil Hydro Wind Nuclear
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States We Serve
Actively serving and selling
Michigan
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Natural Gas Industry Background

• Previously
• North America would be increasingly reliant on
  Liquefied Natural Gas (LNG) imports to
• Meet a growing natural gas demand
• Replace declining domestic production
• Future natural gas prices would be strongly
  influenced by global gas/oil prices
• Natural gas as a fuel for power generation was
  limited to a peaking role
• Today
• Domestic gas reserves measured in decades and
  centuries
• Massive volumes for small increments in drilling
  expense
• Relatively low long-term gas prices
• North American natural gas prices are effectively
  de-coupled from global gas prices
• Poised to become a more baseload fuel due to
  low emissions and cost

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Outline

• Power market mechanics
• Historic gas and power prices
• Key issues for the power industry
• Role of natural gas in power sector
• Impact of unconventional plays like
  Marcellus/Utica

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Electricity Market Fundamentals

• Demand Curve (Load)
• Load Shape
• Load Growth
• Supply Curve (Generation)
• Generation Stack Makeup
• Generation Stack Costs

Peaking
Intermediate / Load Following
Increasing Variable (Dispatch) Cost - /MWh
Baseload
Time Hours (Months, Years)
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Natural Gas Spot Price
Kingsgate
Ventura
Dominion North Point
Tetco M2
PGE Citygate
Panhandle
Transco Z5
Henry Hub
Source Intercontinental Exchange 10x Day Ahead
Natural Gas Pricing Report (Weighted Average
Index per mmBtu.)
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Electricity Spot Price (On-Peak)
Source ISO Day-Ahead prices from PJM, ISO New
England, CAISO, ERCOT, MISO and SPP where
available. Otherwise daily physical power prices
from Enerfax
10
Environmental Regulatory Timeline
Ozone (O3)
SOx/NOx
CAIR/Transport
Water

Effluent Guidelines proposed rule expected
Transport Rule proposal issued (CAIR Replacement)
Final Transport Rule Expected (CAIR Replacement)
Begin CAIR Phase I Seasonal NOx Cap
Effluent Guidelines Final rule expected
Revised Ozone NAAQS
SOX/NOx Secondary NAAQS
Effluent Guidelines Compliance 3-5 yrs after
final rule
Ozone NAAQS Revision
PM Transport Rule
SO2 Primary NAAQS
CAIR Vacated
316(b) final rule expected
NO2 Primary NAAQS
CO2 Regulation (PSD/BACT)
316(b) Compliance 3-4 yrs after final rule
GHG NSPS Final
CAIR Remanded
Ozone Transport Rule
Begin CAIR Phase I Annual SO2 Cap
HAPS MACT Compliance 3 yrs after final rule
Transport Rule Phase II Reductions
Next PM-2.5 NAAQS Revision
Begin Compliance Requirements under Final CCB
Rule (ground water monitoring, double liners,
closure, dry ash conversion)
Final Rule for CCBs Mgmt
316(b) proposed rule expected
CAMR Delisting Rule vacated
Proposed Rule for CCBs Management
GHG NSPS Proposal
Begin CAIR Phase I Annual NOx Cap
HAPs MACT final rule expected
Transport Rule Phase I Reductions
HAPs MACT proposed rule
PM/PM2.5
Hg/HAPS
Ash
CO2
-- Adapted from Wegman (EPA 2003) Updated
01-12-11
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Expected Results of Environmental Regulation

• Effect on coal plants
• Estimated 9 GW to 90 GW coal plants will be
  retired
• Remaining plants retrofitted with environmental
  controls
• Natural gas fired power plants
• Existing plants will be required to generate more
• New natural gas fired power plants will be
  constructed, further adding to power sector gas
  demand

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Wide Range of Retirement Expectations
13
2010 PJM Supply Curve
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2010 PJM Supply Curve Based on 9 Gas
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End resultOpportunities

• Natural gas plants will play increasingly
  important role in setting the hourly price of
  electricity and in energy production in general
• Power sector gas demand could increase by
  8-9TCF/year (25) by 2020
• This represents about 1/3 of the total power
  sector electricity production and about 1/3 of
  the total US natural gas demand

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Final Points

• Marcellus/Utica shale production contributes to
  healthy economies and strong domestic natural gas
  supply
• Strong economy benefits the power sector
  however, lower gas prices lead to lower
  electricity prices
• Power industrys generation fleet is changing,
  with natural gas expected to become an
  increasingly important fuel
• Local natural gas resources like Marcellus and
  Utica are key to future U.S. natural gas supply
  picture
• New market dynamics set the stage to achieve
  operational synergies