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

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, (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, (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 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) – * Source: EIA Annual Energy Outlook 2014 Early Release Overview

7 Review of Merchant Power Markets PJM Merchant Power Market – Energy demand characteristics Source: FEP

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 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

9 Review of Merchant Power Markets ERCOT Merchant Power Market – Energy demand characteristics Source: FEP

10 Recession was both short and mild from a load perspective; recovery exceeds the national average 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 Wind accounted for almost a third of the capacity under development in 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

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 Markets Capacity 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

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 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

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 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 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