California Energy Commission Natural Gas Burner Tip Price Model Documented in the report: Estimating Natural Gas Burner Tip Prices for California and the Western United States (CEC ) IEPR Commissioner Workshop on Preliminary Natural Gas Outlook California Energy Commission 1516 Ninth Street First Floor, Art Rosenfeld Hearing Room Sacramento, California Thursday, May 21, 2015 Peter Puglia Supply Analysis Office Energy Assessments Division / (916)

California Energy Commission Purpose of Burner Tip Price Model NAMGas Model does not estimate burner tip prices NAMGas Model provides multi-sector prices of gas at regional hubs, not at the power plant burner tip Burner Tip Price Model provides plausible estimates of proprietary natural gas prices paid by electric generators; assuming future conditions in 2015 IEPR Common Case scenarios Natural gas prices are critical for modeling electric resources dispatch in PLEXOS ® or other grid simulation models PLEXOS ® relies on exogenously derived natural gas prices The Burner Tip Price Model represents a “bridge” between the NAMGas and PLEXOS ® models 2

California Energy Commission Burner Tip Price Model: “Bridge” Between the NAMGas and PLEXOS ® Models 3 NAMGas Model Estimates regional natural gas prices Burner Tip Price Model Estimates natural gas prices at power plant burner tip PLEXOS ® Simulates electric resources dispatch

California Energy Commission Data: Sources and Uses Annual natural gas commodity price –Source: North American Market Gas-trade (NAMGas) Model Computable general equilibrium model reconciles supply, demand and prices at 359 price hubs in U.S., Canada, Mexico Includes Malin, PG&E Citygate, Topock, SoCalGas Citygate, and other California price hubs Prices for 3 Common Cases in the 2015 IEPR –Use: NAMGas Model estimates cost to produce gas from well, process and transport it to price hub near power plant under Common Case scenario assumptions 4

California Energy Commission Burner Tip Price Model Assumptions Generators buy gas on contract; price indexed to liquid, low-volatility price hub Generators buy firm and interruptible pipeline capacity; most capacity bought at interruptible transportation rate Transportation rates assumed flat through forecast horizon; no historical rate pattern for any pipeline 5

California Energy Commission Burner Tip Price Model Assumptions (cont.) Henry Hub best choice to calculate seasonal factors; it is the pricing point for NYMEX gas futures contracts and ICE OTC swaps Staff tested seasonal factors using prices at five WECC price hubs and showed that Henry Hub seasonal factors not statistically different from WECC seasonal factors June-to-May interpolation factors provide better backcast than January-to-December factors January-to-December factors yield large discontinuities at January/December threshold June seasonal factor is closest to one (June price = average annual price) for all historical baselines evaluated 6

California Energy Commission Burner Tip Price Calculation Burner Tip Price = Commodity Price + Pipeline Transportation Price Commodity Price = Seasonal Factor x Interpolated Price Seasonal Factor = Median Monthly Price ∕ Average 2009 – 2014 Price (Prices from NGI Henry Hub Bidweek Survey) Interpolated Price = NAMGas Model Price + Interpolation Factor Interpolation Factor = 1/12 (2 nd -Year Price − 1 st -Year Price) x Month (Gas Prices from NAMGas Model’s IEPR Common Cases) Month = Numerical Rank of Month in June-to-May Burner Tip Model Year (June = 1, July = 2, August = 3, October = 5, etc.) 7

California Energy Commission Algorithm for October Burner Tip Price BT Oct = SF Oct (NAM t1 + IF OctJM ) + PPL The equation’s variables are defined as follows: BT Oct is the October estimated burner tip final price SF Oct is the October seasonal factor –SF Oct = NGI Oct09-14m ⁄ NGI 09-14a –NGI Oct09-14m is the median of six October 2009-to-2014 NGI Bidweek Henry Hub prices –NGI 09-14a is the average 2009-to-2014 NGI Bidweek Henry Hub price NAM t1 is the NAMGas Model first-year price, converted from 2010 dolllars to nominal dollars per million British thermal units (MMBtu) with Moody’s Analytics GDP deflator 8

California Energy Commission Algorithm for October Burner Tip Price (cont.) BT Oct = SF Oct (NAM t1 + IF OctJM ) + PPL IF OctJM is the October interpolation factor for the Burner Tip Model’s June-to-May year –IF OctJM = 1/12 x (NAM t2 – NAM t1 ) x 5 –The factor “1/12” accounts for the 12 months in one year –NAM t2 is the NAMGas Model second-year price, converted from 2010 dollars to nominal dollars per MMBtu with Moody’s Analytics GDP deflator –The factor “5” accounts for the fact that October is the 5th month in the Burner Tip Model’s June-to-May year PPL is the pipeline transportation rate from pipeline utility tariffs, in nominal dollars per MMBtu 9

California Energy Commission Example: October 2020 SoCalGas (Hub Topock/Needles) Burner Tip Price BT Oct = SF Oct (NAM t1 + IF OctJM ) + PPL $6.06 = ($ $0.11) + $0.34 SF Oct = = median(0.8719, , , , , ) = (Oct 2009 NGI Henry Hub price) ⁄ (1/12)(sum 2009 NGI Henry Hub prices) = (Oct 2012 NGI Henry Hub price) ⁄ (1/12)(sum 2012 NGI Henry Hub prices) IF OctJM = 1/12 x (NAM t2 – NAM t1 ) x 5 $0.11 = 1/12 x ($6.042 – $5.776) x 5 10

California Energy Commission Reality Check: Are the Burner Tip Model’s Prices Plausible? NAMGas Model: Computable general equilibrium models, when populated with plausible and coherent assumptions, simulate real markets –Econometric models estimate the future, based on the past Backcast validation using Ventyx burner tip gas prices Evaluation of PLEXOS ® or other system simulation results by experienced power grid modelers using Burner Tip Model prices 11

California Energy Commission Questions or Comments? Burner Tip Model, plus user’s guide and background in the staff report: Estimating Natural Gas Burner Tip Prices for California and the Western United States, at: CEC /index.html 12