Natural Gas and Power Generation Natural Gas and Power: A Look at Prices Carbon Legislation and Power Generation The future of Power Generation and the Natural Gas Industry Conclusions and Discussion

2 Natural Gas and Power Prices….a little volatility?

3 Power Prices and Carbon Legislation: Can Other Fuels Displace Coal?

4 Coal Displacement….Recent Examples Nationally, PIRA estimates September 2009 coal generation fell 11.8% from September 2008 While power demand only fell 2.6% during the same time frame??? The disparity between the drop in coal generation and the drop in power demand indicates a significant amount of “fuel switching” took place Low cost of spot natural gas resulted in coal-to-natural gas switching, particularly in the Southeast Wind generation also experienced and increased level of generation during this time frame.

5 Where Can Grid Operators Turn If Cost Increases Cause Coal Displacement?

6 Investors View on Carbon Legislation and the Future of Power Generation?

7 Noticeable Growth in Renewable Generation Planned

8 Power Generation After Carbon Legislation….. Carbon tax increases the operating cost of coal-fired generation Can power price increases be contained by displacement of coal-fired generation Nuclear licensing/permitting and investment issues are successfully managed ?? Natural gas price volatility is contained ?? Wind generation becomes easier to forecast ?? Other renewable sources of generation become well established ?? Energy efficiency programs reduce load growth??

9 Can Wind Generation Limit Cost of Generation Increases….or Magnify Volatility? Pros:  Significant growth of installed capacity by wind generators over the last 2 years and projected over the next 5 years….capacity will be there  Near zero incremental cost of generation  Short development period (as short as 2 years) Cons:  Variable nature of wind - does not coincide with variations in electricity demand  Non-controllable and non-dispatchable practice by wind farms  Sudden Changes in wind generation due to cut-off, wind gusts, etc.  Minimum generation events magnified by wind generation production

10 Growth of Wind Generation

11 Can Wind Generation Displace Conventional Generation?

12 Natural Gas-Fired Generation: Opportunity for Expansion?? Natural gas-fired generation is the 2 nd largest capacity source for Midwest power generation Capacity usage factors are currently much lower than coal and nuclear generators Initial Investment costs and licensing/permitting are more attractive than coal and nuclear Emissions are much lower than coal-fired generation Natural gas-fired generators are much easier to operate than coal and nuclear generation  Start-up and shut-down times are much better providing much greater flexibility to grid managers

13 Natural Gas-Fired Generation: Challenges in Expansion?? Natural gas generators present non-standard pipeline draws  Operation flexibility leads grid managers to rely on natural gas generators as power demand exceeds forecasts Grid managers reliance on natural gas-fired generation to offset unpredictable wind generation trickles down to pipelines Storage is essential to natural gas-fired generation owners…..more generation, more storage demand???

14 Time Cents / kWh Realignment of asset base, supply constraints through capacity shortages or transmission constraints Price signals draw in new capacity (construction time-lag 2 -3 years) Significant capacity additions Increasing demand, retirements increase price volatility, postponed projects value potential increases Conclusion: Can Prospect of Economic Recovery and Carbon Legislation Lead the Power Market Higher? Credit & banking crisis cause economic contraction Prospect of economic recovery and carbon legislation