1. Electric Generation at a Crossroads: The Fuels Dilemma THE GEE STRATEGIES GROUP Robert W. Gee President Exnet/The Generation Business 2001 WASHINGTON MAY 21-22, 2001

2. 2 THE GEE STRATEGIES GROUP How are fossil fuel variables affecting competitive prospects for the generation market ? Near-term fuel supply and price trends Long-term market forecast The significance of policy decisions The political variables

3. 3 THE GEE STRATEGIES GROUP The Roller Coaster: Recent Natural Gas Spot Prices

4. 4 THE GEE STRATEGIES GROUP Recent Coal Spot Prices: An Upward Shift Central Appalachia Coal Prices, F.O.B. Mining District (12,500 Btu, 0.6 lbs S/MBtu) Source: Coal Outlook.

5. 5 THE GEE STRATEGIES GROUP What’s In Store Through Next Year?

6. 6 THE GEE STRATEGIES GROUP The Conventional Wisdom In the 1970’s: running out of natural gas/ the solution was coal In the 1980’s and 1990’s: plenty of natural gas/coal was a growing environmental threat In 2001: gas prices and deliverability a growing problem /perhaps coal is the solution again

7. 7 THE GEE STRATEGIES GROUP Important Lesson: Don’t overreact We are bumblers at accurately forecasting long-term (and sometime short-term) trends But we need to correctly identify risks and find ways to hedge

8. 8 THE GEE STRATEGIES GROUP What is true: Both coal and natural gas have advantages and disadvantages The role of each are evolving in an increasingly deregulated market

9. 9 THE GEE STRATEGIES GROUP Natural gas Advantages: cleanest of fossil fuels, short lead and deployment times for gas-fired generation, low up-front capital costs, easier to site, more favorable public image (among fossil fuels) Disadvantages: lack of adequate transmission infrastructure, lack of access to producible areas (onshore and offshore), increasing price volatility attributable to external factors (i.e., OPEC action)

10. 10 THE GEE STRATEGIES GROUP Coal Advantages: low cost, low price volatility, ample volume of indigenous supply Disadvantages: uncertain but increasing environmental compliance requirements (including carbon), poor public image, some recent capacity shortages, recent labor infrastructure shortages

11. 11 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Review 1999 Who gets which fuel: Electricity Flow, 1999 (Quadrillion Btu)

12. 12 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Review 1999 Generation Shares by Source (1999)

13. 13 THE GEE STRATEGIES GROUP The Department of Energy’s 20-Year Long-term Energy Market Outlook Demand for electricity increases per year by 1.8 percent ( to 393 gigawatts) Demand for gas increases per year by 2.3 % (from 21.4 to 34.7 Tcf ) Demand for coal increases per year by 1.1% (from 1.035 to 1.297 million tons) Source: EIA Annual Energy Outlook 2001

14. 14 THE GEE STRATEGIES GROUP The Department of Energy’s 20-Year Long-term Energy Market Outlook U.S. natural gas production increases annually by 2.1 percent (from 18.7 to 29.0 Tcf)/ Imports make up 5.8 Tcf shortfall Coal production increases annually by 0.9 percent (from 1,105 to 1,331 million tons) 1,300 new power plants possibly needed

15. 15 THE GEE STRATEGIES GROUP Source: National Energy Policy Report of the National Energy Policy Development Group, Page X Administration’s 2020 Gas Supply Projection: Short by 13 Tcf

16. 16 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Outlook 2001 1,300 New Power Plants Projected Projected New Generating Capacity and Retirements, 2000- 2020 (gigawatts) 1,300 New Power Plants Projected Projected New Generating Capacity and Retirements, 2000- 2020 (gigawatts)

17. 17 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Outlook 2001 For New Generation, the “Dash for Gas” Continues Projected Electricity Generation Capacity Additions by Fuel Type, Including Cogeneration, 2000-2020 (gigawatts)

18. 18 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Outlook 2001 But By Volume, Coal Retains the Edge Electricity generation by fuel, 1970-2020 (billion kilowatthours)

19. 19 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Outlook 2001 And Coal Also Retains the Price Advantage Fuel prices to electricity generators,1990-2020 (1999 dollars per million Btu)

20. 20 THE GEE STRATEGIES GROUP Source: EIA Annual Energy Outlook 2001 As nuclear plants are retired, coal and gas market share grow Projected electricity generation by fuel, 1999 and 2020 (billion kilowatthours)

21. 21 THE GEE STRATEGIES GROUP Market Share Forecast by 2020 Coal-fired generation increases from 1,880 billion kwh in 1999 to 2,350 billion kwh by 2020, but market share declines from 51 percent to 44 percent Gas-fired generation market share increases from 16 percent to 36 percent by 2020. (By 2004, gas displaces nuclear as second largest source of electricity)

22. 22 THE GEE STRATEGIES GROUP What could change this forecast?

23. 23 THE GEE STRATEGIES GROUP Increased environmental burdens on coal Nox “SIP” (State Implementation Plans) Call/ EPA Regional Smog Limits Impending Mercury controls U.S. agreement and decision to mitigate carbon emissions (other than through Kyoto protocol) A “multi-pollutant” control strategy

24. 24 THE GEE STRATEGIES GROUP A Multi-pollutant Control Strategy EIA Study includes carbon dioxide with sulfur dioxide, and nitrogen oxide controls (mercury later) Price of coal would quadruple, making plant costs uneconomic/ causing “dramatic shift” to gas Coal’s market share would drop to 16 percent while gas’ would leap to 55 percent Source: “Analysis of Strategies for Reducing Multiple Emissions from Power Plants:Sulfur Dioxide, Nitrogen Oxides,and Carbon Dioxide”, EIA, December 2000

25. 25 THE GEE STRATEGIES GROUP A Multi-pollutant Control Strategy (con’t.) Electricity prices would climb by 26 to 32 percent Strategy recently rejected by President in letter to Congress, citing country’s energy needs Source: “Analysis of Strategies for Reducing Multiple Emissions from Power Plants:Sulfur Dioxide, Nitrogen Oxides,and Carbon Dioxide”, EIA, December 2000

26. 26 THE GEE STRATEGIES GROUP Likelihood of carbon controls or a multi-pollutant strategy? Senator Robert Byrd statement on floor of U.S. Senate, May 4, 2001: advocates binding emission limits on all countries Rumored support for some type of multi- pollutant strategy by American Electric Power and Cinergy Announcement by Entergy to voluntarily limit or reduce carbon emissions

27. 27 THE GEE STRATEGIES GROUP Nuclear Power: A Changing Future? Forecast: retirement of 27 percent of existing nuclear capacity, with some license renewals But if waste issue resolved and improved operating characteristics, need for 14 gigawatts of fossil-fired generation negated Assumes no new nuclear capacity through 2020 Different if new capacity realized per Administration’s energy policy recommendation

28. 28 THE GEE STRATEGIES GROUP Future Natural Gas Supply: How Much? Forecast: generally accounts only for supplies from accessible areas Excludes Rocky Mountain and certain offshore reserves currently inaccessible per federal restrictions (National Petroleum Council 1999 Gas Study) Excludes North Slope reserves. Nothing included from Alaska National Wildlife Reserve

29. 29 THE GEE STRATEGIES GROUP Lower 48 Natural Gas Reserves Excluded from Forecast Source: National Petroleum Council

30. 30 THE GEE STRATEGIES GROUP Future Natural Gas Supply: How Much?(con’t.) EIA’s supply projection more optimistic than National Energy Policy Development Group’s Will U.S. production be short by 13 Tcf or 5.8 Tcf (projected imports)?

31. 31 THE GEE STRATEGIES GROUP Gas Delivery Infrastructure: Can it be built? National Petroleum Council: $1.5 trillion in needed capital investment by 2015 to meet gas demand, half for infrastructure 38,000 miles for transmission lines 263,000 for distribution lines EIA Forecast: assumes this will be built, without elaboration Impact of Bush National Energy Policy: ??

32. 32 THE GEE STRATEGIES GROUP Natural Gas: A Political Whipping Boy Politicians and Gas: A Deadly Combination. The Good News: Gas-fired generation available for peaking needs The Bad News: Gas-fired generation available for peaking needs Allegations of market power abuse in California power market Investigation of affiliate collusion in gas delivery at FERC

33. 33 THE GEE STRATEGIES GROUP Will political forces inadvertently discourage gas-fired generation? Irony of being as closely scrutinized as “regulated” companies (after the fact) The escalating cost of business uncertainty Closing the deal in the Hearing Room

34. 34 THE GEE STRATEGIES GROUP Gee’s Crystal Ball For now, even with high environmental risks, coal generation may carry less political risk But because majority of coal-fired generation is utility-owned for now, competitive opportunity for others still centers on gas generation

35. 35 THE GEE STRATEGIES GROUP Crystal Ball (con’t.) Sufficient wholesale and retail transmission capacity and access becomes key for all competitive generation (gas or coal) if market is to grow Power generators will have to develop superior coalition-building skills You can still make money (to keep), but it’s going to take more time and headaches

36. 36 THE GEE STRATEGIES GROUP The Gee Strategies Group Robert W. Gee, Principal 1954 N. Cleveland St. Arlington, VA 22201 (703) 465-9181 (voice and fax) (703) 593-0116 (mobile) Email: racbud@ix.netcom.com For More Information Contact: