Transcript FE Background (Standard Slides)

PRIVILEGED & CONFIDENTIAL — FOR INTERNAL USE ONLY
Shale Gas
One Power Industry Perspective
Lauren Quam
Manager, Market Analytics
FirstEnergy Solutions
Who is FirstEnergy Solutions

Competitive subsidiary of FirstEnergy Corp.
– Nation’s 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 C&I
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
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FirstEnergy’s Unregulated Generating Sources
Ohio
Ohio Edison
The Illuminating Company
Toledo Edison
Pennsylvania
Met-Ed
Penelec
Penn Power
West Penn Power
Coal
Gas/Oil
West Virginia/Maryland/Virginia
Mon Power
Potomac Edison
Hydro
New Jersey
Jersey Central Power & Light
Nuclear
Wind
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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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Demand Curve (Load)

Load Shape

Load Growth
Supply Curve (Generation):

Generation Stack Makeup

Generation Stack Costs
Increasing Variable (Dispatch) Cost - $/MWh
Electricity Market Fundamentals
Peaking
Intermediate / Load Following
Baseload
Time – Hours (Months, Years)
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Natural Gas “Spot” Price
Kingsgate
Ventura
Dominion North Point
Tetco M2
$10.36
10 $7.73 $7.49
5
PG&E
Citygate
$4.16 $4.96
0
Panhandle
2006 2007 2008 2009 2010
Transco Z5
10
$6.45 $6.94
$9.04
Henry Hub
$3.85 $4.56
5
0
2006 2007 2008 2009 2010
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
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Environmental Regulatory Timeline
Ozone (O3)
Begin CAIR
Revised
Phase I
Ozone
Seasonal
NAAQS
NOx Cap
CAIR
Vacated
'08
CAMR &
Delisting
Rule
vacated
Transport Rule
proposal issued
(CAIR Replacement)
SO2 Primary
NAAQS
NO2
Primary
NAAQS
CAIR
Remanded
SOx/NOx
'09
'10
Final Transport
Rule Expected
(CAIR Replacement)
Ozone
NAAQS
Revision
Begin CAIR
Phase I
Annual NOx
Cap
Effluent
Guidelines
proposed rule
expected
SOX/NOx
Secondary
NAAQS
CO2
Regulation
(PSD/BACT)
GHG NSPS
Final
'11
'12
PM/PM2.5
Ash
Effluent Guidelines
Final rule expected
Effluent Guidelines
Compliance 3-5 yrs
after final rule
PM
Transport
Rule
316(b) final
rule
expected
316(b) Compliance
3-4 yrs after final rule
'13
Ozone
Final
Next PM316(b)
Transport
Rule for
2.5
proposed
Rule
CCBs
NAAQS
rule
Mgmt
Revision
expected
GHG NSPS
Proposed
Proposal
Rule for
HAPs MACT Transport Rule
HAPs MACT
CCBs
final rule
Phase I
proposed
Management
expected
Reductions
rule
Begin CAIR
Phase I Annual
SO2 Cap
Water
CAIR/Transport
'14
'16
'15
'17
Transport Rule HAPS MACT
Begin Compliance
Phase II
Compliance 3 yrs
Requirements
Reductions
after final rule
under Final CCB
Rule (ground
water monitoring,
double liners,
closure, dry ash
conversion)
Hg/HAPS
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
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2010 PJM Supply Curve
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2010 PJM Supply Curve
Based on $9 Gas
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End result…Opportunities

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 industry’s 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”
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