1. WCOAEE Meeting: Natural Gas & Electric Update April 16, 2015

2. Natural Gas System

3. Natural Gas Supply

4. Natural Gas Interstate Pipelines

5. Natural Gas BTU Flow in 2008

6. LNG Imports Rise & Fall on Price Canadian & LNG Import History Canadian Imports Fill Rising US Need & Keep Prices Low Canada Can’t Keep Up & Prices Rise US Production Up, Canadian Imports Down

8. Production increased 30% in 10 years and 5% in past year alone. Declining Production Katrina & Rita

9. Gas Demand

10. Residential Consumption Slow Peak Increase & Highly Weather Dependent Steady Summer Use

11. Commercial Consumption Increasing Winter Peak if Normal Weather Steady Summer Use

12. Higher Beginning Levels Warm Winter Cold Winter Higher Storage Peaks

13. Industrial Consumption Rising Prices & Declining Use Low or dropping prices & Increasing Use

14. Electric Generation Consumption $6.00 $13 $4.80 $4.40 $3.00 $3.50 $3.40 Dramatically Growing Use. Nearly 50% Rise in 10 Years.

15. Regulatory Update  Large expansion of gathering lines is gaining speed in Ohio.  Siting of gas stripping plants is going to accelerate.  Interstate pipeline reversals & expansions will shift basis markets.  Horizontal fracking regulations always a possibility.  If fracking regulations are implemented expect dramatic increases in natural gas, oil & electricity prices.

16. Trends & things to watch for  Gas production has continued to increase BUT…  Oil Price decline will eventually reduce gas production.  Rig Productivity has Increased dramatically in past 5 years.  Low Costs have created future Industrial demand.  Gas use for electricity will continue rising…the pace will be driven by the EPA and the Price.  CNG Trucks and Fleets will continue expanding but more slowly.  LNG Exports Coming in 2016. first to Flow due to Price.

17. Electricity

19. Electricity Supply

20.  Supplying customers is broken into three main components…  Generation (deregulated in Ohio).  Transmission (federally regulated).  Distribution: sub-stations to customer meters (State Regulated).  Generation cannot be easily stored.  It is produced as needed by customers.  Customer consumption varies significantly from day to night or weekdays to weekends.

23. Electricity demand

26. Electricity Demand  Charts show that electricity use rises with growth.  Peak demand has risen faster than Use.  1973 peak month exceeded average monthly use by 10%.  2013 peak month exceeded average monthly use by 15%.  5% may not seem like much but that equals 22,000 MW.  Generation output of FE – Ohio, DP&L & Duke-Ohio combined!

27. Generation Capacity Basics  Electricity can’t be economically stored in large quantities.  FERC assigns balancing generation responsibilities to PJM.  PJM covers 65 million people in 13 states.  Balancing is happening 24 hrs/day….every day.  PJM is broken into Zones by Dist. Utility.  Value of capacity established by Zone.

28. Gen. capacity Basics #2  Generation capacity is imbedded in your electric supply costs.  Amount of capacity needed is established by PJM.  Capacity value by region established via auction.  May 2015 Auction: June 2018-May 2019.  PJm system 18/19 peak Est. @ 175,000 MW.  System includes Reserve margin of 15-20%.  Gen. Cap. Are payments to power generators to meet system needs.  Capacity payments for 16/17 est. @ $5.5 billion

29. How much does this impact Me?  Yearly Capacity cost per MW  Est. Cost imbedded using 200 kW PLC with annual use of 1.0 GWh. TerritoryJun ’13- May ’14 Unit Cost Jun ’14- May ’15 Unit Cost Jun ’15- May ’16 Unit Cost Jun ’16 – May ’17 Unit Cost FirstEnergy2.1 mills9.4 mills21.6 mills6.6 mills Rest of Ohio2.1 mills9.4 mills 9.9 mills4.3 mills

30. State Regulatory Update  Duke, AEP & FE all have ESP Cases pending at the PUCO.  Duke & FE attempting to eliminate load factor riders.  All 3 Utilities are requesting stabilization riders.  Duke is/was only looking for OVEC Pass thru.  AEP initially only looking for OVEC past thru.  FE requested pass thru On 4 plants for 3,200 MW.  AEP increased their pass thru request by 2,700 MW.  AEP & Duke orders issued in past 5 weeks.

31. PJM/Federal Regulatory Update  PJM is tasked with keeping power flowing 24 hrs. x 7 days/week.  winter 2014 peaks were much higher than anticipated.  Lots of generation unavailable.  Winter 2015 peaks > 2014 but system was better prepared.  PJM is starting to modify its system to include winter peaks.

32. Trends/Things to watch for  Additional coal plant retirements if EPA restricts carbon.  Low gas prices = added pressure on coal Plants.  Electric Price squeezes or spikes likely to more frequently.  Very cold weather will trigger electric & gas price spikes as gas delivery capacity is stretched very thin.  Nationwide renewable trend is likely to continue.  Generation capacity cost roller coaster will continue.  Higher ancillary costs and price spikes will make electric suppliers more risk averse and they will add margin to cover.  Ongoing emphasis on energy efficiency will continue.

33. Questions? Mark Frye Palmer Energy/Palmer Conservation mfrye@palmerenergy.com 419-539-9180