Future Power Outlook:

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Future Power Outlook

• The Shakeout

73rd Annual KMU Conference
The Energy Team http//www.theenergyteam.com
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Power industry is at a crossroads

• Natural Gas Outlook
• Mixed fundamentals have created market volatility
• Electric Power Outlook
• Waves of new generating capacity have led to
  oversupply in power markets resulting in
  depressed power prices
• Transmission/Delivery Outlook
• Delays in transmission restructuring (RTOs) have
  induced many challenges
• Renewable Energy Outlook
• New Federal Renewable Portfolio Standards mandate
  will create new requirements for power producers
• These issues are now becoming defining factors
  for differentiationand survival

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Future Power Outlook

• Natural Gas

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Natural Gas Outlook

• Short Term
• Mixed fundamentals have made market volatile

• High levels of natural gas in storage 47 full
  as of 5/1/02, vs. 26 in May 2001

• Economic recovery bringing back industrial demand
• Warm summer weather forecast
• Low rig count

• Oil Prices
• Actual summer weather

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SPP North Spot Gas Prices (/MMBtu)
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Natural Gas Outlook
Mid Term

• Price volatility will continue into 2003
• Prices will climb this fall and will continue to
  rise into 2003
• Production will struggle to meet demand because
  of low rig count
• Demand from gas-fired generation will increase
  from last year
• Price sensitive demand will return industrial
  plants
• Weather will play the biggest role in ultimately
  deciding how high prices go, but prices should
  not rise to the levels reached in winter 00-01

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Why we wont see 10.00 gas in 02-03
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Why we will see 3.00-4.00 gas in 02-03
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Natural Gas Outlook
Long Term

• Long term gas demand growth will be substantial
  resulting from new power generation capacity
• Supply becomes more of an issue as production
  decreases in mature gas fields (such as the
  Anadarko and Hugoton basins)
• No major new natural gas reserves expected for
  several years
• Pipeline infrastructure also becomes concern with
  additional power generation

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Natural Gas Forward Pricing
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Future Power Outlook

• Electric Power

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Electric Power Outlook
Pricing

• Energy prices at historical lows
• Barely cover variable costs of new CC plants
• Volatility expected with natural gas prices
• No price volatility expected due to capacity
  surplus

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Electric Power Outlook
Projected Supply vs. Demand

• Boom of adding new power plant capacity (i.e.
  supplies) at a much faster rate than demand is
  leading to lower power prices
• Most regions face significant surplus in 2002 and
  next few years (even if 50 announced projects
  cancelled
• Market scarcity had been detrimental to consumers
  while projected over-saturation will have
  negative effect for producers
• May take more than 3 years to overcome oversupply
  in power markets

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Generation Projects

• Areas of Concern
• Majority of new generation plants are gas-fired
• On average, new power plants operate only on-peak
  (16 Hr/Day, 150 Days/Yr)
• Heat rate of plants built range from 7,000 to
  8,500
• Power prices will be below levels needed to cover
  fixed costs plus variable costs of power plants
• Down phase in generation will last 3 years with
  generators competing for survival

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Projected Generating Capacity by Fuel
Source NERC ESD for 2001
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Total Generation Mix by Fuel
Coal
Natural Gas
Source NERC ESD for 2001
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Most Significant Growth by Fuel
Other
Natural Gas
Dual Fuel
Source NERC ESD for 2001
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Electric Power Outlook
Generation Projects

• Substantial reductions in capital spending will
  result in construction delays cancellations
• Only projects currently under construction will
  be completed (? 40 of announced plants)
• Additional new construction underway will further
  exasperate oversupply (dampen both price levels
  and volatility of wholesale prices)
• Expect additional cancellations and postponements
  of plants not under construction

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Will excess capacity lead to retirements of
existing generation?

• Retirement strategies will depend on
• Continuing cost-of-service ratemaking
• Potential to reduce costs at plants
• Fragmentation of the market who will make the
  first move?
• Environmental regulations
• Plant owners perception of market recovery
• Retirements not likely until after 2002
• When retirements do occur, they will probably be
  concentrated in Texas, the Northeast, and the West

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SPP New Generation through 2003
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Announced
Const.
Capacity
Demand
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Internal Summer Power Capacity Margin(Total
Internal Capacity Summer Demand)
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Future Power Outlook

• Transmission/Delivery

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Transmission/Delivery Outlook

• Plentiful and Economical Gas and Power is No Good
  Without an Adequate and Accessible Transmission
  System

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How Adequate is the Transmission Grid?
280
1990
260
Actual
TRANSMISSION CAPACITY
1995
(miles/GW demand)
240
2000
220
200
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Dr. Eric Hirst www.EHirst.com
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Congestion Too Much Over Too Little
2000
2001
1999
2002
1998
1997
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How Accessible is the Transmission Grid?
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Roadblocks to Accessibility

• Adequacy - designed for different purpose time
• Some owners still exert market power and some not
  under FERC jurisdiction
• FERCs authority influenced by politics
• Artificial seams and pancaked rates

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When Will Accessibility be Fixed?
FERC Shifting into Passing Gear But Theres
Water in the Gas

• Caution is key after California/Enron events
• Sept 11th added reliability security issues
• FERCs pressing to merge RTO efforts (better
  design but takes longer to develop)
• Complexity requires time to design develop

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Present Status of RTO Participation
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FERCs Goal Seamless Marketplace from RTOs
But FERC takes the slice and dice approach
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Midwest RTO Status

• 2/1/02 MISO providing transmission service for 22
  transmission owning members (16 have turned over
  functional control) and completed merger with 31
  MAPP members
• MISO/SPP plan to merge by Q3, 2002 combine
  tariffs by Q3, 2003
• TRANSLink to start operation under MISO as an ITC
  by 1/1/2003
• Crescent Moon is expected to join MISO as an ITC
  later this year

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Key Elements in FERC April 24th Orders

• Conditional approval of the TRANSLink ITC model
• Alliance members have 30 days to decide which RTO
  to join have guidance on 5 disputed areas with
  MISO
• NOPR issued on standardized interconnection
  procedures (consensus approach)

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A Light at the End of the Tunnel
FERCs White Paper SMD (Standardized
Transmission Service and Wholesale Market Design)

• Centralized markets single NAT (Network Access
  Tariff)
• Markets linked to congestion management tools,
  tradable transmission rights/hedging for price
  certainty
• Long-term planning incorporating demand responses
  with generation/transmission expansion

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Transmission Adequacy/Accessibility?

• After 10 years we are on the down hill side
• Full implementation of large RTOs critical
• Finalizing/Implementing SMD is next key
• Central market and single NAT
• Timely transparent price signals
• Central planning and incentives to build
  transmission
• Need to investigate capacity market (old MOKAN
  pooling concept)

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Future Power Outlook

• Renewable Energy

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Renewable Energy Outlook

• Current struggle to grow natural gas supply
  highlights attractiveness of alternative sources
• National focus on power plants Green House Gas
  Reductions
• Renewable Portfolio Standards incorporated as
  States address customer choice
• Transmission constraints create challenges
  delivering renewable energy

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Renewable Portfolio Standards Overhaul of
National Energy Policy Act

• Implement Renewable Portfolio Standards
• Mandated percentage from specified renewable
  energy sources 10 by 2020
• Wind, hydroelectric, solar energy, landfill gas,
  geothermal, biomass.
• Renewable credits can be used to meet mandates
• Tax incentives 2.3 billion for renewable energy
• Initiatives are being reviewed and implemented in
  17 states.

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Kansas Wind Energy Benefits

• Kansas ranks third among U.S. states in wind
  power potential (1st North Dakota 2nd Texas)
• Gray County Wind Farm reduces carbon dioxide
  emissions by 600 tons annually
• CO2 emission absorption equivalent of a
  120-square mile forest

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Tradable Renewable Credits (TRCs)

• TRCs is the purchase, sell, or trade credits to
  meet voluntary or mandatory Renewable Portfolio
  Standards
• TRCs represent environmental attributes of power
  generated from renewable energy plants
• Aquila is active with the DOE, EPA, Utilities and
  other industrial organizations in pioneering this
  critical renewable market
• Advantages
• Avoids transmission constraints
• Cost efficient No transmission purchase
• No ancillary services required
• Eliminates backing down existing off-peak
  generation

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Summary

• Natural Gas
• Price increase and volatility will continue
• Production will struggle to meet substantial
  demand
• Electric Power
• Oversupply in generation resulting in depressed
  power prices
• Demand for natural gas to generate will continue
  to increase
• Transmission/Delivery
• Delays in restructuring to RTOs has induced many
  challenges
• Significant changes in how we utilize
  transmission will occur before we are done
• Renewable Energy
• Federal Renewable Portfolio Standards create new
  requirements
• Tradable Renewable Credits are seen as the market
  to meet those standards

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