Electric Market Update

Presented by:Don Schierenbeck

Agenda Who is Duke Energy Retail? Duke Energy Ohio’s New Electric Security Plan Understanding the PJM Market Electric Capacity Market Update

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Who is Duke Energy Retail A non-regulated affiliate of Duke Energy Corporation

Fortune 500 Company with assets totaling $53 billion Top 5 in US generating capacity Serves 4 million customers

Part of Duke Energy’s Commercial Business Unit, which manages approximately 14,000 MW’s of non-regulated power generation, primarily centered in Ohio

Competitive Retail Electric Service (CRES) provider to businesses, industrial facilities, aggregated municipalities and multi-site customers throughout Ohio

Serving customers throughout Ohio Duke Energy Ohio territory First Energy territory Dayton Power & Light territory American Electric Power territory

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What’s new with DEO ESP

On Oct 24, 2011, Duke Energy Ohio reaches new ESP settlement with PUCO and all parties for the term of Jan 2012 till May 2015.

By-passable portion: DEO will procure all of its energy, capacity, ancillary and other costs associated with serving SSO through

5 descending-clock auctions; PTC for each individual customer will be determined by averaging auction clearing prices; PTC is set for Jan 2012 till May 2013, with minor true-up adjustment; 84% is set for June 13 till May 2014

& 50% is set for June 14 till May 15.

Non-by-passable portion: Network Integrated Transmission Services (NITS) will be collected through BTR rider from utility bill; Rider Load Factor Adjustment (LFA): impact customers under rate of DS, DP and TS, demand charge @

$8/KW/month and a energy credit of $0.020961/KWh; Transmission voltage customers, bigger than 10MW, can elect to nominate part of their load to interruption

through DEO.

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What does this mean to you?

Understanding the PJM Market

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• Energy market operates much like MISO and consists of Day-Ahead and real-time markets;

• Capacity-”iron in the ground”-to ensure that the demand for electricity can be met at all times;

• Capacity pricing-PJM procures capacity 3 years ahead through auction• The auction to determine the capacity

pricing for June 2015 – May 2016 cleared May 2012.

What is Capacity? You can either purchase a factory, or purchase the factory’s output. When you purchase the factory’s output, there is implicitly some “value of the factory”

embedded in the price, but it is rare to pay a separate price for the factory’s productive capability.

The electric power industry has made a clear distinction between the value of “energy” produced from a power plant and the value of “capacity,” which is the ability of a power plant to generate electric energy.

In today’s competitive markets variable prices are not high enough to induce investors to build new power plants. In order to compensate power plant owners for their investment in generating assets, a separate “demand” or “capacity” charge is paid by customers.

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2011 2012 2013 2014 2015$0

$50

$100

$150

$200

$250

$300

$350

$400

$350 (FE)

$116

$17 $28

$126 $136 (DEO)

Capacity Auction Clearing Prices

How is it Changing?

Calculating Your Capacity Obligation

PJM Planning year runs June 1 – May 31 of each year. Peak Load Contribution (PLC)

Determined by individual electric account Is the customer coincidental contribution to the PJM entire system peak demand PJM utilizes a “look-back” function to determine the PLC “Historically” is a summer peaking system “Historically” happens during on-peak hours in the months of June, July and August Derived by averaging a customer’s five (5) hourly coincidental customer peaks Set for the entire planning year. Your five (5) summer 2012 peaks will determine your June 2013 till May 2014 capacity

payment.

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2010 Peak HoursPeak Day 1 - 7/6/10 @ 17:00Peak Day 2 - 7/7/10 @ 17:00Peak Day 3 - 7/23/10 @ 17:00Peak Day 4 - 8/10/10 @ 17:00Peak Day 5 - 8/11/10 @ 17:00

2011 Peak HoursPeak Day 1 - 6/8/11 @ 17:00Peak Day 2 - 7/19/11 @ 17:00Peak Day 3 - 7/20/11 @ 17:00Peak Day 4 - 7/21/11 @ 17:00Peak Day 5 - 7/22/11 @ 15:00

2012 Peak HoursPeak Day 1 - ?Peak Day 2 - ?Peak Day 3 - ?Peak Day 4 - ?Peak Day 5 - ?

What does all this mean to me?

Theoretically, if you knew when the five hourly PJM system coincidental peak hours, and You could reduce your demand to zero Your “capacity” payment would be zero…

First you have to predict accurately the five hourly peaks… Then getting to zero is not possible for all customers, but even peak shaving by 10% can have

a significant impact on your forward pricing…

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That’s great, but I’m trying to run a plant…

Day of Peak (region) Hour of Peak (region) Customer – Coincidental Peak

7/6/2010 Hour 17 1848kW/hr

07/07/2010 Hour 17 2034kW/hr

7/23/2010 Hour 17 1743kW/hr

8/10/2010 Hour 17 2022kW/hr

8/11/2010 Hour 17 1702kW/hr

1870kW/hr average

Year 12/13 13/14 14/15 15/16 15/16 ($350)1,253$ 2,224$ 10,256$ 11,071$ 28,492$

If Peak shaping 10%, what does it mean to me?

What about Demand Response… How does that fit in?

If you currently participant in Duke Energy Ohio’s Demand Response program, then managing your PLC down to zero may not be in your best interest.

Your Demand Response payment is based on your PLC.

You need to align your energy supply with a trusted energy advisor that can help navigate you through these different options to choose the best mix for your business.

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1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6

2005 2006 2007 2008 2009 2010 2011 2012

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30

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50

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PJM Historical AD HUB DA and RT LMP2005-Present

Average of DAAverage of RT

Generation by Fuel

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2005 2006 2007 2008 2009 2010 201115.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%% Total US Generation by Fuel

CoalGas

Gas Generation has increased by 6%since 2005 while Coal Generation isdown by almost 8%.

Shows Coal to Gas displacement related to price.

Natural Gas Storage

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9001,2001,5001,8002,1002,4002,7003,0003,3003,6003,900

5 Yr Range 5Yr Avg Est Capacity 2011 2012

Natural Gas Storage at historical high for this time of year.

Significant chance of filling up storage before end of the injection season

2011 showed that even under hot summer there is plenty of production to offset demand. Expect a similar case for 2012

Natural Gas Pricing

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Prices are off their 1 year low, but stillSignificantly lower than this time last year.

There are support lines as the market doesn’t want to get caught off guard on a run up.

There are also resistance lines that appear to be building.

6/27/2

011

7/8/20

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7/19/2

011

7/30/2

011

8/10/2

011

8/21/2

011

9/1/20

11

9/12/2

011

9/23/2

011

10/4/

2011

10/15

/2011

10/26

/2011

11/6/

2011

11/17

/2011

11/28

/2011

12/9/

2011

12/20

/2011

12/31

/2011

1/11/2

012

1/22/2

012

2/2/20

12

2/13/2

012

2/24/2

012

3/6/20

12

3/17/2

012

3/28/2

012

4/8/20

12

4/19/2

012

4/30/2

012

5/11/2

012

5/22/2

012

6/2/20

12

6/13/2

012

6/24/2

012

$2.25

$2.75

$3.25

$3.75

$4.25

$4.75

$5.25

$5.75Natural Gas (NYMEX) Prices

Bal 2012Cal 2013Cal 2014

Coal Pricing

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6/27/2

011

7/8/20

11

7/19/2

011

7/30/2

011

8/10/2

011

8/21/2

011

9/1/20

11

9/12/2

011

9/23/2

011

10/4/

2011

10/15

/2011

10/26

/2011

11/6/

2011

11/17

/2011

11/28

/2011

12/9/

2011

12/20

/2011

12/31

/2011

1/11/2

012

1/22/2

012

2/2/20

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2/13/2

012

2/24/2

012

3/6/20

12

3/17/2

012

3/28/2

012

4/8/20

12

4/19/2

012

4/30/2

012

5/11/2

012

5/22/2

012

6/2/20

12

6/13/2

012

6/24/2

012

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Coal (NYMEX) Price

Bal 2012Cal 2013Cal 2014

Though coal prices are low, in portions of the Nation (mainly the Southeast), economics price natural gas generation below coal when you add on the environmental costs.

US Coal Production

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301 6 11 16 21 26 31 36 41 46 51

Mill

ions

of s

hort

tons

Week

2009 2010 2011 2012 5yr Avg

Coal Production

Cheap natural gas prices in the United States has displaced significant amounts of coal generation

Coal consumption is the lowest in decades in the US

As a result of weak domestic demand, coal stockpiles have risen to record levels.

These stockpiles should keep a lid on future demand and ultimately pricing for the near term even if natural gas prices rise and coal generation rebounds

Economic sSlowdown in China, the largest consumer of coal in the world, has resulted in weak international prices

Difficulty in permitting additional export capacity and lots of spare capacity in terms of coal production will reduce volatility experienced in recent years

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Summary The Midwest is coming off the 5th warmest winter in recorded history. Natural gas storage is at an all time high. The EPA’s decision to suspend the first phase of the Cross State Air Pollution Rule (CSAPR)

in late December 2011 has allowed coal burning generation facilities to continue to produce power Will the current Administration rule on CSAPR?

Natural gas prices have remained weak Natural gas fired “peaking” units have become base load units Demand has not returned… yet… Natural gas is in abundance given current “fracking” technology

Will the EPA shut it down due to water contamination issues. What type of summer will 2012 be, and does it really matter? Current energy pricing is a bargain… How will all these issues facing the energy sector impact your pricing? Aligning your energy supply with a trusted energy advisor along with budgeting for 2012 and

beyond is the key to managing your energy purchase successfully.

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Questions

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