Natural Gas and Power Generation
•Natural Gas and Power: A Look at Prices•Carbon Legislation and Power Generation•The future of Power Generation and the Natural Gas Industry•Conclusions and Discussion
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Natural Gas and Power Prices….a little volatility?
Cinergy Hub vs. Henry Hub Prices
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10
20
30
40
50
60
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80
90
100
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Time History
Cine
rgy
Hub
$/M
W
0.000
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Henr
y Hu
b $/
MM
Btu
Historical Cinergy Hub
Futures Cinergy HubHistorical Henry Hub
Futures Henry Hub
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Power Prices and Carbon Legislation: Can Other Fuels Displace Coal?
Midwest Power Generation Capacity
Coal55%
Natural Gas28%
Nuclear8%
Wind6%
Hydro3%
Coal
Natural Gas
Nuclear
Wind
Hydro
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Coal Displacement….Recent Examples Nationally, PIRA estimates September 2009 coal generation
fell 11.8% from September 2008 While power demand only fell 2.6% during the same time
frame??? The disparity between the drop in coal generation and the
drop in power demand indicates a significant amount of “fuel switching” took place
Low cost of spot natural gas resulted in coal-to-natural gas switching, particularly in the Southeast
Wind generation also experienced and increased level of generation during this time frame.
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Where Can Grid Operators Turn If Cost Increases Cause Coal Displacement?
Midwest Capacity Utilization
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10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2004 2005 2006 2007 2008 2009
% U
tiliz
atio
n
Nuclear
CoalNatural Gas
WindHyrdro
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Investors View on Carbon Legislation and the Future of Power Generation?
Midwest Planned Capacity Additions
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1000
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3000
4000
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6000
7000
8000
9000
10000
2010 2011 2012 2013 2014 2015
Volu
me
(MW
s)
CoalNatural GasWind
Hydro
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Noticeable Growth in Renewable Generation Planned
Midwest Generation Capacity - 2009 vs. 2015
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10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Coal Gas Nuc Petro Wind Hydro
Volu
me
(MW
s)
Current Capacity
Projected 2015 Capacity
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Power Generation After Carbon Legislation….. Carbon tax increases the operating cost of coal-fired
generation Can power price increases be contained by
displacement of coal-fired generation Nuclear licensing/permitting and investment issues are
successfully managed ?? Natural gas price volatility is contained ?? Wind generation becomes easier to forecast ?? Other renewable sources of generation become well
established ?? Energy efficiency programs reduce load growth??
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Can Wind Generation Limit Cost of Generation Increases….or Magnify Volatility? Pros:
Significant growth of installed capacity by wind generators over the last 2 years and projected over the next 5 years….capacity will be there
Near zero incremental cost of generation Short development period (as short as 2 years)
Cons: Variable nature of wind - does not coincide with variations in electricity
demand Non-controllable and non-dispatchable practice by wind farms Sudden Changes in wind generation due to cut-off, wind gusts, etc. Minimum generation events magnified by wind generation production
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Growth of Wind GenerationMidwest Monthly Average Wind Generation Volumes (MW)
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500
1,000
1,500
2,000
2,500
3,000
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Term
MW
Vol
ume
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Can Wind Generation Displace Conventional Generation?
Midwest Hourly Wind Gen vs Load
1000
1050
1100
1150
1200
1250
1300
1350
1400
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Hour
Win
d Vo
lum
e (M
W)
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55
60
65
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Load
Vol
ume
(GW
)
Wind Gen Volume (MW)
Midwest Load Volume (GW)
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Natural Gas-Fired Generation: Opportunity for Expansion?? Natural gas-fired generation is the 2nd largest capacity source
for Midwest power generation Capacity usage factors are currently much lower than coal and
nuclear generators Initial Investment costs and licensing/permitting are more
attractive than coal and nuclear Emissions are much lower than coal-fired generation Natural gas-fired generators are much easier to operate than
coal and nuclear generation Start-up and shut-down times are much better
providing much greater flexibility to grid managers
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Natural Gas-Fired Generation: Challenges in Expansion?? Natural gas generators present non-standard
pipeline draws Operation flexibility leads grid managers to rely on natural
gas generators as power demand exceeds forecasts Grid managers reliance on natural gas-fired
generation to offset unpredictable wind generation trickles down to pipelines
Storage is essential to natural gas-fired generation owners…..more generation, more storage demand???
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Time
Cents / kWh
Realignment of asset base, supply constraints through capacity shortages or transmission constraints
Price signals draw in new capacity (construction time-lag 2 -3 years)
Significant capacity additions
Increasing demand, retirements increase price volatility, postponed projects value potential increases
Conclusion: Can Prospect of Economic Recovery and Carbon Legislation Lead the Power Market Higher?
Credit & banking crisis cause economic contraction
Prospect of economic recovery and carbon legislation
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