Energy and commodity price benchmarking and market insights

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1 Energy and commodity price benchmarking and market insights London, Houston, Washington, New York, Portland, Calgary, Santiago, Bogota, Rio de Janeiro, Singapore, Beijing, Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Porto and Johannesburg Market Reporting Consulting Events

2 The Cross-State Air Pollution Rule: What the Supreme Court ruling means for markets and utilities* Washington, DC Michael Ball, Editor, Argus Air Daily Stephanie Tsao, Reporter, Argus Air Daily 12 May 2014 *This presentation and its content are the copyright of Argus Media, Inc. You may not, without prior written permission, forward or distribute this information externally or use the content for any commercial purposes.

3 Highlights Supreme Court upholds Cross-State Air Pollution Rule What the court said and what it means for utilities A review of the cross-state program How is it structured and how quickly will it come back into effect A look at past cross-state allowance trading and Argus price assessments Compliance and regulatory challenges moving forward How difficult will it be for states to meet the new caps How will other regulations affect cross-state program

4 Argus markets coverage

5 Cross-state revival

6 A brief history DC Circuit Court of Appeals vacates Clean Air Interstate Rule (CAIR) in 2008 Allows CAIR to remain in place while EPA works on replacement EPA issues Cross-State Air Pollution Rule in 2011 DC Circuit stays implementation in December 2011 pending case review DC Circuit in 2-1 decision vacates rule in August 2012 Rules against EPA s methodology for determining good neighbor contributions Says states should have been allowed chance to revise rejected implementation plans

7 Supreme Court decision Supreme Court 6-2 decision on 29 April in EME Homer City v. EPA reinstates cross-state rule Justices overturn DC Circuit ruling High court said EPA acted properly in issuing Federal Implementation Plans when it rejected state plans Court majority also supported EPA s methodology for determining good neighbor obligations Case sent back to DC Circuit for review of unresolved issues

8 Supreme Court decision Ruling appears to put trading programs at least for SO 2 and NO X on solid footing Court said EPA should be afforded great deference to determine most effective way to address interstate transport of emissions Cap-and-trade was not at issue in the case, but the majority decision seemed to endorse it: This type of cap-and-trade system cuts costs while still reducing pollution to target levels It may also help EPA to allow GHG trading in upcoming regulations

9 Cross-state rule overview New allowances Annual and seasonal NO X plus SO 2 groups Cannot use banked CAIR or Acid Rain allowances Limits on interstate trade Two SO 2 groups, with separate allowances No trading between groups Reduce emissions in two phases starting in 2012 Designed to help eastern states meet federal ozone and particulate matter standards

10 CAIR vs cross-state rule coverage CAIR trading Cross-state trading

11 Cross-state emissions caps 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , Annual NOx Ozone NOx Group 1 SO2 Group 2 SO2

12 Next steps for rule Case returns to DC Circuit to resolve outstanding issues Texas challenging inclusion EPA process for imposing FIPs on several upwind states with valid CAIR SIPs DC Circuit could allow implementation to proceed Likely to first ask EPA and other parties to weigh in Other litigation Georgia, Kansas and Ohio contesting determination that SIPs did not meet good neighbor requirements Use of CAIR to meet BART requirements

13 Next steps for rule EPA must decide whether to update compliance timeline Original 2012 and 2014 deadlines have passed Changes would likely require formal rule-making process, which could last at least a year EPA has not yet said what it will do, but is well aware of issues. We will be very sensitive to the fact that we need to get this up and running [with] a time line that would be manageable for all of us. Gina McCarthy, July 2012

14 Cross-state markets

15 Cross-state SO 2 groups

16 000st Traded volumes by month 9 Group 1 traded volume Group 2 traded volume Aug 11 1 Oct 11 1 Dec 11 1 Feb 12 1 Apr 12 1 Jun 12 1 Aug 12 1 Oct 12

17 $/st Cross-state NO X assessments 4,000 3,000 2,000 1, Aug Nov Feb May Aug 12 Cross-state annual NOx allowances Cross-state ozone season NOx allowances

18 $/st Group 1 and 2 SO 2 assessments 3,500 2,800 2,100 1, Aug 11 Nov 11 Feb 12 May 12 Aug 12 Cross-state SO2 Group 1 allowances Cross-state SO2 Group 2 allowances

19 Cross-state compliance

20 Compliance outlook Existing cross-state rule unlikely to require substantial emissions cuts Emissions already at or near second-phase caps for three of the four markets Only SO 2 Group 1 over 2014 cap Mercury and Air Toxics Rule and power plant retirements already driving deep SO 2 cuts Major utilities say they are ready

21 mn st Total emissions from states covered by rule Annual NOx Group 1 SO2 Group 2 SO2

22 mn st 2013 emissions vs caps Budget 2013 Emissions Annual NOX Ozone season NOX Group 1 SO2 Group 2 SO2

23 mn st 2014 caps vs average emissions Budget Average emissions Annual NOx Ozone Season NOx Group 1 SO2 Group 2 SO2

24 Variability limits 2013 SO2 emissions 2014 variability limit 2014 allowance budget Texas South Carolina Nebraska Minnesota Kansas Georgia Alabama st

25 Group 1 SO 2 states short allowances Net Group SO2 allocation 2013 emissions Iowa Virginia West Virginia Illinois Wisconsin Michigan Kentucky Indiana Pennsylvania Ohio st

26 Coal and gas emissions vs caps Lower emissions and coal retirements could mitigate potential shortages in allocation for coal Program Allocation (st) 2013 emissions (st) Net (st) Group 1 SO 2 Coal 1,235,615 1,827, ,563 Group 1 SO 2 Gas 10,765 1,103 9,662 Other allocation* 62,437 62,437 Overall Program 1,324,915 1,834, ,763 Group 2 SO 2 Coal 830, , ,550 Group 2 SO 2 Gas 9, ,503 Other allocation* 23,166 23,166 Overall Program 892, , ,502 Annual NO x Coal 1,022,150 1,062,757-40,607 Annual NO x Gas 71,905 48,169 23,736 Other allocation* 59,022 59,022 Overall Program 1,206,957 1,120,632 86,325 OS NO x Coal 482, ,031-20,524 OS NO x Gas 69,818 47,267 18,289 Other allocation* 31,658 31,658 Overall Program 586, ,116 45,159 *Includes allocation to dual-fuel units burning oil/gas and allocation to retired units

27 Major utilities say they are ready AEP With the retirement and retrofit plan we currently have in place to comply with MATS (the mercury and air toxics standard) and other rules, we expect that the SO 2 and NO X reductions required in the cross-state rule are close to being achieved. Retiring almost 6,600MW of coal-fired capacity in Southern Co. There may be some small change in the dispatch of some of the smaller coal units that are further back in the stack that will not operate a lot. Retiring or converting 2,766MW of coal generation in NRG Energy Multi-fuel approach will help it comply with cross-state rule Expects demand for low-sulfur Powder River basin coal to rise

28 Plant closures will help with compliance Retirements for Group 1 states with large 2014 allowance shortfalls, based on average emissions State MW of nameplate capacity Grand Total Ohio 2, ,131 6,284 Pennsylvania 680 2, ,495 Indiana 914 1, ,403 Kentucky 75 3,338 3,413 Michigan ,501 Wisconsin Total 3,676 2, ,587 1, ,958 Source: Argus coal plant retirement database

29 Texas remains a wild card Only 1,492MW of coal plant retirements scheduled there in Large deficit of budgeted 2014 allowances relative to average emissions

30 Production falling from low-sulfur PRB mines Mine 2011 production (mn st) 2013 production (mn st) N. Antelope Rochelle Antelope Black Thunder Cordero Rojo Caballo Belle Ayr Rawhide Total

31 Cross-cutting regulations

32 Beyond the cross-state rule EPA due to revisit air quality standards that could drive new round of NO X reductions Eastern states also eyeing new NO X limits Industry awaiting EPA proposal for regulating greenhouse gas emissions from existing units

33 Federal air quality standards National Ambient Air Quality Standards revisions Cross-state rule originally intended to address compliance with ozone and the 1997 annual PM 2.5 and the hour PM 2.5 standards Ozone standard updated in 2008 and annual PM 2.5 in 2012 New ozone NAAQS to be proposed in late 2014 EPA has been working on new transport rule due late summer Pollutant Ozone PM 2.5 CSAPR 1997 eighthour 0.08 ppb 1997 Annual 15 mg/m hr 35 mg/m 3 Latest Revision 2008 eighthour ppb 2012 Annual 12 mg/m hr 35 mg/m 3 Further changes? 2015 revision TBD ? n/a

34 Ozone Transport Commission efforts Commission conducted largest contributor analysis Identifies largest NO x -emitting power plants in and outside the OTC region that contribute to nonattainment with the 2008 eight-hour ozone standard Public comment period for analysis closed on 1 May Proposed NO x rates by power plant type to help reduce daily NO x emissions Rates range from 0.125lb/mmBtu to 0.15 lb/mmbtu for solid fuel boilers over a 24-hour averaging period

35 Largest NO X contributing units Source: 10 April OTC presentation

36 Pending EPA regulations 16 May Settlement agreement stipulates that EPA finalize 316(b) fish kill rule (water) 22 May Consent decree deadline for final effluent guideline regulations for steam boilers (water) 1 June- EPA release draft greenhouse gas standards for existing power plants (air) 19 Dec- EPA to finalize coal ash rule (waste) The most recent interstate emissions rule, the Cross- State Air Pollution Rule (CSAPR), would if implemented, also require investments for some fossil-fired power plants in the PJM footprint in order to reduce SO2 and NOX emissions. - PJM 2013 State of the Market report

37 Key takeaways Cross-state rule unlikely to take effect in near term Current emissions caps will not be difficult to meet Sharp cuts in Group 1 SO 2 states could drive some demand for PRB coal Future federal and state regulations likely to have a larger impact on sector

38

39 Any questions?

40 Michael Ball Editor, Argus Air Daily Stephanie Tsao Reporter, Argus Air Daily Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DeWitt, FMB, FUNDALYTICS, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited. Visit for more information. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.