Natural Gas, Electricity and CHP

Natural Gas, Electricity and CHP Evaluating and Marketing CHP May 18, 2005 Joel Bluestein www.eea-inc.com (703) 528-1900

Overview Natural Gas Background Electricity Rate Background Gas, Electricity and CHP 2

Natural Gas Overview Gas is produced by hundreds of independent producers in North America. Gas is delivered to market by independent regulated pipelines. Gas is delivered by utilities. Gas price clears on the North American market. Transmission/delivery price can be locally determined. 3

Regional Gas Prices Gas Price ($/MMBtu) Ilinois $6.56 New York $6.93 Boston $6.72 Texas $6.47 California $5.70 Data Source: Enerfax Daily 5/16/05 4

The Changing Gas Balance Historical Gas Price at Henry Hub ($ per MMBtu) Lower-48 Dry Gas Production vs. Dry Gas Productive Capacity (Bcfd) $10 $9 $8 $7 55 54 53 52 Hurricane Ivan $6 $5 $4 $3 $2 $1 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 51 50 49 48 47 46 45 44 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Productive Capacity Gas Production Divergent trends in gas supply and demand have led to the tight balance between supply and demand, higher gas prices, and increased price volatility. TIGHT BALANCE EXPECTED TO CONTINUE 5

Natural Gas Supply Relying On New Frontiers Production from mature producing areas will decline by 1.3 percent per year. New frontier supplies will account for 35 percent and 51 percent of total U.S. and Canada gas supply in 2010 and 2020, respectively. 40 35 30 25 20 15 10 5 0 TCF Per Year 3.7 TCF 14% 35% 86% 22.0 TCF U.S. And Canada Gas Supply 65% 9.9 TCF 18.9 TCF 51% 49% 2000 2010 2020 17.4 TCF 17.0 TCF New Supply Maritimes Alaska LNG Imports Rockies MacKenzie Delta Deep Gulf Traditional Supply Sources 6

Proposed LNG Terminals Constructed A. Everett, MA : 1.035 Bcfd (Tractebel DOMAC) B. Cove Point, MD : 1.0 Bcfd (Dominion Cove Point LNG) C. Elba Island, GA : 0.68 Bcfd (El Paso Southern LNG) D. Lake Charles, LA : 1.0 Bcfd (Southern Union Trunkline LNG) Approved by FERC 1. Lake Charles, LA: 1.1 Bcfd (Southern Union Trunkline LNG) 2. Hackberry, LA : 1.5 Bcfd, (Sempra Energy) 3. Bahamas : 0.84 Bcfd, (AES Ocean Express)* 4. Bahamas : 0.83 Bcfd, (Calypso Tractebel)* 5. Freeport, TX : 1.5 Bcfd, (Cheniere/Freeport LNG Dev.) 6. Sabine, LA : 2.6 Bcfd (Cheniere LNG) 7. Elba Island, GA: 0.54 Bcfd (El Paso Southern LNG) Approved by MARAD/Coast Guard 8. Port Pelican: 1.6 Bcfd, (Chevron Texaco) 9. Gulf of Mexico: 0.5 Bcfd, (El Paso Energy Bridge GOM, LLC) Proposed to FERC 10. Fall River, MA : 0.8 Bcfd, (Weaver's Cove Energy/Hess LNG) 11. Long Beach, CA : 0.7 Bcfd, (Mitsubishi/ConocoPhillips Sound Energy Solutions) 12. Corpus Christi, TX : 2.6 Bcfd, (Cheniere LNG) 13. Corpus Christi, TX : 1.0 Bcfd (Vista Del Sol - ExxonMobil) 14. Sabine, TX : 1.0 Bcfd (Golden Pass - ExxonMobil) 15. Logan Township, NJ : 1.2 Bcfd (Crown Landing LNG BP) 16. Bahamas : 0.5 Bcfd, (Seafarer - El Paso/FPL ) 17. Corpus Christi, TX: 1.0 Bcfd (Ingleside Energy Occidental Energy Ventures) 18. Providence, RI : 0.5 Bcfd (Keyspan & BG LNG) 19. Port Arthur, TX: 1.5 Bcfd (Sempra) 20. Cove Point, MD : 0.8 Bcfd (Dominion) 21. LI Sound, NY: 1.0 Bcfd (Broadwater Energy TransCanada/Shell) Proposed to MARAD/Coast Guard 22. California Offshore: 1.5 Bcfd (Cabrillo Port BHP Billiton) 23. Louisiana Offshore : 1.0 Bcfd (Gulf Landing Shell) 24. So. California Offshore : 0.5 Bcfd, (Crystal Energy) 25. Louisiana Offshore : 1.0 Bcfd (Main Pass McMoRan Exp.) 26. Gulf of Mexico: 1.0 Bcfd (Compass Port - ConocoPhillips) 27. Gulf of Mexico : 2.8 Bcfd (Pearl Crossing - ExxonMobil) Potential Sites Identified by Project Sponsors 28. Coos Bay, OR: 0.13 Bcfd, (Energy Projects Development) 29. Somerset, MA : 0.65 Bcfd (Somerset LNG) 30. California - Offshore : 0.75 Bcfd, (Chevron Texaco) 31. Pleasant Point, ME : 0.5 Bcf/d (Quoddy Bay, LLC) 32. St. Helens, OR: 0.7 Bcfd (Port Westward LNG LLC) 33. Offshore Boston, MA: 0.8 Bcfd (Northeast Gateway Excelerate Energy) 34. Galveston, TX: 1.2 Bcfd (Pelican Island BP) 35. Pascagoula, MS: 1.0 Bcfd (Gulf LNG Energy LLC) 36. Port Lavaca, TX: 1.0 Bcfd (Calhoun LNG Gulf Coast LNG Partners) 37. Philadelphia, PA: 0.6 Bcfd (Freedom Energy Center PGW) 38. Pascagoula, MS: 1.3 Bcfd (ChevronTexaco)) 39. Cameron, LA: 2.6 Bcfd (Creole Trail LNG Cheniere LNG) 40. Astoria, OR: 1.0 Bcfd (Skipanon LNG Calpine) Canadian Approved and Potential Terminals 41. St. John, NB : 1.0 Bcfd, (Canaport Irving Oil)** 42. Point Tupper, NS 1.0 Bcf/d (Bear Head LNG - Anadarko)** 43. Quebec City, QC : 0.5 Bcfd (Project Rabaska Enbridge/Gaz Met/Gaz de France) 44. Rivière-du- Loup, QC: 0.5 Bcfd (Cacouna Energy TransCanada/PetroCanada) 45. Kitimat, BC: 0.34 Bcfd (Galveston LNG) 46. Prince Rupert, BC: 0.30 Bcfd (WestPac Terminals) 47. Goldboro, NS 1.0 Bcfd (Keltic Petrochemicals) Mexican Approved and Potential Terminals 48. Altamira, Tamulipas : 1.12 Bcfd, (Shell)** 49. Baja California, MX : 1.0 Bcfd, (Sempra & Shell)** 50. Baja California - Offshore : 1.4 Bcfd, (Chevron Texaco) 51. Lázaro Cárdenas, MX : 0.5 Bcfd (Tractebel/Repsol) 7 52. Puerto Libertad, MX: 1.3 Bcfd (Sonora Pacific LNG)

Obstacles For Supply Growth Large Capital Requirements Liquidity Crunch Access Restrictions Investor Recognition of Opportunities Price Volatility Creates Uncertainty Uncertainty About Future Gas Demand E&P Infrastructure & Technology Cumbersome Approvals Process Environmental and Siting Issues There is much uncertainty about future gas supply development. 8

Projected Annual Average Henry Hub Gas Price Continued price pressure likely to persist 11.00 for next few 10.00 years. 9.00 Henry Hub gas prices will average between $5 and $7 per MMBtu - 1990 levels will not return. Fuel Prices (2004 $ per MMBtu) 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Long-term prices in parity with oil prices. Long-term oil price of about $35 per barrel (real$) assumed. 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Natural Gas Residual Fuel Distillate Sources: Historical data from Platts Gas Daily, Projection by 9

AGF SCENARIO ASSUMPTIONS Expected Expanded Existing Drilling Moratoria Unchanged Intermountain West Access Unchanged Alaskan Pipeline 2014 Relaxed Increased Unchanged Unchanged Not Built 2014 2014 Not Built LNG in 2020 18 Bcfd 23 Bcfd 5.3 Bcfd New Gas-Fired Generation 60 GW 30 GW 60 GW 10

AGF Gas Price Scenarios $10 $9 $8 Existing $7 $2003/MMBtu $6 $5 $4 Expected $3 Expanded $2 $1 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 11

CHP and Energy Prices Typical CHP application reduces electricity purchases, increases gas purchases. CHP trades increased capital cost and gas purchases for lower electric purchases. Electricity savings must offset gas and capital costs. 12

The Concern Higher gas prices will swamp electricity savings. A reasonable concern where gas and electricity prices are decoupled. But - electricity markets are changing and increasingly linking to gas markets... 13

The Price of Electricity Average cost/regulated prices vs Marginal cost/competitive prices 14

Historic Electricity Prices Regulated electric rates, based on average cost of utility generation. Majority of electricity generated by lowcost nuclear, coal, hydro assets. Energy cost $25-$35/MWh (2.5-3.5 cents/kwh). Large electric user rates relatively low - <$0.05/kWh ($50/MWh). Retail rates higher than wholesale energy cost. 15

Restructured Electric Prices Wholesale price based on the marginal unit at each hour. Marginal units in many areas are gasfired units for much of the year, even where coal is the primary energy source. In this case, gas and electricity prices are linked. 16

Load Duration Curve 18,000 Peaking Turbines 16,000 14,000 160 Hours 0.1% of Generation 12,000 1100 Hours 2% of Generation MW 10,000 8,000 Cycling Gas, Oil 4700 Hours 90% of Generation Gas Combined Cycle 6,000 4,000 Base Load Coal 8760 Hours 58% of Generation 2,000 - Nuclear 1 1001 2001 3001 4001 5001 6001 7001 8001 Hours 17

When Are Electricity and Gas Linked Restructured electric markets Marginal cost pricing Where gas-fired units are on the margin most of the time. California/Northwest Texas Northeast U.S. Illinois - more and more 18

Wholesale Gas/Electric Price Linkage Gas Price ($/MMBtu) Electricity Price ($/MWh) Ilinois $6.56 $47 New York $6.93 $57 Boston $6.72 $66 Texas $6.47 $48 California $5.70 $52 Data Source: Enerfax Daily 5/16/05 19

Changing Electric Rates Price caps are coming off in restructured markets. Utilities moving to market-based rates for large customers. Electricity prices will track gas prices. Electricity prices are more than the energy component. 20

Comm Ed Example Large customers being transitioned from Rate 6L to Rate HEP. Electricity charged at PJM day-ahead rates plus capacity charges. PJM hourly rates can be low at off-peak times but very high at peak, especially during high demand periods Prices easily over $0.10/kWh during summer. Need to consider future pricing in project evaluation! 21

Conclusions Gas prices are higher and will stay higher. Electricity prices will track gas prices in restructured markets with gas on the margin. Need to consider forward-looking, full cost of electricity in project evaluation. CHP can be competitive in these markets. CHP has greater value than energy commodity price. 22