Commodity Forecasting

1. Commodity Forecasting

2. National Drivers & Forecast Assumptions • TVA forecasts reflect current market (forwards) for the first few years of the forecast • Beyond the first few years, the TVA forecast is based upon long-term supply and demand balance 2 TVA Restricted – Deliberative and Pre-Decisional Privileged

3. SO2 and NOx Forecasts • Since the FY 12 Budget, the EPA has clarified CSAPR: • Historical values reflect the recently vacated CAIR • 2014 step-down in emission limits • Fragmented markets compared to CAIR • Utility MACT still drives the U.S. coal controls and portfolio decisions • Depending upon unit controls and fuel selection, this increase may be up to several $/MWh dispatch TVA Restricted – Deliberative and Pre-Decisional Privileged

4. TVA SO2 & NOx Dispatch Adders for TVA (internal) Use • Three Guiding Principles • Plan for “self compliance” • Minimize cost of “self compliance” • Emissions allowances have value TVA Restricted – Deliberative and Pre-Decisional Privileged

5. Pre-Controlled Preferred Coal • Since the FY 12 Budget, compliance coal prices have decreased slightly due to: • CAPP: Reduced demand, in the near term due to low gas prices and longer term due to switching to lower cost PRB and ILB coals. • Regulatory requirements and reserve depletion place upward pressure on production costs, leading to increasing prices through the forecast period • Uinta: Low gas prices and new nuclear units compete with eastern units burning Uinta coal in the short term. Due to high transport costs, lower cost PRB and ILB coals will displace Uinta coals in the longer term • Coal unit retirements, lack of new builds and increased regulatory requirements reduce demand for these coals • International coal pricing continues to provide some opportunities for U.S. thermal coal exports TVA Restricted – Deliberative and Pre-Decisional Privileged

6. Post-Controlled Preferred Coal • Since the FY 12 Budget, the ILB & PRB coal markets have increased due to: • PRB: Reduced demand in the near term due to low gas prices. Increased demand for lower-priced coals in the medium and long term, placing upward pressure on prices • Potential export demand through the PNW could place additional upward pressure on prices • ILB: Reduced demand in the near term due to low gas prices. Reduced mining costs lower price in the mid to long term due to more efficient mining techniques • The last new builds coming online will burn ILB & PRB • ILB & PRB remain more economical than compliance coals through the forecast period TVA Restricted – Deliberative and Pre-Decisional Privileged

7. Natural Gas Supply/Demand Increases • Utilities lead the increase in demand • Utilities are responding to more stringent environmental regulations • US Lower 48 demand increases 7.5 TCF over the forecast period • Nearly 6 TCF of the increased demand comes from the power sector • Shale gas leads the increase in supply • Shale gas will represent nearly 60% of production in 2032, increasing nearly 11 TCF over the forecast period • Net pipeline imports decrease • U.S. LNG Imports are no longer economically viable, with many facilities applying for export permits TVA Restricted – Deliberative and Pre-Decisional Privileged

8. Natural Gas Price • Changes from prior forecast: • Short term prices decreased due to increased shale supply • Medium term increases come from increased power demand due to coal retirements • Long term decreases are due to increased economic reserve estimates • Shale Gas Impacts • Shale continues to increase while conventional production remains flat • Shale supplies account for 60% of 2032 production, up from ~30% today • Prices continue to decline from the spikes of 2008 as low cost shale gas production increases, shifting the supply curve down • Oil and Natural Gas Liquids (NGL) • Natural gas production costs are dampened by NGL production into the oil/gas price spread • LNG exports could put additional upward pressure on prices beyond 2015 if the majority of the nearly 4 TCF of announced export capacity is completed TVA Restricted – Deliberative and Pre-Decisional Privileged

9. National Electricity Outlook • Gas fired generation is relatively inexpensive when compare to other alternatives with similar capacity factors (Coal w/ CCS, Nuclear) • Natural gas will represent up to roughly 75% of all expansion units by 2030 • Gas prices have come down since the FY12 Budget encouraging a greater national build out of gas technologies • Nationally, there will be growth in wind and solar technologies and a small growth in nuclear capacity in the southeast TVA Restricted – Deliberative and Pre-Decisional Privileged

10. TVA Electricity Spot Price Forecast • This is a forecast of “into TVA” power during the 5x16 hours • Low levels of demand, mild weather and favorable fuel prices keep prices low in the short term • The Cross-State Air Pollution rule marginally impacts power prices in the short term to the extent that coal is beating gas to set the marginal price • Favorable gas prices continue to fuel coal on gas competition keeping downward price pressure on power prices • Gas will play an important role in long-term power prices as most new capacity and energy served is from gas-fired generation • Carbon regulation impacts the power forecast beginning in 2022 TVA Restricted – Deliberative and Pre-Decisional Privileged

11. TVA Electricity Spot Price Forecast • This is a forecast of “into TVA” power during the off-peak (not 5x16) hours • CO2 regulation drives prices higher starting in 2022 • Coal plant retirements and future demand for power generation will lead to gas units generating to help meet off-peak power demand TVA Restricted – Deliberative and Pre-Decisional Privileged

12. Appendix TVA Restricted – Deliberative and Pre-Decisional Privileged

13. Coal Benchmarks – Industry Perspective TVA Restricted – Deliberative and Pre-Decisional Privileged

14. Gas Benchmarks – Industry Perspective • PIRA has: • Highest carbon price • Highest gas demand • Highest industrial, commercial, and residential demand • Highest shale supply • CERA has: • Highest gas demand for power generation • Lowest industrial, commercial, and residential demand • Highest net imports TVA Restricted – Deliberative and Pre-Decisional Privileged

15. Power Benchmarks – Industry Perspective • Carbon legislation begins in 2022, with gas on the margin a large percent of the time prices experience a $6 -$8 MWh increase • The impact will vary regionally depending on the efficiency of gas units setting the marginal price • CERA has the highest demand for both gas and power • WoodMac carbon assumption begins in 2022, however is far more aggressive when compared to TVA • CERA has the lowest price for both power and gas in the long-term TVA Restricted – Deliberative and Pre-Decisional Privileged

16. Power Benchmarks – Industry Perspective • CERA has the highest demand for both gas and power • WoodMac carbon assumption begins in 2022, however is far more aggressive when compared to TVA • CERA has the lowest price for both power and gas in the long-term • Assumptions around MACT could place upward price pressure on benchmark pricing in the short term TVA Restricted – Deliberative and Pre-Decisional Privileged

17. Emission Benchmarks – Industry Perspective TVA Restricted – Deliberative and Pre-Decisional Privileged

18. CO2 Benchmarks – Industry Perspective • Ventyx & EIA have “no CO2” in their base case forecasts • Most agree the magnitude of a cap & trade would be less severe than previous estimates TVA Restricted – Deliberative and Pre-Decisional Privileged