What’s Driving Future Power Supply:

1. 800 North Third Street, Suite 303 Harrisburg, Pennsylvania 17102 Telephone (717) 909-3742 Fax (717) 909-1941 What’s Driving Future Power Supply: Remarks Before the Pennsylvania Public Utility Conference Pennsylvania Bar Institute Hilton Harrisburg Hotel May 31, 2011 Presented by: Douglas L. Biden President Electric Power Generation Association

2. Macro Forces Affecting Supply - Summary • Long-term commodity bull market raises cost of new plants while domestic demand slows. • Environmental regulations challenge thermal plants, particularly coal. • State RPS legislation creates mandates that must be met in a slow growth market. • Regulatory uncertainty discourages new supply (particularly baseload) and favors demand side resources. • Shale gas development a “game-changer.”

3. PJM Supply Mix - 2010 • PJM operates wholesale electricity market that serves most of PA and all or part of 13 other states and DC. • These percentage statistics are very similar for PA. • PJM installed capacity on 12/31/10 was 166,512 MW. • Fastest growing generation sources are natural gas, wind and solar.

4. Construction Costs Rising Amidst Slow Growth • Construction costs for new power plants more than doubled since 2000. • Higher worldwide demand for commodities: cement, iron, steel, copper. • Financing larger capital intensive projects (e.g., coal, nuclear) more difficult, especially in slow growth environment – PJM forecasts 1.1% growth in peak over next 15 years. • New market dynamic: Goldman Sachs Commodity Index doubled in last 2 years while natural gas prices have remained flat. • PJM Independent Market Monitor (IMM): most new plants have not covered their fixed costs over the past 11 years, but new gas combined cycle plants have performed better than other new entrants.

5. Environmental Regulations Challenge Thermal Plants • The Four Most Evaluated Proposals • Clean Air Transport Rule • Air Toxics Rule (Utility MACT) • Clean Water Act 316(b) Rule (Intake Structures) • Coal Combustion Residuals Rule (Solid Waste) • Others coming: GHG Regs, Transport 2, tighter ozone, SO2 and particulate standards. • Will there be retirements? NERC estimates 33-70 GW could retire nationwide. PJM IMM estimates 14-19 GW will need additional revenues or may retire. • Other factors: low natural gas prices, low demand growth, RPS mandates. Discourages new coal too.

6. RPS/AEPS Mandates • 9 of 13 PJM states + DC have RPS statutes. • PJM RTEP Report: 100% compliance will require 50,055 MW by 2025 @ 30% capacity factor. • This is approximately equal to total generating capacity of PA (2nd largest generating state in U.S.). Additional RPS capacity needed (40,636 MW) far exceeds expected growth in demand in PJM ( approx. 28,000 MW). • Will crowd out more cost-effective generation, particularly in slow growth environment. • Increasing levels of variable energy resources will greatly increase need for dispatchable ramping capability: quick start CTs, Storage Technologies (Flywheels, Batteries, etc.). • Portfolio reconfiguration over time: changes desired operating characteristics of non-variable capacity – favors less baseload and more nimble generation to back up renewables.

7. Regulatory Uncertainty • State legislative proposals subsidize generation entry for some (e.g., NJ, MD) while others dependent on market incentives – will not work. • Could depress capacity prices. Investment community watching. Adds a risk premium to future supply. • FERC Final Rule on demand response (DR) over-compensates DR. Goal is price suppression for its own sake. If you subsidize you get more than optimal supply of subsidized resource, less of others. • Price suppression can’t persist in long-term equilibrium. Suppliers will respond by retiring more/building less/increasing capacity market offers due to reduced energy margins.

8. Shale Gale Blowing • Shale gas development called the “game changing resource of the decade.” • Growing dependence once considered a threat to reliability. Now less susceptible to disruption in production in GOM. • We had a relatively hot summer followed by a cold winter and gas prices stayed near lowest level in a decade. • U.S. natural gas resource base grew by 61 Tcf in 2010 to record-high assessment of 1,898 Tcf due to shale gas increase. • Among all RTOs, PJM had largest increase in natural gas deliveries to power plants in last 5 years at 149%. • Advantage gas: shorter construction times than nuclear, lower emissions than coal, more reliable than renewables, lowest total cost per MWH.

9. PJM Capacity Queues and Auction Highlights • At 12/31/10, there were 76,415 MW in PJM active or under construction queues. Many projects do not get built. • Breakdown: • Wind 38,301 50.1% • Natural Gas 20,995 27.5% • Nuclear 6,617 8.7% • Steam 5,689 7.4% • Solar, Hydro, Other 4,813 6.3% • Recent Capacity Market Results for 2014/15 delivery year procured 149,974 MW of capacity resources, yielding 19.6% reserve margin. • Renewable resources and DR made up nearly 68% of new capacity available and 10% of cleared resources. • DR resources increased by 52% to 14,118 MW. Wind clearing the auction represents 5,349 MW and solar 120 MW.

10. Concluding Remarks • Wholesale markets still young and evolving but they are all we have to depend on for cost recovery and to assure generation adequacy. • If allowed to work without excessive interference markets will bring forth right combination of generation supply and DR at competitive cost to consumer. • Generation supply a policy/incentive driven industry in a slow growth capital-constrained environment. Investors smart enough to recognize attempts to pick winners and losers and suppress prices. • Investors must be assured markets will not be materially altered by legislators/regulators if we are going to attract the investment/innovation on scale needed to meet future supply challenges.