New environmental regulations will have significant weight in the utility sector\’s future investment decisions. This presentation examines the requirements of the Cross-State Air Pollution Rule and the compliance strategies available to utility companies that face tight SO2 and NOx caps beginning next year.

1. Cross-State Air Pollution Rule trading
and generation fuels
Ross Allen
Carrie Sisto
15 November 2011
London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing,
Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hamburg and Johannesburg

2. Today’s Agenda
• Development of the SO2 market
• Cross-State Air Pollution Rule requirements
• Compliance options and costs
• Building CSAPR in to fuel quality adjustments

3. From the Acid Rain Program to CSAPR
• Acid Rain Program
– Created by 1990 amendments to Clean Air Act
– SO2 allowance defined as 1 short ton of SO2 emitted
– Emissions well below the nationwide 8.95mn st cap
• Clean Air Interstate Rule
– Uses Acid Rain SO2 allowances
– Eastern generators surrender two allowances/st
• Cross-state Air Pollution Rule
– Created by judicial fiat – CAIR replacement
– New SO2 allowances are created for two new trading programs

4. Clean Air Interstate Rule
SO2 allowances must
be worth a full ton
Reduce upwind states’
emissions
Meet deadlines for
decades-old
standards

5. CAIR’s downfall
CAIR allowance prices
collapsed after a federal
court in 2008 found the
rule violates the Clean
Air Act

6. Cross-State Air Pollution Rule
• Takes effect in 2012
• New allowances
– Cannot use banked allowances
• Limits on interstate trade
– Two SO2 groups, with separate allowances
– No trading between groups
• Destruction of value for existing SO2 allowances
– Acid Rain Program allowances dent Q3 2011 results
• Dominion wrote down $60mn in allowances down to “fair
value” of less than $1mn
• NRG wrote off $160mn in SO2 allowance value in the quarter
• Lost value carved $133mn out of GenOn’s profits

7. Cross-State Air Pollution Rule States

8. SO2 groups

9. Compliance strategies for 2012
• No time to build new control technology
– Long project lead times, short compliance deadlines
• Increased operation of existing controls
– Mild increase in consumables costs, parasitic loads
– Diminishing returns and slight differences
• Coal switching
– Powder River Basin coal is low sulphur…
– …but not all PRB coal is low enough
– And capital costs for logistics and handling changes are high
• Optimizing dispatch
– But optimizing dispatch for emissions control means less
perfectly optimizing dispatch for economics

10. Group 1: nearly 670,000 allowances short
2010 2012 Percent 2010 2012 Percent
State State
Emissions Budget change Emissions Budget change
Ohio 572,119 304,022 -46.9 Tennessee 118,722 145,188 22.3
Pennsylvania 413,438 273,070 -34.0 Wisconsin 109,430 75,501 -31.0
Indiana 412,552 276,855 -32.9 W. Virginia 109,066 135,943 24.6
Kentucky 271,380 218,699 -19.4 Iowa 104,666 104,944 0.3
Michigan 243,411 224,710 -7.7 Virginia 93,389 67,986 -27.2
Missouri 236,193 203,312 -13.9 New York 49,565 33,793 -31.8
Illinois 220,088 223,135 1.4 Maryland 29,947 29,514 -1.4
N. Carolina 120,387 125,927 4.6 New Jersey 15,270 9,613 -37.0

11. Group 1 2012 SO2 emissions limits
Michigan 0.500
Missouri 0.486
Tennessee 0.470
Iowa 0.441
Ohio 0.428
Indiana 0.415
Kentucky 0.414
Illinois 0.391
Pennsylvania 0.369
North… 0.295
West Virginia 0.293
Virginia 0.277
Wisconsin 0.271
Maryland 0.184
New York 0.085
New Jersey 0.049
0 0.1 0.2 0.3 0.4 0.5 0.6
SO2 emissions rate (lb/mmBtu)

12. Group 1 fuel switching not feasible from 2014
Michigan 0.315
Missouri 0.389
Tennessee 0.186
Iowa 0.310
Ohio 0.189
Indiana 0.235
Kentucky 0.189
Illinois 0.207
Pennsylvania 0.148
North… 0.125 2014
West Virginia 0.152
Virginia 0.137
Wisconsin 0.137
Maryland 0.172
New York 0.051
New Jersey 0.035
0 0.1 0.2 0.3 0.4 0.5 0.6
SO2 content (lb/mmBtu)

13. Group 2: more than 230,000 allowances short
2010 2012 Percent
State
Emissions Budget change Nebraska 0.437
Alabama 204,197 211,715 3.7 Alabama 0.395
Georgia 218,911 155,345 -29.0 South Carolina 0.315
Kansas 45,251 40,694 -10.1 Georgia 0.294
Minnesota 0.200
Minnesota 41,574 41,139 -1.0
Kansas 0.190
Nebraska 64,184 62,448 -2.7
Texas 0.130
S. Carolina 94,656 86,848 -8.2
0.0 0.1 0.2 0.3 0.4 0.5
Texas 461,661 301,817 -34.6
SO2 emissions rate (lb/mmBtu)

14. Low-sulfur mines in the PRB
2010
SO2/
Mine production
mmBtu
(mn st)
N. Antelope
105.8 0.45
Rochelle
Antelope 35.9 0.59
Black 0.55/
115.2
Thunder 0.6/≥0.8
Cordero
38.5 0.69
Rojo
Caballo 23.4 0.8
Belle Ayr 25.7 0.77
Rawhide 10.6 0.89

15. Low sulfur, limited supply
Ultra-low sulphur share averaged just 37pc of production
500,000
400,000
289,627
mn st
300,000 284,078 283,905 256,462 260,987
200,000
122,426
100,000
147,000 152,607 162,059 160,644 167,424
83,096
0
2006 2007 2008 2009 2010 H1 2011
Ultra-low sulfur Other Wyoming production
Wyoming coal production 2006-June 2011

16. Costs of new generation: Plant options
Plant Types, Characteristics and costs
Fixed O&M Variable O&M
Capacity Heat Rate Capex
Cost Cost
(MW) (Btu/kWh) ($/kW)
($/kW-yr) ($/MWh)
Advanced PC 650 8,800 3,167 35.97 4.25
Dual Unit Advanced
1,300 8,800 2,844 29.67 4.25
PC
Single Unit IGCC 600 8,700 3,565 59.23 6.87
Dual Unit IGCC 1,200 8,700 3,221 48.90 6.87
Conventional NGCC 540 7,050 978 14.39 3.43
Advanced NGCC 400 6,430 1,003 14.62 3.11
Note: Costs in $2010 Source: EIA

17. Valuing SO2 in generation fuels
• Acid Rain Program SO2
– One market, one price
• Clean Air Interstate Rule
– Two markets, two prices
• Cross-State Air Pollution Rule
– Three markets, three prices

18. Correlating markets: Trends between groups
Group 1 and Group 2 prompt SO2
3,000
2,500
2,000
$/st
1,500
1,000
500
0
30-Aug 19-Sep 6-Oct 25-Oct 11-Nov
Group 1 Group 2

19. Valuing SO2 under CSAPR
• Fragmented SO2 markets
– Price variance between group 1 and 2
– Negligible prices for Acid Rain Program
• Uncertainty
– Rule changes/court decisions
– Market size vs. cap stringency

20. Market development
• Regional trade until 2014? Key dates in CSAPR implementation:
Argus launches vintage 2012 and 2013 CSAPR SO2 group
26-Aug-11 1, SO2 group 2, annual NOx and ozone season NOx
– Larger variability limits assessments
Argus launches vintage 2012 CSAPR SO2 group 1, SO2
• Lack of liquidity providers 30-Sep-11 group 2, annual NOx and ozone season NOx monthly
indexes
– Burned by CAIR 1-Dec-11 Last CAIR ozone season NOx compliance deadline
Argus ceases CAIR ozone season NOx assessment
2-Dec-11
• Natural players are 1-Jan-12
No change in CSAPR assessments
CSAPR SO2 and annual NOx programs launch
1-Mar-12 Last CAIR annual NOx and SO2 compliance deadline
conservative Argus ceases pre-CAIR SO2 and CAIR annual NOx
assessments
– Hesitant at first 2-Mar-12 Acid Rain Program SO2 assessment continues, with
2012 as prompt
– Also burned by CAIR No change in CSAPR assessments
1-May-12 CSAPR ozone season NOx program launches
– Will find opportunities to 1-Dec-12 First CSAPR ozone season NOx compliance deadline
trade Vintage 2013 becomes prompt Argus ozone season
2-Dec-12
CSAPR assessment
1-Mar-13 First CSAPR SO2 and annual NOx compliance deadline
Vintage 2013 becomes prompt Argus CSAPR SO2 and
annual NOx assessment
2-Mar-13
Acid Rain Program SO2 assessment continues, with
2013 as prompt

21. States with proposed changes

22. SIPs planned for 2013

23. Legal hurdles

24. Potential paths for change
DC Circuit Court of
Appeals
Congress EPA

25. Take aways
• CSAPR changes the game for coal-fired generation
– Impossible engineering deadlines
– Tough fleet decisions
• Regulatory and judicial relief unlikely to be
comprehensive
– Around the edges changes possible
– But impossible to bank on
• Argus CSAPR indexes are key tools to manage this risk
– Forward trading kicked off in August, liquidity improving
– Market prices point to growing comfort with compliance options
including fuel switching to natural gas and low sulphur coals

26. For more information:
www.argusmedia.com
+1 (202) 775-0240
ross.allen@argusmedia.com
carrie.sisto@argusmedia.com
London, Houston, Washington, New York, Portland, Calgary, Santiago, Singapore, Beijing,
Tokyo, Sydney, Dubai, Moscow, Astana, Kiev, Hamburg and Johannesburg