March 2022 Monthly Monitor

March 2022

Monthly Monitor

INSIDE THIS REPORT: 1

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Natural Gas Market Fundamentals Regional NG - West

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Crude Oil

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Regional Power - CAISO

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Electricity Market

10 Mexico Market 12 Sustainability

Natural Gas Market It’s Complicated: New Variables Impacting the Natural Gas Markets As the Russian invasion of Ukraine continues to unfold, our thoughts and prayers are with the Ukrainian people. While we have yet to understand the full impact of the conflict, we do know that there have already been ramifications that have reached well beyond the borders of those countries and the region.

While the price of energy pales in comparison to the greater concern for the Ukrainian people around the world, the impact of this invasion does indeed impact the price of energy across the globe. Over the last 8-10 years, many European countries have increasingly relied on Russian natural gas and oil to supply the demand of the region. It is estimated that between 30-40% of energy into western Europe is provided by Russia. Thus, when there is potential disruption of energy supply, supply and demand balances are impeded, market concerns grow, and price volatility occurs.

On February 23, Brent crude traded at $97.68/barrel. By March 7, the price rose 17.3% and was trading at over $114. The TTF natural gas April 2022 contract in Europe was trading at $93.14 on 2/24. It is now $121.67--a 30.5% rise.

In the U.S., WTI crude has followed a similar rising trend to Brent, but natural gas pricing has not seen the same impact. Unlike Europe, the U.S. exports a significantly higher percentage of oil production than gas. The U.S. also produces more natural gas than it consumes, leaving excess to be exported to other regions across the world. The result of this major difference is that oil prices trend closer to international pricing, while natural gas prices have detached.

Based on that single data point, one might assume that there should be little to worry about regarding rising natural gas prices long term. But before we bet the farm on that concept, let’s look at just one of several variables that could change the supply/ demand balance in the U.S. over the next six years. That variable is coal-fired power generation retirements.

According to the EPA’s Effluent Limitation Guidelines, which regulate coal ash and toxic metals in wastewater, generators that do not meet the requirement were given an extension to comply until Dec. 31, 2028--if they agreed to retire their plants by that date. The S&P Platts chart above shows the planned coal retirements by year that total 51 GW from 2022-2027 and peaking in 2028, with over 23,000 MW to be shuttered in that year.

Renewable generation will see significant growth into the foreseeable future as we transition to a greener energy market.

Source: S&P Global However, until the bridge to a cleaner world can be built, traditional fuels like natural gas and nuclear will not only be needed but will see growth--especially in states or regions that are still reluctant to embrace the renewables transition. Should that occur, natural gas pricing could rise and experience volatility.

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Edison Energy Monthly Monitor

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Fundamentals Basis Map

NYMEX Settle

Fuel Comparison

Temperature Outlook

Precipitation Outlook

Three Month Outlooks - March-April-May 2022 NOAA Climate Prediction Center | Release Date: February 17, 2022

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Regional Natural Gas West Markets Trade Significantly Higher Natural gas markets in the Rockies, Southern California, and Pacific Northwest continue to trade at significantly higher levels since western region basis markets bottomed in mid-2018, although most are now below recent levels from the summer and fall of 2021.

• The most influential factor pushing western natural gas basis markets higher over the last few years has been the dramatic growth of LNG (liquefied natural gas) exports.

• As of mid-2019, LNG exports averaged about 4-5 Bcf/day. Today, they are nearly 12 Bcf/day. Natural gas produced in west Texas, for example, which previously would have been shipped to southern California, is now being moved eastward across the state of Texas and into the Gulf of Mexico to be transported to higher-priced markets in Europe and Asia.

• For 2022, further increases in LNG exports should push the U.S. above Australia and Qatar as the world’s largest exporter. The U.S. currently exports about 22% of the world’s LNG demand.

• Western Canadian production continues to be trapped by takeaway capacity constraints. While most western natural gas markets bottomed in mid-2018, the AECO forward basis bottomed in early 2019 and continues to trade roughly $1.20/ mmbtu below the Henry Hub price. The AECO market is an exception to the trend occurring directly south of the Canadian border.

• Rockies’ basis markets also bottomed in mid-2018 and have moved steadily higher as some supplies have shifted toward California and the Pacific Northwest.

• The PG&E forward basis market is well above price levels from the past decade but has declined from recent peak prices in late fall and early winter. As with SoCalCitygate, the forward basis chart for PG&E shows that traders’ expectations for significantly higher winter prices were never met. The PG&E forward basis is currently trading about $0.80/mmbtu above the Hub price.

• As with PG&E and SoCal-Citygate, the Sumas forward basis remains well above historical norms and is trading about $0.20/mmbtu above the Hub price.

• The most likely area in the West to see price spikes continues to be Southern California. With limited import capacity and continuing storage constraints from Aliso Canyon, the risk for increased volatility in Southern California is higher than other regional markets.

• As can be seen on the chart on the following page, the SoCal-Citygate forward basis market has declined from a recent peak in the fall but remains well above historical levels:

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Regional Natural Gas West

• SoCalGas’ largest storage field, Aliso Canyon, resumed operations in July 2017 after a massive leak was discovered in October 2015. On October 1, 2021, after the California Public Utilities Commission (CPUC) announced its intention to increase the maximum storage capacity of Aliso Canyon to increase reliability for the winter, the SoCal-Citygate forward markets declined dramatically, as reflected in the above chart. The CPUC later approved an order on November 3rd to increase the maximum storage capacity to 41.16 bcf from 34 bcf, but only temporarily through the current winter. The future operation of the Aliso Canyon storage facility remains in doubt due to much public opposition.

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Crude Oil Commentary Ukraine Invasion Brings Prices Not Seen Since 2011

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NYMEX WTI futures were sharply higher for the week and closed at levels not seen since 2011 due to the escalating invasion of Ukraine.

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The April contract settled at $115.68 up $24.09 per barrel, or 26.3% for the week ending March 4th.

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Russia’s escalating invasion of Ukraine continues to be the primary drivers of global markets.

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With global condemnation of the attacks, greater risk premiums are being added to the oil and products markets, as there is more pressure to officially sanction Russian oil and natural gas, which is Russia’s current source of hard currency.

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In many ways, Russian oil supplies have had de-facto sanctions imposed on oil through their removal from SWIFT, as well as fears of being sanctioned by any party that is found to do business with Russia. This includes oil buyers, vessel operators, and financial institutions.

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It is estimated nearly 70% of Russian crude trade is frozen due to the sanctions and fear of sanctioning.

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Case in point: early in the week, Russian producer Surgut failed to award two tenders of Urals grade crude for a March loading. However, by the end of the week, it was reported Shell bought a cargo of Russian Ural crude at a record discount of $28.50 per barrel below the prevailing Brent market.

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Adding to the volatility was news midweek that a deal to revive the Iran nuclear deal is close.

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This reengagement would effectively lift current oil sanctions on Iran and free up to 1.5-2.0M barrels.

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Given the current inflationary environment and reduced Russian oil supply, western leaders will have more motivation to strike a deal in order to bring Iranian barrels to the supply deficit market.

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During their monthly meeting, OPEC+ stuck with their 400,000 barrels per day monthly increase and did not cave to pressures to increase production.

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Many remain skeptical whether Saudi Arabia and OPEC+ have the spare capacity to increase production to begin with.

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| March 2022

Crude Oil Commentary •

Weekly inventory figures for oil remained supportive. Oil inventories decreased by 2.6M barrels.

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Oil inventories at Cushing, Oklahoma, are near critically low operational levels. With Cushing being the delivery point for the NYMEX WTI contract, low physical inventory leaves the prompt months very vulnerable to extreme upside volatility as the contract enters expiration. Gasoline withdrew 0.5M barrels, while distillate inventories decreased by 0.6M barrels for the week.

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Production continues to hold elevated levels due to increasing rig counts.

Production was unchanged at 11.6M bpd for the week.

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Refinery utilization rates were at 87.7% for the week and compares to 56% for the same week last year.

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Technically, the oil and products complexes have blown through resistance and have reached levels not seen since 2011.

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Price action is acting parabolic, which leaves the market vulnerable to sudden down drafts in price like we saw when news about the Iran nuclear deal was released this week.

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However, given the grave fundamental conditions with over 10% of the world’s oil supply at risk because of sanctions, the path of least resistance will continue to be up and expect backwardation conditions to expand.

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Oil-focused rigs were surprisingly lower by three for the week. Total count is now at 519, or 209 ahead of the same week last year.

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Regional Power CAISO California's 20-Year Transmission Outlook With the continued expansion and planned implementation of renewable electricity resources across the state of California, the California ISO(CAISO) recently released its first-ever 20-year transmission outlook. This outlook outlines the steps necessary to integrate the increasing number of renewable electricity resources coming onto the grid, with nearly 120 GW expected to be added by 2040.

As is often the case with large-scale projects, transmission projects usually have lead times of up to 10 years. Knowing of the transformative electricity resource stack within California, the CAISO President and CEO has said that “there is a critical need for more proactive, long-term transmission planning and coordination.”

As California expands utility-scale solar and wind resources to supplant traditional dispatchable resources of natural gas and nuclear, significant transmission development is needed to effectively access the targeted development of renewable resources both offshore and out of state. Currently, the CAISO has 136 GW in its interconnection queue with proposed online dates now through 2028, with nearly all of that coming from renewable or battery storage resources.

CAISO’s 20-year transmission outlook is intended to provide a plan for the transmission grid over the next 20 years to meet the state’s resource load needs and ensure resource adequacy during the transition to a carbon-free system. The outlook assumes that 120 GW will be added to the CAISO energy grid by 2040 to meet California’s rising demand for electricity. With such an accelerated plan by California LSEs, significant investment will be required to accommodate all the new capacity being added.

What does this mean for California consumers? Expect increasing costs for the transmission component of retail service, as CAISO Is recommending approval of $2.9 billion in projects to be completed over the next 10 years. Most transmission expansion plans that have been implemented by ISOs across the country rarely lead to lower costs and, contrarily, have been the contributor to the largest year-on-year increases in costs for residential and commercial end-users. Will California be the same?

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Electricity Market Deregulated / Active States - States considered to have “healthy” markets where third-party supply opportunities are readily available Limited States - States with limited opportunity

AES Corporation Announces Plans to Exit Coal-Fired Generation Business by End of 2025 In February 2022, utility company Applied Energy Services (AES) Corporation introduced its plans to completely exit the coal-fired generation business by the end of 2025 in an attempt to attract new investors and boost its credit rating.

The AES Corporation is a Fortune 500 global energy company that owns and operates regional utilities and develops renewable energy projects, including forms of clean energy generation and distribution and energy. AES provides utility services to customers in portions of Ohio, Indiana, West Virginia, and Virginia.

AES' coal plant capacity, which peaked at 22,000 MW, is down to approximately 7,100 MW, with nearly half of that remaining capacity in the sale process, according to President and CEO Andrés Gluski.

Industry experts expect companies like AES to accelerate coal exits as pressure to decarbonize prompts aggressive revisions to timelines for achieving net-zero emissions.

While divesting from coal will be a risk, the combined strategy of retirements and asset sales may help AES attain improved level credit ratings, potentially attracting more shareholders due to its efforts to mitigate risk and improve dividends.

On the clean energy side, AES executives indicated that is has nearly 10 GW of planned clean energy capacity in the U.S. that is ready to bid out of a development pipeline totaling about 59 GW, thanks in part to the 2021 acquisition of Pennsylvania-headquartered Community Energy Solar LLC. But while AES was a major provider of corporate renewable power in 2021--including to tech giants such as Alphabet Inc. subsidiary Google LLC and Microsoft Corp.--its stock price has declined more than 13% so far in 2022, a reflection of sector-wide supply chain bottlenecks that have not yet directly impacted the company, according to management.

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Electricity Market Impact of Potential Coal Plant Retirements on PJM Power Costs Coal plants are the primary source of resilience for the power market due to their ability to generate increased power when needed by the system operator to meet demand. Wind and solar cannot increase generation, as these resources already run to capacity when available.

On the other hand, nuclear plants provide reliability but because they are typically operated at maximum levels when the plant is available, their contributions to resilience – or their ability to increase generation when needed-- are minimal.

Natural gas plants provide resilience, as they can readily follow load, except in periods of extreme cold weather when both home heating demand and power demand are at peak at the same time, and gas cannot be delivered in sufficient quantities to support both markets. During these peak periods, coal is the only source of resilience for the power system.

The continued reduction in coal capacity would generally increase the average capacity market price for retail ratepayers in future years. The declining amount of coal capacity clearing electricity auctions each year shows that the capacity clearing price is not sufficient for coal plants to continue operating with off-peak power prices below their dispatch costs (as opposed to natural gas, where almost all the capacity cleared). To remain economic, the coal plants will require capacity payments sufficient to cover their fixed operating and maintenance (O&M) costs.

Change in the markets, including lower energy market prices and declining coal, has caused Regional Transmission Organizations (RTOs) capacity prices to increase in recent electricity auctions. Commercial and industrial customers are charged this capacity component in their monthly electric invoices. This component will see a slight to moderate increase in many regions of the country where RTO capacity auction prices have cleared at higher values than in previous years.

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Mexico Market Mexico's Congress Discusses Energy Reform Proposal Mexico’s Congress recently wrapped up its discussions around the energy reforms proposed last year by President Andrés Manuel López Obrador.

Proponents of the reforms have maintained that if the proposal fails to pass, CFE would reduce its market participation in generation to just 16% over the next eight years. In 2017, CFE had a market participation of 54%, decreasing to 39% in 2020, with stakeholders attributing this decline to restrictive regulations made by the Energy Reform of 2013.

Many of the discussions were centered on the lack of renewable energy investments by CFE, which conflicts with the clean energy transition and global climate objectives.

According to CFE Director Manuel Bartlett, CFE will be generating more renewable energy with the 1 GW Sonora Solar Park, increasing the utility’s market participation from 38% to 40%. However, this will not be enough to comply with international commitments, thus necessitating increased private sector investment.

Supporters of the energy proposal noted the speculative nature of the Wholesale Electricity Market (WEM), which could impose risks to CFE, also adding that to date, CRE and CENACE have not yet achieved their planned objectives. Experts argued that since 2018, energy investments have been used as a partisan tool to wage battle against the government rather than being utilized to increase capacity or build new projects.

Other topics of discussion were centered around CFE’s ability to reduce tariffs should the dispatch order change and favor fossil fuel generation over renewables. Experts have urged that action be taken to lower energy costs and make transmission and distribution more efficient in order to obtain better tariffs.

An opposition political party is expected to present an alternative energy proposal, which could extend the legislative debate until June 2022, after the state elections. While there is no specific timeframe to finalize a decision around the energy proposal, delays in the regulatory process will continue to impact the development of the WEM until a decision is made.

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Mexico Market Average Day-Ahead LMP Prices Jan 17 to Feb 22 (USD/MWh)

Average Real-Time LMP Prices Jan 17 to Feb 22 (USD/MWh)

Differences in RTM and DAM Prices Jan 17 to Feb 22 (USD/MWh)

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Sustainability Unpacking the Infrastructure Bill’s 5 Key Climate Investments In November, Congress passed the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act, a once-in-a-generation investment in the nation’s core infrastructure priorities including roads and bridges, the electric grid, water systems, and broadband. The Act calls for major climate investments, including funds for grid reliability and resiliency, key technologies like carbon capture, hydrogen, direct air capture, and energy efficiency, and a national network of electric vehicle (EV) charging infrastructure.

Energy Infrastructure Data Collection (Section 40412) What it is: The Energy Information Administration (EIA) is directed to establish an online database that tracks the operations of the bulk power system. Within a year, the EIA must expand the dashboard to include hourly data from all U.S. electricity balancing authorities, including to the extent possible, the estimated marginal greenhouse gas emissions by MWh of electricity generated within the balancing authority.

What it means: Access to standardized and granular electricity and emissions data could help corporate buyers develop their renewable procurement strategies around emissionality to maximize greatest decarbonization impact from their actions.

National Electric Vehicle (EV) Formula Program (Division J) What it is: $5 billion is dedicated to strategically building out a national network of vehicle charging, made available under the new National Electric Vehicle Infrastructure (NEVI) Formula Program.

What it means: The program will provide nearly $5 billion over five years to help states create a network of EV charging stations along designated Alternative Fuel Corridors, particularly along the Interstate Highway System. The total amount available to states in Fiscal Year 2022 under the NEVI Formula Program is $615 million. States must submit an EV Infrastructure Deployment Plan before they can access these funds. A second, competitive grant program designed to further increase EV charging access in locations throughout the country, including in rural and underserved communities, will be announced later this year.

Grants for Charging and Fueling Infrastructure (Section 11401) What it is: The Department of Transportation, in coordination with the Department of Energy, will roll out a $2.5 billion competitive grant program through 2026 for publicly accessible EV charging infrastructure. Grants will be offered up to $15 million, prioritizing infrastructure in rural areas and low-to-moderate income communities.

What it means: Additional state and local funding for public charging infrastructure build-out will attract and expedite adoption of EVs by corporate buyers by addressing concerns of range anxiety.

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Energy Efficiency & Conservation Block Grants (Section 40552) What it is: $550 million will be provided to states, cities, and local governments to support energy efficiency, renewable energy, and zero-emission transportation projects. 68% of funds will be set aside for grant awards to cities and counties, 28% awarded to communities through the state energy offices and 2% awarded to Indian tribes. The first funding opportunity is anticipated Fall 2022.

What it means: State and local governments have greater flexibility to administer new program types, such as incentive programs to reduce emissions in commercial buildings.

Smart Grid Investment Matching Grant Program (Section 40107) What it is: $3 billion in matching grants to fund the costs of utilities’ smart grid investments to improve the flexibility of the grid and minimize blackouts during extreme weather events. The grants will be awarded via a competitive solicitation issued by the Department of Energy that is anticipated to open by the end of 2022.

What it means: Enhanced technology to enable grid flexibility and upgraded distribution systems will help fully integrate commercial & industrial distributed energy resources (DERs), giving these DERs (rooftop solar, behind-the-meter battery storage, microgrids, etc.) access to additional revenue streams beyond fixed payments or reduce up front capital requirements. This will further unlock services DERs can offer the grid during times of need.

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