Exelon 2015 Annual Report Download - page 43

Table of Contents
: The spot market price of electricity for each hour is generally determined by the marginal cost of supplying the next unit of
electricity to the market during that hour. Thus, the market price of power is affected by the market price of the marginal fuel used to generate the
electricity unit. Often, the next unit of electricity will be supplied from generating stations fueled by fossil fuels. Consequently, changes in the
market price of fossil fuels often result in comparable changes to the market price of power. For example, the use of new technologies to recover
natural gas from shale deposits has increased natural gas supply and reserves, placing downward pressure on natural gas prices and, therefore,
on power prices. The continued addition of supply from new alternative generation resources, such as wind and solar, whether mandated through
RPS or otherwise subsidized or encouraged through climate legislation or regulation, may displace a higher marginal cost plant, further reducing
power prices. In addition, further delay or elimination of EPA air quality regulations could prolong the duration for which the cost of pollution from
fossil fuel generation is not factored into market prices.
The market price for electricity is also affected by changes in the demand for electricity and the available supply of
electricity. Unfavorable economic conditions, milder than normal weather, and the growth of energy efficiency and demand response programs
could each depress demand. The result is that higher-cost generating resources do not run as frequently, putting downward pressure on electricity
market prices. The tepid economic environment in recent years and growing energy efficiency and demand response initiatives have limited the
demand for electricity in Generation’s markets. In addition, in some markets, the supply of electricity through wind or solar generation, when
combined with other base-load generation such as nuclear, could often exceed demand during some hours of the day, resulting in loss of revenue
for base-load generating plants. Increased supply in excess of demand is furthered by the continuation of RPS mandates and subsidies for
renewable energy.
Generation’s retail operations compete for customers in a competitive environment, which affects the margins that
Generation can earn and the volumes that it is able to serve. In periods of sustained low natural gas and power prices and low market volatility,
retail competitors can aggressively pursue market share because the barriers to entry can be low and wholesale generators (including Generation)
use their retail operations to hedge generation output. Increased or more aggressive competition could adversely affect overall gross margins and
profitability in Generation’s retail operations.
Sustained low market prices or depressed demand and over-supply could adversely affect Exelon’s and Generation’s results of operations or
cash flows, and such impacts could be emphasized given Generation’s concentration of base-load electric generating capacity within primarily two
geographic market regions, namely the Midwest and the Mid-Atlantic. These impacts could adversely affect Exelon’s and Generation’s ability to
fund other discretionary uses of cash such as growth projects or to pay dividends. In addition, such conditions may no longer support the
continued operation of certain generating facilities, which could adversely affect Exelon’s and Generation’s result of operations through accelerated
depreciation expense, impairment charges related to inventory that cannot be used at other nuclear units and cancellation of in-flight capital
projects, accelerated amortization of plant specific nuclear fuel costs, severance costs, accelerated asset retirement obligation expense relate to
future decommissioning activities, and additional funding of decommissioning costs, which can be offset in whole or in part by reduced operating
and maintenance expenses. A slow recovery in market conditions could result in a prolonged depression of or further decline in commodity prices,
including low forward natural gas and power prices and low market volatility, which could also adversely affect Exelon’s and Generation’s results of
operations, cash flows or financial positions. See Note 9—Implications of Potential Early Plant Retirements of the Combined Notes to
Consolidated Financial Statements for additional information.
36
Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,
except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.