APS Resource Management February 10 2017 APS Resource

APS Resource Management February 10, 2017

APS Resource Management • Purpose: – Optimize the use of APS resources to provide the lowest cost reliable power to our customers • Total fuel and purchased power costs are about $1 B per year: APS Confidential Proprietary

APS Resource Management • What we do: – Forecast system load (total customer demand) and renewable resource production – Economically commit resources to meet demand – Procure and arrange for delivery of necessary fuel supplies – Make sales and purchases based off market prices and generation costs – Limit exposure to commodity prices through execution of commodity hedge program – Integrate maintenance into plans – Negotiate and manage long-term wholesale power contracts APS Confidential Proprietary 3

Resource Management - Key Tools Load Forecasting Models Renewable Forecasting Tools (services) Unit Commitment and Dispatch Models Fuel Forecasting and Management Transmission Procurement Electricity Market Transacting Systems Real-time View of Load, Generating Units, Transmission, Market Prices, Gas Pipelines • Support Functions: – Settlement (Back Office) – Energy Risk Management – Legal – Resource Planning and Acquisition • • APS Confidential Proprietary 4

APS Resource. Management – Trading 3 Years to Next Month Current Month to Next Day Current Day to Present Time Term Trading Short-Term Trading Commodity hedge program Long-term transmission procurement Load and weather forecasting Outage planning Coordination of maintenance with Forward sales/purchases Balance supply and demand power plants Next day to balance of the month Load & weather forecasting power and gas trading Economic dispatch of generators Next day transmission Respond to unanticipated events procurement Intraday power and gas trading Transmission procurement Coordinate with power plants on emergent issues Real-Time Trading Analysis Support Scheduling 5

Operations Functions Transmission Operations • • Electric system operations System Reliability Balancing Provide transmission services to 3 rd parties Wholesale Market • • • Utilities Merchant Generators Traders Gas Producers CAISO Buy & Sell Resource Ops Customers • Retail • Wholesale Energy • Dispatch of generation • Ensure sufficient reserves to meet reliability needs • Buy/Sell with wholesale market • Meet fuel requirements APS Confidential Proprietary Generation Resources • APS - Owned Generation Production • Long-Term Contracts Orders 6

Five Major Categories of Resources Nuclear • Palo Verde Coal • Four Corners • Cholla • Navajo Natural Gas Intermediate Units • Redhawk, Gila River, Arlington • West Phoenix Units 1 -5 • Ocotillo Steamers Natural Gas Peaking Units • Sundance • Yucca • West Phoenix, Saguaro, and Ocotillo GTs Renewables (utility-scale) • Wind • Solar • Geothermal/Biomass • Reliable source of carbon-free aroundthe-clock power • Lowest operating cost 1, 146 MWs • Affordable source of around-the-clock power • Relatively expensive and time consuming to start/stop 1, 672 MWs • Large, high efficiency units, with longer ramps and longer minimum up and down times • Reliable and Flexible to System Demands 3, 151 MWs • Small, less efficient units, quick start that can be online in 10 -30 minutes • Very flexible 1, 017 MWs • Clean source of energy with low longterm costs • Inflexible, must take energy as it is produced (non-dispatchable) 840 MWs

2016 - Well Balanced Energy Portfolio 11% 10% 26% Nuclear Coal Natural Gas Renewables 21% Energy Efficiency 32%

Renewable Plants Overview Arizona New Mexico 9 2 16 7 8 California 11 15/18 1 19 14 13 12 20 17 6 AZ Sun Operating Plants 22 10 23 21 4 3 Generating Facility 5 24 Capacity COD 13) Paloma 17 09/12/11 14) Cotton Center 17 10/24/11 15) Hyder 16 10/31/11 16) Chino Valley 19 11/25/12 17) Foothills 17 03/18/13 17) Foothills 18 12/27/13 18) Hyder II 14 12/17/13 21) Gila Bend 32 10/17/14 22) Luke AFB 10 09/18/15 23) City of Phoenix 10 09/18/15 EPC In Development Generating Facility 7 24) Red Rock Capacity COD 40 03/01/17

Transmission, Generation & Trading Hubs • Palo Verde • Four Corners • Mead = 500 k. V = 345 k. V = 230 k. V = 69 k. V APS Confidential Proprietary 10

Natural Gas Pipelines Serving Arizona APS Confidential Proprietary 11

Commodity Hedge Program • Purpose: – Dampen price risk and volatility for APS customers – Program is systematic and independently monitored by Risk Management • Parameters: – 3 year rolling program – Current volumes: • Approximately 150 BCF of natural gas • Equivalent to 19, 800 GWHs • Notional value of $421 M APS Confidential Proprietary

Daily Communications and Coordination • 7: 30 AM – Daily Management Meeting – Review current day plan, next day plan, and near term outlook – Includes updates from Term Trading and weather • 8: 00 AM – Fossil Generation Morning Call – Present current and projected next day plan to Fossil Generation • 8: 30 AM – Resource Operations Daily Coordination Call with Energy Control Center (ECC) – Discuss Daily Plan and current transmission and generation constraints • 1: 00 PM – – Daily Resource Operations Turnover Meeting Short Term plan for next day turned over to Real-Time update of current and next day gas plan Daily compliance updates APS Confidential Proprietary 13

Energy Imbalance Market (EIM) “the newest tool” 14

Customer Load Net of Renewables (Actual data from May 5, 2015) 3490 3470 MWs 3450 Variability of Net Load Intra-hour 3430 3410 3390 3370 3350 0 Minutes 60 • Customer demand constantly fluctuates • Demand can trend up/down during the hour • Renewable output can vary (intermittency) 15

The Role of. EIM - Findingthe Optimal. Solution Hedging up to 3 years Month Ahead Day Ahead Inside the Hour Ahead With EIM Hedging up to 3 years Month Ahead Day Ahead Hour Ahead 15 minute Ahead Ramp APS Generation Units Up/Down for Balancing Inside of 5 minutes 16

EIM is an easily-scalable extension of the real-time market • Supports integration of renewables by sharing diverse resources across a larger geographical area • Enhances reliability through improved situational awareness in ISO and EIM footprint • Brings down costs by allowing access to a wider array of resources • Balancing authorities maintain control and responsibility for the reliability of their system 8

EIM Footprint • 18

Focus on Solar 19

Solar Resource Growth • California - Renewable Portfolio Standard 50% energy production by 2030 – Rooftop solar is in addition – Utility scale solar currently over 8, 000 MW • APS – utility scale - 500 MW – rooftop > 500 MW growing at 10 -12 MW per month 20

APS Load Shape Prior to Significant Rooftop Solar –Late fall day 4, 500 Flat load middle of day MW 4, 000 3, 500 3, 000 2, 500 Review 2, 000 1, 500 Load 2006 Scaled 1, 000 1 3 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour

Rooftop Solar Impact on APS Load Shape (Late Fall Day 2014 versus 2006) 4, 500 Load middle of day dips MW 4, 000 3, 500 3, 000 2, 500 2, 000 Load 2006 Scaled 1, 500 Load 2014 1, 000 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour

Factoring in all Obligations and Operating Limitations 4, 500 Over generation nears 500 MW 4, 000 1530 MWRamp Down MW 3, 500 1525 MWRamp Up 3, 000 2, 500 2, 000 1, 500 1, 000 Over Gen ~500 MW Redhawk min down time (8 hours) Redhawk min up time (6 hours) Base load units’ minimum generation Total Obligations net of renewables Baseload Min + Hydro + AG 1 + ED 3 + Reg down + min load on gas unit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 5 Hour

Average Hourly Market Prices (Mar-16) 45 40 35 $/MWh 30 25 20 15 10 5 0 Mid-day prices below 1 cent/k. WH 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Hour Ending Note – blue is day-ahead and green is real-time 24

Longer Term Solutions • Creating operational flexibility across generation fleet • Wholesale market changes that diversify load and resources – EIM participation – Developed new wholesale trading options (Trough hours and evening peak products starting soon) • Storage options • Retail rate design changes 8

CAISO Load Shape Reaches 2020 Minimum Load Level Already 9

Renewable Curtailment in CAISO 10