climate policy compliance from an electric utility...

Climate Policy Compliance from an Electric Utility Perspective

EPRI Global Climate SeminarMay 21-22, 2008Victor NiemeyerTechnical Executive

2© 2008 Electric Power Research Institute, Inc. All rights reserved.

Goal is Build on Discussion of Long-term Analyses of Lieberman-Warner

• Focus is very near term – “Year One” and lead-up period• Question is how would electric sector respond to “sudden”

constraint on CO2 emissions– Impact on emissions and drivers– Impact on customers and drivers

• Consistent with long term models, but dig into details• “The first step can be a doozie”


Outline

• Electricity Can Plan Key Role in Near Term• Cutting Electric CO2 Means Cutting Coal, and that's

Expensive• The Near-term Story is Gas• The Near-term Story is Offsets• And the Customer Pays• The Allocation Scramble


L-W Studies Show: Four Paths to Cut CO2

For a source of significant cuts in CO2 in the near term the electric sector may be the economy’s best shot at cutting emissions – but the CO2 price necessary to make that happen could exceed $100/ton

Electric Trans Off-sets ROETiming Sector -portation (rest of econ)Near term 0 ? ?Long term ?


Outline

• Electricity Can Plan Key Role in Near Term• Cutting Electric CO2 Means Cutting Coal, and That's



U.S. Climate Policy Proposals Focused on Cutting Emissions Below Historic Levels


Electric Sector is Major Source of Emissions

Electric sector’s share of national total (2006)•33% of total GHGs•39% of total CO2

Shares within the electric sector CO2

•15% from natural gas ($10/MMBtu)•83% from coal ($2.5/MMBtu)


Outline




Coal-fired Steam – Coal Creek

• Two 550 MW units

• 11,000 Btu/kWh heat rate

• Dispatch cost $16/MWh

• 1.2 tCO2/MWh

• 8,100 hrs in 2005


Natural Gas-fired Combined Cycle – Metcalf

• 417 MW CC



• 0.48 tCO2/MWh

• 4,700 hrs in 2005


Natural Gas-fired Combustion Turbine

• Five 74 MW CTs



• 0.81 tCO2/MWh

• 250 hrs in 2005


Redispatching Metcalf for Coal Creek @ $91/ton

The cost of reducing CO2 emissions through redispatch is calculated by comparing variable costs

$16

$80

1.2tons

ExistingCoal

ExistingGas

0.5tons

• Extra cost: $64

• 0.7 tons CO2 reduced

• Cost/ton = $91

Fuel + VOM ($/MWh)

Capital + FOM ($/MWh)

CO2 tons

Fuel + VOM ($/MWh)Fuel + VOM ($/MWh)

Capital + FOM ($/MWh)Capital + FOM ($/MWh)

CO2 tonsCO2 tons


Transmission Charges May Apply


Cost to Cut Emissions by Redispatch Gas for Coal Highly Sensitive to Price of Natural Gas

$0

$40

$80

$120

$160

$200

$240

$0 $20 $40 $60 $80 $100 $120 $140 $160 $180CO2 Price ($/ton)

Cos

t of E

lect

ricity

($/M

Wh)

X CoalX Gas $12X Gas $10X Gas $8X Gas $6


U.S. Natural Gas Prices Near Historic Highs and Expected to Remain High

Henry Hub Natural Gas - Spot Price History and Futures as of 5-16-08

$0

$2

$4

$6

$8

$10

$12

$14

$16

Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-14 Dec-17 Dec-20

Delivery Date

Pric

e ($

/MM

Btu

- $20

08)

Nat Gas Spot PriceNYMEX Gas Futures


CRAI -- Sensitivity of Natural Gas Consumption to Banking

Gas Consumed by Electric Sector

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2010 2015 2020 2025 2030 2035 2040 2045 2050

Year

Qua

ds

no banking

banking


Total U.S. Electric Sector Gas Burn Highly Sensitive to Higher CO2 Price

• Gas-intense regions greatly increase gas burn w. high CO2 prices

• Increased demand for gas should increase gas price

• Buts…– Electric sector 1/3 of use– Other 2/3’s will have

incentive to cut demand ($1/ton $0.06/MMBtu)

– LNG may be swing supply• Impact on gas market a

critical unknown

Base Case: Gas Burn in 2012 (MMBtu - millions)

0

2,000

4,000

6,000

8,000

10,000

12,000

$0 $20 $40 $60 $80 $100 $120

CO2 Price ($/ton)

Gas

Bur

n in

201

2 (M

MB

tu -

mill

ions

)


Outline




Offsets May be Able to Cut the Electric Sector’s Reduction Burden in Short Term

Electric Trans Off-sets ROETiming Sector -portation (rest of econ)Near term 0 ? ?Long term ?

• Domestic and international opportunities abound• Not being tied by EU policies opens door wider• Require rules and process which take time• New projects take time to arrange, plan, develop, operate,

document, verify, record• Just in time delivery?


With Steep Abatement Curves A Small Number of Offsets Can Have a Big Impact on CO2 Price

Electric Sector CO2 Abatement Curve for 2012

$-

$10

$20

$30

$40

$50

$60

$70

$80

- 500 1,000 1,500 2,000 2,500 3,000CO2 Emissions (tons - millions)

CO

2 Pr

ice

($/to

n)


Outline




EPRI WECC Collaborative Provides Estimate of Impact of CO2 Price on Electric Power Prices

Reference Case: Year 2012 - Wholesale Power Price by CO2 Price

$-

$20

$40

$60

$80

$100

$120

$140

$160

$- $20 $40 $60 $80 $100 $120CO2 Price ($/ton)

Elec

trici

ty P

rice

($/M

Wh)

$1/ton CO2 $0.82/MWh


Impacts of CO2 Price on Electricity Price Shows Critical Role of Allocations

• Link varies by region, time horizon, and is non linear

• This example shows rate increases needed to cover $75/ton CO2 price in WECC

• Example assumes rate-regulated average costs

• Assumes utility purchases 100% of allowances

Components of Rate Increase

$0

$5

$10

$15

$20

$25

$30

$35

Rate-Regulated

Pric

e C

hang

e ($

/MW

h)

Abatement CO2 Allowances


Impacts of CO2 Price on Electricity Price Shows Critical Role of Allocations

• Varies by region, time horizon, and is non linear

• This example shows rate increases needed to cover $75/ton CO2 price in WECC

• Example assumes rate-regulated average costs

• Assumes utility purchases 50% of allowances

Calculations for competitive customers more detailed

Components of Rate Increase

$0

$5

$10

$15

$20

$25

$30

$35

Rate-Regulated

Pric

e C

hang

e ($

/MW

h)

Abatement Allowance PurchasesFree Allocation to Customer


Outline




Emission Reductions from a Utility Perspective

Projected "Compliance "Gap" PowerCo Existing Facilities

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Milli

ons

GH

G E

mis

sion

s (m

etric

tons

CO

2)

AllowancesExisting Facilities

2012 Gap =xx MtCO2

2020 Gap =yy MtCO2


Timing of Allowance Distribution and Compliance for Policy Starting in 2012

02008 2009 2010 2011 2012 2013 2014

Year

1,000

2,000

3,000

4,000

5,000

6,000

CO

2 A

llow

ance

s (M

MT)

Auction - Annual

Load Serving Entities

States

Farmers and forestry

HFC producerEnergy IntensivePetroleum

Electric PowerAuction - Early

SubsidyAllocations

TransitionAllocations

Actual Emissions?Offsets??

?

“Cap”

Compliance Deadline


Compliance Planners Need to Recognize Price Uncertainty

Illustrative CO2 Emissions Price Paths

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

$/to

nne

CO

2

"High" CO2 Price Path"Low" CO2 Price Path


Compliance in a “Low” Price Regime

Closing PowerCo's Projected "Compliance Gap"("Low" Expected $/tCO2 Price)

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Mill

ions

GH

G E

mis

sion

s (m

etric

tons

CO

2)

Biomass Cofiring

Efficiency Improvements

GHG Offsets

Market Purchases

Allowances

BAU CO2 Emissions


Compliance in a “High” Price Regime

Closing PowerCo's Projected "Compliance Gap" ("High" Expected $/tCO2 Price)

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Mill

ions

GH

G E

mis

sion

s (m

etric

tons

CO

2)

Demand Reduction

Biomass Cofiring

Efficiency Improvements

GHG Offsets

BigCoal1 CCS

Market Purchases

Free Allowances

BAU CO2 Emissions


Insights

• Electric sector has potential to significantly cut emission in the near term

• Cutting electric sector emission below existing levels means backing off existing coal

• As existing coal is an extreme bargain compared to gas, very high CO2 prices are needed to effect reductions

• Any offsets in early years can make big difference in CO2prices needed to meet the cap

• High CO2 prices will lead to significant jumps in retail rates, but allocations that reach customers can cut impact

• Compliance will force utilities to juggle participation in volatile markets with lead times for a mix of abatement activities

climate policy compliance from an electric utility...

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