CO2 cap would boost Northeast US power price $4/MWh: consultants

Boston (Platts)--6Apr2005

Wholesale power prices in nine northeast states could rise by $4/MWh if the
states agree to impose a cap on power plant emissions of carbon dioxide,
consultants for the Regional Greenhouse Gas Initiative said Wednesday in
Boston. In a presentation to RGGI states, Steve Fine and Chris McCracken, two
emissions experts at ICF Consulting, said cutting CO2 35% below 1990 levels
would increase wholesale electricity prices in the nine states from $38/MWh to
$42/MWh in 2024. 

The 35% reduction scenario is the latest in a series of possible cuts modeled
by ICF. A 25% cut would boost the electricity prices to $40/MWh, Fine said.
The only scenario under which electricity prices would remain flat is a 5%
cut, McCracken said. 

RGGI was created by state officials from New York, Massachusetts, Connecticut,
New Jersey, Delaware, New Hampshire, Maine, Vermont and Rhode Island in an
effort to develop ways of curbing greenhouse gas emissions on a regional
basis. The group is developing a rule to create the nation's first CO2
cap-and-trade program.

If no action is taken, ICF assumes that CO2 would grow from 115-mil short tons
currently to 144-mil short tons by 2024. Under the 35% scenario, ICF estimates
that CO2 allowance prices in the region would start trading at $4.40 and rise
to $12/short ton in 2024. If the states adopt a 25% cut, allowance prices
would start at $2.50 and rise to $6.80/short ton, ICF concluded. 

If the US adopts a national CO2 cap for power plants by 2015 and Canada moves
ahead with the same approach in 2008 under the Kyoto Protocol, trading would
expand and the price of allowances would increase, ICF predicted. Prices could
actually be lower than ICF estimates if the northeastern states allow power
plants to invest in projects such as CO2 sequestration aimed at offsetting
emissions, McCracken said. Once a CO2 cap is set under the RGGI, northeastern
states will decide how their allowances will be allocated.

Michael Bradley, a lobbyist for PSEG and other northeastern utilities, said
states--much to the chagrin of power producers--are unlikely to come up with a
uniform way of allocating allowances. They failed to do so when given the
authority to do so in the existing US emissions markets, Bradley said.

Meanwhile, an economist working with RGGI said the most efficient means of
distributing allowances would be a hybrid of the approaches used under the US
acid rain program, which established sulfur dioxide and nitrogen oxide trading
program for power plants in eastern states. States hope to complete work on a
draft rule and present it to state environment and energy commissioners late
this month, but lingering questions on the price of a cap threaten to delay
the effort, meeting participants said.

This story was originally published in Platts Electricity Alert
http://www.electricityalert.platts.com