(UtiliPoint.com - Sept. 22, 2006)
 

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By Bob Bellemare President and CEO

The United States has thus far resisted both entering into international agreements and implementing federal regulations for curbing carbon dioxide (CO2) emissions. In the past month, however, seven Northeast states and California initiated their own CO2 emissions programs. These initiatives could indeed spell the beginnings of a drive towards federal regulation that may have a profound long-term impact on the electric generation market. The Initiatives

In separate initiatives, seven Northeastern states and California put their stakes in the ground regarding regulating carbon dioxide emission quantities. The states are proposing to cap and then lower their level of CO2 emissions. It is envisioned CO2 emission allowances would be traded to provide impacted facilities with a means for coming into compliance. Such schemes, known as "cap and trade" systems, were successful in ensuring and lowering the cost of compliance for other types of regulated emissions such as nitrogen and sulfur oxides (NOx and SOx).

The seven Northeastern states involved in the so-called Regional Greenhouse Gas Initiative (RGGI) include Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont. Additionally, the state of Maryland recently adopted legislation requiring Maryland to join RGGI by June 2007. The program aims to cap regional CO2 emissions from power plants at their current levels of 121 million tons annually beginning in 2009 and ending in 2015. The states would then reduce the cap over four years to achieve a 10 percent reduction in power plant related CO2 emissions by 2019. RGGI estimates the 2015 total annual direct electricity bill impact to range from $3 - $16 per average household.

Under the RGGI trading program, states will issue allowances, with one allowance representing the right to emit one ton of CO2. Each power plant over 25 MW in size will be required to have enough allowances to cover its reported emissions. The plants can trade (buy or sell) allowances and an individual plant's total CO2 emissions cannot exceed the amount of allowances it possesses.

The RGGI states have agreed that 25 percent of the revenue from the sale of the allowances will be used to support energy efficiency, renewable energy, innovative energy technologies or consumer rebates. The program also allows power plants to use "offset" allowances from other regions and/or from non-power plant applications such as end-use efficiency measures, reforestation, and landfill gas recovery for meeting a portion of their requirements. The amount of offsets that can be used for compliance purposes depends upon the traded price of the CO2 emission allowance as the following table illustrates.



California recently passed a bill requiring the state to reach 1990 levels of greenhouse gas emissions by 2020. That goal equates to a 25 percent decrease, or 174 million metric tons (tonnes), of projected 2020 emissions according to reports. The Bill calls for the State Air Resources Board to adopt the necessary regulations for emission limits to become operative by January 1, 2012. It is expected that about one-third of the reduction would come from a separate law now being challenged by automakers in court that would regulate car tailpipe emissions. Energy-intensive industries such as power plants, refineries and other heavy industry would reduce their emissions through a "cap-and-trade" system.

Potential Implications for Electric Utilities

According to data provided by the Energy Information Administration (EIA), the United States is responsible for 23 percent of the global fossil-fuel related emissions of carbon dioxide, releasing 5,912 million metric tons in 2004. California has the second highest emissions of any state, contributing 383 million metric tons. The RGGI states (inclusive of Maryland) total to nearly 500 million metric tons. Combined, these states represent about 15 percent of the U.S. total CO2 emissions.

While 15 percent may not sound like a large fraction, it may be significant enough to start a trend towards a national carbon regime. One problem with the state-by-state approach to emission regulation is the ability to trade carbon between states or regions will likely be impeded due to different state/regional standards. And although California and Great Britain are looking into ways to trade credits internationally, to make such a mechanism robust the U.S. federal government would likely need to enter into international treaties on the issue, something individual states are prohibited from doing. My expectation, therefore, is that there will be growing pressure on the federal government to pass national regulations to create uniform markets across the United States and to better enable trade of carbon allowances internationally. This type of global regime makes particular sense for CO2 because CO2 emissions are not generally viewed as having localized health impacts. The main health concern with CO2 is that raising CO2 concentrations in the global atmosphere will lead to increasing global temperatures.

The impact on electric generation is potentially profound and certainly has utility planners scratching their heads about what is the best option for new generation supply. Electric generation emissions accounts for 39 percent of the United States CO2 emissions, with 83 percent of those emissions coming from coal fired power plants.

The current average CO2 emission levels from power plants in coal dominate states exceed 0.89 tonnes/MWh. Fortunately new, more efficient, technologies can do better than that. A 2002 technical paper published by Bechtel Power estimates the following CO2 emissions levels for new, large-scale power plants.

Coal fired, supercritical steam plant - 0.8 tonnes/MWh Coal gasification plant - 0.67 tonnes/MWh Natural Gas combined cycle (NGCC) - 0.37 tonnes/MWh Nuclear - 0 To give you an idea of the possible cost risk implications, the cost for CO2 emission credits in markets around the world, such as the European Union which is already trading CO2 allowances under Kyoto, have ranged from $5 to $30 per tonne. Multiplying this cost range by the emission rate estimates, corresponds to a 0.4 to 2.4 cents/kWh CO2 related cost "risk" for a new, coal fired, supercritical steam plant. By comparison a new NGCC plant would have about half the risk range (0.2 to 1.1 cents/kWh potential impact), and nuclear, off course, has no CO2 related risk since it does not emit carbon dioxide when generating power.

With the level of uncertainty in long-range costs, utilities have more incentive to take a look at ways for reducing their CO2 footprint. Unfortunately there are no commercially available technologies for "scrubbing" CO2 emissions so CO2 reduction efforts will likely take the form of constructing new, more efficient coal units, nuclear units, and renewable technologies along with the retirement of less efficient units and investment in energy efficiency measures to stem load growth.

With states plunging into carbon dioxide regulations, the implications on the utility industry could be profound in the next 10 years. Most analysts and industry executives expect federal regulations to take hold somewhere in that timeframe. The uncertainty in potential compliance costs makes resource planning a challenge. This does not, however, spell the end of coal-fired generation. Coal is far too abundant and inexpensive to dismiss it as a viable generation resource. What's more likely is a combination of tools will be used by utilities over time to lower their CO2 footprint.

UtiliPoint's IssueAlert® articles are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's® IssueAlert® articles are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlert articles is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues.

© 2006, UtiliPoint® International, Inc. All rights reserved.

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