Transcript Power Prices and Resource Choices in a Carbon

Power Prices and Resource Choices in a
Carbon-Regulated Environment
ROBERT W. GEE
PRESIDENT
GEE STRATEGIES GROUP LLC
UNIVERSITY OF TEXAS SCHOOL OF LAW
2008 CARBON AND CLIMATE CHANGE
AUSTIN, TEXAS
APRIL 25, 2008
Overview
• Current demand and infrastructure outlook for electric sector
• Competing analyses over the price and economic impact of
compliance with cap-and-trade controls over greenhouse gas
emissions (GHG)
• Outlook for resource choices depending upon availability of
emerging technology
• The potential role of retail rate regulators over federal cap and
trade price mitigation
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Current Outlook: Electricity Demand Expected to
Escalate, Necessitating More Generation Capacity
• Electricity sales will grow 1.4 percent annually through 2030
(Energy Information Administration 2007 Annual Energy Outlook)
• Peak demand will grow by 19 percent, or 141 GW, from 2006
through 2015 (North American Reliability Corp.)
• 258 GW of new generation capacity required by 2030 to meet
new demand and replace retired capacity (EIA)
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Utility Capital Expenditures Growing in an
Escalating Cost Environment
•
Economic growth and aging infrastructure will require major capital
expenditures over the next two decades
•
Edison Electric Institute Survey: from 2006 – 2009, $31.5 billion to be
invested in transmission
•
13,000 miles of new transmission added by 2015 -- 6.1 percent increase
in total miles of installed extra high-voltage between 2006 and 2015
(NERC)
•
Materials and labor costs in generation and network infrastructure have
escalated
– From January 2004 and January 2007, prices increased rapidly. Costs for
steam-generation boilers, transmission facilities and distribution-grid
equipment rose by 25 percent to 35 percent
– No cost abatement currently envisioned
Source: Greg Basheda and Marc Chupka, Sticker Shock, Public Utilities Fortnightly (December 2007)
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Supply Resource Choices with Current Technology
Under a Carbon-Constrained Scenario
• Because gas-fired
generation has set marginal
cost of power today, natural
gas prices influence choice
of supply options
• If carbon “penalty” is low,
but gas prices high,
conventional coal is
competitive
Source: E.Spiegel & A. Begosso, Coal’s Black Future, Public Utilities Fortnightly (March 2008)
• If carbon penalty high, and
gas prices high, nuclear
becomes competitive
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What’s Will Be the Electric Price Impact of Carbon
Regulation Compliance Under Cap & Trade?
•
It depends on . . . . . .
•
Whether CO2 regulation is sector specific (e.g., utilities only) or economy wide
•
One’s estimated carbon “penalty” or cost
•
Future costs of various resource technology options and when will they be
available on commercial terms
•
Whether CO2 emission allowance is auctioned or awarded at no cost and which
entity receives it
•
Who you ask
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The Battle of the Consulting Firms: How Difficult or
Easy will Carbon Control Compliance Be?
• Analysis done by McKinsey/Conference
Board
• McKinsey study challenged by CRA
International
• CRA Refuted by Union of Concerned
Scientists
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McKinsey/Conference Board Study
•
Analyzed 250+ opportunities to reduce US GHG emissions by 2030
•
Did not factor adoption of any specific policies (carbon cap, mandates, or incentives), or consumer
responses resulting
•
US emissions of 3 to 4.5 billion gigatons of CO2 could be reduced by 2030 using tested approaches and
high-potential emerging technologies
•
Based on wide array of options available at marginal costs of >$50/ton w/lower net costs to economy if
energy efficiency gains realized
•
Almost 40 percent of reductions realizable at “negative” marginal costs, paying for themselves
•
Example: Greater efficiency in buildings-and- appliances and industrial sectors could offset 80 percent
of projected demand by 2030
•
Carbon Capture & Sequestration (CCS) offers less than 11 percent of potential reduction
•
Requires strong, economy-wide action in near future, including $1.1 trillion in additional capital
expenditures
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CRA’s critique of McKinsey
•
Premised on “engineering” potential and related costs, net of benefits, but not
market response of individuals and organizations to public policies and
economic incentives contained in federal and state legislation
•
Examines only a single year in the distant future (i.e., 2030) and therefore
provides no insight for developing 5- or even 10-year strategies in 2008
•
Fails to consider the complications associated with interrelated macro- and
micro-economic effects of carbon control limits
•
Under CRA’s assessment of Lieberman-Warner bill:
–
Marginal cost of CO2 abatement will be $55 per ton in 2015, $85 per ton in 2030, and
$280 per ton in 2045 (in constant 2007 dollars); therefore, McKinsey $50/ton benchmark
is too low
–
Growth in GDP will be 1.5 percent lower by 2015, and 2 percent lower by 2045 from
“business as usual” case
–
Wholesale electricity prices will be 50 percent higher by 2015, and 80 percent higher by
2045
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Union of Concerned Scientists: CRA’s Analysis
Fails to Consider. . .
• The costs of global warming, such as increased flooding, the
demise of the New Hampshire ski industry, and reduced forest
productivity
• Cost savings from investments in increased efficiency, which
would curb power usage
• Economic gains from technological innovation in response to
carbon caps and other policies
• Additional benefits from combating global warming, including
strengthened national security, lower trade deficits, less air
pollution, and reduced health care costs.
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The EPRI “Prism” (Based on EIA Early Release
Reference Case 2008)
3500
U.S. Electric Sector
CO2 Emissions (million metric tons)
3000
2500
2000
EIA 2008 Early Release
Reference Case (12/07)
Target
Load Growth ~ +1.2%/yr
Load Growth ~ +0.75%/yr
Renewables
60 GWe by 2030
100 GWe by 2030
Nuclear Generation
20 GWe by 2030
64 GWe by 2030
No Existing Plant Upgrades
40% New Plant Efficiency
by 2020–2030
130 GWe Plant Upgrades
46% New Plant Efficiency
by 2020; 49% in 2030
CCS
None
Widely Deployed After 2020
PHEV
None
10% of New Vehicle Sales by 2017;
+2%/yr Thereafter
< 0.1% of Base Load in 2030
5% of Base Load in 2030
Technology
1500
Efficiency
1000
Advanced Coal Generation
500
0
1990
DER
1995
2000
2005
2010
Source: EPRI
2015
2020
2025
2030
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Two Resource Scenarios with Differing
Technology Expectations
*Economy-wide CO2 emissions capped at 2010
levels until 2020 and then reduced at 3%/yr
Source: EPRI
12
Wholesale Power Prices Under “Limited”
versus “Full” Technology Portfolio
180
4.0
160
Index Relative to Year 2000
3.5
140
3.0
120
$/MWh*
2.5
Limited
100
2.0
80
1.5
60
Full
1.0
40
0.5
20
0
2000
2010
2020
2030
*Real (inflation-adjusted) 2000$
2040
0.0
2050
Source: EPRI
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Observations from “Prism”
• Achievement of “Full Portfolio” option rests heavily on:
– Successful timing of commercial availability of emerging technology
(i.e., carbon capture and sequestration, smart grid, et al.)
– Successful nuclear expansion at competitive costs
• Demand reduction an essential option under either scenario
– Under “Limited Portfolio”, will require much greater commitment
– Likely to include demand destruction
• Unsuccessful realization of any of these elements could
aggravate resource adequacy and escalate price pressure
– Example: “Limited Portfolio” contemplates increased reliance on
natural gas
– Power prices likely subject to greater volatility and global
competition for LNG
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EPA’s Assessment of Compliance Costs
• Study issued 14 March 2008, upon request of Senators Lieberman
and Warner to evaluate impact of S.2191(Lieberman-Warner
Climate Security Act of 2008)
• Some assumptions:
– CCS is viable by 2015 and that by 2035 has been deployed in 30
percent of all coal plants
– Nuclear power generation increases by 150 percent between 2005
and 2050
• Will be updated later this year after EIA’s issuance of 2008 Annual
Energy Outlook, which will include the impact of the Energy
Independence and Security Act of 2007
• EIA analysis of S.2191 expected shortly
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EPA’s Assessment (con’t.)
•
•
From Senators Lieberman and Warner’s Press Release (the “Good News”):
–
US gross domestic product (GDP) grows by 80 percent from 2010 to 2030 or 1 percent less
than w/o bill
–
Average annual per-household consumption in the US grows by 81 percent from 2010 to 2030,
or 2 percent less than the growth w/o bill
–
Emission allowance prices are $22/ton in 2015 and $46/ton by 2030
–
Increases in average US electricity prices materialize slowly and gradually, attaining level only
18 percent higher than the 2005 level after 40 years
But EPA itself notes (the “Less Favorable News”):
–
While GDP increases by approximately 97 percent from 2007 levels by 2030 and 215 percent by
2050, estimated annual reduction in GDP ranges from $238 billion to $983 billion in 2030 and
between $1,012 billion and $2,856 billion in 2050.
–
Electricity prices are projected to increase 44 percent in 2030 and 26 percent in 2050
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Retail Rate Regulators: Seeking a
Role in Price Mitigation
•
Perspective of state retail regulators toward federal carbon controls (if adopted):
– Carbon controls be economy wide w/appropriate transition period
– Sufficient certainty created to ensure the financing of needed energy infrastructure
consistent with the achievement of the environmental objectives
•
If cap & trade adopted, want price mitigation mechanisms and oversight of
allowance benefits :
– Find allowance auctioning to be most efficient mechanism to achieving emission
reduction goals, but considers no-cost allowances to be appropriate transitional tool
– Prefer assigning all allocated no-cost allowances available to the electricity sector to
local distribution companies (LDCs) providing a regulated local distribution function for
end-user customers
– Desire cost-containment measures to be included in any cap-and-trade mechanism to
minimize abrupt changes in the cost of compliance
Source: NARUC Resolution on Federal Climate Legislation and
Cap-and-Trade Design Principles, Adopted November 14, 2007
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Retail Rate Regulators (con’t.)
• Lieberman-Warner assigns no-cost allowances to “fossil fuel-fired
electric power generating facilities” with electric utilities getting a 19
percent share at the outset, phased out by year 2031
• At odds with state regulators’ position who want assignment of
allowances to LDCs to be able to pass through allowance benefits
to ratepayers, or use for demand-side management programs
• Regulators are sensitized to rate impacts being compounded
owing to additional costs from utilities’ cap ex programs
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Conclusions
• Divergence of projections of carbon control effect on power
prices and economy signals absence of consensus among key
stakeholders
• Difficult to estimate impacts extending over decades
• Even more difficult estimating timing and commercial availability
of emerging technologies
• New slogan for everyone:
“If they come. . . you will build it.”
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Robert W. Gee
President
Gee Strategies Group LLC
7609 Brittany Parc Court
Falls Church, VA 22304
U.S.A.
703.593.0116
703.698.2033 (fax)
[email protected]
www.geestrategies.com
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