Transcript Slide 1

OPSI Panel
Climate Change
Sonny Popowsky
Consumer Advocate of Pennsylvania
October 1, 2009
Annapolis, MD
PA Office of Consumer Advocate
555 Walnut Street
Forum Place, 5th Floor
Harrisburg, PA 17101-1923
(717) 783-5048 Telephone
[email protected] www.oca.state.pa.us
118001.PPTX
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What’s the Problem?
• There is a difference between the cost to electric
generators of reducing carbon emissions and the cost to
customers of paying for those emission reductions.
• In restructured states, in which electric generation rates are
based on marginal market clearing prices, the initial costs
to consumers of a cap and trade program for carbon
emissions will be far higher than the costs of such a
program to consumers in regulated states where electric
generation rates are based on the cost of service.
• When carbon-emitting units set the market clearing price in
restructured markets, the cost of carbon allowances will be
included in the price paid to all operating generating units,
including nuclear units that have no actual carbon
compliance costs.
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PJM Climate Change Report
• Assuming a CO2 allowance price of $20 per ton in the
year 2013, “[t]he impact on the PJM Energy Market
could be power price increases as high as $15/MWh,
and market-wide expenditures increase by as much as
$12 billion, while providing emission reductions from
PJM sources of approximately 14 million tons.” PJM
Climate Change Report at 25.
• According to the PJM Study, the increase in the market
clearing price is about 75% of the CO2 allowance price
because “coal remains the marginal generating
resource for close to 70 percent of the hours and coal
has an approximate emissions rate of one ton per
MWh.” Report at 24.
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Synapse Climate Change Report
• On July 15, 2009, Synapse Energy Economics
issued a Report entitled Productive and
Unproductive Costs of CO2 Cap-and-Trade:
Impacts on Electricity Consumers and
Producers.
• The Report was prepared for NARUC,
NASUCA, APPA, and NRECA.
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Synapse Climate Change Report:
PJM Results
• Assuming a CO2 allowance cost of $20 per ton,
using generation data from the year 2005, the
Synapse Report estimates a power price impact
of $15.02 per MWH, and a total annual cost to
PJM consumers of $10.876 billion if there are no
“free” allowances.
• But the Synapse Report shows drastically
different consumer impacts in restructured states
vs. regulated states. The differences vary
depending on how allowances are allocated.
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Impact of Allocation Approach in PJM
$18.00
No Free Allocation of Allowances
Allocation for Free to LDCs
Allocation for Free to Merchant Coal and LDCs
Total for Market-Based Plants
Based on Synapse Energy Study, Appendix p.4-7
Total for Cost-Based Plants
$0.89
$1.03
$2.94
$1.90
$0.00
$1.41
$2.00
$0.80
$4.00
$6.57
$6.00
$5.60
$8.00
$9.07
$10.00
$10.69
$12.04
$12.00
$8.15
$/MWh Average Price Increase
Cost of Abatement
$15.02
$14.00
$17.07
$16.00
$17.07
Allocation for Free to Generators
Weighted Average Impact on
Consumers ($/MWh)
Synapse Estimate of PJM Nuclear Plant
Payments
• In recent years, nuclear generation in PJM has
amounted to approximately one-third of PJM
generation.
• Based on $20 per ton CO2 allowance price and
2005 generation levels, Synapse estimates
that PJM nuclear units with market-based
rates would receive over $2.6 billion of
increased annual revenue even though they
incur no carbon compliance cost.
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Adding Insult to Injury: Free
Allowances to “Merchant Coal” Plants
• The Waxman/Markey legislation adopts a proposal made
by EEI that a portion of free allowances be allocated to
“merchant coal” plants, based on 50% of their base year
emissions. See, Testimony of Jeffry Sterba, Hearing of April
23, 2009, at page 12.
• The basis for the EEI proposal was that “in most
unregulated markets the market price of electricity is
determined by natural gas, and natural gas emits
approximately 50% of the carbon from coal.”
• The free allocation of allowances for 50% of emissions
would allow merchant coal plants to recover “the portion
of their increased costs that is not recovered through
market prices.”
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PJM Marginal Unit by Fuel Type
Fuel Type
2005
2006
2007
2008
Coal
69%
70%
70%
78%
Misc
1%
1%
2%
1%
23%
25%
24%
17%
Nuclear
0%
0%
0%
0%
Petroleum
8%
5%
5%
3%
Natural Gas
Source: PJM Market Monitor Reports
Merchant Coal Allocation
• The factual premise of the free merchant coal
allocation is demonstrably false in PJM, where
coal still sets the market clearing price more than
70% of the time.
• Under Waxman/Markey, merchant coal plants
recover their “cost” of compliance, while
merchant nuclear plants will charge market prices
that include the value of allowances, even though
they incur no compliance costs.
• In other words, unregulated generators will
charge the higher of cost or market.
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Merchant Coal Plant Allocation
• Based on an assumed CO2 allowance price of $20 per
ton, the 10% merchant coal allocation will add about
$4 billion per year to the cost to consumers of cap and
trade legislation nationwide. Synapse estimates that
the increased annual cost to PJM consumers would be
about $700 million.
• This will result in higher costs even for customers in
regulated states, because they will be losing 10% of the
free allowances that otherwise would have gone to
their regulated distribution utilities for the benefit of
their customers.
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Caveat
• The Synapse Report represents a near-term analysis of
the comparative impacts of carbon emission allowance
methods in restructured vs. regulated generation
markets. The Report acknowledges that: “In the long
run, the economic rewards of avoiding emissions costs
may be an efficient driver for the development of new
low-carbon resources, including new nuclear plants, to
replace existing carbon-intensive resources.”
• Proponents of market-based generation pricing have
argued that by giving appropriate price signals, the
competitive markets will result in a lower cost longterm response to emission reduction requirements.
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But On The Other Hand….
• There are principled arguments for either costbased or market-based approaches to establish
the price of carbon emission allowances.
• But by giving free allowances to merchant coal
generators to cover their “costs”, while allowing
merchant nuclear generators who have zero
compliance costs to charge “market” prices that
reflect the market value of allowances, we are
allowing merchant generators to charge the
higher of cost or market.
• What is the principled argument for that?
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