Distributing CO2 allowances would be big deal under EPA Clean Power Plan

The Bipartisan Policy Center think tank tackled the issue of how states might elect to divvy up carbon dioxide emission allowances under the Environmental Protection Agency Clean Power Plan during a panel discussion Jan. 11 in Washington, D.C.

Representatives of merchant generator Dynegy and Duke Energy, which does most of its business in traditional regulated utility states, differed on the best way for states to distribute CO2 emissions.

“It’s controversial because there’s so much money at stake,” said Bruce Phillips, director of the NorthBridge Group. Allowance distribution will involve “billions of dollars,” Phillips said.

Some of the splinter issues concern whether to allocate or auction the right to emit CO2; whether distribution should be based on historical electric generation or new sources; and whether some generators could reap “windfall profits,” various panelists said.

EPA released its final Clean Power Plan last August. The rule was published in the Federal Register in October. It is already the subject of several legal challenges in federal appeals court. The rule requires states to cut power sector CO2 32 percent by 2030.

States are trying to decide whether to opt for a rate-based or mass-based implementation plan. For states that use mass-based trading, the decision of how to allocate emissions allowances is a key political choice, Phillips said.

While the approach that a state selects might not affect the environmental outcome, it can affect who bears the cost of the program, according to BPC panelists.

Other panelists included Duke Energy Environmental and Energy Policy Director Venu Ghanta; Dynegy Director of Environmental Affairs Bruce Wilcoxon; and Resources for the Future Senior Fellow Dallas Burtraw. The discussion was moderated by BPC Senior Advisor Jennifer Macedonia.

“The states are thinking now about whether to go rate-based or mass-based,” Macedonia said.

Phillips of NorthBridge said allowance allocation is a complicated and controversial topic that raises “dread” in a lot of people. But it will help states decide how they wish to implement the EPA plan in their state.

The choices can be bewildering but states should remember what their objectives are, Phillips said.

A mass-based approach would focus on “short tons” rather than rate-based (lbs/MWh). Under mass-based goals, each generating unit must hold an emission allowance for each ton emitted. “Allocation refers to the way allowances are initially distributed within a state,” Phillips said. Once allocated, they could presumably be bought and sold, Phillips said.

States should set priorities, Phillips said.

Some states might put priority on mitigating retail rate increases; provide asset compensation for fossil generating companies; or supporting new low-CO2 sources, Phillips said. This could include everything from renewables and efficiency to nuclear power and carbon capture and storage, Phillips said.

Luckily, there are already models that states can look at, Phillips said, including the SO2 and NOx trading programs, he noted.

Duke has regulated utilities in six states, Ghanta noted. Duke has already reduced CO2 emissions 22 percent since 2005 largely through coal retirements. Duke also operates the largest utility “Ëœregulated’ nuclear fleet in the United States,” Ghanta said.

“Auctions” could result in an “abrupt” increase in retail power prices without any real difference in CO2 reduction, Ghanta said. Duke wants allocation rather than auctions. This would prevent or minimize rate spikes while still achieving CO2 reduction, said the Duke official. State utility commissions can ensure that ratepayer concerns are protected, Ghanta said.

Wilcoxon noted that Dynegy is a merchant power generator that operates in eight states total. Dynegy has dramatically increased its size in the recent past and is split about equally between gas and coal. It owns no nuclear or renewables.

The company’s website says Dynegy has 35 power plants that can generate 26,000 MW. About a quarter of Dynegy facilities covered by the EPA CO2 rule are in Regional Greenhouse Gas Initiative states, Wilcoxon said.

Dynegy essentially thinks the market should be allowed to play out, Wilcoxon said. (Dynegy does think that states should draft their own plans, rather than running the risk of a federal implementation plan, Wilcoxon said).

“We do believe that emission allowances should be auctioned,” Wilcoxon said. Dynegy thinks this can be done in a manner that rate increases would be moderate.

RFF’s Dallas Burtraw has written extensively on emission allowance issues. When CO2 emissions become regulated they will become scarce, and therefore valuable, Burtraw said.

“The decision we are talking about now is how to distribute that value into the economy. Burtraw said. Don’t expect this EPA rule to be the last word on CO2 emissions.

A replay of the BPC panel discussion will soon be available on the BPC website.

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Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 22 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants.

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