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by Nancy Spring, Managing Editor
Federal climate change legislation is inevitable — that’s the consensus on U.S. global warming policy. Beyond that, there’s no accord as far as “when” or “what.”
In the meantime, state governments have been moving ahead quickly with their own climate change legislation. These plans are ambitious and earnest in their desire to control greenhouse gases but lack specifics. They also create another planning nightmare: When a national program is put in place, will state programs be pre-empted?
Charged with providing reliable and affordable electricity, electric utilities uneasily watch demand grow while capacity margins thin, but without clarity on the cost of carbon, power plant projects are in jeopardy. In Benefit of Counsel, page 12, Richard Lehfeldt sums up the pricey dilemma: “Investment choices will for the most part be frozen with regard to all fuels until the rules of the road for (and full costs of) coal-fired generation are known. Until then, fossil-fired plant development will continue to lurch forward in a perilous zone somewhere between the difficult and the impossible.” The future for nuclear is unclear, too.
One thing is for certain, climate change regulations are going to hit this industry hard. The electric power sector accounts for 40 percent of total U.S. carbon emissions and it will be called upon to shoulder most of the carbon burden.
“Unfortunately, the debate on climate change will continue for some time and that’s not desireable,” said FERC Chairman Joseph Kelliher in the opening address of the second power day at CERA Week in February. “Fifty-four percent of the coal plants ordered in the past two years have been cancelled.”
Complexity is phenomenal
Most analysts agree that climate change legislation is unlikely to go to the president in 2008. The holding pattern will probably continue until after the election.
Speaking at the Clean Tech Investor Summit in February, John Podesta, former White House chief of staff under Bill Clinton and head of the Center for American Progress, noted that all of the major presidential candidates—Hillary Clinton, Barack Obama and John McCain—have made global warming a central issue in their campaigns. “Regardless of who wins,” he said, “we will see a lid on carbon within the next few years.”
Timing of enactment may be hazy, but at least a clearer picture of likely climate change legislation has emerged. By the end of 2007, members of the 110th Congress had introduced 165 bills, resolutions and amendments specifically addressing climate change and GHGs, according to a Paul, Hastings, Janofsky & Walker report. Through attrition, that number has been whittled down to one bill with broad support, the legislation by Sens. Joseph Lieberman (I-Conn.) and John Warner (R-Va.).
The Lieberman-Warner Climate Security Act (S.2191) was the first climate change bill to pass out of committee and it could reach a floor vote this year. The act calls for a cap on GHG emissions from most of the U.S. economy beginning in 2012, with a reduction of approximately 63 percent in GHG emissions by 2050. Lieberman-Warner establishes a cap-and-trade system and proposes an initial auction of 26 percent of allowances in 2012, moving to an auction of almost 70 percent of the allowances by 2031. (See sidebar for more highlights.)
An offset provision in Lieberman-Warner allows an entity to meet up to 15 percent of its compliance obligations with specified domestic offsets. One U.S. utility is already giving offsets a try. According to the Pew Center for Global Climate Change, in December 2003, Entergy became the first U.S. utility to purchase carbon emissions credits from geological sequestration projects. Entergy also sequesters CO2 by planting thousands of trees on its landholdings and among other credits, leased 30,000 tons of CO2 offset credits from the Pacific Northwest Direct Seed Association.
The complexity of climate legislation is phenomenal, especially if a cap-and-trade system is chosen instead of a carbon fee. A carbon fee may be simpler but unluckily it’s been labeled with the onerous word “tax.” Podesta said there is no question that cap-and-trade will be the chosen system. “The debate is over who gets the permits,” he said. “Do they go through an auction or go to the incumbents?”
“Lieberman-Warner bastardized cap-and-trade,” said Duke Energy CEO and President, Jim Rogers, at the Clean Tech Summit. “Auctions are a polite way of saying carbon tax. Let’s do it the way we did with SO2 and NOx.” Climate change regulation will have a huge impact on Duke: it’s the third largest emitter of CO2 in the U.S. Rogers describes his company as being on a “burning platform.”
FPL Group CEO Lewis Hay III supports mandatory, economy-wide controls on greenhouse gases and strongly endorses a carbon fee as the best way to achieve meaningful reductions. In an interview with Electric Light & Power for the November/December 2007 issue, Hay detailed his carbon fee proposal.
“There are several reasons why we prefer a carbon fee. First, it is simple. We propose a modest initial fee imposed on every ton of CO2 ($10) that would escalate $2 per year in real terms. The fee would be imposed upstream when carbon enters the economy, at roughly 2,000 sources, making it very easy to administer.
“Unlike cap-and-trade, there is no need for a long and complex rulebook for trading, nor is there a need for numerous governmental agencies to administer it. One look at the proposed Lieberman-Warner bill will show you how complex cap-and-trade really is and the large number of agencies required to manage it. The simplicity of a fee also offers the benefit of rapid implementation. A fee could be implemented years ahead of cap-and-trade.
“The second benefit of a fee is its transparency. Everyone will know the costs and the impact on our economy and on each participant. Many of the proponents of cap-and-trade want to avoid discussing the costs and impacts. This is because the costs in their proposals are unacceptably high and U.S. consumers would not stand for it if they knew the costs, or because certain groups (usually large emitters) would obtain enormous quantities of free allowances worth billions of dollars. Similarly, a carbon fee provides cost certainty for the long-cycle, large capital investments our industry must make to provide clean, reliable energy.
“We believe a carbon fee is also fairer. Everybody pays the same rate. But the worst emitters pay more on an absolute basis and those who have already made improvements pay less. Companies will win or lose based on their ability to innovatively invest to reduce carbon emissions—not on how successful they are in lobbying Congress for free allowances.
“Our proposed fee is also fair to consumers, as we propose recycling most of the gross receipts back to consumers (e.g., a carbon allowance). This will benefit low-income consumers, who typically do not use much energy, and it will increase the costs to higher income consumers, who typically consume much more energy. So, unlike cap-and-trade, which is highly regressive, our carbon fee is progressive.”
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State GHG regulations abound
In the void left by federal non-action, states are developing comprehensive climate change legislation at a rapid pace. Speaking at the Clean Tech Investor Summit, Terry Tamminen, formerly the Secretary of the California Environmental Protection Agency and currently an advisor to Gov. Schwarzenegger, said that state groups have proliferated very quickly. The number has grown from three states with climate change regulations to 27.
“A year ago, there was RGGI [Regional Greenhouse Gas Initiative] and now there are the Western Governors and eight states in the Midwest,” said Tamminen. “Without giving away too much that is confidential, look for one more trading block focused around the Southeast.”
RGGI is a cooperative effort between 10 eastern states to establish a cap-and-trade program. According to the Paul Hastings report, RGGI is the closest to implementing its cap-and-trade regulator model. Caps of CO2 emissions begin at 1990 levels from 2009 through 2014, and move up to reduce emissions 10 percent below that level by 2018.
Each RGGI member has to create market-based regulations that cap total CO2 emissions from fossil fuel-fired power facilities and provide for trading of emission allowances throughout the Northeast. A portion of the allowances will be auctioned and a portion will be granted to existing facilities at no cost. Carbon offsets may be used in limited circumstances and can be expanded if carbon prices become overly burdensome. Currently, RGGI’s first allowance auction is scheduled for June 2008 and the entire program is slated to take effect by 2009.
The Western Climate Initiative (WCI) and Midwestern Greenhouse Gas Accord (MGGA) intend to regulate all GHG gases from various economic sectors, rather than controlling only CO2 from power generation facilities.
The WCI is a collaboration between western states, Canadian provinces and Mexican states. A regional reduction goal of 15 percent from 2005 levels by 2020 has been established. All members of the WCI have joined The Climate Registry, a non-profit corporation that is developing standard protocols for reporting greenhouse gases to enable carbon trading markets. Five subcommittees are analyzing the technical aspects of creating a cap-and-trade program. WCI has not declared its target implementation year.
Under the MGGA, emissions must be reduced by 16 million tons. The group expects to have a model rule developed by August 2008 and intends to be fully implementational by 2010.
Some states are acting independently. After he vetoed an energy bill in 2007 that he thought did not go far enough, Florida Gov. Charlie Crist issued three executive orders. One directed the Florida Department of Environmental Protection to aggressively cut greenhouse gas emissions statewide—by 2017, down to 2000 levels; by 2025, down to 1990 levels; and by 2050, 80 percent below that.
So far, five coal plant projects proposed in Florida have been cancelled. In an article in the January/February issue of Public Power, Barry Moline, executive director of the Florida Municipal Electric Association, wrote, “For new generation options, utilities are now officially confused. “The governor and state regulators have created a cloud of regulatory confusion where no one can determine if even something as simple as a gas-fired combined-cycle power plant has a chance of receiving approval.”
California, ever the innovator
California was the first state to limit statewide global warming pollution. AB 32, a market-based regulatory initiative called the Global Warming Solutions Act, passed in September 2006 and requires a 25 percent reduction in GHGs by 2020.
In the implementation stage at this point, various state agencies are developing a series of plans and a reporting system. The California Air Resources Board will begin enforcing limits on emissions starting in 2012. AB 32 also requires CARB to institute a mandatory emissions reporting and tracking system to monitor and enforce compliance with the emissions limit.
In January 2007, the California Public Utilities Commission adopted an interim GHG Emissions Performance Standard. The EPS is a facility-based emissions standard that requires all new long-term commitments for baseload generation to serve California consumers to be with power plants that have emissions no greater than a combined-cycle gas turbine plant. The level is established at 1,100 pounds of CO2 per MW. “New long-term commitment” refers to new plant investments (new construction), new or renewal contracts with a term of five years or more, or major investments by the utility in its existing baseload power plants.
California has determined that AB 32 will provide substantial economic benefits to the state. State analysis shows growth in the economy of more than $4 billion, with 83,000 new jobs. According to the bill’s fact sheet, “By acting now California will capture significant economic benefits by securing a leadership position in the emerging worldwide clean energy market.”
Estimating the costs of compliance
Getting a handle on the costs of proposed climate change legislation is difficult, if not impossible.
A study commissioned by the American Petroleum Institute in November 2007 found that energy legislation pending in Congress would have significant adverse effects on the economy and consumers, including nearly 5 million lost jobs and $1 trillion in lost economic output. The study, prepared by CRA International, found that the combined effect of seven legislative proposals would restrict the supply of energy available to the U.S. economy and would likely increase the cost of energy supplies to consumers and businesses.
The other side of the economic coin is the creation of new “green collar” jobs and new clean tech industries. Ira Ehrenpreis, Clean Tech conference chairman, said clean tech is the fastest growing sector for venture capital and the greatest economic opportunity of the 21st century. “There’s a mania around green energy,” he said.
CRA International also prepared a report for the Edison Electric Institute but results from a draft report apparently caused a mutinee. One group of EEI-member utilities immediately suggested that revisions were needed.
Power News.com reported that the draft predicted economic shock from the Lieberman-Warner bill, with sharply increased electricity prices for consumers and a dash-to-gas for power generation. Eight utility executives immediately responded to EEI about the report’s findings, according to the Miami Herald, saying that the report had not accurately estimated the costs that would be associated with the Lieberman-Warner bill. The letter was signed by the CEOs of Avista, Constellation Energy, Entergy, Exelon, National Grid, PG&E, Public Service Enterprise Group and FPL Group. At the time this article was written, an EEI spokesperson said the report’s release was not imminent and that further analysis was being done.
Making it even more difficult to estimate the cost of controlling GHGs is the fact that besides not knowing the “when” or the “what,” the “how” is still unclear. “For climate change, current technologies will not get us to where we need to be,” said Jeff Sterba, PNM Resources president and CEO and EEI chairman, at the Clean Tech Summit. Clean coal technologies, for instance, are still in their infancy, especially carbon capture and storage. Nevertheless, legislation was introduced in the U.S. House of Representatives in March that would bar the licensing of coal plants unless they were equipped with carbon capture and storage.
The price of uncertainty
By most estimates, demand for electricity in the U.S. will increase by more than 40 percent by 2030. Where will the power come from?
Concern about climate change regulation is making it difficult to finance coal-fired power plants. JPMorgan Chase, Morgan Stanley and Citigroup developed a system called the “Carbon Principles” to help lenders evaluate the potential carbon risks associated with such investments. The federal government suspended a major loan program for coal-fired power plants in rural communities in early March. The Rural Utilities Service will not issue any loans in 2008 and probably none in 2009. Project developers will have to put construction plans on hold or seek private funding, which will increase costs.
The Electric Power Research Institute projects 64 GW of new nuclear capacity by 2030 in order to make a significant reduction in CO2. Can we construct almost 50 nuclear plants in 21 years? Commissioner Peter Lyons of the Nuclear Regulatory Commission told CERA conference-goers that the NRC is expecting 15 more applications for 22 new reactors and projects a four-year timeframe for construction. The application process has been improved although recently reports of delays have surfaced.
Securing parts for new nuclear power plants in a competitive global market will be tough, too, and capital costs are skyrocketing. Progress Energy estimated the cost of two nuclear reactors in Florida at about $3 billion per reactor several years ago, but in a recent filing with the Florida Public Service Commission, the company said the price tag is now $17 billion.
If a generation pinch comes, natural gas will be the fuel of choice. That’s an expensive choice and one that will create another dependence on foreign imports, exposing the U.S. to a risky security situation. At CERA Week, American Electric Power President and CEO Mike Morris said he is very concerned. “There is no question that there is a technological answer [to GHG emissions] that will bring us through, but it will be a half a decade to a decade,” he said. “The peril is if we don’t do enough we will find ourselves in an electric shortage and we’ll come up with a terrible answer. The dash-to-gas is a reckless conclusion.”
Putting a lid on CO2 and keeping our economy humming along is a challenge. Besides the other issues U.S. utilities are facing—an aging workforce, an aging infrastructure— there’s a whole new world of people who want to live as comfortably as we do, vying with us for resources. Electric utilities will build the bridge to the future but it will probably take more time and money than we think.
America’s Climate Security Act of 2007
Highlights of the Lieberman-Warner Bill
- Emission allowances will begin in 2012 with a declining cap on GHGs to 2050. A GHG registry and a GHG emission allowance transfer system will be established for “covered facilities.” Facilities in the electric power and industrial sectors are “covered” as are facilities that produce or import petroleum- or coal-based transportation fuel or chemicals.
- Emission allowances will initially be given to load-serving entities that deliver electricity to retail consumers. An “Emission Allowance Account” will also be provided for covered facilities in the electric power and industrial sectors.
- A “Climate Change Credit Corporation” will auction emission allowances. Auction proceeds will be used for several programs including one for zero- or low-carbon energy technologies and one for advanced coal and sequestration technologies.
- Allowances can be traded. A board will oversee the national GHG emission market and can provide cost relief measures if it determines that “the market poses significant harm to the U.S. economy.” A domestic offset program will be set up to sequester GHGs in agriculture and forests.
- The act also supports carbon capture and sequestration by amending the Safe Drinking Water Act to permit commercial-scale underground injection of CO2 and establishing a task force to study the cost implications of potential federal assumption of liability for closed geological storage sites. The Secretary of Energy will be required to study the feasibility of constructing geological CO2 sequestration facilities and pipelines for the transportation of CO2 for sequestration or enhanced oil recovery.
- The SEC will be required to direct securities issuers to inform investors of material risks related to climate change. An interagency group will be set up to determine whether foreign countries have addressed GHGs.