Addressing Climate Change while Protecting Consumers (…and a New Idea) NASUCA Annual Meeting...

Addressing Climate Changewhile Protecting Consumers

(…and a New Idea)

NASUCA Annual MeetingNovember 16 2010

Ezra D. Hausman, Ph.D.

www.synapse-energy.com | ©2010 Synapse Energy Economics Inc. All rights reserved.

2www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 2

From America’s Finest News Source…

Report: Global Warming Issue From 2 Or 3 Years Ago May Still Be Problem

The Onion, November 10 2010


Basic Assertions

• Human-caused, global climate change is a serious environmental, economic, social, and national security issue

• Climate change will have significant and harmful impacts on our lives and on our children’s lives

• The severity of this threat will become increasingly obvious and difficult to dismiss over the next decade

• The U.S. Government will ultimately take action to progressively and severely restrict the emissions of greenhouse gases into the atmosphere

• Consumer advocates and commissions have a role to play TODAY to protect consumers’ interest as this debate moves forward


Basic Assertions

“If the climate-deniers are right—but we combat climate change anyway—we’ll have slightly higher energy prices but cleaner air, more renewable energy, a stronger dollar, more innovative industries and enemies with less money. If the climate deniers are wrong, and we do nothing…”

-Thomas Friedman, NY Times, November 14 2010


…There Have Been some Setbacks


Cap and Trade Works for Acid Rain…

DAILY PRICING

SPECTERM BID PRICE

OFFER PRICE

SO2 2009 $8.000 $10.000

SO2 2010 $5.000 $9.000

Annual NOx 2010 $300.000 $320.000

Seasonal NOx

2010 $45.000 $50.000


Taxes Worked for Cigarettes…


…But CO2 is Different


Regulatory/Market Innovations

• Renewable Portfolio Standards

• Production and Investment Tax Credits

• Feed-in Tariffs

• Renewable Power Authority

• Requirements or prudence determinations for long-term contracts

Each of these provides benefits, but none has the broad, market-based impact of cap-and-trade or a carbon tax


A New Idea…CO2RCs (“Corks” – Named by Steve Michel of WRA)

…or ZEEKs (ala Jeremy Fisher)

• Tradable, technology-independent low-carbon generation attributes

• Based on a CO2 emissions threshold of 1 ton per MWh (“efficient coal generation”)

• ZEEKs are earned (or burned) for deviating from the threshold with each MWh of energy generated

• A zero-CO2 MWh produces 1 ZEEK, while a gas CC might

produce 0.5 ZEEK per MWh; inefficient coal would have to buy ZEEKs down to the threshold

• ZEEKs would be fully fungible and separable from energy deliveries


ZEEKs vs. Renewable Portfolio Standards

• Pretty similar, actually.

• LSEs must “hold certificates” based on a regulated percentage of electricity sales – compliance obligation is on load

• We expect (hope?) that ZEEKs would be more standardized, less beholden to parochial interests, independent of deliverability requirements, and more fully fungible

• Not Technology-Specific: and certifiable low-carbon source can qualify, including demand resources—market picks technology winners and losers

(May be some vintaging restrictions, as with RPS)

• More directly targeted to produce GHG-displacement impacts (this is a secondary benefit of RPS)


ZEEKs vs. Cap and Trade: Similarities

• Effectively places a price on greenhouse gas emissions, i.e., internalizes the externality

• Provides a strong incentive for producers of low-carbon electricity

• Market-based, fully tradable, allows “the market” to find the least cost sources of low-carbon energy

• Sets a specific quantitative target for CO2 emissions from the power sector and allows the market to find the lowest price/cost


ZEEKs vs. Cap and Trade: Differences

ZEEKs do not increase the price of electric energy—although their cost does get passed on to ratepayers

Emissions allowances (Cap-and-Trade) or taxes increase the energy clearing price in electricity markets because they increase the variable cost of production.

ZEEKs actually decrease the variable cost of production for lower-carbon generators (i.e., gas) because they create a secondary source of revenue for these generators.

Price-takers (i.e., nuclear, hydro, renewables, often coal) receive a lower price for their energy, making higher-emissions generation less economically viable

ZEEK-eligible resources make up the revenues in ZEEK sales (or, for IOUs, obviated purchases)


ZEEKs vs. Cap and Trade: Differences 2

• Uncle Sam does not produce ZEEKs – generators do

• Uncle Sam does not sell or allocate ZEEKs – no fighting over money or allowances, nor are there opportunities to pilfer

• Identical (?) impacts (on consumers) in regulated and deregulated electricity markets

• ZEEKs are electricity-specific, although there is no reason that they could not be a part of an economy-wide cap-and-trade system or carbon tax.

• ZEEKs target consumer funds towards GHG mitigation, not to windfalls and payoffs


ZEEKs: Some Numbers

Total US Electric Sector Energy: 3.8 Billion MWh/year

Total US Electric Sector CO2 Emissions: 2.3 Billion Tons

Pre-Policy ZEEKs: 3.8 - 2.3 = 1.5 Billion (assumes all generation qualifies)

Total ZEEKs required for 20% reduction in electric sector emissions: 3.8 – (0.8 * 2.3) = 1.96 Billion

A 31% Increase in ZEEKs0.46 Billion MWh of carbon-free electricity, or0.92 Billion MWh at half-ZEEK levels


ZEEK Numbers: Some Perspective

Total natural gas generation in the US: 0.85 Billion MWh – doubling this (and displacing coal) would almost meet 20% reduction target

A new 1000 MW nuclear plant would add 8.3 Million ZEEKs per year –55 new such plants (replacing coal) would meet 20% reduction target

So would 55,000 3MW wind turbines replacing coal, operating at 33% capacity factor

So would reducing load by 1%/year for 20 years (if displacing coal)


Wrap-up

ZEEKs (or CO2RCs) represent a way to price carbon and directly support EE, renewables, and any other source of energy that is truly low-carbon.

Would replace hodgepodge of state, regional, and federal incentives with a single, market-based approach while avoiding many pitfalls

Steady ramp-up of requirement would provide a stable price signal for low-carbon resources in a large, liquid market

Not the only idea out there for regulating carbon, but perhaps the best?

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Addressing Climate Change while Protecting Consumers (…and a New Idea) NASUCA Annual Meeting...

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