OPSI Panel Climate Change

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OPSI PanelClimate 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
• [phone] Telephone
• spopowsky_at_paoca.org www.oca.state.pa.us

118001.PPTX
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Whats 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, the 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 ReportPJM 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
/MWh Average Price Increase
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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
Source PJM Market Monitor Reports
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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 long-term response to emission
  reduction requirements.

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But On The Other Hand.

• There are principled arguments for either
  cost-based 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?