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The Change in Profit Climate
How will carbon-emissions policies affect the generation fleet?
revenues. The cash flow of gas and oil plants, already marginal, also changes very little, but net revenues for nuclear and hydro plants jump by about 50 percent.
Both Figs. 2 and 3 represent a region of the Upper Midwest (ECAR-MAIN) dominated by coal, which means that rising CO 2 prices have very little effect on total emissions, since the non-emitting nuclear and hydro plants already are running flat out and economically competitive gas generation is limited. As a result, even a CO 2 value of $50/ton would produce only a 4 percent reduction in regional emissions given the current generation mix. Including customer response to higher prices could lead to greater reductions than redispatch for this region, depending on the price elasticity.
The situation is somewhat different for a region like Texas (ERCOT), with its supply curve dominated by gas. Here, greater availability of lower-emitting gas generation means that rising CO 2 penalties can result in a shift in the dispatch order in favor of gas plants. Even so, reductions in regional emissions in response to CO 2 costs are highly dependent on natural-gas prices. When gas is selling for around $8/MMBtu, even a CO 2 value of $40/ton produces little emissions reduction. On the other hand, with gas at $4/MMBtu, a $20/ton CO 2 price could generate a 20-percent reduction in emission through redispatch.
Regional differences also are apparent in the combined effects of emission penalties and changing gas prices on the cash flow of a hypothetical, highly efficient (9 MMBtu/MWh) coal-fired power plant, as shown in Figure 4. With natural gas at the 2005 average price of $8.24/MMBtu, in the diagram on the left, net revenues from the plant would start off much higher in the ERCOT region than in ECAR-MAIN, but fall more rapidly with rising emission costs. If the price of gas were to fall to $4.24/MMBtu, however, net revenues for the plant only would be marginally higher initially in the gas-dominated region and would quickly fall below those of a similar plant in the coal-dominated region with rising CO 2 penalties.
Two major conclusions can thus be drawn from the analysis so far, which has focused on the current generation mix. First, the impacts of climate policy on the electric-power industry must take into account the net revenues of individual plants in a region and not just the impact of rising CO 2 value on production costs. Second, only under the combined circumstances of available gas-fired generation capacity and low gas prices does a rising price for CO 2 significantly affect the cash flows of efficient coal plants and lead to substantial reduction of regional emissions through redispatch.
Impact of CO 2 Price on Investment Incentives
The largest emission reductions to result from imposing CO 2 costs will come over time by providing investment incentives for new generation that produces lower or no emissions. To explore this potential impact, the EPRI framework was extended to provide a multi-year analysis of the effect that investor-driven generation additions could have on utility net revenues and regional CO 2 emissions.