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The Change in Profit Climate

How will carbon-emissions policies affect the generation fleet?

Fortnightly Magazine - May 2007

Consider, for example, the impact of adding more nuclear generating capacity to the ECAR-MAIN region. Assuming a net-revenue threshold of $300/kW-year for such additions to provide the equity returns required by investors, the region already could support about 6,900 MW of new nuclear plants. The effect of adding this non-emitting capacity would be to shift the supply curve to the right—pushing gas plants even further toward the margin and significantly reducing net revenues for existing coal and nuclear plants. The additions also would reduce regional CO 2 emissions by about 7 percent.

Emission penalties would magnify this impact greatly. A CO 2 price of $10/ton, for example, would enable ECAR-MAIN to support almost three times as much new nuclear generation at the $300/kW-year net-revenue level (18,600 MW versus the 6,900 MW of economic additions estimated with no CO 2 cost). The result, however, would be to push the supply curve far enough to the right that more coal plants would become marginal and virtually the entire coal fleet would have net revenues below $100/kW-year. Meanwhile, regional CO 2 emissions would fall 19 percent. Clearly adding this much nuclear generation will take time. Figure 5 shows how emissions continue to fall as the price of CO 2 rises and stimulates further investments in non-emitting generation.

If investors require a larger return on investment because of higher construction costs or greater perceived risk, the effect would be to shift both curves in Figure 5 to the right. For example, an investment threshold of $400/kW-year would imply that achieving a 19 percent reduction in emissions might require a CO 2 price of around $18/ton instead of $10/ton. Similar analyses could be conducted for investments in other low- and non-emitting technologies, such as coal with carbon capture and storage or renewables.

Climate policy that puts a price on CO 2 significantly increases the dispatch cost of fossil generation, particularly coal, but these cost increases largely are passed on to the wholesale market in the short run. Net revenues for the more efficient coal-fired generators stay relatively flat except under circumstances of available gas generation and low gas prices. In the near term when the generation mix is fixed and gas prices are high, putting a price on CO 2 emissions results only in small reductions in CO 2 emissions through redispatch of the existing generators, and the increased use of gas is likely to strain the gas market. In the longer term, a price on CO 2 creates a powerful incentive to add new non-emitting generation. These additions greatly can cut emissions, but the extent of reductions is highly sensitive to the cost of these non-emitting technologies.

 

Endnotes

1. EPRI Technical Update 1013296, Program on Technology Innovation: A Conceptual Framework for Modeling the Impact of CO 2 Policy on Generator Cash Flows , 2006.

2. EPRI Report 1012577, Program on Technology Innovation: Managing the Risks of Climate Policies: The Effect of a Carbon Price on Existing Generation and Evaluation of Emission Reduction Investments , 2006.

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