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Carbon Wargames

U.S. utilities gain strategic insights by playing out a carbon-constraint scenario.

Fortnightly Magazine - December 2007

capture the opportunities accompanying those changes need to stretch their organizations’ strategic horizons.

As a start, companies can ask five questions:

1) How could different potential regulatory schemes affect our particular existing portfolio? To what degree will that impact depend on how other portfolios are affected, and on how those other portfolios respond?

2) What are the actual technology choices we will face for our portfolio? What estimates can we make now about evolution in the cost and efficacy of those options?

3) How can we build our portfolio planning around the kinds of uncertainty we face? How should we identify the option value of particular investments, and how do we initiate and manage those options to take maximum advantage of timing opportunities?

4) How will the forces set in play by carbon regulation change our relationship with customers? Higher prices, ramped-up DSM, technology improvements, and carbon awareness inevitably will complicate that relationship—likely pushing the utility away from its current role as a pure deliverer of power toward a role as manager and facilitator of myriad customer power-related choices. Will we have the tools and skills needed to be as good at that job as we have been at delivering the commodity?

5) What regulatory approach will best accommodate the tangled public and private purposes at issue? Investor-owned utilities always have served a public interest, but that public-private nexus has been managed within a reasonably straightforward company-specific economic framework. Carbon control imposes a far more diffuse public purpose that will strain today’s regulatory institutions severely. Without early discussion of how the strains might play out, and what institutional changes will help manage those strains effectively, the industry is heading for a highly contentious future.

It’s a good bet federal carbon regulation lies in the industry’s future. Already the prospect of that regulation casts a shadow over all long-term generation and infrastructure planning. The carbon wargame illustrates the magnitude of discontinuities introduced by such regulation, and the location of particular pitfalls. Also, it offers hope that some winning strategies exist, new opportunities will be created, and deep emissions reductions are achievable. Above all, it suggests how thoroughly the industry’s strategic challenges will enmesh with the fundamental social choices that lie ahead.