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Carbon in the West

Prices between $50 and $80 a ton will trigger major market responses.

Fortnightly Magazine - November 2008

It is becoming increasingly likely U.S. lawmakers will adopt some type of climate-change policy in the near future. Whatever the details, it almost certainly will include the power-generation sector, which represents fully one-third of U.S. greenhouse gas (GHG) emissions. Such a policy—imposed as a carbon tax or as a cap-and-trade regime—is bound to have a profound effect on power generation, on the power companies that supply electricity into the U.S. market, and on electric customers throughout the land. Carbon dioxide (CO 2) price of any magnitude will lead to higher electricity prices for consumers, but also will provide suppliers with incentives over time to invest in lower-emitting and non-emitting generation, such as nuclear power, coal with capture and sequestration, and renewable technologies.

In anticipation of such changes on the horizon, EPRI organized and conducted a broad-based study of climate change policy effects on electricity generators and consumers in the Western Electricity Coordinating Council (WECC) region. A diverse collection of nine Western generation companies funded and participated in this effort, and added immeasurably to the quality of results and insights.

The results reflect the underlying structure of the WECC market, and the key uncertainties that characterize it, through an examination of alternative future scenarios. A reference case, reflecting an optimistic future, is described for baseline purposes. Also a case called “wild card,” reflecting a more pessimistic view of future events, is presented as an alternative characterization.

Reference Case: $50/Ton

The behavior of the power system and electric customers was investigated over a future period 2006 through 2030, for a range of CO 2 prices imposed beginning in 2012 (see Table 1). This analysis assumes that the price will remain constant (in real 2006 dollars) from 2012 through 2030.

Key conditioning assumptions of the reference case include:

Future load growth in this market was assumed equal to the recent historical period 1995-2005, at 1.73 percent a year.

Natural gas prices (in real 2006 dollars) were set to a recent (May 6, 2008) NYMEX Futures market curve through the year 2020, then held constant at 2020 levels.

Capital costs for new generating plant were driven initially by EPRI estimates from 2007, but as the study progressed these estimates further were inflated 25 percent, in recognition of continued escalation in all global construction markets.

Western state renewable portfolio standards (RPS) targets were assumed to be met in future years, per individual state law.

The data show an increasing CO 2 price will drive up the power price and drive down emissions. The power price in the initial year (2012) increases almost linearly with the CO 2 price, because the power system has very limited response capability in the very short term. Western markets can switch some resource usage from

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