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The Costs of Going Green

Carbon costs will reshape the generation fleet and affect retail rates.

Fortnightly Magazine - June 2009

but more than in the business-as-usual (BAU) case. Finally, in both cases, there are no new coal plants built without some form of carbon-capture technology— i.e., the existing pulverized-coal technology is no longer built.

This one element of carbon legislation—offsets—would have a major impact on the total amount of new capacity built. At a lower level of offsets, it would lead to more total capacity (about 560 GW by 2030), since utilities and other generators would be compelled to replace aging plants to meet emissions-reduction requirements on their own. With a higher level of offsets, just the opposite would occur, with less total capacity required (about 470 GW by 2030) than in the reference case (about 515 GW). Thus, the swing in capacity built would be almost 10 percent based only on a change in the level of offsets allowed.

The total cost of adding such capacity will make a meaningful difference to consumers. Under the modeled scenarios, the cost of adding new capacity through 2030 would be approximately $1 trillion. Making wise choices about how this capital is spent is crucial for utilities, their ratepayers, regulators and investors. Consumers will feel the difference both in the cost of building and financing the plants, and in the cost of fuel and emissions allowances.

The implications of these capacity choices are far from academic, as the need to plan for new capacity is starting in many regions (see Figure 5) . The inescapable conclusion is that legislators in Washington, D.C. need to send a strong signal on CO 2 emissions soon to the utility industry, or many of them will have to make decisions on what types of capacity to add to ensure the industry can keep the lights regardless of policy signals. They also will need to quickly implement programs to reduce demand ( e.g., interruptible load and time-of-day pricing) in order to buy time. Delays in making these decisions will raise the cost of meeting growing power demands while controlling CO 2 emissions, and will absorb more of Americans’ paychecks. Of course, the current recession somewhat delays the need for new capacity, allowing a bit of breathing room for both the implementation of new regulations and the development of new technologies, but a continuing recession is the kind of medicine no one wants to take. Further, the lower demand can give false hope, as economic growth typically snaps back quickly, so the need for new generation capacity in the near term may re-emerge just as rapidly.

Consumer Impacts

The way the power sector is regulated determines largely what the impact will be on consumers. Thus, it is critical to distinguish between what those impacts would be under two different regimes: 1) competitive wholesale markets; and 2) traditional cost-of-service/regulated markets.

In cost-of-service markets, the additional cost of CO 2 allowances at plants that use fossil fuels likely will treated in a manner similar to a fuel surcharge. The incremental cost—whatever it is—likely will be passed through to consumers. Many (but not all) traditionally-regulated states have fuel adjustment clauses that allow utilities