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The Costs of Going Green

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

Fortnightly Magazine - June 2009

owner to build and operate a gas plant over its lifetime, assuming a levelized price of gas of $7 to $8/MMBtu.

Figure 3 adds other generation options, including the IGCC plants (with carbon capture), nuclear plants and wind generation. As before, all plant types have a different starting point for the levelized cost of power plant construction and operation—with the levelized cost of IGCCs the highest of them all—but the slope of the cost line depends on their carbon footprints. Thus, the cost of nuclear and wind do not change as the cost of carbon emissions rises, while the cost of IGCC with CO 2 capture rises only slowly, as we assume 90-percent capture.

Most of the action takes place between about $15 and $40/ton. At the low end, wind and nuclear become more economic than either pulverized coal or combined cycle, and above $40/ton, the IGCC plant is a better economic choice than pulverized coal. At the far right, a price of $55/ton marks the cross-over between combined cycle and IGCCs, with the latter being the better choice at CO 2 prices above that level.

Naturally, these figures are a moving target, as the cost of building and operating plants is in flux. No one has built a new nuclear plant in the United States in decades, nor is the cost for commercial deployment of CCS well known. These results must be tailored to each situation, but represent a conceptually strong way to think about the tradeoffs between the cost of generation, GHG regulations, technology and fuels.

Figure 4 shows the implications of a climate bill similar to the legislation proposed—the Dingell-Boucher discussion draft bill—on the capacity additions and the generation mix between now and 2030. 14 The results are dramatic in terms of changes in the future mix of power generation, and this also affects the future cost of power.

One not-often-cited, but key element that affects this mix is the allowed level of CO 2 emissions offsets. “Offsets” refers to the ability of those required to reduce their emissions to purchase emissions reduction credits from other, uncapped sources, instead of having to reduce their own emissions, if they can make more cost-effective CO 2 reductions. Offsets effectively raise the emissions cap, while reducing emissions in sectors and regions where reductions are not required. The analysis modeled both 11 percent and 22 percent offset scenarios—the 22 percent commensurate with the amount of offsets allowed under Dingell-Boucher over time, and the 11 percent with the exclusion of international offsets. Both Lieberman-Warner and Waxman-Markey allow for greater use of offsets, although they have more stringent emissions limits. 15 The higher the allowed level of offsets, the greater the flexibility that generation owners have to meet the required targets. This flexibility means that the new megawatts that need to be built is lower, since more existing coal capacity can continue to operate while its owners purchase lower cost allowances using offsets. Further, a higher level of offsets means that there is less gas generation and renewables than in the more restrictive offsets case,