Some advocates claim markets can help reduce electricity prices by changing the design of wholesale auctions. However, taking a pay-as-bid approach could make matters worse.
The Costs of Going Green
Carbon costs will reshape the generation fleet and affect retail rates.
Purchase and Reduce Moderately : Reduce CO 2 emissions through a combination of purchasing allowances; cutting back or shifting production using environmental dispatch; co-firing or retiring some of the smaller, older units. This strategy could apply to all plants or just the most highly emitting ones.
• Aggressively Reduce or Eliminate : Phase out the majority of CO 2 emissions through an aggressive program of new technology and substitution, including non-emitting alternatives such as renewables, nuclear and end-use efficiency, and retrofitting existing coal units as well as developing new coal capacity with carbon capture and sequestration. 10
The most cost-effective choice among these options will depend on the details of the GHG legislation and regulations, and on the plant owner’s mix of capacity and cost of compliance.
From a plant owner’s perspective, a key question is whether existing coal plants will be dispatched less often if they are substantial CO 2 emitters. Lower production from coal plants, for example, would increase the generation from other types of plants, significantly influence the level of capital investment that makes economic sense, and affect operations and maintenance required over the entire generation portfolio.
What is the break-even point for CO 2 costs, where it becomes uneconomic to operate existing coal plants? ICF’s market models suggest that even though such legislation will increase the cost of generation from existing fossil-fuel plants, CO 2 prices at moderate levels (such as $25 per ton in 2006 dollars) will not affect their dispatch order; that is, they still will be cheaper to operate than other alternatives. This suggests that until utilities need to make decisions on the next increments of capacity, the relative utilization of their plants isn’t likely to change, if carbon prices are moderate and gas prices remain at or above $7/MMBtu 11(see Figure 1).
It’s important to look at all the costs of plant operation in conducting this analysis. Figure 1 shows all these costs, including: fuel and variable O&M costs; NO x and SO x expenses; 12 and finally, under the CO 2 control case, CO 2 costs. For coal plants, every $10/ton adds about 1 cent per kilowatt hour on a marginal (dispatch) cost basis, so a $25/ton cost adds 2.5 cents/kWh. For gas-fired combined-cycle plants, on the average every $10/ton adds just over 0.4 cents/kWh to the marginal dispatch cost, so a $25/ton cost adds a bit more than 1 cent/kWh. CO 2 cost additions of this order of magnitude will increase the cost of generation, but do not change the relative order of the cost of dispatching these plants—with the exception that the uncontrolled coal unit is pushed out.
As CO 2 prices rise, existing coal plants become less attractive to operate. Specifically, above about $30/ton for CO 2, with natural gas prices of $7 to $8/MMBtu, coal’s competitiveness in the dispatch order drops dramatically. Existing coal plants likely would provide about 2 million GWh in 2030 at prices up to that level. But should CO 2 prices reach $60/ton, production from existing coal plants would fall about 40 percent