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The Costs of Going Green

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

Fortnightly Magazine - June 2009

higher costs for all types of new generation, consumers’ rates will be taking a northward turn. Tackling climate change very well may be desirable from a public policy perspective, given the widespread impacts on the economy and our overall welfare. In terms of the cost of power, however, utilities and regulators, and others must fully understand the implications and communicate those impacts to consumers. Through education, utilities and their regulators can help consumers learn how to control their bills, in light of anticipated rate increases.

No Time to Lose

Large amounts of new capacity will be required by 2030. The cost of these capacity additions will total hundreds of billions of dollars, most of which will be absorbed by consumers. The cost of controlling and mitigating CO 2 emissions will add materially to that cost, and will make a substantial difference in the type of capacity that utilities and other generators add over time.

Legislators and regulators need to be aware of the break points where one type of generation becomes more cost-effective than another. The dispatch of existing plants will not change until the cost of CO 2 emissions rises above $30/ton, but above that level, coal generation falls off sharply. With regard to new plants, strong CO 2 controls essentially eliminate coal plants without carbon capture. CO 2 costs in the $15/ton range represent the break point for making economic decisions on the type of capacity to build. Above $20/ton, all non-coal forms of capacity (nuclear, wind and combined cycle) are cheaper than ones that use coal, while above $55/ton, IGCCs are lower in cost than combined-cycle plants.

Under all regulatory regimes, consumer bills will rise as CO 2 costs are added to the mix, but those costs will differ depending on whether the market we are operating in has a competitive wholesale market or uses cost-of-service regulation. Policy design—particularly in terms of how allowances are allocated or auctioned and the level of offsets permitted—also will affect rates. The longer the delay in making the needed investments, the less flexibility utilities will have to meet the required targets from existing capacity, since they will have to make decisions very soon on what to build next in order not to compromise reliability.

There is no downside—for consumers and utilities—to knowing as soon as possible what the legislative and regulatory requirements will be with regard to carbon emissions, especially now that the Obama Administration has decided to make climate a domestic, as well as international policy priority.

 

Endnotes:

1. The U.S. Census Bureau recently projected that the U.S. population will grow from approximately 304 million today to more than 430 million by 2050, a growth of about 43 percent. These new Americans will want automobiles, refrigerators, iPods and computers.

2. NERC is currently forecasting a ten-year peak growth of 1.5 percent, while the EIA’s AEO 2009 is forecasting 0.9 percent.

3. According to a recent study, China will increase CO 2 emissions in 2008 by nearly 1/3 over 2007 alone, and will officially surpass the U.S. in CO 2 emissions, with an economy