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Carbon In Electricity Markets

Price transparency will drive GHG reductions.

Fortnightly Magazine - August 2009

operate). This is particularly true of nuclear units, since the variable costs of operating a nuclear unit are extremely low, and increased availability results directly in increased capacity utilization and higher returns (see Figure 4) .

On average, the capacity utilization of nuclear power plants in the RTO/ISO markets increased from 81 percent to 93 percent between 1996 and 2007. Capacity utilization is a direct function of two variables: the measure of how closely the plant is operated to its rated capacity when it is running, and the down time the plant experiences each year. Since nuclear plants typically operate at their maximum rating when they are available, plant down time is the main factor impacting capacity utilization. A 93-percent utilization factor represents an average of approximately three weeks of down time per year, or about five weeks over an 18-month refueling cycle. This level is close to the physical limit for refueling and maintenance cycles of typical nuclear plants.

This data indicates that competitive forces and price signals have led nuclear plant operators to seek out and take advantage of opportunities to maximize their output and minimize their down time. 10, 15

Consolidation of nuclear plant ownership under merchant fleet operators also has led to substantial performance improvement. Data on the performance of 13 nuclear units sold by traditionally regulated utilities to merchant operators between 1999 and 2003 indicates that, for the five-year period prior to the sale, the average capacity factors for these plants was below the five-year industry average, while the average capacity factor for the five-year period after the sale was above the industry average.

Price Signals in Retail Markets

While the elasticity of electricity consumption is difficult to generalize, and the degree to which carbon costs are passed through to retail power prices will differ by state, the addition of carbon costs to electricity prices likely will spur interest and participation in a variety of energy-efficiency and demand-response programs. For example, PJM stated in a recent report, “Regardless of the higher electricity prices that could result from CO 2 prices, the increased market penetration of energy efficiency and some types of demand response can reduce total consumption and customer costs for electricity, and in turn mitigate the wholesale price impacts, and result in additional, CO 2 emission reductions.” 11

Demand-response programs within competitive markets illustrate the linkage between price signals and consumer response, and the ability of markets to provide the innovative products and services necessary for tapping energy efficiency as a resource. RTOs/ISOs are moving rapidly to implement programs that enhance the ability of end-use consumers (and their agents, the demand-response aggregators) to trade off investments in improved end-use efficiency against electricity purchases. By relying on individual companies engaged in the demand-response business to enroll individual end-use consumers, these markets have created opportunities for innovative solutions, while providing the structured oversight necessary to ensure resource delivery. Demand-response programs provide the means for end-use consumers efficiently to evaluate conservation and peak-load reduction options while considering the full costs (including CO 2 emission costs) of available alternatives.