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Electric Vehicles and Gas-Fired Power

A strategic approach to mitigating rate increases and greenhouse gas price risk.

Fortnightly Magazine - December 2011

A U.S. economy-wide cap-and-trade law to reduce U.S. greenhouse gas (GHG) emissions appeared to be a distinct possibility in 2008 and 2009. Today, the concept of implementing a national cap-and-trade program is off the table and is unlikely to be resurrected anytime soon. However, this doesn’t mean that GHG abatement is no longer of concern for electric utilities. Rather, electric utilities are facing GHG cost risk and abatement pressures in a variety of other forms, from renewable portfolio standards and energy efficiency requirements to Environmental Protection Agency (EPA) standards, such as best-available control technology regulations on coal plants—with maximum-achievable control standards expected soon.

Other important changes in the electricity industry include historically low fuel costs for natural gas generation due to the discovery and exploitation of shale gas, making other generation resources less cost-competitive, at least in the near term. In addition, higher costs for nuclear power construction and insurance are anticipated in the wake of Japan’s tsunami and ensuing nuclear safety crisis. Even under favorable conditions, financing new nuclear power requires large increases in retail rates. Renewable energy remains expensive in many parts of the country, especially compared to natural gas generation and existing generation assets like coal, nuclear and hydropower. Energy efficiency is an attractive option as it both reduces emissions and customers’ electricity bills, but it also lowers total utility sales and increases customers’ retail rates, so in some regions—such as those without policies to decouple revenue from sales—it will reduce utility earnings.

Rising environmental compliance costs and high costs for mitigation options combine to create a real dilemma for utilities seeking to mitigate shareholder risk and keep their rates low and affordable for all customers. Vehicle electrification, 1 combined with a shift toward natural gas-fired generation, might represent one of the few options for coal-dependent utilities—especially those in the Southeast—to achieve environmental goals while also reducing pressure on retail rates and mitigating shareholder carbon price risk.

What utilities need is a resource procurement strategy that will help them mitigate emissions risk while maintaining or expanding shareholder earnings and keeping retail rates relatively low. Applying a simple revenue requirement model to Duke Energy Carolinas as a case study, this analysis demonstrates that high electric vehicle (EV) penetration, combined with increased natural gas fired generation, can result in lower costs to consumers, lower risk to utility shareholders, and lower greenhouse gas emissions than a business-as-usual, coal- and nuclear-dominated scenario. However, at least three policy changes must be implemented