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The Costs of Going Green

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

Fortnightly Magazine - June 2009

The Intergovernmental Panel on Climate Change has made clear that climate change is a worldwide issue imbued with unparalleled urgency. Naysayers remain, but the weight of evidence today indicates that we need to deal with it—collectively and quickly. At the same time, it’s clear that the need for new power generation capacity in the United States will continue growing. Efficiency and the recession will reduce the rate of growth, but the inexorable forces of economic growth; general electrification of the economy; aging power infrastructure; new technologies ( e.g., electric vehicles); and population growth will stimulate the need for additional sources of electricity. 1 Even during recessions in the United States in the 1980s, the 1990s and earlier this decade, the demand for electric power dipped only temporarily before recovering strongly to maintain a long-term growth rate of 2 to 2.5 percent. 2 While some countries continue to pursue business-as-usual resource options, 3 often involving coal generation, it’s clear that for both developed and developing countries, the challenge revolves around the imperative to sharply lower emissions of greenhouse gases (GHGs), while also meeting the growing need for power.

But there is another dynamic at work as well—the dynamics of the pocketbook. All the legislation proposed to deal with climate change—whether called “cap and trade” or “carbon tax,” of which many proposals target emissions reductions of approximately 80 percent by 2050 4—would increase the cost of power. 5 Moreover, this impact on consumers will differ depending on the type of regulatory framework ( e.g., cost-of-service or competitive market). As consumers struggle with economic challenges, regulators and legislators naturally will seek to avoid significant increases in energy costs, since higher energy costs, particularly for fossil fuels, ripple throughout the economy, not just at the gas pump or the electricity meter. This is a compelling generational challenge—what’s necessary in the long run (the mitigation of climate change and its impacts, and the creation of green jobs) might not be so good in the near term. 6 How much of a hit should consumers be expected to take to mitigate the impacts of GHGs?

In the midst of this dichotomy—this inter-generational challenge—utilities and their regulators (and occasionally their legislators) must deal with a multi-billion-dollar, multi-faceted question: How can we best satisfy the need for a reliable power supply, at a reasonable price, with acceptable environmental impacts? In the process, what happens to the existing capacity, particularly the 330 GW of coal capacity that today provides about half of our electric power? However necessary CO 2 reductions may be, as legislation and policies are being considered to force these reductions, we also need to understand the implications of this legislation on electricity consumers.

Prioritizing the Climate

There are many signs that policy-makers, industry and the public are taking the issue of climate change seriously:

• Individual utilities are showing strong leadership