TEXAS STUDY SAYS EMISSIONS CUTS COULD COME AT MODERATE COST

Analysis of Potential Impacts of CO2 Emissions Limits on Electric Power Costs in the ERCOT Region
May 12, 2009 (Electrric Reliability Council of Texas)

SUMMARY
The price of electricity may only be affected modestly by climate change legislation requiring significant cuts in greenhouse gas emissions (GhGs) if the cuts are accompanied by improvements in Energy Efficiency.

That is the conclusion of a study performed by the Electric Reliability Council of Texas (ERCOT) at the request of the Public Utility Commission of Texas (PUCT).

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Unlike the Aldy and Pizer report on competitiveness from the Pew Center (see CAP&TRADE, INDUSTRY AND CONGRESS) and the AEI carbon tax report (see CONSERVATIVES FOR A CARBON TAX), which describe GhG reductions that cause a small $15/ton GhG price, the ERCOT study evaluated a quite significant emissions cut – adequate to reduce Texas GhGs to 2005 levels by 2013 – that would cause a $40-to-60/ton GhG price.

The ERCOT study references Potential Effects of Proposed Climate Change Policies on PJM’s Energy Market, a similar study done by PJM Interconnection, that also found likely modest price impacts to ratepayers from climate change legislation that could also be mitigated by improvements in Energy Efficiency.

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To determine the cost of electricity under carbon-constraining legislation, ERCOT simulated the generation mix anticipated for 2013. It used a number of scenarios with 3 basic variables: (1) Varying prices of natural gas, (2) varying levels of efficiency providing varying levels of demand, and (3) varying levels of installed wind capacity that would also impact natural gas demand.

Simulations were created for emissions allowance costs of $0, $10, $25, $40, $60 and $100 per ton. The change in total annual wholesale power costs paid by consumers, wholesale prices, production costs, total CO2 emissions and similar output variables were quantified.

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COMMENTARY
It is worth remembering what Jim Rogers, the head of Duke Energy, repeatedly told a House subcommittee this week when he was asked if climate change legislation would cause an increase in power prices to his ratepayers. Demand will grow, the hidden harms of GhGs will be priced and, Rogers said, prices are going to go up, regardless of whether there is climate change legislation. A market-based system offers the opportunity to adjust efficiently and profitably to this new and incontrovertible reality.

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Key findings:
(1) With natural gas at a “reference case” price of $7/MMBtu, the price on emissions would have to reach the $40-to-60/ton level to reduce Texas’ GhGs to the 2005 level by 2013. This would mean wholesale power costs of ~$10 billion. It would add $27 to the typical electricity consumer’s monthly bill.
(2) If demand rises unimpeded by improved efficiency, natural gas prices would be something like $10/MMBtu, emissions allowances would cost more than $60/ton, wholesale power costs would be more like ~$20 billion and the cost increase to the typical electricity consumer would also be twice as much.
(3) There is a strong possibility energy demand will drop as prices rise. In such a case, the emissions allowance price would moderate. A 10% drop in demand would result in a $25-to-40/ton allowance price while still bringing emissions down to 2005 levels by 2013. Wholesale power costs would then only rise by ~$7 billion and a typical consumer’s monthly bill would increase by $17, $10/month less than the reference case.
(4) Texas’ present Competitive Renewable Energy Zone (CREZ) plan envisions more than 18 gigawatts of new wind power added to the state’s generation capacity. Adding this much emissions-free capacity would put emissions at the 2005 level by 2013, hold natural gas prices at the $7/MMBtu price, raise wholesale power costs to ~$7 billion and increase a typical consumer’s monthly bill $22.
(5) Multiple alternative variations are possible. An example: With the increased wind and a 2% improvement in efficiency in conjunction with an increase of the natural gas price to $10/MMBtu, the wholesale power cost and the price to the consumer goes up, but only to the reference case level.

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QUOTES
- PUCT Chairman BarrySmitherman to ERCOT CEO Bob Kahn: “I am very concerned about the effects this legislation of Messrs. Waxman and Markey will have on electricity prices in the ERCOT market…”
- From the report: “On April 1, 2009, U.S. Representatives Henry Waxman (D-CA) and Edward Markey (D-MA) posted a “discussion draft” entitled the “American Clean Energy and Security Act of 2009.” This bill intends to establish a mechanism to reduce U.S. CO2 emissions…to 20% below 2005 levels in 2020 and would further increase to a targeted reduction of 83% by 2050. Several mechanisms for accomplishing these reduction goals have been discussed: a cap and trade program in which all allowances are auctioned, one in which some or all allowances are assigned based on historic emissions, and the implementation of a federal tax on carbon emissions…[M]eeting

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these goals will necessarily result in a significant impact on the electric power sector…On April 2, 2009, the Electric Reliability Council of Texas (ERCOT) was requested by Chairman Barry T. Smitherman of the Public Utility Commission of Texas (PUCT) to conduct an “analysis of the likely effects of proposed climate change legislation on electricity prices in the ERCOT market,” …”
- From the report: “The analysis assumes that the goals of the legislation must be met directly by reductions in carbon emissions by ERCOT-region generation.”