Victor Niemeyer

Technical Executive

EPRI Climate Program

11th Annual IEA, IETA, EPRI Workshop on GHG Emission Trading

October 4, 2011

How Bad is Second Best? An Initial Comparison of Trading Approaches to Achieve Carbon

Mitigation

2© 2011 Electric Power Research Institute, Inc. All rights reserved.

Market vs. Non-Market Approaches: How Cost Effective is a CES in Cutting CO2?

• Despite current political/cultural impasse key long-term issue for U.S. power sector is climate policy

• Many expect policy of decarbonized electricity by 2050

• How and at what cost?

• EPRI investigating implications of alternative policy approaches

• Analysis comparing policies forcing renewables (RES), or clean energy (CES) which includes nuclear and CCS, or market-based CO2 caps/taxes

• All policies have market elements, but can differ greatly in cost effectiveness

3© 2011 Electric Power Research Institute, Inc. All rights reserved.

EPRI REGEN Model Used to Compare Alternative CO2 Mitigation Policies

Mix of generation and

transmission investment and

operating decisions to

minimize cost of electricity

• Simultaneous regional

8760 hourly loads and

wind/solar/bioenergy

potential

• Existing mix of

generation and

transmission capability

• New generation costs

• Future year fuel costs

• Policy options

Pacific

California

Mountain

Texas

NW-Central

SW-Central

NE-Central

M-Atlantic

S-Atlantic

SE-Central

Florida

NE

1.6

1.4

4.1 2.4

2.0

3.6

3.9

3.5

3.3 1.4

5.9 4.1

5.2

2.8

2.4

2.8

4.4

4.0

1.3

2.90.5

0.5

0.0

0.40.6

1.0

2.6

1.5

5.2

3.5

9.7

1.6

7.9 6.6

Summer Capacity in GW (source: EPA)

REGEN Optimization

4© 2011 Electric Power Research Institute, Inc. All rights reserved.

EPRI’s REGEN Model Designed to Appreciate Nuances of Carbon and Clean Energy Policy

Compressor train Expander/generator train

Fuel (e.g. natural gas, distillate)

Intercoolers

Heat recuperator

Power

In

Power

Out

AirExhaust

Air

Storage

Salt cavernHours of Storage

2/1000

_.__

mW

CapacityPVIrradianceGlobaloutputPV h

h

Wind CAES Storage

Solar

Bioenergy

New Interregional

Transmission

8,760 Hourly Loads

Hydro

Nuclear

Gas CTs

& CCs

Coal

5© 2011 Electric Power Research Institute, Inc. All rights reserved.

Analysis Overview and Caveats

• Static analysis captures electric system in approximation of long-run equilibrium for a hypothetical “future” year

• Shows minimum-cost mix of generation and transmission investment and operating decisions needed to meet load

• Powerful approach for

– Assessing fundamental economic trade-offs in meeting policy objectives

– Identifying competitive potential and market niches of different energy technologies

– Understanding the implications of key uncertainties

• Important to recognize that this static approach is not intended to be a policy analysis

6© 2011 Electric Power Research Institute, Inc. All rights reserved.

Analysis Compares Thee Policy Mechanisms

• CO2 tax puts direct price on CO2

– Many similarities to cap-and-trade with 100% auction

• Clean energy standard (CES) requires sum of weighed “emission-focused” MWh generation to meet goal

• Renewable energy standard (RES) requires sum of wind, solar, and bioenergy to meet goal (equal weights)

7© 2011 Electric Power Research Institute, Inc. All rights reserved.

Example: CES goal of 50%

1.0 x (wind + solar + bioenergy + nuclear + hydro)

+ 0.9 x (coal CCS)

+ 0.95 x (gas CCS)

+ 0.5 x (gas)

≥ 50% x (total load)

• Units in MWh

• Applies to new and existing capacity

• FYI, current CES mix approximately 40% of total load

8© 2011 Electric Power Research Institute, Inc. All rights reserved.

CO2 Emissions Drop Dramatically as Price on CO2 Increases

0

500

1,000

1,500

2,000

2,500

3,000

0 50 100 150 200 250

CO

2 E

mis

sio

ns

(mill

ion

to

ns/

year

)

CO2 Tax

Emissions by CO2 Tax Level

9© 2011 Electric Power Research Institute, Inc. All rights reserved.

Cost of CO2 Mitigation with CO2 Tax

0

50

100

150

200

0 500 1,000 1,500 2,000 2,500

An

nu

al C

O2

Mit

igat

ion

Co

st (

$B

)

CO2 Emission Reductions (million tons per year)

Electric Sector CO2 Mitigation Costs ($B)

CO2 Tax Gross Cost ($B)

0

50

100

150

200

0 500 1,000 1,500 2,000 2,500

An

nu

al C

O2

Mit

igat

ion

Co

st (

$B

)

CO2 Emission Reductions (million tons per year)

Electric Sector CO2 Mitigation Costs ($B)

CO2 Tax Gross Cost ($B)

CO2 Tax Net Cost ($B)

Mitigation cost

“Real” mitigation cost

plus tax revenue

(or allowance value)

10© 2011 Electric Power Research Institute, Inc. All rights reserved.

Cost of CO2 Mitigation with Emission-focused RES Policy

0

50

100

150

200

250

0 500 1,000 1,500 2,000 2,500

An

nu

al C

O2

Mit

igat

ion

Co

st (

$B

)

CO2 Emission Reductions (million tons per year)

Electric Sector CO2 Mitigation Costs ($B)

CES

11© 2011 Electric Power Research Institute, Inc. All rights reserved.

Cost Effectiveness of CES Nearly Matches that of CO2 Tax (or cap-and-trade)

0

50

100

150

200

250

0 500 1,000 1,500 2,000 2,500

An

nu

al C

O2

Mit

igat

ion

Co

st (

$B

)

CO2 Emission Reductions (million tons per year)

Electric Sector CO2 Mitigation Costs ($B)

CES

Tax (net)

12© 2011 Electric Power Research Institute, Inc. All rights reserved.

RES Approach Comes in a Distant 3rd

0

50

100

150

200

250

0 500 1,000 1,500 2,000 2,500

An

nu

al C

O2

Mit

igat

ion

Co

st (

$B

)

CO2 Emission Reductions (million tons per year)

Electric Sector CO2 Mitigation Costs ($B)

RES

CES

Tax (net)

Wind + storage + transmission

Nuclear + CCS

Gas

13© 2011 Electric Power Research Institute, Inc. All rights reserved.

Observations on 2nd Best

• Pure CO2 market provides lowest cost CO2 mitigation

• Emission-focused CES may be a very close alternative

• RES is a distant 3rd in CO2 mitigation cost-effectiveness

• Advantage of Tax and CES depends on option to deploy nuclear, CCS, and natural gas

• Tax and CES economics depend on nuclear and CCS

• RES economics depend on wind and large-scale deployment of new interregional transmission

• Nobody’s perfect

14© 2011 Electric Power Research Institute, Inc. All rights reserved.

Together…Shaping the Future of Electricity