Evaluating Cooperation Opportunities Under CAA 111(d)

Transcription

1 Evaluating Cooperation Opportunities Under CAA 111(d) PRESENTED TO Eastern Interconnection States Planning Council PRESENTED BY Kathleen Spees Judy Chang October 2, 2015 Copyright 2014 The Brattle Group, Inc.

2 Questions What Inefficiencies Should We Expect without Cooperation? What if Some States Do Rate-Based and Others Mass-Based? How Can States with Disparate Interests Come to Terms? How Big is Are the Benefits of Cooperation? 1 brattle.com

3 What Inefficiencies Should we Expect without Cooperation? EPA Indicative CO2 Prices (No Cooperation) Policy Case (Option 1, No Cooperation), Rate-Based Sources and Notes: EPA IPM Option 1, No Cooperation scenario. Map shows shadow prices on emissions rate constraint, expressed in $/ton of CO 2. Table reports total compliance costs. 2 brattle.com

4 What if Some States Do Rate-Based and Others Mass-Based? Wholesale prices would be higher under mass-based CO 2 trading: Mass-based: Fossil generators must pay for every ton of carbon produced, increasing dispatch costs and wholesale prices They or consumers could be compensated through allowance auction revenues Rate-based: Fossil units only have to pay for enough CO 2 to reduce their emissions rate to the standard In many states, the rate exceeds that of gas CCs, so they will earn revenue from creating offsets when they run (reducing energy their offer price!) Coal and Gas Dispatch Price Sources and Notes: Illustrative calculation assumes that coal-to gas switching is the marginal CO 2 abatement opportunity, resulting in equal coal and gas dispatch prices. 3 brattle.com

5 What if Some States Do Rate-Based and Others Mass-Based? Rate-based approaches will create substantial dispatch inefficiencies between states and some resource types. Two examples: Different Dispatch Prices for Identical Plants in Neighboring States Production shifts into the state with a more lax standard Identical New and Existing Gas CCs Existing CCs at advantage compared to new. State A State B 4 brattle.com

6 How Can States with Disparate Interests Come to Terms? Year 2030 Emissions from IPM Policy Case (Option 1, No Cooperation) minus Business as Usual States listed in order of declining 2012emission rates. Source: EPA IPM 5 brattle.com

7 How Can States with Disparate Interests Come to Terms? Explicitly acknowledge the property right embedded in EPA s established rates (high rates = better bargaining position, e.g. for allocating CO 2 allowances to the state) Try to avoid the sunk cost fallacy (i.e. don t allow unfair rates established by EPA prevent the state from making the best decision for the public interest going forward) Design a mechanism that maximizes the size of the pie for the region, ignoring potential winners and losers (if possible!) Separately and second, negotiate allowance allocations to compensate losers, understanding that: (1) no state will cooperate if they will be better off going alone, but (2) if the pie is bigger with cooperation this means that every state can be made better off Basic bargaining currency is CO 2 allowances in mass-based design (negotiation is also possible but much more confusing under rate-based), need to test a range of equitable alternative approaches to support negotiation Use CO 2 allocations and/or auction revenues to achieve in-state policy objectives (e.g. offset state budget, fund efficiency/renewables programs, rebate to ratepayers/taxpayers) 6 brattle.com

8 How Big Are the Benefits of Cooperation? Indicative estimates already published: EPA: $ billion per year nationally over (rate-based approach) MISO: ~$3 billion per year (NPV $28 billion) in Midcontinent over (mass-based approach) Anticipate additional estimates as regional entities and states continue their assessments Estimated benefits will depend greatly on the types of cooperative or non-cooperative scenarios compared (and many other study assumptions) Net regional benefits likely highest with: Single carbon price covering the entire region, e.g. through cap-and trade or administrative carbon pricing All CO 2 emissions covered, including new resources under 111(b) Mass-based rather than rate-based compliance Regionally uniform tradable products for CO 2 allowances and renewable/efficiency credits (if relevant under a particular mechanism) 7 brattle.com

9 Presenter Information KATHLEEN SPEES Senior Associate Cambridge, MA Dr. Kathleen Spees is a senior associate at The Brattle Group with expertise wholesale electric energy, capacity, and ancillary service market design and analysis. Dr. Spees has worked with system operators in the U.S. and internationally to improve their market designs with respect to capacity markets, scarcity and surplus event pricing, ancillary services, wind integration, and energy and capacity market seams. For other clients, Dr. Spees has engaged in assignments to support business and investment decisions related to demand response penetration potential, virtual trading, FTRs, ancillary service markets, impacts of environmental regulations on coal retirements, tariff mechanisms for accommodating merchant transmission upgrades, renewables integration approaches, and market treatment of storage assets. Kathleen earned a B.S. in Mechanical Engineering and Physics from Iowa State University. She earned an M.S. in Electrical and Computer Engineering and a Ph.D. in Engineering and Public Policy from Carnegie Mellon University. JUDY CHANG Principal, Director Cambridge, MA Judy.Chang@brattle.com Ms. Judy Chang is an energy economist and policy expert with a background in electrical engineering and over 17 years of experience in advising energy companies and project developers with regulatory and financial issues. Ms. Chang has submitted expert testimonies to the U.S. Federal Energy Regulatory Commission, U.S. state and Canadian provincial regulatory authorities on topics related to transmission access and renewable energy. She also has authored numerous reports and articles detailing the economic issues associated with system planning, including comparing the costs and benefits of transmission. In addition, she assists clients in comprehensive organizational strategic planning, asset valuation, finance, and regulatory policies. Ms. Chang has presented at a variety of industry conferences and has advised international and multilateral agencies on the valuation of renewable energy investments. She holds a Bachelor of Science in Electrical Engineering from University of California, Davis, and a Master s in Public Policy from Harvard Kennedy School, is a member of the Board of Directors of the Massachusetts Clean Energy Center, and the founding Executive Director of New England Women in Energy and the Environment. The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the views of The Brattle Group, Inc. 8 brattle.com

10 About the Brattle Group The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governmental agencies worldwide. We combine in-depth industry experience and rigorous analyses to help clients answer complex economic and financial questions in litigation and regulation, develop strategies for changing markets, and make critical business decisions. Our services to the electric power industry include: Climate Change Policy and Planning Cost of Capital Demand Forecasting Methodology Demand Response and Energy Efficiency Electricity Market Modeling Energy Asset Valuation Energy Contract Litigation Environmental Compliance Fuel and Power Procurement Incentive Regulation Rate Design and Cost Allocation Regulatory Strategy and Litigation Support Renewables Resource Planning Retail Access and Restructuring Risk Management Market-Based Rates Market Design and Competitive Analysis Mergers and Acquisitions Transmission 9 brattle.com

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