Assessment of the Greenhouse Gas Impact of the SSJID Project

Transcription

1 Greenhouse Gas Impact Assessment: Technical Report 1 Assessment of the Greenhouse Gas Impact of the SSJID Project Introduction and Summary The South San Joaquin Irrigation District (SSJID) has proposed forming a municipal utility to serve the electricity needs of customers within its service area. Should SSJID assume responsibility for providing this service, Pacific Gas and Electric (PG&E) would stop providing power to these customers. PG&E s total electricity load would be reduced by the amount of load that SSJID serves. If SSJID uses different generation resources than PG&E does to meet this load, SSJID s municipalization could result in a net change in electric procurement-related greenhouse gas emissions. The difference between the emissions no longer produced from generation units displaced when PG&E stops procuring power for SSJID s load and the emissions from generation units that SSJID uses to serve this load determines the electric procurement-related greenhouse gas impact of SSJID s proposal. The resources that will be displaced when PG&E stops procuring non-renewable power for SSJID will be primarily gas-fired power plants, the marginal resources called on by PG&E to serve load. When SSJID begins serving its own load it will also use gas-fired power plants to meet its non-renewable power requirements. If SSJID were to procure power from those same marginal gas-fired plants that were displaced from PG&E s system (which would now be free to offer power to SSJID), this would result in no net change in greenhouse gas emissions. However, to obtain reliability and economic benefits, SSJID will likely obtain its natural gas-fired power through power contracts instead of obtaining the displaced marginal power from the pool of market resources. In this event, SSJID would contract with the lowest-cost generation available that meets its needs; this lower-cost generation can be expected to have a lower rate of greenhouse gas emissions than the marginal resources displaced from PG&E s system, resulting in a net reduction in greenhouse gas emissions. This emission reduction is likely to occur because the cost for power from thermal power plants is largely determined by thermal efficiency, 1 which also determines the greenhouse gas emission rate. In other words, the lowest-cost generation resources available are generally those resources with the lowest greenhouse gas emissions, whereas the marginal (i.e., most expensive) power plants that will be displaced from PG&E s system are likely to be the power plants on the system 1 This is particularly true under a condition of excess supply (as currently exists in the Western U.S.), when competition among suppliers pushes power prices to a level close to the plants operating costs. For natural gas-fired plants, operating costs consist predominantly of fuel costs. So, particularly under conditions of excess supply, plants with higher fuel costs (and higher emission rates) are more expensive than plants with lower fuel costs. California s power market is currently in such an excess supply condition, and is expected to remain so at least through Available gas-fired capacity in 2020 is expected to be 35%-51% greater than needed to meet load. (See Track I Direct Testimony of Mark Rothleder on behalf of the California Independent System Operator Corporation in California Public Utilities Commission proceeding R , July 1, 2011, pages )

2 Greenhouse Gas Impact Assessment: Technical Report 2 with the highest levels of greenhouse gas emissions. Therefore, if SSJID obtains power from lower-cost resources, there will likely be a positive greenhouse gas benefit from SSJID s taking over procurement of non-renewable resources from PG&E. By 2020, PG&E and SSJID are each required under state law to serve at least 33% of their loads using renewable power, which has zero or low greenhouse gas emissions (with interim requirements in the preceding years). Since both PG&E and SSJID face the same renewable procurement requirements, the worst case scenario with respect to renewable procurement by SSJID is that the amount of renewable power displaced from PG&E s system will be equivalent to the amount of renewable power added to SSJID s system, resulting in no change in net greenhouse gas emissions. However, PG&E may not immediately slow down its renewable power procurement upon SSJID s municipalization because PG&E is in the process of ramping up its renewable power procurement to meet the 33%-by-2020 requirement and will continue to require additional renewable power even after it stops procuring renewable power for SSJID s load. At least in the near-term, then, SSJID s renewable purchases may displace gas-fired power on PG&E s system, therefore providing an additional net greenhouse gas benefit from SSJID s municipalization. In summary, at worst, SSJID s municipalization will result in the replacement of PG&Eprocured renewable power with an equivalent amount of SSJID-procured renewable power and the replacement of PG&E-procured gas-fired power with an equivalent amount of SSJIDprocured gas-fired power with the same emission rate. This would result in no net change in greenhouse gas emissions (Figure 1). A more likely scenario is that SSJID s gas-fired power will have a lower emission rate than the gas-fired power displaced from PG&E s system, and, at least in the near term, SSJID s renewable power purchases will displace gas-fired power purchases by PG&E. This would lead to a net reduction in greenhouse gas emissions (Figure 2). As a result, SSJID s municipalization will at worst lead to no net change in greenhouse gas emissions and will more probably yield a reduction in greenhouse gas emissions. Figure 1: Net Effect of SSJID s Municipalization Worst Case Scenario: No Net Greenhouse Gas Impact Power Displaced from PG&E's System Power Procured for SSJID's System 33%: Renewable Power 33%: Renewable Power 67%: Gas- Fired Power 67%: Gas- Fired Power Same emission rate as PG&E's displaced gas- fired power

3 Greenhouse Gas Impact Assessment: Technical Report 3 Figure 2: Net Effect of SSJID s Municipalization Alternate Scenario: Net Reduction in Greenhouse Gas Emissions Power Displaced from PG&E's System Power Procured for SSJID's System 33%: Renewable Power 100%: Gas- Fired Power 67%: Gas- Fired Power Lower emission rate than PG&E's displaced gas- fired power This technical report presents the research and analyses behind these findings. It begins with a discussion of the theoretical approaches for assessing displaced greenhouse gas emissions from a power grid and the consensus of experts and regulators that the displaced marginal resource approach should be used in all but the simplest of analyses. It then illustrates the widespread use of this approach among California regulators for complying with state law and for the purposes of California Environmental Quality Act (CEQA) assessments. It next identifies the displaced marginal resources in California as predominantly gas-fired resources and discusses estimates developed by California regulators of the emission rate of these marginal resources. Finally, it calculates the emission rate of the renewable and non-renewable power that will be displaced from PG&E s system and the emission rate of the renewable and non-renewable power that SSJID will likely procure to meet its load and finds that there will be no negative greenhouse gas impact and a potential greenhouse gas benefit from SSJID s municipalization.

4 Greenhouse Gas Impact Assessment: Technical Report 4 Methodologies for Estimating Emission Reductions Due to Load Reductions When SSJID municipalizes, PG&E will no longer be required to procure power on SSJID s behalf, resulting in less PG&E power procurement and, consequently, fewer greenhouse gas emissions associated with PG&E power procurement. The primary question at hand is how to calculate how much lower PG&E s greenhouse gas emissions will be when it stops procuring power for SSJID s load. This reduction in PG&E s greenhouse gas emissions is referred to as PG&E s avoided emissions. Experts and regulators are often required to assess avoided emissions in related contexts. For example, energy efficiency measures result in load reductions, analogous to the load reduction that will occur on PG&E s system when PG&E stops procuring power for SSJID. Regulators at the state and federal levels determine avoided emissions from energy efficiency measures in order to credit energy efficiency providers with the appropriate amount of emission reductions and to incorporate these avoided emissions in cost-effectiveness assessments. Adding a new power plant to the system increases the power supply, which affects the system s supply-demand balance in the same way as does a reduction in system load. As part of CEQA analyses for new power plants, the California Energy Commission ( Energy Commission ) considers the emissions that will be avoided from displaced power plants once the new plants begin to operate. As demonstrated below, the broad consensus of experts and regulatory agencies is that in calculating avoided emissions the emission rate of the displaced marginal resources should be used in most circumstances. Furthermore, the broad consensus is that use of a utility s average emission rate is a simplified approach that can be quite inaccurate and should generally be avoided except in the simplest of analyses. This section begins with an overview of the most common approaches to assessing avoided emissions from load reductions. It then discusses the preferred approach of federal regulators and other experts and the reasons for their preference for using the emission rate of the displaced marginal resource in place of the average emission rate. Next it summarizes a number of avoided emission analyses conducted by California regulatory agencies to implement statutory requirements and as part of CEQA assessments, all of which use the displaced marginal resource approach. Finally, it presents an application of the displaced marginal resource approach that focuses on longer-term resource displacements and discusses the relevance of this approach to the SSJID analysis.

5 Greenhouse Gas Impact Assessment: Technical Report 5 Approaches to Assessing Avoided Emissions from Load Reductions In assessing avoided emissions from load reductions there are two emission rates that might be used: the average emission rate or the marginal emission rate. The average emission rate is the weighted average emission rate of all resources on a system. The marginal emission rate is the emission rate of the marginal resources on a system, which are the resources that would be displaced due to the load reduction. 2 There is consensus among experts and regulators that the marginal emission rate is the preferred emission rate to use wherever feasible for avoided emissions assessments. As explained in the section, Marginal Power Plants in California and in PG&E s Service Territory, power plants in California are dispatched (i.e., given orders to operate) in order of their marginal costs of operations. As a result, the marginal resources, which are the last resources dispatched, are typically the most expensive resources to operate and the resources with the highest rates of greenhouse gas emissions. The preferred approach, referred to here as the displaced marginal resource approach, calculates avoided emissions based on the emission rates of these marginal resources. These are the resources that are most likely to be displaced on account of a load reduction. The average emission rate should generally not be used because it does not accurately reflect the operations of the power system. Specifically, the average approach implicitly assumes that all generating units would be affected by a load reduction in equal proportion, whereas in actuality, most units would be unaffected and only the production of specific units, the marginal units, would be displaced. In California and many other regions, the marginal units displaced by energy efficiency programs can have very different emissions characteristics from the base load units that dominate the average emissions rate. 3 As a result, the average emission rate is not an accurate representation of the emission rate of the marginal resources that are displaced on account of a load reduction. 2 The marginal resource is the resource that would be used to serve an additional increment of load added to the system. In other words, it is the resource at the bottom of the dispatch queue (i.e., last in line and first to be displaced). 3 National Action Plan for Energy Efficiency (2007), Model Energy Efficiency Program Impact Evaluation Guide. Prepared by Steven R. Schiller, Schiller Consulting, Inc., p

6 Greenhouse Gas Impact Assessment: Technical Report 6 Widespread Preference for the Displaced Marginal Resource Approach over the Average Approach In a 2003 report, Estimating the Emission Reduction Benefits of Renewable Electricity and Energy Efficiency in North America: Experience and Methods, Synapse Energy Economics (Synapse) elaborated on why the system average approach can provide highly inaccurate results 4 and should be avoided if possible : 5 Many budget-constrained studies and quick estimates of displacement rely on system average rates. This method, however, can provide highly inaccurate results. As noted, additional generation or reduced load in an electric system affects the marginal generating units far more than it affects other units, and in most systems, the units that operate on the margin are quite different from the units providing baseload energy. For example, hydro and nuclear units with very low air emissions provide much of the baseload energy in many regions of the US. If a weighted system average is calculated, these units extremely low emission rates have a large impact on the result. But most new assets will have virtually no affect on the operation of baseload units. Thus, this is clearly an inappropriate emission rate to use for assessing the air impacts of new assets. 6 Academic researchers have also been clear that differentiating between marginal and average emissions is essential to accurately estimate the CO 2 savings from reducing electricity use. 7 Such a distinction is important because the characteristics of the marginal electricity that would not be generated otherwise determine the costs and emissions associated with using electricity. 8 The U.S. Environmental Protection Agency (EPA) follows this distinction with regard to determining the amount of air pollutants that are avoided by energy efficiency measures. The EPA has provided explicit guidance that the amount of emission reductions that will occur from the [energy savings] measure is directly tied to the emissions rate of the facilities at which energy generation is displaced (i.e., the marginal generators). 9 The EPA guidance does not allow for the use of the system average emission rate. Guidance provided by the National Action Plan for Energy Efficiency is consistent with this approach. The Model Energy Efficiency Program Impact Evaluation Guide developed by the National Action Plan for Energy Efficiency reviews techniques for evaluating the emission impact of load reductions and directs that the use of system average emissions values should 4 Synapse Energy Economics. Estimating the Emission Reduction Benefits of Renewable Electricity and Energy Efficiency in North America: Experience and Methods. September 22, 2003, p. 6. (Synapse) 5 Synapse (2003), 9. 6 Synapse (2003), 6. 7 L. Price, et al, Lawrence Berkeley National Laboratory and G. Franco, California Energy Commission. Development of Methodologies for Calculating Greenhouse Gas Emissions from Electricity Generation for the California Climate Action Registry, p R. McCarthy, et al, Institute of Transportation Studies, UC Davis. Interactions Between Electric-Drive Vehicles and the Power Sector in California. May 2009, p U.S. Environmental Protection Agency. Guidance on State Implementation Plan (SIP) Credits for Emission Reductions from Electric-Sector Energy Efficiency and Renewable Energy Measures. August 2004, p. 14.

7 Greenhouse Gas Impact Assessment: Technical Report 7 be avoided except in the simplest estimates. 10 The Guide further explains that the average approach is an easy approach to apply, but the tradeoff can be relatively high uncertainty. 11 It directs that using an hourly dispatch model to identify the units displaced by the energy efficiency program is the most precise means of quantifying avoided emissions and is a preferred approach where feasible. 12 Displaced Marginal Resource Methodology Used to Implement California s Greenhouse Gas, Demand Response, and Energy Efficiency Statutes The displaced marginal resource methodology is used in numerous regulatory contexts in California by all of the state s key energy regulatory agencies. 13 For example, as described in this section, this methodology is used by the California Air Resources Board ( Air Resources Board ) in implementing the state s greenhouse gas laws, by the California Public Utilities Commission (CPUC) in implementing demand response programs, and by the Energy Commission in implementing the state s building efficiency statutes. We have not identified a single instance of California regulatory agencies using the average emission approach to calculate avoided emissions. California s Global Warming Solutions Act of 2006, Assembly Bill 32 (AB 32), required the Air Resources Board to develop a plan to reduce statewide greenhouse gas emissions to 1990 levels by In developing this plan, the Air Resources Board evaluated the greenhouse gas reductions achievable from the electricity sector through measures such as energy efficiency and demand response, a cap-and-trade program, and a renewable portfolio standard. Consistent with the displaced marginal resource approach, the Air Resources Board assumed for its calculations that these measures would displace natural gas-fired generation, 14 which, as discussed in the next section, is the type of resource that is nearly always on the margin in California. The CPUC and the Energy Commission developed a more detailed, simulation-based model to support the Air Resources Board s evaluation of greenhouse gas reductions attainable through the electricity sector. Consistent with the displaced marginal resource methodology, this GHG Calculator evaluates the marginal GHG emissions rate of generation based on results from an hourly dispatch model of the western electricity grid. 15 The CPUC relied on these modeling results to develop its Final Opinion on Greenhouse Gas Regulatory Strategies, which represents the recommendations of the CPUC and the Energy Commission to the Air Resources Board on measures and strategies for reducing GHG emissions in the electricity and natural gas sectors 10 National Action Plan for Energy Efficiency (2007), National Action Plan for Energy Efficiency (2007), National Action Plan for Energy Efficiency (2007), See Appendix A for a partial list of California regulatory proceedings that use the displaced marginal resource approach to evaluate avoided emissions. 14 California Air Resources Board. AB 32 Climate Change Scoping Plan, Appendix I-23. December Energy and Environmental Economics. Greenhouse Gas Modeling of California s Electricity Sector to 2020: Updated Results of the GHG Calculator Version 3b Update, October 2010, p

8 Greenhouse Gas Impact Assessment: Technical Report 8 for compliance with AB With regard to demand response programs, California state law requires that the displaced marginal resource approach be used in calculating avoided greenhouse gas emissions. The California Public Utilities Code specifies that greenhouse gas benefits that are included in demand response pricing incentives should be calculated based on the reduction in emissions of greenhouse gases and other pollutant emissions from generating facilities that would have been required to operate but for these demand reductions. 17 Consistent with this directive, the CPUC s protocols for assessing the value of a greenhouse gas reduction due to demand response programs specify use of the emission rate of the marginal resource. 18 The Energy Commission also uses the displaced marginal resource approach in evaluating greenhouse gas reductions associated with energy efficiency improvements under Title 24 of California s building code (building efficiency standards). Specifically, the Energy Commission sets the avoided cost of greenhouse gas emissions to the cost of carbon dioxide emissions (CO 2 ) associated with the marginal electricity generation resource. 19 California Energy Commission Use of Displaced Marginal Resource Methodology to Calculate Avoided Greenhouse Gas Emissions for CEQA Assessments The Energy Commission uses the displaced marginal resource methodology to evaluate the avoided greenhouse gas emissions of new power plants for CEQA assessments. These assessments are relevant to the assessment of avoided emissions from a load reduction, such as the loss of SSJID s load from PG&E s system, because the addition of a new power plant and the reduction of system load have the same effect on the operations of existing units on the system: adding a new power plant displaces the less efficient power plants that had been on the margin, just as occurs due to a reduction in system load (Figure 3). The assessment of operational greenhouse gas impacts from power plant additions is therefore analogous to the assessment of operational greenhouse gas impacts from load reductions. 16 CPUC decision D in R October 16, 2008, p California Public Utilities Code, Section California Public Utilities Commission Demand Response Cost-Effectiveness Protocols. Decision D , Attachment 1, in R , December 16, 2010, p Energy and Environmental Economics. Time Dependent Valuation of Energy for Developing Building Efficiency Standards, prepared for the California Energy Commission. February 2011, p DV_Methodology_Report_23Feb2011.pdf

9 Greenhouse Gas Impact Assessment: Technical Report 9 Figure 3: Effect of Load Reduction or Plant Addition on Dispatch of Existing Plants 1,200 MW Baseline Demand Plant 1: $0/MWh Plant 2: $5/MWh Plant 3: $15/MWh Plant 4: $25/MWh Plant 5: $40/MWh Plant 6: $60/MWh 200- MW Load ReducRon Plant 1: $0/MWh Plant 2: $5/MWh Plant 3: $15/MWh Plant 4: $25/MWh Plant 5: $40/MWh Plant 6: $60/MWh 200- MW Plant AddiRon Plant 1: $0/MWh Plant 2: $5/MWh Plant 3: $15/MWh Plant 4: $25/MWh Plant 5: $40/MWh New Plant: $50/MWh Plant 6: $60/MWh Each plant in the schematic above has a capacity of 200 MW. In the baseline case, all six plants are dispatched to meet the 1,200 MW of demand. In the Load Reduction case, the plant with the highest operating costs (Plant 6) is not dispatched because the remaining plants are sufficient to meet the remaining demand. In the Plant Addition case, Plant 6 again is not dispatched because the new plant, having lower operating costs, displaces it in the queue. In its CEQA reviews for new power plants, the Energy Commission uses the displaced marginal resource approach to evaluate greenhouse gas impacts. 20 Notably, in the proceeding approving the Avenal gas-fired plant, the Energy Commission specifically refuted a contention that the system average emission rate should be considered instead of the marginal emission rate, stating that the average rate reflects much non-fossil generation, such as nuclear and renewables, with lower heat rates or lower running costs, that the Avenal Energy Project would never displace. 21 In other words, the emission rate that needs to be considered is the emission rate of the displaced generation, which is the emission rate of the marginal generator. The Energy Commission used the displaced marginal resource approach most recently in its May 2011 decisions approving two PG&E gas-fired plants: the Oakley Generating Station (Oakley) combined cycle plant and the Mariposa Energy Center (Mariposa) peaker plant. In these decisions, the Energy Commission estimated that the greenhouse gas emission rate from Oakley s operation would be metric tons per MWh, 22 which is 50% higher than PG&E s 20 See Appendix B for a list of siting cases in which the Energy Commission has applied the displaced marginal resource approach. 21 California Energy Commission. Avenal Energy Project Final Commission Decision, CEC CMF. December 2009, p (Avenal Final Decision) 22 California Energy Commission. Oakley Generating Station: Commission Decision, CEC CMF, May 2011, p. GHG-8. (Oakley Commission Decision)

10 Greenhouse Gas Impact Assessment: Technical Report average emission rate. 23 The Commission estimated that the greenhouse gas emission rate from Mariposa would be metric tons per MWh, 24 which is more than double PG&E s 2009 average emission rate. As a result, if the Energy Commission had used PG&E s system average emission rate as the baseline for evaluating greenhouse gas impacts of these new plants, the Energy Commission would have likely found the Oakley and Mariposa plants to have significant greenhouse gas impacts from operation. Instead, using the displaced marginal resource approach, the Energy Commission found that operational greenhouse gas emissions from neither plant would cause a significant environmental impact and that both plants would reduce system-wide greenhouse gas emissions. 25 Table 1: GHG Emission Rates: New PG&E Plants Compared with PG&E Average 26 Metric tons per MWh PG&E average (2009) N/A Oakley (forecast) % Mariposa (forecast) % % Higher than PG&E The Energy Commission explained the reasoning behind its methodology in the CEQA analysis for the Oakley plant: Not only is the electricity system integrated physically, but it also operates as such. The California Independent System Operator (CAISO) is responsible for operating the system so that it provides power reliably and at the lowest cost. Thus, the CAISO dispatches generating facilities generally in order of cheapest to operate (i.e., typically the most efficient) to most expensive (i.e., typically the least efficient). (Id.) Because operating cost is correlated with heat rate (the amount of fuel that it takes to generate a unit of electricity), and, in turn, heat rate is directly correlated with emissions (including GHG emissions), when one power plant runs, it usually will take the place of another facility with higher emissions that otherwise would have operated PG&E s average 2009 greenhouse gas emission rate was metric tons per megawatt-hour delivered to customers. (PG&E 2009 Electric Power Sector Report, submitted to The Climate Registry. However, not all generated power is delivered to customers on account of losses that occur in the process of transmitting the power. Accounting for these losses, the average emission rate of the facilities that provide electricity to PG&E is metric tons per megawatt-hour generated. (We used a loss factor of 8.8% for this calculation, as reported in a PG&E June 2011 CPUC filing: Pacific Gas & Electric Company Energy Resource Recovery Account and 2012 Generation Non-Bypassable Charges Forecast Prepared Testimony, A p June 1, 2011.) 24 California Energy Commission. Mariposa Energy Project: Commission Decision, CEC CMF, May 2011, p. GHG-10. (Mariposa Commission Decision) 25 Oakley Commission Decision, p. GHG-15, Conclusions of Law 3 and 11 and Mariposa Commission Decision, p. GHG-19, Findings of Fact 18 and PG&E Electric Power Sector Report, Oakley Commission Decision, p. GHG-8, and Mariposa Commission Decision, p. GHG See footnote Oakley Commission Decision, p. GHG-10.

11 Greenhouse Gas Impact Assessment: Technical Report 11 The Energy Commission therefore found that Oakley will displace generation from lessefficient (i.e., higher-heat-rate and therefore higher-ghg-emitting) power plants [and] will reduce overall GHG emissions from the electricity system. 29 The Commission concluded, Oakley s operational GHG emissions will not cause a significant environmental impact and will reduce system-wide GHG emissions. 30 Similarly, with regard to Mariposa, the Commission noted, Gas-fired power plants such as Mariposa currently play a role in advancing the State s climate and energy goals by displacing less-efficient generation resources and facilitating the integration of renewables into the system. 31 The Commission found that Mariposa will displace generation from less-efficient (i.e., higher-heat-rate and therefore higher-ghg-emitting) power plants in the Greater Bay Area [and] will reduce overall GHG emissions from the electricity system. 32 The Commission concluded, Mariposa Energy Project s operational GHG emissions will not cause a significant environmental impact and will reduce system-wide GHG emissions. 33 Consideration of Displaced Plants through Additions and Retirements The displaced resource approach commonly considers resource displacements due to changes in the operations of existing units. This is the approach taken in all of the situations discussed above. However, this marginal resource method can also be applied to consider resource displacements due to changes in the long-term need for capacity. In this application, avoided emissions are assessed based on the emission rates of specific plant additions that would be made unnecessary and specific plant retirements that would be expedited due to the load reduction or resource addition. 34 Synapse explains that this plant addition/retirement application is most appropriate for assessing medium- to long-term impacts, 35 whereas the displaced marginal resource approach applied to existing plants provides a comprehensive and accurate approach for assessing how a given asset affects an existing electric system. 36 Synapse also warns that assessing the impact of a project on plant additions and retirements is subject to considerable uncertainty: 29 Oakley Commission Decision, p. GHG-14, Findings of Fact 16 and Oakley Commission Decision, p. GHG-15, Conclusions of Law 3 and Mariposa Commission Decision, p. GHG Mariposa Commission Decision, p. GHG-19, Findings of Fact 18 and Mariposa Commission Decision, pp. GHG-19-20, Conclusions of Law 2 and The California Energy Commission uses this approach qualitatively as part of its assessment of avoided emissions from new power plants. It also considers the avoided emissions from the displaced marginal resource on the existing system. See, for example, Avenal Final Decision, p Over the short term, new resources displace existing units primarily the marginal unit in the existing electric system. Over the long term, a resource added today will displace other new resources competing for market entry and/or cause retirements of existing capacity. Synapse (2003), Synapse (2003), 7.

12 Greenhouse Gas Impact Assessment: Technical Report 12 Predicting plant additions and retirements is difficult, because it is not simply a question of costs. Many factors regulatory, political, economic and financial influence the decision to build a new unit or retire an existing one, and plant developers and owners do not always behave like the rational market participants assumed in textbook economics. In addition to basic economics (such as relative fuel prices and technology costs), some of the important factors affecting plant additions are: the prevailing attitudes of capital markets toward the power generation sector, environmental regulatory policy (e.g. in attainment and nonattainment areas), energy policies designed to support the addition of certain unit types and discourage the addition of others, strategic considerations and market power, and irrational behavior in the project development process. 37 Given the analytical difficulties with the plant addition/retirement application and its relevance only for longer-term impacts, the numerical analyses in this report generally assess avoided emissions from the displaced marginal resources on the existing system. We expect, however, that an analysis using the plant addition/retirement approach would not alter the conclusion of this report, which is that SSJID s municipalization would lead at worst to no net change in greenhouse gas emissions and to possible emission reductions. This is consistent with the Energy Commission s conclusion when it considered the capacity retirements that would be facilitated by the development of the Avenal gas-fired plant. The Energy Commission found that the new plant would reduce overall GHG emissions from the electricity system in part because it would probably replace power from two types of power plants that are less-efficient (and therefore higher-ghg-emitting): coal-fired power plants that are unable to sell to California utilities and power plants that must be retired because they currently use once-through cooling. 38 Conclusion on Methodology The consensus of experts and regulators is that the displaced marginal resource approach should be used to assess avoided emissions from load reductions or resource additions because this method targets emission reductions from those resources that are most likely to be displaced. Likewise, the consensus of experts and regulators is that the average emission approach should not be used, except perhaps in the most simple of analyses, because it incorporates emission reductions from many resources that would not in fact be displaced. California regulators have been consistent in using the displaced marginal resource approach for all legal and regulatory avoided emission analyses. Most of these analyses consider the displaced marginal resources on the existing system, often using hourly dispatch models to identify these resources. For CEQA analyses of new power plants, the Energy Commission additionally considers displaced resources from longer-term changes in the system s portfolio (i.e., plant additions and retirements). Both approaches are based on the displaced marginal resource methodology, though the plant addition/retirement approach is subject to greater uncertainty and is relevant only for longer-term analyses. 37 Synapse (2003), Avenal Final Decision, p. 113, Finding of Facts 17 and 18.

13 Greenhouse Gas Impact Assessment: Technical Report 13 Marginal Power Plants in California and in PG&E s Service Territory In California, the CAISO dispatches power for PG&E and the other entities that it serves in an integrated manner using economic dispatch. 39 Plant owners or their scheduling coordinators (typically, the utilities) bid available units into the CAISO market at the units marginal cost of operation, and the CAISO dispatches the units in a least-cost manner until system demand is met. 40 Plants with zero or low fuel and operational costs, including nuclear, hydroelectric, and renewable power plants, are dispatched first. Gas-fired plants and other fossil-fired plants, which have higher fuel and operational costs, are then dispatched in order of their marginal costs, with the highest-cost plants lowest on the dispatch queue and used only in times of very high demand. 41 A report from a consultant to the CPUC explains how this least-cost dispatch process results in a dispatch order from (roughly) lowest to highest greenhouse gas emissions intensity: [t]he efficiency of a natural gas combined cycle power plant is an important determinant of its variable, or operating cost. In the wholesale electricity market in California, generators bid into the market based on their marginal cost, and are dispatched from lowest to highest bid [Currently,] as long as California generators are dispatched in economic order, then they are also dispatched in order of their emissions intensity: hydropower, nuclear power, and renewable energy have basically no marginal cost, as well as no GHG emissions, and are dispatched first. Gas generators in California are also dispatched in economic order, from the most efficient combined cycle units (CCGTs) first to the least efficient combustion turbines (CTs) last. This dispatch order corresponds with their emissions intensity rank order. 42 To identify which plants are lowest in the dispatch order, UC Davis researchers simulated the operation of California s electricity dispatch system over a 12-month period and found that in California generation from hydro, nuclear, and renewable power plants, which have very low operating costs, is never on the margin and that the marginal plants are almost always natural gas-fired. 43 This can be seen in the sample output shown in Figure 4 below, which identifies the types of resources that are dispatched to meet each tranche of demand: starting from the bottom of the image, first the nuclear plants are dispatched, then other (unspecified) resources, then renewables, firm imports, and hydroelectric plants. After all these resources have been 39 Avenal Final Decision, p The Security Constrained Unit Commitment (SCUC) and Security Constrained Economic Dispatch (SCED) applications used in the Integrated Forward Market (IFM), [Hour-Ahead Scheduling Process], and the Real-Time Market (RTM) shall calculate optimal resource commitment, Energy, and Ancillary Services Awards and Schedules at least cost to End-Use Customers consistent with maintaining System Reliability. California Independent System Operator Corporation, Fifth Replacement FERC Electric Tariff, Section 8.3.1, April 1, There are exceptions to this process for must-take contracts or resources needed for local or system reliability. These resources are dispatched even if lower-cost resources are available. 42 Energy and Environmental Economics, Inc. Greenhouse Gas Modeling of California s Electricity Sector to 2020: Updated Results of the GHG Calculator Version 3b. March 2010, pp R. McCarthy and C. Yang, Institute of Transportation Studies, UC Davis. Determining marginal electricity for near-term plug-in and fuel cell vehicle demands in California: Impacts on vehicle greenhouse gas emissions, p. 3. Journal of Power Sources. October 12, 2009.

14 Greenhouse Gas Impact Assessment: Technical Report 14 dispatched, efficient natural gas plants (combined cycle and combined heat and power plants) are dispatched to meet most of the remaining load, with natural gas peaking plants (steam turbines and combustion turbines) supplying additional power if needed. For the time period shown, natural gas peaking plants are on the margin during the periods of highest demand, and natural gas combined cycle plants (or, at times, perhaps combined heat and power plants) are on the margin during the remaining hours. Figure 4: California's Dispatch System: Simulation Results Source: McCarthy, Yang, J. Power Sources (2009) Consistent with this finding, PG&E assumes for ratemaking purposes that the marginal capacity resource, which is the marginal existing resource in the market, is a gas-fired power plant. 44 Similarly, a June 2010 Air Resources Board staff report addressing the proposed 33% Renewable Electricity Standards stated, The power being displaced [when renewable resources are added to the grid] is incremental power provided by generators to address load changes ( marginal power ), which is typically provided by natural gas power plants PG&E. Update to Prepared Testimony in 2011 General Rate Case Phase 2, A , Exhibit PG&E-15: Marginal Cost. January 7, 2011, p II/Testimony/PGE/2011/GRC2011-Ph-II_Test_PGE_ _ pdf. 45 California Air Resources Board Staff Report. Initial Statement of Reasons. Proposed Regulation for Renewable Electricity Standard, Appendix D: Supporting Documentation for Environmental Analysis. June 2010, p. D-11.

15 Greenhouse Gas Impact Assessment: Technical Report 15 These same findings apply also to PG&E s own power supply. PG&E serves about half of its load with nuclear, hydroelectric, and renewable resources, which are dispatched first, and the remaining half primarily with natural gas-fired power. 46 SSJID s load of about 540,000 MWh per year 47 is about 0.675% of PG&E s retail load of 80,000,000 MWh per year 48 of retail electricity deliveries. Therefore, in a typical hour, the departure of SSJID s load from PG&E s system will have no effect on the dispatch of PG&E s nuclear, hydroelectric, and renewable resources but will displace the least efficient 1.35% of PG&E s gas-fired generators. 49 Figure 5: PG&E's 2009 Resource Mix and SSJID's Share of this Mix Renewables 14% Hydro 13% Nuclear 20% Gas 50% PG&E 49% Source: PG&E EPS Report to the Climate Registry 1% SSJID In summary, there is broad consensus that the marginal plant on the CAISO system is almost always a gas-fired plant. The departure of SSJID s load from PG&E s system will therefore almost always displace gas-fired resources and is not expected to displace PG&E s lowgreenhouse gas resources. 46 Nuclear, hydroelectric, geothermal, wind, and solar generation collectively accounted for about 43.6% of PG&E s energy deliveries in PG&E. Climate Registry 2009 EPS Report, Additional Optional Information retail load. SSJID Administrative Subsequent EIR, Section , citing Sphere Plan/MSR, Table 4-5 (2011) % = 540,000 SSJID MWh/ 80,000,000 PG&E MWh. PG&E retail load from PG&E 2009 EPS Report % = 540,000 SSJID MWh/ (80,000,000 PG&E MWh * 50% of MWh from gas-fired resources)

16 Greenhouse Gas Impact Assessment: Technical Report 16 Greenhouse Gas Emission Rate of Marginal Resources in California In developing rules to implement California s greenhouse gas statutes, the California Air Resources Board deliberated with the CPUC and the Energy Commission on the appropriate emission rate that should be used to report the emissions from power delivered into California from unspecified plants. The CPUC and the Energy Commission recommended use of a greenhouse gas emission factor of 1,100 pounds per MWh (0.499 metric tons per MWh), which also approximates an emission factor for marginal electricity generation available in the market. 50 The Air Resources Board decided that instead of using the Energy Commission estimate of the marginal emission rate it would use the emission rate of all dispatchable market resources (excluding hydroelectric resources) with capacity factors of at least 60%. This includes both marginal resources and more efficient gas-fired resources that are likely to be on the margin for very few hours of the year, if at all. Using a calculator developed by CPUC staff and vetted through stakeholder discussions held by the [Western Climate Initiative] Electricity Team as well as the Interagency Electricity Working Group comprised of [Air Resources Board], CPUC, and [Energy Commission] staff, 51 the Air Resources Board calculated an emission rate for these market resources of metric tons per MWh. 52 Since this value incorporates the emission rates of both marginal resources and more efficient market resources, this value is below the emission rate of the marginal resources that are likely to be displaced from PG&E s system due to SSJID s municipalization and can be used as a highly conservative lower-bound emission rate for the marginal resources. These more detailed numeric analyses support the general understanding that gas-fired generation is nearly always on the margin in California and that a loss of load would therefore be expected to displace gas-fired generation. They also establish a best estimate for the emission rate of the marginal resources on the CAISO system of metric tons per MWh and a conservative lower-bound estimate for the emission rate of the marginal resources on the CAISO system of metric tons per MWh. These emission rate estimates are also applicable to PG&E s system, since PG&E can procure power from the CAISO market to meet its marginal loads. However, it appears that they underestimate PG&E s actual marginal emission rate. According to reports PG&E provided to the California Climate Action Registry and the Climate Registry, PG&E s average fossil generation emission rate averaged metric tons per MWh over the last three reporting years (Table 2). 53 This average emission rate marks a lower bound to PG&E s marginal emission rate during these years. 50 California Air Resources Board Staff Report. Initial Statement of Reasons for Rulemaking: Revisions to the Regulation for Mandatory Reporting of Greenhouse Gas Emissions Pursuant to the California Global Warming Solutions Act of October 28, 2010, p See 51 California Air Resources Board Staff Report, October 2010, p California Air Resources Board Staff Report, October p PG&E reports to the California Climate Action Registry, 2007 and 2008, and PG&E report to the Climate Registry, Includes both PG&E-owned and PG&E-procured fossil-fired power.

17 Greenhouse Gas Impact Assessment: Technical Report 17 Table 2: Average Emission Rate of PG&E's Fossil Generation, 54 metric tons per MWh year weighted average While this lower-bound estimate of PG&E s marginal emission rate exceeds both the Air Resources Board estimate and the CPUC/Energy Commission estimate (Table 3), for consistency with other regulatory proceedings, we rely on the Air Resources Board and the CPUC/Energy Commission emission rate estimates for this assessment. It should, however, be recognized that these are highly conservative values that underestimate PG&E s actual avoided emissions. Table 3: Summary of Marginal Emission Rates, metric tons per MWh Air Resources Board estimate of CAISO market emission rate: conservative lower-bound Energy Commission/CPUC estimate of CAISO marginal emission rate: best estimate Average emission rate of PG&E's fossil generation: lower bound PG&E marginal emission rate PG&E reports to the California Climate Action Registry, 2007 and 2008, and PG&E report to the Climate Registry, Includes both PG&E-owned and PG&E-procured fossil-fired power. 55 Three-year generation-weighted average.

18 Greenhouse Gas Impact Assessment: Technical Report 18 Effect of Renewable Procurement on PG&E s Avoided Greenhouse Gas Emissions SSJID and PG&E will both be obligated to procure renewable power to meet 33% of their loads beginning in 2020 with smaller renewable procurement requirements in the interim years. PG&E s increase in renewable procurement to meet this requirement will not change PG&E s marginal resource: since renewable power has low marginal costs of operations, renewable power is dispatched early in the queue, and plants with higher marginal costs, primarily natural gas-fired plants, remain on the margin. Therefore, in the short term, the displaced marginal resource due to SSJID s departure from PG&E s system will continue to be a gas-fired plant. This assessment is consistent with the displaced marginal resource approach used by California regulatory agencies for considering avoided emissions due to energy efficiency and demand response load reductions. Following the plant addition/retirement application discussed above in the section, Consideration of Displaced Plants through Additions and Retirements, it is also reasonable to evaluate longterm changes to PG&E s power portfolio on account of SSJID s departure. However, as discussed in that section, this application is subject to considerable uncertainty. Following this application, we can conjecture that in the long-term PG&E may reduce its renewable procurement/development to reflect the loss of SSJID load. If PG&E does so to the fullest extent allowed, the displaced power on PG&E s system would be a combination of twothirds power from the marginal resources and one-third power from renewable resources that otherwise would have been procured. If the marginal resource has an emission rate of metric tons per MWh and the avoided renewable resources have no emissions, the resulting rate of avoided emission would be metric tons per MWh. 56 A more conservative assessment using the lower-bound marginal emission rate of metric tons per MWh yields a portfoliowide avoided emission rate of metric tons per MWh. This plant addition/retirement application is generally not applicable to short-term analyses, where the displaced resource should be evaluated based on the marginal resource of the existing system (see discussion on page 11). In addition, in this case in particular, the plant addition/retirement approach is not appropriate for a short-term analysis because any reductions to PG&E s renewable procurement/development may not be made for a number of years. This is because PG&E has yet to achieve the 20%-by-2010 renewable procurement standard 57 and must therefore continue to procure additional renewable resources if it is to achieve California s 33%- by-2020 requirement. As PG&E is in the process of ramping up its renewable procurement to meet this requirement, in the short-term PG&E may not slow down its renewable procurement even upon SSJID s departure. Instead, SSJID s departure may simply make it marginally easier for PG&E to meet its statutory renewable procurement obligation = 0.499*67% + 0.0*33%. 57 CPUC. Renewables Portfolio Standard Quarterly Report for Q1 2011, p. 2.