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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