The Clean Power Plan Market Directions and Policy Impacts PRESENTED TO 43 rd Annual PURC Conference Gainsville, Florida PRESENTED BY Marc Chupka March 17, 2016 Copyright 2015 The Brattle Group, Inc.
Final Clean Power Plan Who: Existing electric generation units (EGUs) affected by 111(d): Steam Units: Coal and oil/gas-fired steam turbine units NGCCs: Natural gas-fired combined cycle units (Not Included: Simple cycle combustion turbine units) When: States plan implementation into 2018, compliance starts in 2022: Sept 6, 2016: Initial submission of plans (must request extension to 2018) Sept 6, 2018: Final submission of plans Jan 1, 2022: Annual EGU standards, with three interim compliance periods 2022 2024 2025 2027 2028 2029 2030 and beyond: Final EGU standard 1 brattle.com
EGU Emission Rate Standards: Basis for CPP Final CPP fundamentally based on EGU category-level emission rate standards for fossil steam & NGCC a significant departure from proposed rule EGU compliance requires outside the fence measures, but. CPP defines allowances and credits that enable compliance at the EGU level and promotes trading among EGUs (intra-state and interstate in some cases) Category Specific Rate Standards based on BSER (lb. CO 2 /MWh) 2 brattle.com
State Rate Standards from 2012 Baseline to 2030 Final What: Phased-in emission rate reductions from 2012 Baseline to 2030 goals which roughly level state emission rates. Because of different starting points, some states already meet 2022 targets while some face over 40% rate reductions by 2030. Disparities in reductions does not necessarily imply inefficient distribution of burden 3 brattle.com
Calculation from Rate Standard to Mass Although the explanation and rationale are confusing, it is actually simple arithmetic, using a single US-wide factor: Mass Target 2030 = Rate Target 2030 X Adj. Generation 2012 X Factor 2030 Does Factor > 1 mean mass is systematically easier than rate? NO Depends on how affected EGUs operated in 2012; if any headroom exists for growth in existing generation; changes (e.g. retirements) since 2012 Depends on opportunities for accessing emission reduction credits (ERCs) in and out-of state, especially ERCs that arise from 2016-2021 investments useable in 2022 and beyond ( latent ERCs) Relative value of ERCs and allowances for compliance depend on prices Leakage provisions may be problematic if cap only on existing EGUs 4 brattle.com
Generation Headroom 2012 Capacity Factors: NGCC vs. Fossil Steam Note: This chart includes affected operating and expected to return generators; it does not include CHP or standby generators. FL Each dot is a state Color of dots correspond to combined fossil and NGCC capacity factor High combined capacity factor (low headroom) suggest that existing generation was near limit, cap may be preferred Low combined capacity factor (high headroom) states may prefer rates Relative capacity factors of fossil steam and NGCC, capacity weights and RE/EE potential also important 5 brattle.com
New Source Complement States including new sources in their cap get a New Source Complement Adds 1-2% in Eastern Interconnect, 4-5% in Texas, 6-10% in West Avoids leakage measures needed for cap on existing only 6 brattle.com
Ends and Means Differ Among Plan Types Emission Standards State Measures Goal Type: Mass Rate Mass Trading Mechanism Trading Mechanism Definition Covered Generators Allowance Emission Rate Credit (ERC) Allowance One short ton CO 2 Existing EGUs Or Existing + New EGUs One MWh of zero- CO 2 Generation Existing EGUs One short ton CO 2 Existing EGUs (Part of larger Cap & Trade) Compliance Formula CC 2 AAAAAAAAAA = CC 2 EEEEEEE Submit EEEE = EGU Emission Rate Generation x ( 1) RRRRRRRRR EEEEEEEE RRRR CC 2 AAAAAAAAAA = CC 2 EEEEEEE Can the CPP work with different states adopting different implementation plans? 7 brattle.com
Mass-Based Plans: Allowance Fights States adopting mass-based plans decide how to allocate allowances Auction (EGUs buy them from state, which uses $ for.?) Give to generation (affected EGUs, all EGUs, output or emission basis) Give to retail companies (load) for sale to EGUs (ratemaking rules apply?) In near term, historical allocations are zero-sum distributional games Concepts of fairness & equity and/or politics dominate choices In long run, allowance allocations can affect resources choices That s the rationale behind the leakage provisions Primary impact still distributional, but distortions can arise which have resource costs Different allocations produce different types of distortions Relative magnitude and impact of different distortions may be casespecific 8 brattle.com
Wholesale Price Differs Rate vs. Mass Programs Red bar is wholesale price Illustrative example assumes state average rate program Mass-based program (cap) adds to coal and NGCC bids Rate-based program has blend of adders on coal (ERC demand) and credits for NGCC generation ( fossil ERC supply) Overall price impact depends on emission rates and capacity mix 9 brattle.com
Complementary Measures Most states will pursue complementary policies even if they chose a mass or rate based trading option Existing or likely policies could affect the analysis of rate vs. mass Political preferences for policy measures could affect choice as well RE/EE policy measures create ERCs ERCs provide direct monetary support mechanism for RE/EE Value of RE/EE policy measures less direct, unless awarded allowances States that prefer to keep their hands on the tiller with RE/EE support may prefer rate-based systems or some version of state measures States that prefer to design their own policies and forego the model trading systems can elect either mass or rate based plans Mass based target needs to be as strict, backstop provisions (e.g., AB-32) States can set their own individual EGU rates, but have to demonstrate attainment of state average goal, no interstate ERC trading allowed 10 brattle.com
Neighbors and Friends The outcome of state choice between mass and rate based plans will depend heavily on what other states decide: complex, co-determined Neighbors: electrically adjoining states Friends: states pursuing similar plans that enable EGUs in those states to trade allowances or ERCs among states ( trade-ready states) For EGU owners operating in multiple states, may be more important that those states choose the same system, rather than which one any one state chooses Generally better off if Neighbors are also Friends Operational sanity enhanced, implementation cost possibly reduced For single-state EGU owners, Friends can be more important You can Friend somebody remotely (e.g., CA and QC) through trade, more Friends are better as market is deeper States that have few Friends may not fare as well: dominant solutions may preferable 11 brattle.com
Can RIA Analysis Help Rate v. Mass Decision? 2011 $/ton CO 2 Price ( shadow price of constraint ) Mass-Based IPM 2030Case Rate-Based IPM 2030 Case Disclaimer: The Brattle Group has not confirmed that the EPA IPM results are a valid reflection of the economic impacts of the Clean Power Plan Final Rule. These values are presented for illustrative purposes only. (Actually, no) 12 brattle.com
Outlook for Retirements with CPP NOTE: Figures reflect 2015 imposition of MATS, which accounts for much of the projected coal retirements 13 brattle.com
Natural Gas Prices Dominate Policy Impact Henry Hub Natural Gas Spot Price 8.00 $/ MMBtu 6.00 4.00 2.00 Low gas prices erode coal s competitive position - Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Coal and gas in rough economic parity in much of the country Competition in gas reduces coal generation, while environmental rules (e.g., MATS) trigger retirements of capacity 14 brattle.com
Current Trends Coal capacity already shows decline as new builds overwhelmingly renewable and gas even before CPP compliance deadlines 15 brattle.com
Impact of SCOTUS stay Coal stocks jumped briefly after the SCOTUS stay announcement Euphoria short lived, and coal stocks continued to decline Suggests that thoughtful investors believe that current problems are unrelated to CPP or that CPP will survive judicial review 2/8/16 2/9/16 2/10/16 2/11/16 2/12/16 16 brattle.com
Should States take a Stay-cation? Under the CPP, states had to submit implementation plans to EPA, for final approval by 9/2018. Prior to the stay they clustered into three groups: Support CPP and work on plans (e.g., West Coast, Northeast) Oppose CPP and work on plans (about 20 states, including coal-based) Oppose CPP and not work on plans delay and pray (handful, e.g. OK, KY) First and last group don t change with the Stay; middle group split and reassessing Expect about 20 states to continue efforts (maybe slow down) and maybe a dozen to finish prior to existing deadline, about 20 states to abandon planning for now Current consensus is that policy and market developments will continue to move in the general direction of CPP compliance, with or without enforceable CPP deadlines 17 brattle.com
Florida Considerations Capacity mix already moving in the right direction, while load continues to grow FPL called for a rate approach since rate target already achieved and generation can grow unimpeded with appropriate mix Gas (NGCC and CT) capacity will dominate, and maintain compliance Long term, nuclear becomes an option Rate impacts probably less under rate approach, FL PSC has some control over the distribution of impacts Average rate impacts could be negligible, but utilities vary Planning for clean energy future remains sensible regardless of CPP mandates or considerations Convening stakeholders, establishing a state viewpoint (consensus?) on direction and analyzing potential outcomes remain valuable Can reduce CPP content while maintaining deliberative infrastructure Some states have active public energy policy forums (e.g., New York) 18 brattle.com
Presenter Information MARC W. CHUPKA Principal Washington DC Marc.Chupka@brattle.com +1.202.955.5050 Marc Chupka provides expertise on the market impacts of both domestic and international energy and environmental policy. He assists energy market clients and counsel in a broad span of management analysis, regulatory proceedings, and litigation support. Mr. Chupka has focused on integrated resource planning, electricity and fuel procurement policies, renewable energy policy design, and climate change policies. The views expressed in this presentation are strictly those of the presenter and do not necessarily state or reflect the views of The Brattle Group, Inc. 19 brattle.com
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