Today, many electric companies are actively considering substantial investments in new capacity. The technology choices these companies make and the financial returns on investments are integrally tied to future environmental policies and, in particular, to climate policy. This report examines the implications of possible future climate policies for existing capacity from two perspectives. First, it evaluates the near-term implications of a carbon value for the operation and net revenue of plants in two regional electricity markets. Next, the report explores the implications of climate policy for retirement of a single plant. The report also discusses the challenge of complying with a greenhouse gas emissions limitation and an approach for comparing possible emission reduction investments on a consistent basis.
Climate policy creates substantial risks and opportunities for companies in the electric sector and the broader energy sector. Understanding these risks and making investment choices that explicitly recognize future policy uncertainty are critical to effective risk management. Today, many electric companies are actively considering substantial investments in new capacity. The technology choices these companies make and financial returns on investments are integrally tied to future environmental policies and, in particular, to climate policy. This report presents results from several analytical efforts conducted in 2006. It presents a simple framework for evaluating the effect of a carbon price on existing generating capacity and explores the implications for plant retirement. In addition, it examines the challenges of complying with a near-term, voluntary or mandatory limit on CO2
emissions and provides an analytical approach for evaluating greenhouse reduction investments on a consistent basis. All of these assessments explicitly incorporate uncertainty about future environmental policies in order to provide insights for today's decision makers.
Climate policy represents a fundamental uncertainty for electricity generating companies. Although many analyses are available, the timing and stringency of domestic climate policies are unknown and will likely be dependent upon the actions of other countries. The outcomes of deliberations on climate policy can dramatically change the return on generation investments. This report examines the near-term implications of a carbon price for existing generation, describes the challenges an electricity generator encounters when faced with a near-term emission reduction target, and introduces an analytical framework for evaluating potential emission reduction investments.
This report introduces a new approach for examining the impact of a carbon value on regional electricity markets, a framework for evaluating plant retirement decisions, and the Greenhouse Gas Cost Analysis Model (GHG-CAM) framework for analyzing individual greenhouse gas reduction investments.
The effect of a range of CO2
prices on individual plant operations and net revenues are examined for the National Electric Reliability Council regions ECAR+MAIN (termed "Coal Land") and ERCOT (termed "Gas Land"). Aggregate implications for regional CO2
emissions and electricity prices are highlighted. In general, the value of non-emitting generation rises markedly with higher CO2
prices, while the value of newer coal plants is somewhat protected from rising CO2
prices if natural gas prices remain high. The value of older coal plants can be significantly eroded by higher CO2
prices even if gas prices remain high. However, an examination of the implications of these lowered revenues for older plants concludes that there are strong financial incentives for keeping them on-line, even at a very low level of utilization.
From an individual company perspective, meeting a significant near-term emission reduction requirement on-system will be extremely expensive, easing only when new, low- and non-emitting generation can be added. Electricity generators will need to rely largely on marginal generation efficiency improvements, end-use efficiency improvements, and purchases of reductions from outside the electric sector if near-term targets are tight. Evaluating reduction investments can be complex due to differing time horizons, scales, and risk of potential projects. A consistent framework for evaluating reduction investments is presented. The framework is applied to examine possible investments in a dedicated biomass power plant and in a wind power generation facility.
Application, Value and Use
Climate policy has the potential to fundamentally change the economics of power generation. A CO2
value of $10/ton adds about $10/MWh to the cost of coal generation and can lead to significant increases in electricity prices. Understanding this interplay between costs and revenue is critical to companies making decisions to invest in new and existing generation. Significant emissions limitations create a challenge, with on-system emission reductions often being more expensive than possible off-system options. Approaches to evaluate off-system emission reductions consistently and efforts to create efficient emission reduction markets are critical to controlling compliance costs over the next decade or more.
EPRI offers unique capabilities for helping companies develop overall climate strategies and assess possible emission reductions and investment actions. In specific, EPRI integrates in-depth technical knowledge of climate policies, energy technologies, emission offset opportunities, and electricity and environmental markets with practical experience gained from company case studies. This report is one in a continuing series addressing the critical issues, challenges, and opportunities facing senior executives, analysts, planners, and other personnel charged with making decisions that may be influenced by climate policy. It represents an interim product, complementing the conceptual framework for portfolio evaluation and earlier case studies presented in EPRI reports 1005247 (2002), 1005248 (2003), 1008488 (2004), and 1010173 (2005). Where the earlier reports focused largely upon consistent evaluation of emission reduction investments, this report—consistent with industry needs—focuses both on the implications of climate policy for generation investments as well as an analysis of potential emission reduction investments.