Energy industry players and observers agree that California’s new global warming laws will have long-term economic and electricity price impacts, but there is no agreement on exactly how those impacts will unfold. It is still a question that will take months, if not years, to sort out.
Over a six-year period — by 2012 — California is now supposed to establish a cap on greenhouse gas (GHG) emissions, mandatory reporting by power plants and other large sources, and a market for trading emission credits by 2012.
As a result, the state is slated to become more dependent on natural gas to produce electricity and in turn gas prices will drive electricity prices even more than currently, a number of industry players told NGI. State officials are hoping that a combination of increased renewable resources and more diverse gas supplies, including liquefied natural gas (LNG) imports, will help mitigate gas prices.
Backers of the new state laws (AB 32 and SB 1368) did little or no analysis of projected impacts on retail power prices. Utility sources verified that analyses have been done, but they are internal confidential documents. Most public analysis has been on the overall economic impact on the state, and the new laws’ supporters point to more jobs and new industries being created with the push toward added renewables and energy efficiency programs in place of fossil fuel-fired generation.
A knowledgeable source at one of California’s major utilities that supports the new laws said his company has no data it can share publicly, and other individual stakeholders may have data, but they are for internal use only.
SB 1368 directs the California Energy Commission (CEC), in collaboration with the state air emission regulatory agencies, to establish by June 30 next year performance standards for all baseload generation (owned locally or purchased). The standard can be “no higher than the rate of GHG emissions for a combined-cycle natural gas baseload generating plant.” It applies the new CEC-created standard to all local load-serving entities — public and private sector — in the state.
In contrast, AB 32’s impact is elongated, not requiring the mandatory reporting rules (by power plants and others) for GHG emissions until Jan. 1, 2009, along with plans for how emissions reductions will be achieved. Final regulations are not due until Jan. 1, 2011, to “achieve the maximum technologically feasible and cost-effective reductions in GHG, including provisions for using both market mechanisms and alternative compliance mechanisms.”
Regardless, it is clear that the new laws will have a significant impact on future electricity prices — “no doubt,” according to Tom Hewson, a principal and founder of Arlington, VA-based Energy Ventures Analysis. “Whenever you start to try to limit the choices in any place, it will have impacts, and indeed both AB 32 and SB 1368 in combination with what the California Public Utilities Commission (CPUC) is doing on environmental portfolio standards is an attempt to a certain extent to restrict certain resources [coal] to supply power to the state.
“I have not yet seen an analysis by California (CPUC or CEC) that has attempted to quantify what the impact is. If you are a major utility just following the state policy and you can pass on your costs to the ratepayers, you aren’t really concerned about making this analysis. It reminds me of the question of who is standing up for the ratepayer in California. If I were to take steps to assure higher cost power, these laws would be the way to do it.”
Less concerned is Swami Venkataraman, the San Francisco-based analyst for Standard & Poor’s Ratings Services (S&P) who closely follows California energy developments. He thinks the real impact of the new laws is still far enough away that no one knows what will happen with prices longer term. For the near term, Venkataraman is not concerned.
“The real impact on power prices will be adding to its volatility,” said Venkataraman, who noted that at one time it was thought that some incremental coal-fired supplies from out of state would be allowed, but SB 1368 has ruled that out. “Coal prices are a lot more stable; natural gas prices are more volatile. You can get baseload power at a steady, stable price with coal, so if all of the power is going to come from the more volatile-priced natural gas, power prices will face increased volatility.
“Going forward the trading and risk management functions are much more important, and it also makes more important the utilities’ ability to recover their fuel costs in rates in a timely manner “
With more reliance on natural gas for power, whatever price volatility there is will impact the cost of the power feeding into the California market to a larger degree than ever, Energy Ventures’ Hewson said. Disagreeing somewhat, however, was Gary Ackerman, executive director of the Palo Alto, CA-based Western Power Trading Forum (WPTF).
“The assumption is that the volatility will increase, but I don’t think it necessarily will. It is hard to say what the economic impacts are going to be,” Ackerman said. “However, you can say AB 32 establishes a time schedule that reaches out over the next six years, and what investors in a cement plant, auto manufacturer or a power plant would invest now not knowing what the environmental costs and consequences would be down the road? It may put a chill on investment in California for a couple of years.”
A lobbying tool used earlier in the year by environmental groups, “Global Warming and Jobs,” concluded that California presently has no market for clean technologies that reduce global warming, but now that there are going to be enforceable limits on emissions, “clear market incentives” will develop to reduce the pollution and thus what the state feels are “world famous entrepreneurs” in the Silicon Valley and elsewhere will rise up to develop new technologies that foster new products and new jobs.
“We are watching the economic opportunity of a lifetime unfold right in front of our eyes,” said the white paper sponsored jointly by the Natural Resources Defense Council and Environmental Defense, two leading advocates for the state’s new laws. “Each year, Californians send about $30 billion out of the state to purchase fossil fuels, including oil, natural gas and coal, the primary sources of the state’s global warming pollution. Reducing global warming pollution will bring that money back home to reinvest in our communities.”
Greater reliance on renewables also comes at the price of higher power costs, according to Hewson, because the global warming gains are derived from eliminating or greatly reducing the use of some of the lower cost fuels. “You’re going to have higher cost [and in some cases, less reliable] options to depend upon.
“I think the cost is going to be significant. The only question is, how do you phase in this new requirement because California does obviously use a great deal of coal?” said Hewson, who cited some of his work on California’s renewable energy portfolio requirements for the Center for Energy and Economic Development (CEED), a coal industry nonprofit organization working to keep it as a viable energy alternative. He cited CEED statistics saying that the Southwest depends on coal for more than half of its power supplies (54.4%), compared to the Pacific Northwest, which draws almost 8% of its electricity from coal.
Hewson is skeptical of California’s lack of analysis, and what he thinks are “blinders” that overinflate the expected benefits from more renewable-produced power and refuse to consider more nuclear power, which is GHG emission-free, but WPTF’s Ackerman and S&P’s Venkataraman are not as worried about volatility or lack of reliability.
“The two fuels [coal and gas] compete; coal follows gas prices,” Ackerman said. “They don’t run independently. Just like hydropower follows gas prices.”
Venkataraman doesn’t agree that clean coal options, such as “integrated gasification combined-cycle” (IGCC) technology, have to drive up power prices inordinately. “IGCC should be fine,” he said. “It could be cheaper than natural gas power, but it is not clear whether IGCC will be accepted under SB 1368 since IGCC gasified coal-fired generation has greater emissions than a natural gas plant, unless there is carbon sequestration.”
The lack of real analysis could be crucial. As California once again attempts to reform its energy usage, some skeptics point to recent history and the state’s headlong and disastrous race to restructure its electric power market.
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