IMPLEMENTATION OF THE

GLOBAL WARMING SOLUTIONS ACT: AB-32 (AND SB-1368)

John A. McKinseyStoel Rives LLP

770 L Street, Suite 800Sacramento, CA 95814

916.319.4746jamckinsey@stoel.com

Overview of AB-32 and SB-1368

SB-1368

AB-32• Broad in scope but some focus is on electricity generation, oil refining, and cement

• Requires CARB to reduce CO2 Emissions to 1990 levels

• CARB to Determine Reduction Measures

CO2 Reduction Measures and Emission Limits

• Specific to electricity industry

• Prohibits long term PPA’s with baseload generation facilities that don’t meet CO2 emission standards

• CPUC to set performance standard for IOU’s

• CEC to set performance standard for muni’s

Baseload Electricity Performance Standards

What Are the Issues?

• How will CARB reduce CO2 emissions? – Will trading of CO2 credits be allowed?– Will power plants be required to reduce or

offset emissions? (Load or source-based?)– What effects will this have on facility

development and value?

• What will the performance standard be for baseload units and what will it do to facility development trends?

AB-32

SB-1368

Electricity Industry Perspectives

• Utility or Independent Power Producer?

• Baseload or peaker?

• Renewable energy or traditional fossil fuel based?

Depending on what your perspective is, you probably have different viewpoints on the issues

• Adopt a list of early action measures by July 1, 2007 that can be implemented before January 1, 2010 and adopt such measures by then.

• Establish by January 1, 2008, a statewide GHG emissions cap for 2020, based on 1990 emissions.

• Adopt mandatory reporting rules by January 1, 2008 for significant sources of greenhouse gases.

• Adopt a scoping plan by January 1, 2009 that indicates how emission reductions will be achieved from significant GHG sources via regulations, market mechanisms and other actions.

• Adopt regulations by January 1, 2011 to achieve the maximum technologically feasible and cost-effective reductions in GHGs, including provisions for using both market mechanisms and alternative compliance mechanisms.

What AB-32 requires CARB to do:

Reduction Measures and Limits (AB-32)- Major Questions

• “How” will CARB reduce emissions? Indirectly, directly, or a combination of both?– Answer: It is clear that direct reductions will be

included. Indirect (trading) is not as clear.

• “What” will CARB reduce? Existing plants? New plants? “Dirtier” ones? Less efficient ones?

• “How much” will CARB reduce emissions?– Answer: Probably as much as is feasible.

The Monster

1990: 440 Million Metric Tons (MMT)

2004: 500 MMT

2020 Projected: 610

The Task: Reduce the emission rate by about 170 MMT in 16 years (includes reductions to counter further increases)

CO2

AB-32: Early Action Measures

• CARB “Adopted” three measures- Low carbon fuel standard- Auto A/C improvements- Landfill methane capture

• CARB has announced six more measures:– Trucking (aerodynamic retrofitting)– Ports (plug in docked ships to they can turn off)– Tire pressure (no tickets, don’t worry)– Semiconductor industry (standards)– Consumer products (standards)– Reduce use of sulfur hexafluoride

AB-32: Early Action Measures cont….

• CARB has also announced five more measures to come:– Cement plant efficiency– Cement blending requirements– Ban on truck idling at rest stops– Recover refrigerants– Possible fertilizer standards

Reduction Measures and Limits (AB-32)- Thoughts

• CARB has broad task and vehicle emissions, though a major source, are not really an option for reductions right now.

• This endeavor is new. Expect delays, missteps, lawsuits, and lots of uncertainty.

• Lurking quietly in the background is the federal government. With one quick action, the California scheme could be gutted, eliminated, or significantly changed.

• California electricity generation is already very lean on CO2 and getting leaner. It may be very hard to squeeze many reductions out.

Implementing AB-32 on the Electricity Sector• The CPUC is taking the initiative to continue its GHG

rulemaking. In Phase II it plans to adopt, as recommended to CARB, a load-based cap and trade scheme for the electricity sector.

• CARB is not obligated to follow the recommendation.

• The battle over the electricity sector under AB-32 will come down to:– Load or source-based?– Trading, direct, or both?– How much?

• It is clearly significantly too early to predict the outcome.

Performance Standards(SB-1368)• CPUC, CEC and CARB must establish

greenhouse gasses emission performance standards that baseload generation must meet.

• Targeted directly at electricity industry• Can be thought of as “indirect” regulation of

greenhouse gas production.• Must have greenhouse gasses emission no

higher than natural gas, combined cycle powerplant levels

• Applies to long term procurements (5 years)• Applies to “baseload” (>60% CF)

SB-1368: Events so far…..

• The CPUC adopted Emissions Performance Standard of 1100 lbs/MWh

• The CEC has almost adopted an Emissions Performance Standard of 1100 lbs/MWh.

Nuclear/ Hydro/ Wind***

CC CGT Standard SS CGT Oil Coal

1100

1400

1,900

2,100

1000?

Comparative Emission Rates

Units of 1000’s pounds per MW-HR

Applies to Long term procurements (5 years)

Applies to baseload (>60% CF)

15Source: Draft Greenhouse Gas Inventory Update, Cali forni a Energy Commission, 2001

Transportation Is California’s Largest Source of COCO22

Residential

9%

Industrial

13%

Transportation

58%

Electricity Generation

16%

Commercial

4%

California Fossil Fuel CO2

Emission Sources, 1999

The Big Picture

• Need 170 MMT reduction

• Have 2.8 MMT from early measures

• Will get some from SB-1368

• Will get some from RPS • Total is maybe 36 MMT at this point

• Where will the other 135 or so MMTs come from?

• Answer: The biggest fruit. In 2004 cars were 166 MMT and electricity 100 MMT and growing every year.

For electricity this clearly means higher fuel efficiency and more renewable energy.

The Battlefront: CEQA

• The California Environmental Quality Act (CEQA) is, and will become more, involved– Ex: AG Brown forces SF Bay Refiner to pay $7M for

mitigation of new CO2 emissions resulting from refinery expansion.

– Ex: Environmental intervenor insists that peaker project EIR inadequately addresses potential impacts from CO2 emissions.

• Clearly, CEQA “projects” now have to include an analysis of the potential for significant impacts to the environment through greenhouse gas emissions.

The Big Picture: Implications

• Getting reductions from electricity generation will clearly mean raising fuel efficiency, developing and installing equipment to scrub CO2, and/or via trading.

• New generation will clearly be biased towards CC CGT as baseload and as much renewable energy as we can develop.

• Increased non-dispatchable renewable energy creates need for peakers which, in turn, pulls somewhat downward on fuel efficiency.

• This suggests that dispatchable renewable sources (hydro, geothermal, and bio-mass) may gain some preference.

Uncertainty

• A project permitted between now and 2011 faces undefined restrictions and costs as the reduction measures and limits will not be established until then

• Any baseload plant that is not a natural gas combined cycle facility faces greater risk and uncertainty

• Financing these projects may prove to be difficult (not so far…)

• Even peaker projects face these potential burdens in the form of reductions in emission allowances.

Summary

• Pressure on new sources of electricity to be CC CGT or better.

• Peakers (and all projects) face CEQA issues.

• Future limits under SB-32 may force all or some generators to offset or directly scrub CO2 emissions or prevent them from getting contracts or maintaining high capacity factor.

Next Events

• More CEQA comments, challenges

• CARB rulemaking and AB-32 implementation.

• CPUC Phase II GHG rulemaking

• Outcome of vehicle emissions cases

• Outcome of EPA decision on whether to regulate GHGs (driven by Supreme Court Decision)

Forums to track

• CARB: www.arb.ca.gov

• CPUC: GHG Phase II Rulemaking 06-04-009 www.cpuc.ca.gov/proceedings/R0604009.htm

• CEC: 06-OIR-1

www.energy.ca.gov/ghgstandards

• Federal EPA: GHG decision

epa.gov/climatechange/index.html