Opportunities in Cap/Trade?

Lon W. House, Ph.D.Water& Energy Consulting

530.676.8956lonwhouse@waterandenergyconsulting.com

Presented at ACWA Spring ConferenceMonterey, CaMay 10, 2012

California Carbon Market• 90 percent of the allowances will

be given out free, but 10 percent will be sold on the open market

Europe’s Cap/Trade Prices

• Gone from high of $47/ton to $8/ton. Now cheaper to pollute than to clean up (carbon capture and storage needs to be about $30/ton, switch from coal to natural gas needs to be about $20/ton)

• Prediction of sub$5/ton for the near future. 1.99 billion tons allocated, emitted 1.93 billion tons in 2011. Program allows unused allowance to be rolled over to later years: 1.3 billion tons rolled over to this year

• Recommended “solutions”: set carbon floor price, reduce the amount of emission allowances, add other sectors (transport industry), prop up carbon prices, i.e., do not let the market decide.

2005 2006 2007 2008 2009 2101 2011 20120

5

10

15

20

25

30

35

40

45

50

Europe Carbon Credit Prices

$ per ton

carbon sequestra-tion

switch coal to gas

Natural Gas Prices: US

California Electricity Prices• Generation in California (2012):

– Natural gas 63%, Hydro 14%, Renewables 13%, Nuclear 8%, 2% Coal/oil

– Generation is about 40% of electricity cost• Utility programs

– Smartgrid and transmission and distribution system upgrades (+2-2.5%/year); Green House Gas reductions (AB32), and cap and trade (+2-2.5%/year), 30% RPS and fuel costs (+1.5-2%/year).

Incentives Available

• CSI - California Solar Initiative– PG&E: Step 10, 2.5 cents/kWh (8.8 cents/kWh

governmental)– SCE: Step 8, 5 cents/kWh (15 cents/kWh

governmental)– SDG&E: Step 8, 5 cents/kWh (15 cents/kWh

governmental)• SGIP – Self Generation Incentive Program• Technology Type Incentive ($/W)

– Renewable and Waste Energy Capture • Wind Turbine $1.25• Waste Heat to Power Technologies $1.25• Pressure Reduction Turbine (hydro)$1.25

– Conventional Combined Heat and Power • Internal Combustion Engine – CHP $0.50• Microturbine – CHP $0.50• Gas Turbine – CHP $0.50

– Emerging technologies • Advanced Energy Storage $2.00• Biogas $2.00• Fuel Cell – CHP or Electric Only $2.25

– PG&E – closed

Conclusions

• Make any cap/trade investment decisions with eyes wide open

• Take advantage of any incentives that are available

• The longer term you can sell your carbon credits for the better off you are

• Determine minimum carbon price that your investment can sustain, and be prepared to adjust as prices vary