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RGGI and CO2 Policy AnalysisOverview

Steve Fine and Chris MacCracken

November 2007

icfi.com© 2006 ICF International. All rights reserved.

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Outline

• ICF Overview

• RGGI Analytic Process

• Analytic Approach and IPM® Overview

• RGGI Reference and Package Scenarios– RGGI Region Results– Delmarva Results– Other Scenario Results

• CO2 Policy Implications for Generators

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ICF Overview

Thirty-eight years of experience –founded in 1969

A leading management, technology, and policy consulting firm providing advisory and program implementation services to public and private clients in many sectors:

EnergyEnvironmentEconomic DevelopmentTransportSecuritySocial Programs

Over 2,000 employees – 1,700 full-time, 300 part-time

Global presence with headquarters in Washington, DC area

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More than 30 years International Experience Advising Clients in the Energy Markets

Helping clients obtain

maximum value from

their energy market assets in Americas, Europe, and

Asia

Asset Acquisition & Deployment

• Wholesale power market and renewables energy analysis

• Fuel market analysis• Transmission and

interconnection assessment • Asset valuation• Due diligence• Asset & portfolio

optimisation

Network Analysis

• Regulatory strategy• Network benchmarking• Network valuation• Value of transmission

Emissions and Climate Change Management

• Regulatory analysis• Value-at-risk analysis• Project-based emissions

reductions• Emissions trading

support

Other Services

• Energy efficiency• Information management

systems• Economic & community

development• Emergency management

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Selected Experience in Environmental Strategy and Analysis• State and Regional Policy Analysis

– California Air resources Board (CARB) Multi-sector GHG Policy Analysis

– Regional Greenhouse Gas Initiative (RGGI) CO2 Analysis

– NY GHG Analysis– CT GHG Stakeholder Dialog– WRAP SO2 Regional Haze

• Air Emissions Compliance Strategy and Expert Witness Testimony

– Expert testimony on CO2 prices– Expert testimony and analytic support for

coal unit compliance plan • Allowance Market Analysis

– US Emission and Fuel Markets Outlooks since 1992

• Renewable Market Analysis– Costs and impacts of New York renewable

portfolio standard– REC forecast for wind developer

• Federal Policy Analysis– EPA policy and regulatory support analysis

for CAAA 1990, OTAG, SIP Call, 1997 NAAQS, CAIR, CAMR, Clear Skies, Carper

– EIS for FERC wholesale power market rulemaking for Order 888, Order 2000, Cost-Benefit Study for Standard Market Design

• Technology Assessment– Projected long-term penetration of IGCC

under multiple CO2 scenarios– Market analysis for pollution control

vendors and engineering firms

• Air Emissions Impact Analysis of Transmission Lines

– Minnesota Arrowhead-Weston line

• Compliance Planning– Real Options Analysis of NOX control

strategy

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Summary of Climate Change Experience

Highlights of Experience• Provide climate policy advice to

> 60 governments• Provide analysis to RGGI and CARB• Provide climate strategy advice to

> 55 companies in the FT Global 500• Over 230 professionals with climate-

related expertise

Service Offerings• Developing climate strategies aligned

with key corporate drivers based on our Value-at-Stake methodology

• Carbon market pricing analysis using our IPM® and InCaP models

• GHG emission inventories• Bringing CDM and JI projects through

the Kyoto cycle• Undertaking due diligence of CDM and

JI projects using our K-Prism model• Providing market analysis to low-carbon

technology companies• Modeling emissions scenarios• Assisting governments establish their

climate change policy framework and institutions

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RGGI Analytic Process

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Introduction

• NYSERDA, on behalf of the Regional Greenhouse Gas Initiative (RGGI) State Working Group (SWG) commissioned ICF to evaluate the impacts of implementing a CO2 cap on the electric power sector in the northeast and mid-Atlantic region.

• The analysis that was produced was driven by two key issues: theAssumptions used and Scenarios examined.

• Both the technical and market assumptions that served as inputs to the modeling analysis as well as the policy scenarios evaluated weredeveloped by the RGGI Staff Working Group (SWG) and were the sole responsibility of the SWG.

• ICF used the Integrated Planning Model® (IPM®) to analyze these policies based upon the assumptions developed by the SWG.

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RGGI Analytic Process

• The bulk of the electric sector analysis for RGGI was focused onthe original 9-state configuration. Maryland has since joined to become the 10th state (after MA and RI re-joined).

– The 10 RGGI states are shown on the map on the previous page.

• Members of the 9 states participated as part of the SWG in the assumptions development and Reference and Policy case specifications.

• While ICF performed the analysis using its proprietary IPM® tool, the assumptions and scenario/policy specifications were the decisions of the SWG.

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RGGI Analytic Process continued

• The analytic process was carried out in multiple phases

• The first phase included 3 general stages:– Assumptions development– RGGI Reference Case Development– RGGI Policy Scenario Analysis

• The original RGGI Reference Case was based on the assumptions developed during the assumptions process. The entire assumptions document is available on the RGGI website.

– Note that the vast majority of assumptions developed during this process remained the same in every Reference Case variation and policy case.

• In this first phase of the analysis, the SWG had ICF analyze theimpacts of multiple CO2 caps on electric markets in the RGGI region as compared to the Reference Case.

– The initial cap cases included reductions ranging from 5% up to 35% from 1990 levels in the region.

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RGGI Analytic Process continued

• The SWG also defined a set of alternative Reference Cases that, for the most part, varied over 3 key assumptions:

– Natural gas prices– The availability of new coal capacity in RGGI– Electric demand growth

• The same policy (e.g., 15% below 1990 levels) was then implemented with each of the alternative Reference Cases to examine the impact ofalternative assumptions on the cost of compliance with the RGGI policy. That is, comparison of the results of the alternative reference case with and without the RGGI policy would show how the impacts of the policy behaved under different market conditions.

• Later phases of the analysis included updates to the underlying Reference Case assumptions made in response to SWG and Stakeholder comments.

– Changes were made to the gas and oil price trajectories, operating characteristics of oil and gas steam units in the RGGI region and to the representation of the New York capacity market in IPM®, among other things.

• Policy analysis after the first phase focused only on a single policy option referred to as the “Package” Case.

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Analytic Approach and IPM® Overview

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IPM® Analytic Framework

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The IPM® Modeling Framework

• The Integrated Planning Model (IPM® ) was used to analyze the impacts of environmental policies on allowance markets, electric markets and compliance decisions.

• IPM® is a linear programming model with a detailed representation ofevery boiler and generator operating in the United States. The model determines the least cost means of meeting electric energy and capacity requirements, while complying with specified air regulatory scenarios.

• In addition to optimizing wholesale and environmental markets, IPM®

simultaneously optimizes coal production, transportation and consumption.

– IPM® contains 40 coal producing regions and has over 10 coal types defined by rank and sulfur content.

– Each coal plant is assigned to one of over 40 coal demand regions characterized by location and mode of delivery including rail, barge, and truck.

• Natural gas prices are derived within IPM® using a similar supply curve and transportation network.

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IPM® North America

SPP-W

SPP-NVirginia

NEPOOL

PJM-W LILCO

PJM SouthPJM East

BritishColumbia Alberta

Sask

atch

ewan

Manitoba

OntarioQuebec

LabradorNewfoundland

New Brunswick

Nova Scotia

Prince EdwardIsland

PACNW-OR

PACNW-ID

PACNW-WA

Montana

NWPP East

NOCAL

SOCAL

S-NMArizona

ERCOT

RMA

N-NM

MAPPEn

terg

y TVA

COMED

ILMO

WU

MS

MEC

SSOECAR

Southern

Florida

Downstate NYUpstate NY

NYC

SO-NV

PJM-W ISOCarolinas

RI

CTSEMA(Southeast MA)

BOSTON

ME

VT

NH

WMA(Western MA)

Southwest CT / Norwalk

CMA/NEMA (Central / Northeast MA)

NOTE: PJM-East is represented as 3 IPM® regions to separate the RGGI-affected and unaffected units in the region: PJM-East-NJ, PJM-East-Delmarva, PJM-East-PA (PECO).

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• ICF uses a national version of IPM® specifically designed for simulating the effect of environmental regulations in the electricity sector.

• For this analysis, IPM® North America included representation of at least 40power market regions (depending on the final Northeast representation), including 10 New England regions, 5 New York regions, and 5 Canadian regions.

• IPM® explicitly models transmission links between those regions.• The model includes endogenous pricing of coal supply, gas supply and fuel

transportation costs.• The national model determines the least cost means of complying with the

specified air pollution regulations:– Multiple environmental compliance requirements are evaluated simultaneously - e.g., SO2 ,

NOX, CO2, Hg.– Determines optimal compliance for the system from a comprehensive range of choices

including: new investment in capacity and/or pollution controls, fuel switching, repowering, retirement, and dispatch adjustments.

Key Features of IPM®

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The IPM® Optimization Process

• IPM® combines peak power demand, total energy demand, and hourly load profiles to create load duration curves for each season and region.

• To meet demand, IPM® selects units to create a stack of generators dispatched by variable cost, subject to availability and other operating constraints. The last unit to be dispatched (i.e., the unit with the highest variable costs to operate) is the marginal unit and sets the energy price for that demand period.

• IPM® will choose to endogenously bring to market new capacity where it is economically feasible, in order to minimize the present value costs over the lifetime of the forecast period. For example, saving 1$ in 2003 is equivalent to saving $1.60 in 2010, assuming a 7% discount rate.

• All costs are prices in IPM® are represented in real 2003 dollars.

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AEO 2004 (EIA)

EPA ICF ISOs/ States Other

National Electricity and Peak Demand X Complete

Regional Electricity and Demand Breakout X Complete

Gas Supply and Price Forecast (wellhead and regional) X Complete

Oil Price Forecast X X Complete

Coal Supply and Price Forecast X X Complete

Financial Assumptions X Complete

Firmly Planned Capacity Additions X Complete

New Conventional Capacity Cost and Performance X X Complete

New Conventional Capacity Emissions Profiles X X Complete

Pollution Control Retrofit Cost and Performance X X Complete

Renewable Power Technology Cost and Performance X Complete

Renewable Power Resource Availability and Cost X Complete

Nuclear Unit Relicensing and Uprate Assumptions X (Rel.) X (Uprt.) Complete

Existing Transmission Total Transfer Capabilities X Complete

RTO Structure & Transmission Tariffs X Complete

New/Enhanced Transmission Line Capacity Not Applicable - No New Transmission Allowed Beyond Firmly Planned

Renewable Portfolio Standards X X Complete

3-pollutant Federal Program Specification X Complete

Status of Assumptions Development

Market Assumptions

Technical Assumptions

Policy Assumptions

Proposed Data Source

Assumption

Market, Technical and Policy Assumptions Status of Assumptions Development

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RGGI Reference and Package CasesRGGI Region Results

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RGGI Cumulative Capacity Additions by 2024

-

5

10

15

20

25

30

35

40

Reference Case Package Case

GW

Other RenewablesWindGasCoalNuclear

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RGGI Generation Mix in 2024

-

100

200

300

400

500

600

Reference Case Package Case

TWh

Net Imports

OtherRenewablesWind

Other

Oil/Gas

Gas

Coal

Nuclear

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RGGI 9-State CO2 Emissions

0

20

40

60

80

100

120

140

160

2006 2009 2012 2015 2018 2021 2024

Mill

ion

Tons

Reference Case

Package Case With Offsets

Package Case Cap

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CO2 Allowance Prices – Package Case

0

1

2

3

4

5

6

7

8

2006 2009 2012 2015 2018 2021 2024

$/To

n

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RGGI Average Annual Energy Prices

NOTE: Energy prices include annualized capacity prices.

0

10

20

30

40

50

60

70

80

2006 2009 2012 2015 2018 2021 2024

$/M

Wh

Reference Case

Package Case

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Change in RGGI Average Annual Energy Prices

NOTE: Energy prices include annualized capacity prices.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2006 2009 2012 2015 2018 2021 2024

Cha

nge

in E

nerg

y P

rice

Package Case

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RGGI Net Imports

0

10

20

30

40

50

60

70

80

90

2006 2009 2012 2015 2018 2021 2024

TWh

Reference Case

Package Case

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Cumulative CO2 Reductions by 2015 and 2021RGGI and Eastern Interconnect/Canada

0

50

100

150

200

250

300

350

400

RGGI EI & Canada RGGI EI & Canada

Mill

ion

Tons

Offsets

On SystemReductions

2015 2021

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RGGI Reference and Package CasesDelmarva Region Results

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Delmarva Cumulative Capacity Additions by 2024

-

0.5

1.0

1.5

2.0

2.5

3.0

Reference Case Package Case

GW

Other RenewablesWindGasCoalNuclear

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Delmarva Generation Mix in 2024

-

5

10

15

20

25

30

Reference Case Package Case

TWh

Net Imports

OtherRenewablesWind

Other

Oil/Gas

Gas

Coal

Nuclear

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Delmarva 9-State CO2 Emissions

0

2

4

6

8

10

12

14

2006 2009 2012 2015 2018 2021 2024

Mill

ion

Tons

Reference Case

Package Case With Offsets

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Delmarva Average Annual Energy Prices

NOTE: Energy prices include annualized capacity prices.

0

10

20

30

40

50

60

70

2006 2009 2012 2015 2018 2021 2024

$/M

Wh

Reference Case

Package Case

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RGGI Reference and Package CasesOther Scenario Results

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RGGI Alternative Scenarios

• In addition to the Reference and Package Cases, ICF analyzed several scenarios and sensitivities defined by the SWG. These cases were designed to assess the impacts of key uncertainties and/or policy components, including

– High Emissions Case assumptions, including higher gas prices than in the Reference Case and new coal allowed in the RGGI region

– Efficiency penetration– Federal CO2 policy

• CO2 prices in the High Emissions Cases were generally 2-to-3 times higher than those in the standard Package Case.

• Higher assumed efficiency penetration pushed down allowance prices and also reduced leakage.

• RGGI CO2 prices in the cases with a federal CO2 policy overlaying RGGI were 5-to-6 times higher than in the Package Case.

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CO2 Policy Implications for GeneratorsImpacts on Existing Unit Operation

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CO2 Regulations Change Dispatch Costs, but Have Modest Impacts on Dispatch Order

0

10

20

30

40

50

60

70

80

90

Uncont.Coal

ControlledCoal

CC ($6.5) CC ($8) Nuclear

$/M

Wh

0

10

20

30

40

50

60

70

80

90

Uncont.Coal

ControlledCoal

CC ($6.5) CC ($8) Nuclear

$/M

Wh

Variable O&M and Fuel SO2 Hg NOx CO2

Without CO2 With $25/tonCO2

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CO2 Regulation Will Fundamentally Affect Unit Profitability

• CO2 regulation may not reorder dispatch, but it has potentially significant impacts on operating margins in competitive markets

0

10

20

30

40

50

60

70

80

0 10 20 30 40 50CO2 Price ($/Ton)

Mar

gin

from

CC

($6.

50/M

MB

tu)

Nuclear

Coal

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Allocations May be Used to Compensate for Lost Margins

• Existing units may receive some allocation for free to help compensate them for that reduced profitability

• Or … they may be required to spend tens of millions per year on allowances at auction

– Chart assumes 500 MW coal unit and 1990 stabilization target

0

10

20

30

40

50

60

70

80

90

100

Allocation(Input)

Allocation(Output)

Hybrid(50%)

Auction

Mill

ion

$ pe

r yea

r

Annual Allowance Expenditures Required to Cover Emissions (500 MW Coal Unit at $25/tonCO2)

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Carbon Regulations Impact Power Plant Asset Value

• Emissions costs associated with carbon regulations increase the operating costs of existing and new power plants.

• Because carbon regulations typically increase costs for all fossil fired power plants, electricity prices also rise. For an individual plant, or a power companies’ portfolio, the net impact of carbon regulations depends on how much costs rise relative to the increase in power prices.

-

200

400

600

800

1,000

1,200

BaseValue

EnergyRevenue

Fuel Cost EmissionsExpense

AllocationValue

Carbon-Adjusted

Value

Uni

t Val

ue ($

/kW

)

Increase in Value

Decrease in Value

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CO2 Impacts Portfolio Asset Values

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

NoCarbon

Carbon NoCarbon

Carbon NoCarbon

Carbon NoCarbon

Carbon

Coal Nuclear O/G Gas Other NOx & SO2 Allocation CO2 Allocation

Ass

et I

mpa

cts

(in m

illion

s of

dol

lars

)

Company A Company B Company C Company D

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Appendix

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Transmission Capability -- EnergyPJM (GW)

* Inputs from NYISO

1.2

6.3

4.1

2.6

2.0

5.6

2.6 1.5

5.7

1.0

3.1

5.1

4.3

2.5

6.2

4.2

(NJ,DELMARVA)

3.7

2.2

2.6

3.6

3.22.2

4.5

3.1

Upstate NY

NYC

0.5*

1.0*

0.0*

2.4*

6.2

Downstate NY1.6*

0.6*9.6

3.3

5.3

4.8

5.9

7.1

4.7

3.3

2.6

2.175

FEW-Cen

West

PJM East(NJ,DELMARVA)

PJM-South(BGE,PEPCO)VIEP

AEP

COMED

Joint Capacity Constraints

Transmission Lines

Long Isl.

0.66

0.66