12 Feb Putting a price on carbon

Dear Mayor, City Council members, and supporting staff,

I am writing to you with the introduction of an important element for the discussion around Fayette and the generation plan. It deals with the uncertainty around the price of climate change and regulation of greenhouse gasses. There are many voices and industry that want a price on carbon, and some are already using it internally, especially for their long term planning. And that is exactly what I am asking you to do as well.

How the generation plan can promote clean energy and be affordable: utilities are adding a new ingredient into the mix by putting a price on carbon

The scenarios that Austin Energy proposed for the discussion around Fayette and, I am assuming the scenario for the update of the generation plan, do not include a price of carbon pollution. Eight utilities in the US are putting a price on carbon in their strategic planning. They are including a carbon price in the economic analyses of their generation portfolio. I would like to recommend including a carbon price component in the scenarios that Austin Energy is using for Fayette and is planning on using in the scenarios for the generation plan. A good first step would be to reach out to these eight utilities to ask them how they did it and to discuss the conclusions and findings from these assessments.

The eight utilities in the US that are using an internal carbon price are:

Ameren Corporation, $30

American Electric Power Company, Inc.

CMS Energy Corporation

Duke Energy Corporation

Entergy Corporation

Integrys Energy Group

PG&E Corporation

Xcel Energy Inc., $20

Let’s have a look at how they are using the carbon price.

Climate change has also influenced our long term strategies through our capacity planning process. In this process we evaluate a number of factors including a carbon price for CO₂ emissions in our generation capacity planning. Future generation planning incorporates this business strategy to make sound business decisions. The most substantial business decision made in 2012 influenced by this capacity planning process was the decision to begin development of a new natural gas-fired electric generating facility. This facility is scheduled to begin serving our electric customers in 2017. Furthermore, the Company continues to work toward the late 2011 decision to cease operations at several small coal-fired generating facilities in the 2015-2016 timeframe which will reduce the Company’s carbon footprint.

CMS Energy Corporation

AEP has stated that it assumes a price on carbon (either through regulation or EPA requirement) will begin in the United States by roughly 2020. In the absence of clear price signals in the US, AEP will use a projected price and expects its pricing approach to evolve over time.

American Electric Power Company, Inc

PG&E uses a “carbon adder” to incorporate a carbon price proxy for planning analyses. This mechanism ascribes a cost to emitting CO2 when weighing competitive bids for renewable electricity supply from power generators and in our all-source Request For Offer for new generation facilities. This adder changes annually according to Appendix A of CPUC Resolution E-4118. Our use of a carbon adder helps drive more investment towards lower emissions electricity.

PG&E Corporation

Ameren uses $30 per metric ton in future planning (2025) in its power generation and distributed energy businesses and includes that price in its mandatory Integrated Resource Plan for 2011-2014.

Ameren

You can see the entire report here: https://www.cdp.net/CDPResults/companies-carbon-pricing-2013.pdf

How would Austin Energy include this? Looking at the generation portfolio, we would need to put a price on each generation pathway (coal, gas, biomass, wind,….etc.) and include that in the forecasts. We can make this work by looking at the amounts of greenhouse gasses emitted per source and then assigning a value to this. Market scenarios for the utilities show a range of $20-$30 which seems modest, especially since the social costs are estimated to be in the range that extends up to $100 based on the Obama’s administration work. (http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf).

And to be honest, we already have a way to include this pricing mechanism, although we are doing it the wrong way around: we are charging the renewable energy Greenchoice extra for being green. That is 1c/kWh on top of the price of the average price by definition. In other words, the budget for 2014 includes a pricing mechanism for Greenchoice that is the following: whatever average energy cost + 1c/kWh.

What we are currently getting into is the following:

–       We charge clean energy, although we all agree we want more of it

–       We let the revenues just go into the general fund, where we should put it toward an energy efficient renewable energy economy and use it as an investment fund

–       We do not charge for dirty energy, although we know the market/legislation will put a price on it at some point in time

Putting a price on carbon has many friends. Not only utilities are putting a price on carbon. Companies are doing it as well, and the list includes fossil fuel companies like EXXON, BP, Shell and Chevron. These companies rather see a price on carbon that functions over the entire system (in Austin context: all sources of power generation) that creates clarity in the market (a price for what we do not want) then piecemeal legislation focusing on one aspect or project at the time (in Austin context: Fayette instead of the entire generation plan).

A short overview of pricing that they are using shows a higher range than the utilities are using:

–       ExxonMobil : $60 per metric ton by 2030.

–       BP currently uses $40 per metric ton

–       Royal Dutch Shell  $40 per metric ton.

–       Devon Energy $15 per metric ton of CO₂ to account for the cost or benefits associated with any change in GHG emissions resulting from proposed projects.

There are many thought leaders in Austin that are working on federal regulation on this topic. They are all ready to discuss this pathway with you.

In summary: I would like to recommend including a carbon price component in the scenarios that Austin Energy is using for Fayette and is planning on using in the scenarios for the generation plan.

I also recommend reaching out to these 8 other utilities to ask them how they included a carbon price and to discuss the conclusions and findings from these assessments.

A clear directive from council to evaluate gen options with a firm carbon price is very meaningful.

Let’s put a price on carbon emissions.