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Preparing for Cap and Trade and its Impact on Energy Costs
OTHER PARTS OF THIS ARTICLEPt. 1: How Cap and Trade Regulations Work and Who May Be AffectedPt. 2: This Page
Assuming a cap-and-trade system similar to that described in the proposed legislation is deployed, little impact on energy costs would be seen on day one. As previously mentioned, present plans would give away enough allowances to cover 85 percent of a plant's emissions, and sell to the facility the other 15 percent at what will likely be a relatively low price. As the screws tighten and carbon markets develop, however, the need to buy allowances (and their price) will likely increase. Claims by opponents that the annual energy bill of an average household could jump over $1,000 assume that all allowances would instead be sold at a high price on day one, which is not on anybody's agenda.
Based on schedules in the proposed legislation, significant dollar impacts could begin to appear in roughly 5 to 10 years, assuming that no economical carbon mitigation technology is developed in the interim. Under such a scenario, those in states still heavily dependent on coal-fired electricity would likely be first to notice rising electric bills as the cost of allowances is folded into their rates. The same is likely for those using fuel oil as refineries add such incremental costs to their price per gallon.
This expected squeeze is, however, already pressing some utilities to retire, repower, or otherwise phase out coal-fired power plants. In North Carolina, Progress Energy recently announced it is building new gas-fired plants to replace three of its coal-fired generators by 2013.
At this time, about half the states get at least half of their power from coal. About a dozen depend on coal for over 70 percent of their power. Other states receive most of their power from nuclear, hydro and/or natural gas.
How Big An Impact?
On the electric side, how much of an impact this legislation will have depends on how much carbon is generated per kWh consumed, how many allowances must be purchased in a given year, and the prevailing price for them. Opponents of the legislation posit a worse case scenario that imagines a customer buying power from a 100 percent coal-fired utility, at a price of $28/MT (a price limit being considered in the legislation), with no free allowances available. In such a case, electricity prices could rise by $.025 per kWh. For a customer paying $.06/kWh, that could mean a 40 percent increase.
However, assuming 70 percent coal (with the remainder natural gas), 40 percent free allowances (after several years of reductions), and the rest bought at a more realistic $15/MT (a price developed by Point Carbon, an international financial analyst specializing in this area), the increase for a coal-dominated utility is about $.007/kWh (about 12 percent). While still significant, the annual impact on an average homeowner served by that utility would be roughly $85. By comparison, average U.S. residential power prices rose by about $.007/kWh from 2007 to 2008.
In coastal and other areas that are primarily served by natural gas, hydro, and nuclear power plants, the impact on electric bills would be much lower. As wind and other alternative sources of power are deployed, the impact would be further blunted.
The goal of such impending costs is to encourage carbon reductions rather than to collect fees which, by themselves, do nothing to cut carbon. As carbon reduction technologies are developed and deployed, their costs should drop to the point that installing them becomes cheaper than buying more allowances.
How Should Facility Executives Prepare?
So what are facility executives to do? For those having large boiler plants that are not otherwise exempted, options are limited. At present, lots of research money is being thrown at every plausible process to capture carbon before it leaves the stack, but there's nothing off-the-shelf or even state-of-the-art.
To limbo under the 25,000 MT limit, those with coal or oil-fired boilers may find it instead cost-effective to convert them to natural gas, where pipeline access exists. On a BTU basis, gas emits about half as much carbon as coal and about a third less than oil. In rural areas, some coal-fired boilers are being converted to use renewable biomass, such as corn husks, as part of their fuel, thus cutting their net carbon generation.
Energy efficiency — boiler controls, HVAC improvements, insulation — is always an option, and proposed climate legislation includes financial incentives to support it. While on-site renewables hold promise, most are focused on making power instead of the heat needed to displace boiler fuel consumption.
Those concerned about the impact of rising electric rates should consider long-term efforts to replace their least efficient uses of power: electric resistance heating, inefficient cooling systems, 20-year-old and older refrigeration, and T12 and incandescent lighting. New buildings or major renovations would benefit from carbon-sensitive specifications that minimize future vulnerability to tightening carbon regulation.
Fortunately, many energy efficiency options offer a decent rate of return, especially when supported by incentives and tax credits. Various government programs and building organizations offer assistance to those looking to take advantage of such opportunities. With a little effort, meeting this challenge might even help polish your bottom line.
Lindsay Audin, CEM, LEED AP, CEP, is president of EnergyWiz, an energy consulting firm based in Croton, N.Y. He is a contributing editor for Building Operating Management. He can be reached at firstname.lastname@example.org.
Preparing for Cap and Trade and its Impact on Energy Costs