Insights on Economic Impacts of Utility Mercury and CO2 Controls

Anne SmithCharles River Associates

North Carolina DENR/DAQ Workshopon Mercury and CO2

Raleigh, NCApril 20, 2004

2

Mercury Controls and Costs

3

Mercury Sources and Control Options

Hg comes primarily from coal generation Various retrofit controls are possible

“Co-benefits” from PM, SO2 and NOx control equipment, especially for bituminous (eastern) coals:

CESP removes ~35% of Hg; FF removes 75-90% of Hg Wet FGD + CESP removes 60-70% of Hg SCR with WFGD + CESP removes 85-90% of Hg

Activated carbon injection (ACI) Cheap to install, expensive to operate, for removals of 60-80%

ACI with small baghouse Substantial capital cost, but lower operating costs 85%-90% removal appears possible

All Hg controls still have uncertain removal potentials Co-benefits are likely, but magnitude still speculative ACI still being developed; not “commercialized” yet

4

Hg Controls May Not Increase Projected Electricity Prices Much…But They Will Affect:

Average Costs of GenerationRegulated Electricity RatesAsset Values of Coal-fired Units

Demand

Supply$/kwh

Q of Electricity

Wholesaleprice

Gas

Nuc, HydroCoal

5

~ .5% increasein total

COS

~ 2% increasein total

COS

Annual Costs ($ millions) -- CSA vs. 2.2 #/tBtu MACT

 

2008 $278

2010 $1,129

2012 $1,083

2015 $1,450

2018 $2,225

CSA 2.2 #/tBtuMACT

2020 $1,425

Source: A Framework for Assessing the Cost-Effectiveness of Electric Power Sector Mercury Control Policies , (# 1005224), EPRI, Palo Alto, California, May 2003

$4,574

$4,016

$3,913

$3,275

$2,002

$394

6

Co-Benefits May Be “Cheap” But Require Flexibility in Timing

0

5

10

15

20

25

30

35

40

45

50

2004 2006 2008 2010 2012 2014 2016 2018 2020

AnnualTons Hg

FromElectricity

Generation

1999 Emissions (ICR-based estimate)

Projected Hg Co-Benefits from Proposed IAQR

Industry

EPA (approx.)

7

Hg Trading Is Very Cost-Effective Compared to Hg Unit-Specific Targets EPA’s proposed MACT would cost 5-10 times more

than its proposed Hg Cap on NPV basis Hg trading is far more cost-effective:

MACT achieves ~32 tons by 2008 Hg Cap achieves 15 tons by 2020 (32 tons at ~2012)

Cost-effectiveness advantages of proposed trading rule would be heightened by technical improvements in Hg control options Timing flexibility gives opportunities for technology to

improve before it must be implemented broadly Trading “places a price” on Hg emissions which also

incentivizes technical improvements better than MACT

8

Hg Trading Tends to Concentrate Reductions on the Largest Sources

CSA Deposition Change

-6%

-4%

-2%

0%

-6% -4% -2% 0%

TX21 WI31

2.2 #/tBtuMACT

Deposition Change

Shaded area:Deposition under

CSA is reduced morethan under 2.2# MACT

Source: A Framework for Assessing the Cost-Effectiveness of Electric Power Sector Mercury Control Policies , (# 1005224), EPRI, Palo Alto, California, May 2003

9

CO2 Controls and Costs

10

CO2 Sources and On-System Control Options

CO2 comes from coal, oil and natural gas generation But coal emits roughly 2x more CO2 per kwh than natural gas

Retrofit controls are the most costly control option Switch coal to gas: ~$30-50/tonne C for first few %(**)

Switch coal to renewables: >$100/tonne C for first few %(**)

Remove CO2 from stack: ~$300/tonne C (large reductions)

On-system controls are expensive even for new generation Build IGCC with C-sequestration: ~$100/tonne C Large reductions possible, but only with decades

of lead-time

(**) See next slide for further explanation

11

Switching from Current Coal Generation Has Very Limited Potential Coal-to-Gas:

A 20% reduction in current coal MWh: Would require a 50% increase in current gas generation Would require even more new gas plants to be built Would drive natural gas prices up (affecting other industry) Would reduce national CO2 emissions <3%

Coal-to-Renewables:A 10% reduction in current coal MWh: Would require >5-fold increase in renewable capacity Would reduce national CO2 emissions <3%

Both would drive $/tonne higher than the estimates on previous slide for “first few %” of reductions

A multi-decade approach is required to achieveon-system reductions at less than $100/tonne C

12

What About “Offsets”?

“Offsets” are reductions in carbon that do not occur on-system

Usually associated with Changes in land use practices Changes in forestry practices Energy demand-reduction projects Projects in other countries that reduce their CO2 baseline

Are currently much cheaper (<$10/tonne C) Issues

Are these real reductions from baseline? Are these permanent reductions? Will they remain cheap once there is a real demand for them?

13

Implications for Electricity Prices

CO2 policy will increases wholesale power prices, as well as raise cost-of-service and reduce asset values

On-system reductions will cause large price increases

This stands in direct contrast to SO2, NOx and Hg control impacts.

Demand

Supply$/kwh

Q of Electricity

Wholesaleprice Gas

Nuc, HydroCoal

14

What Do These Carbon Prices Mean to the Consumer?

$100/tonne C: Cost of coal-fired generation doubles Cost of gas-fired generation increases by 35% Average cost of all generation increases ~60% Average retail electricity rates increase by ~30%

$10/tonne C: Average retail electricity rates increase by ~3%

~ 5-15% Generationemissionsreductions

(2-5% change in national emissions)

~ 0% Generationemissionsreductions

(? change in national emissions)

15

Regional Competitive Impacts Also Need to Be Considered

Unilateral NC State Policy Power may be wheeled in from states without carbon cap Costs of power and costs of gas will rise to NC industry Industry that can move will do so, reducing NC jobs Consumers in NC will face cost-of-living increases National emissions will not be reduced

As part of a unified national carbon policy Inter-regional competitive issues are diminished Concern is competition from international sources Some emissions will still “leak” and reappear elsewhere

globally NC economy appears to face impacts similar to US-wide

average impacts if the policy is nationally applied.

16

Examples of Estimates of CO2 Cap Costs to NC Economy (Kyoto Caps)

1 - Annex B Trade 2 - Annex B Trade w/No Hot Air

3 - No Trade 4 - Global Trade

North Carolina

Source: Charles River Associates’ SIAM Model Simulation

Global Trade

Annex B Trade (2)

Trade only in US

17

Change in GSP in Different States (Scenario: Kyoto with Annex B Trade - No Hot Air)

9 - North Carolina 10 - Tennessee 11 - California

California

North Carolina

Tennessee

Source: Charles River Associates’ SIAM Model Simulation

18

Estimated NC & US GSP Impacts Under McCain-Lieberman Bill (S.139)

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

2005 2015 2025 2035

Gross Regional Product

(% change from baseline)

Phase I only -- NCPhase I only -- US

Phases I & II -- NCPhases I & II -- US

Source: Costs to the State of North Carolina if EPA Regulated Carbon Dioxide Emissions Under the Clean Air Actby P. Bernstein and D. Montgomery, Charles River Associates, November 4, 2003.

19

-12.00

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

Agriculture EIS Manufacturing Services Electricity

Ind

ust

rial

Ou

tpu

t (%

ch

ang

e fr

om

bas

elin

e)

2010-Amended

2010-Original

2020-Amended

2020-Original

Source: Costs to the State of North Carolina if EPA Regulated Carbon Dioxide Emissions Under the Clean Air Actby P. Bernstein and D. Montgomery, Charles River Associates, November 4, 2003.

Estimated Impacts to NC SectorsUnder McCain-Lieberman Bill (S.139)

North Carolina Sectoral Impacts

Impacts to NC’s economy would be far worse than the preceding estimates if NC were to act on its own.

Boston, Washington DC, Los Angeles, Philadelphia, Berkeley, Palo Alto, Salt Lake City, Austin, Houston

London, Brussels, Toronto, Mexico City, Wellington, Brisbane, Melbourne