Consumer Cost Effectiveness of Carbon Mitigation Policies in Restructured Electricity Market

1. Consumer Cost Effectiveness of Carbon Mitigation Policies in Restructured Electricity Market Jared Moore and Jay Apt (adviser) CMU Engineering and Public Policy Carnegie Mellon Electricity Industry Center Technology, Management, and Policy Graduate Consortium Lisbon , Portugal June 2014

2. EPA to use Clean Air Act Section 111(d) to regulate existing power plants : • EPA has proposed how much each state must cut • EPA to approve State Implementations Plans which are flexible • Research Question: How will consumers in restructured markets be affected?

3. Use CAA 111(d) cost-effectively for consumers: • White House to EPA: “…Ensure that the standards are developed … with the continued provision of reliable and affordable electric power for consumers and businesses” • Former EPA Administrator Lisa Jackson: We will “…implement the mostcost-effectivemeasures that do not burden small businesses and nonprofit organizations”. • EPA estimates ~$8B cost and consumers savings of 9%

4. Carbon Price Wealth Transfer Payments

5. Carbon Price Wealth Transfer Payments $25/t CO2 Tax

6. Economic Dispatch with Renewable Portfolio Standard Renewables Shift Supply Curve to the right

7. Economic Dispatch with Renewable Portfolio Standard Decreased Market Clearing Prices

8. Economic Dispatch with Renewable Portfolio Standard Cost of renewables to LSE’s including variability and transmission Decreased Market Clearing Prices 8

9. Assumptions for dispatch models: • No new builds or retirements of capacity or ELCC 9

10. Capacity additions in U.S.

11. Assumptions: • No new builds or retirements of power plants (with the exception of renewables) • Model one year of hourly economic dispatch for existing generators in PJM, ERCOT, and MISO • Vary price of gas from $4 to $7/MMBTU • No transmission constraints • No price elasticity of demand 11

12. Results in PJM(no capacity reaction)

13. Marginal Abatement Costs of Carbon Policies: PJM(Economist’s Perspective: Wealth Transfers Neutral) $4 Gas $7 Gas Cost Effectiveness of Carbon Price 13

14. Marginal Abatement Costs of Carbon Policies: PJM(Economist’s Perspective: Wealth Transfers Neutral) $4 Gas $7 Gas Cost Effectiveness of RPS (wind at $100/MWh) Cost Effectiveness of Carbon Price 14

15. Marginal Abatement Costs of Carbon Policies: PJM(Consumer Perspective) $4 Gas $7 Gas Cost Effectiveness of Carbon Price Cost Effectiveness of RPS (wind at $100/MWh) 15

16. Results in ERCOT

17. $4 Gas $7 Gas Cost Effectiveness of RPS (wind at $100/MWh) Cost Effectiveness of Carbon Price 17

18. Capacity Market Reaction Capacity bids are the difference between fixed costs and profits earned in energy markets

19. Capacity Market Bids in PJM (2014/2015) Market Clearing Price (2014/2015)

20. New NGCC plant Existing Sub-Critical Coal Plant in PJM (class average) PJM RTO market clearing price range (2007-2016) 20

21. New NGCC plant Existing Sub-Critical Coal Plant in PJM (class average) PJM RTO market clearing price range (2007-2016) 21

22. New NGCC plant Existing Sub-Critical Coal Plant in PJM (class average) PJM RTO market clearing price range (2007-2016) 22

23. Conclusion: • Rational consumer might prefer RPS over market based mechanism • The problem is that RPS has unintended consequences: • Renewables supply energy but not capacity

24. Current Research: CCS Standard CCUS Standard Pros • Increased low carbon energy supply (base load, but can peak during times of high demand) • Increased capacity supply • Increased oil supply (through EOR) • Allows other industry emitters to use CCS infrastructure • Keeps coal, jobs in U.S. • Opens natural gas up to other industries, for use in long haul trucking, or for LNG exports

25. Thank You This work was supported by grants from the Doris Duke Charitable Foundation, the R.K. Mellon Foundation, and the Heinz Endowments to the RenewElec program at Carnegie Mellon University, and the U.S. National Science Foundation under Award no. SES-0949710 to the Climate and Energy Decision Making Center.

27. Capacity Market Bids in PJM (2014/2015) Market Clearing Price (2014/2015)

28. Current Research RPS Standard Pros • Increased low carbon energy supply (base load) • Increased capacity supply • Increased oil supply (through EOR) • CCS pipelines for other industry emitters • Keeps USA coal industry alive and keeps coal where environmental standards are stringent • Opens natural gas up to other industries, for use in long haul trucking, or for LNG exports?

29. Conclusions • Rational consumer in restructured market may prefer RPS over a carbon price if: • Gas is expensive • And capacity supply remains long • And nuclear generators continue to operate • And it is fair/legal for fossil producers to pay for mitigation 29

30. $4 Gas PJM

31. $4 Gas $7 Gas New NGCC induced New Wind induced ($85/MWh) PJM

32. Carbon Mitigation Due to Fuel Switching $4 Gas $7 Gas ERCOT PJM MISO 32

33. $4 Gas $7 Gas Cost Effectiveness of RPS (wind at $100/MWh) Cost Effectiveness of Carbon Price

34. Marginal Abatement Costs of Carbon Policies: PJM Cost Effectiveness of Carbon Price (consumer perspective) $4 Gas $7 Gas Cost Effectiveness of RPS (consumer perspective, wind at $100/MWh) Cost Effectiveness of Carbon Price(wealth transfers neutral)

36. Classification of Costs in Restructured Markets