Economic Impacts of Implementing a Regional SO2 Emissions Program in the Grand Canyon Visibility Transport Region Volume II Prepared for: Western Regional Air Partnership Market Trading Forum Prepared by: ICF Consulting January 2000
Agenda • Overview of Analytic Framework and Inputs to REMI • Detailed Discussion of Economic Impacts
Regional Economic Impact • Regional economic impacts were analyzed using REMI’s Policy Insight Model. • A10-region, 53 sector version of REMI’s model was acquired to simulate the regional economic impact of regional SO2 reduction policies at the state level for the thenine GCVTC states and the single tribal region. • Key drivers to REMI were derived from theeconomic modeling using ICF’s IPM.
Key Inputs to REMI • Key inputs to REMI derived from IPM are: • Non-fuel expenditures resulting from the policy • Total Capital Investment • Annual incremental cost • Changes in wholesale electricity prices • Changes in fuel production and consumption • Net revenue from permit allocations. • All impacts from IPM were characterized by state, sector and year.
Key Drivers: Non-Fuel Expenditures • Non-fuel Compliance Costs (by state and sector) • Incremental Capital Investments • Incremental Annual Fixed and Variable O&M • Annualized Cost (by State and Sector) • Net Change in annualized production costs = change in revenue+change in annual capital and FOM+Net fuel cost changes+net permit revenues • Electric generators pass-through unrecoverable cost changes or excess revenues to shareholders > Share ownership - national and distributed based on household income • Other sectors experience decreased profitability due to increased production cost > Sectors that compete regionally pass-through costs via to producers and consumers > Sectors that compete nationally experience a change in market share • Expenditures from Installation of Equipment (scrubbers, new generation or retrofits) • Capital expenditures are split between construction and equipment purchases • Regional Purchase Coefficients (RPC) in REMI determines allocation of expenditures across regions • REMI allocates regional expenditures by sector and input mix. • Secondary effects are on household income, wages, prices,
Annual Incremental Cost • Annual incremental costs, projected by IPM, denote the compliance cost of the policy and are incremental to the base case. • Annual incremental cost consist of changes in capital investment and changes in variable and fixed operating cost. • Annual incremental costs affect the regional economy in two main ways. • Non-electric industries that compete nationally experience a decrease in competitiveness, while non-electric industries that compete locally change their product price. Electric generators pass through unrecoverable cost changes or excess revenues to shareholders. • Capital investments spur construction and increase equipment purchase.
Annual Incremental Cost (Continued) • Sources located inAZ, CO and WY bear most of the cost (primarily capital investment costs)associated with the command & control scenario because a large share of the BART-eligible sources are located in these states. • Sources located inCA realizes lower costs in 2013 and 2018 under the trading scenarios because of the lower level ofrepowering ofexisting oil/gas steam units relative to the Baseline.
Annual Incremental Cost(Continued) • Similarly, sources located inCO and WY realize lower costs in 2013 under the trading scenarios relative to the baselinebecause repowering of existing ICI boilers is postponed in anticipation of the policy in 2018.
Key Drivers: Changes in Wholesale in Electricity Prices • Electric Distribution Companies • Changes in electricity prices affects industrial, commercial and residential customers. • Changes in wholesale electricity prices affects utility revenues and shareholder profits. • Residential User of Electricity • Changes in electricity prices affects residential consumers as change in Consumer Price Index (CPI) and purchasing power • Changes in CPI directly affects real after-tax wage rate, and has indirect effects on migration, labor force and government services. • Commercial/Industrial Users of Electricity • Changes in electricity prices for the commercial/industrial sector affects the cost of raw material inputs. • Non-electric sectors that compete regionally are able to pass-through input cost changes to their consumers. • Sectors that compete nationally experience a change in competitiveness relative to other regions.
Wholesale Electricity Prices • Projected changes (relative to the baseline) in wholesale energy prices from IPM are used to derive changes in retail energy prices paid by residential, commercial and industrial sectors. • We assume competitive market conditions where changes in wholesale energy prices are the only price impacts observed by end users under a policy. Any unrecoverable costs are absorbed by shareholders; revenues in excess of costs are passed on to shareholders in the form of increased dividends.
Wholesale Electricity Prices (Continued) • Wholesale energy prices in IPM represent the variable cost of the marginal generating unit and simulate continuously clearing competitive electric generation markets. • Electricity prices only change if the variable cost of production of the marginal unit changes. • Electricity price impacts in the command & control scenario are small relative to the trading scenarios because capital investment (which does not directly influence variable operating cost) dominate the compliance strategy under the command & control scenario.
Wholesale Electricity Prices (Continued) • Since fuel costs (which directly influence variable cost of operation) dominate incremental cost under the trading scenarios, electricity price impacts under the trading scenarios are relatively more pronounced. • Decline in electricity prices in 2013 represent inter-temporal tradeoffs in anticipation of the policy in 2018.
Fuel Mix Impacts in REMI • Fuel Production and Consumption • Changes in the value of coal produced • Changes in the value of gas consumption by the electric utility and non-utility sector • Changes in fuel expenditures by sector and region is modeled as a change in dividends for public-utility sector companies and as production costs for non- public utility sector Companies • Coal • Change in the value of coal produced affects the mining sector in REMI • Gas • REMI determines the share of gas consumption that is produced within a particular region
Fuel Production & Consumption • Regional coal production is a key driver to the REMI model and is based on changes in coal production by state as projected by IPM. • A coal producer experiences revenue losses (gains) when less (more) coal is produced and coal prices decrease (increase) due to lower (higher) quantity of coal demanded. • Changes in coal production have been valued at the market clearing mine-mouth price based on IPM projections. • Changes in gas consumption, based on IPM projections, also feed into the REMI model.
Impacts on Coal Markets • Coal prices and coal production in IPM are endogenously determined in IPM and are based on coal supply curves. • Coal revenues increase under the trading scenarios. The total increase in the GCVTC region is less than a percent (0.7 %) in 2018 under the Environmental scenario. • Coal revenues decline under the Command & Control scenario. The total decline in the GCVTC region is less than a percent (0.5 %) in 2018.
Impacts on Coal Markets Trading Scenarios • Although coal-based generation (and coal consumption) decreases in the 9 states GCVTC region in the Trading scenarios, coal production in the same 9 state region increases. • Revenues from coal production from the 9 states region increases as the SO2 reduction requirement becomes more stringent across the trading scenarios. • Increase in coal revenues is largely due to increased exports of western coals to other parts of the country.
Impacts on Coal MarketsTrading Scenarios (Continued) • Increased demand for western coals is offset by decreased demand for coal from other regions of the country, predominantly the mid-west. • Increased export of western coal to other parts of country reflect: • Decreased demand for coal in the GCVTC region. • Less stringent national SO2 cap due to SO2 reductions in the GCVTC region. This leads to increased coal generation in the rest of the country.
Impacts on Coal MarketsCommand & Control Scenario • Under the command and control scenario coal revenues in the GCVTC region declines. • Command & control is a capital intensive program that does not lower coal purchases in the GCVTC region: • Coal consumption increases slightly in the GCVTC region. • Increased coal demand in the 9 state region is largely the result of additional new coal capacity.
Impacts on Coal MarketsCommand & Control Scenario (Continued) • Increased coal demand in GCVTC region: • Puts upward pressure on western coal prices and plants capable of receiving non-western coal switch away from western coal. • Decline in export of western coal to other parts of the country leads to a decline in coal production in the western states. • Production cuts in the western states are balanced by production increases in the Appalachian region.
Gas Consumption • Change in gas consumption is relatively small under the Command & Control scenario because the policy does not create incentives to shift to natural gas. • Gas consumption increases with the stringency of the trading program because increased generation from gas is a significant compliance strategy.
Permit Trading Impacts in REMI • Revenue Impacts from Allocations • Allowance allocation is compared to projected emissions to determine net allowance position by sector and geographic area • Revenue impacts from allocation depend on net allowance position and permit price • Tribal • Revenue impacts from allocation to tribal areas flow through as changes in tribal government expenditures. • Non-Tribal • Revenue impacts from allocations for sectors that compete regionally flows through as changes in dividends for shareholders • Revenue impacts from allocations for sectors that compete nationally flow through to the production cost of that sector
Allowance Allocation Revenues • Revenues (or expenses) from net allowance sales (or purchases) represent the net position of each state given the initial distribution of allowances and projected emissions. • Data on the distribution of allowances by sector and state were provided by MTF participants. • Allowance prices and the emissions in each state were projected by IPM. • A state sells allowances if its allocation exceeds its emissions and buys allowances if its emissions exceeds its allocations.
Economic Impacts • For the purposes of this analysis, three indicators of economic impacts are reported: • Employment, • Gross regional product, and • Real personal disposable income.
Review of Key Assumptions • Sectors that compete regionally are able to flow through changes in production cost to prices. • Sectors that compete nationally are unable to flow through production cost increases to price and pass-through these changes to shareholders (as changes in profits). • Electric utility sector operates in a competitive regional market. To the extent that price increases are reflected in wholesale electric prices, they are recovered. Excess recovery or under-recovery are flowed through to shareholders. • Shareholders are distributed across the country and are approximated by the distribution of personal income. On this basis, approximately twenty percent of the shareholders areestimated to be located in the nine western states and tribal region.
Economic Impacts for GCVTC States in 2013 Note: Totals might not match due to rounding.
Environ- Command Changes Minority MTF EPA mental & Control Employment -926 -1,418 -1,434 -7,918 -625 GRP (Million 92$) -29 -43 -22 -271 -42 Real Disp Pers Inc (Million 92$) -78 -133 -159 -525 -44 Environ- Command % Change Minority MTF EPA mental & Control Employment -0.002 -0.004 -0.004 -0.021 -0.002 GRP -0.001 -0.002 -0.001 -0.012 -0.002 Real Disp Pers Inc -0.005 -0.009 -0.011 -0.036 -0.003 Economic Impacts for GCVTC States in 2018 Note: Totals might not match due to rounding.
Regional Economic Impacts • Changes in the three economic indicators are positive in 2013 and negative in 2018 by a similar order of magnitude. • The magnitude of the changes in the three economic indicators are all very small, with no change in an economic indicator being larger than 0.05 percent at the regional level. • Impacts on the three economic indicators are relatively small because the cost of the SO2 reduction policies are all relatively small. Even the highest cost of $274 million to all sectors is well under one percent of the total production cost of the electric utility sector alone.
Command & Control Scenario • Economic impacts from the command and control scenario are positive in 2013 and comparable to the EPA trading scenario. • Increased economic activity in 2013 under the command and control scenario reflects the surge in capital investment that begins in 2013. • The one-time surge in employment in 2013 is primarily due to capital investments under the command and control scenario. Employment levelsdecline with some lag.
Command & Control (Continued) • Economic impacts in 2018 under the command and control scenario, however, are negative, but of a more modest magnitude. • Command and control scenario is a capital intensive program primarily affecting the electric utility sector. • Because under the command and control scenario most costs impacts are capital, electricity price impacts in competitive markets are relatively small.
Command and Control • Declines in gross regional product and real personal disposable income occur in 2018 under the command and control scenario after positive impacts in 2013. • For the command and control scenario, the longer-term economic equilibrium would be expected to approach pre-policy levels due to the fact that the policy reflects a one-time shock to the region that does not systematically alter the non-utility sectors. • Shareholders of the utility sector continue to bear the costs of the policy. However, these effects are distributed nationally, with, of the nine state area, only California bearing a significant share of this impact.
Trading Scenarios • All trading scenarios yield an overall increase in all three economic indicators in 2013, and an overall decrease in the economic indicators in 2018. • The dampened decline in gross regional production in 2018 under the EPA scenario represents the lagged effects of 2013. EPA trading scenario, unlike the other trading scenario, has no incremental cost in 2013.
Trading Scenarios Impacts (Continued) • Economic impacts from the environmental scenario are greater than the other trading scenarios because in these scenarios nationally competing, non-utility sectors bear a larger portion of the compliance cost relative to the other trading scenarios. • Thus, they loose competitiveness and market share with attendant impacts on employment, wage rates, and household income. • The Environmental Scenario also has the lowest level of capital investment, lower than the Base Case, thus employment impacts are largest.
Trading Scenarios Impacts (Continued) • California bears a large share of the impacts in employment, GRP and income relative to other states.This is primarily due to its relative size. California is the largest of the nine states, in terms of employment, income and output. • Income was used as the proxy for shareholder distribution. Sixty-six percent of GCVTC utility shareholders are assumed to be located in California. • GCVTC electric utility shareholders realize a loss in income when increased electric utility expenditures due to the policy are not recovered through electric prices. • California experiences a larger than average increase in electric prices which increases the cost of production for all other industries.
Trading Scenarios Impacts (Continued) • In addition, the mix of industry in California affects the relative impacts. • Many of the industries located in California compete nationally and are not able to pass through the increased production cost from higher electricity prices. • These industries because less competitive as a result of the the increased production cost from electric price increase. • Loss of competitiveness leads to lower output, resulting in lower employment, reduced income and lower gross regional product.
Impact on Gross Regional Product in 2013(millions 1992$) Environ- Command State Minority MTF EPA mental & Control AZ 18 40 48 90 61 CA 48 73 64 113 79 CO 21 32 41 75 31 ID 2 4 4 7 8 NM 0 17 18 32 1 NV 6 7 3 9 -9 OR 6 11 14 29 24 UT 7 14 18 32 13 WY 12 26 32 58 33 Tribal 7 18 23 45 2 Total 128 242 265 490 244