SM Greenhouse Gas Regulations Southern California Edison Gary Stern March 10, 2008 SOUTHERN CALIFORNIA EDISON SM Agenda • Overview of Assembly Bill (AB) 32 - Background • Options to Reduce Greenhouse Gas Emissions – Cap-and-Trade – Point of Regulation – Allowance Allocation • CPUC/CEC Proposed Decision • Questions? 3/10/08 Page 1 SOUTHERN CALIFORNIA EDISON SM AB 32 – California Global Warming Solutions Act of 2006 • AB 32 “…require(s) the state board to adopt a statewide greenhouse gas emissions limit equivalent to the statewide greenhouse gas (GHG) emissions levels in 1990 to be achieved by 2020…” GHG Emissions MM mton CO2e 2012: AB 32 Rules and Regulations take effect 600* 174* 426* 426* 1990 2007 2012 2020 Others 8.3% Source of California Emissions Electric Power 22.2% Transportation 40.7% * Climate Action Team (CAT) Report Industrial 20.5% Page 2 Ag & Forestry 8.3% SOUTHERN CALIFORNIA EDISON 3/10/08 SM Details of AB 32 CARB Milestones January 1, 2008: CARB adopts reporting regulations January 1, 2009: CARB preliminary declares how reductions will be achieved January 1, 2011: CARB completes rulemaking and adopts GHG regulations including rules governing market mechanisms January 1, 2012: CARB rules and market mechanisms take effect December 31, 2020: Deadline for reducing emissions to 1990 levels CPUC Milestones July 1, 2007 Dec. 31, 2020 February, 2008: CPUC issues staff report September 2008: CPUC Decision • All Sectors of the California economy involved • California Air Resources Board (CARB) is the lead agency – CPUC and CEC have a joint role in providing recommendations on the Electricity sector regulations *Source:California Energy Commission, Inventory of California GHG Emissions and Sinks: 1990-2004, Figure 3 3/10/08 Page 3 SOUTHERN CALIFORNIA EDISON SM Options to Reduce GHG Emissions • Command & Control – Traditional Regulations • Renewable Portfolio Standard • Energy Efficiency Standards • Unlike criteria pollutants (SOx, NOx), GHG emissions do not have a simple abatement solution – Regulators may not know the most cost-effective abatement options • AB 32 provides CARB the option to use market based systems – Internalize cost of emissions and send price signal to consumers – Allow markets to seek cost-effective abatement options – Market based systems include • Carbon Tax • Cap-and-Trade Program 3/10/08 Page 4 SOUTHERN CALIFORNIA EDISON SM Cap-and-Trade vs. Command and Control Cap-and-Trade ALLOWANCE Good for One Metric Ton of CO2 CO2 Command and Control CARB Thou Shall… Point of Regulation Entity CARB Point of Regulation Entity Implements required pollution reducing technology 3/10/08 Page 5 SOUTHERN CALIFORNIA EDISON SM Cap-and-Trade vs. Carbon Tax – Carbon Tax • Emissions reduction is a function of abatement costs and is difficult to forecast • Tax revenue may not be used efficiently – Cap-and-Trade • Emissions cost is a function of marginal abatement costs • Greater certainty in level of emission reductions • Revenue generated from cap can be returned to harmed entities reducing overall costs – Consumers – Generators SCE supports a broad, multi-sector, cap-and-trade program 3/10/08 Page 6 SOUTHERN CALIFORNIA EDISON SM Point of Regulation (POR) Across Sectors Upstream Downstream Coal Mines Electricity Generation First Entrance to Grid/ Point of Transaction Load-Based Cap LSE Sales Retail End Use Natural Gas Wellhead “Deliverer” Retail End Use Dist. Co. Oil Extraction Oil Refinery Gasoline Sales Retail End Use 3/10/08 Page 7 SOUTHERN CALIFORNIA EDISON SM Point of Regulation in Electric Sector • Two main options currently being considered 1. Load-Based Cap • LSE is responsible for submitting emission allowances for emissions associated with load served • Requires tracking energy from source to load – Not possible with portfolio purchases 2. “Deliverer” Cap (a.k.a. Source-Based Cap) • Generator is responsible for submitting emission allowance based on emissions from plant • Tracking systems are in place Which one is better? … 3/10/08 Page 8 SOUTHERN CALIFORNIA EDISON SM Point of Regulation Issues • Overall program costs • Imports – Costs are generally similar under both approaches – Account for 25% of energy, yet 50% of emissions – Neither approach handles imports very well – A load-based cap requires the use of default emissions rate • Generators can hide emissions • Accuracy • Wholesale Markets – Under a load-based cap a low-emission generators will enter into bilateral contracts and avoid wholesale markets – This may adversely impact market efficiency SCE advocates the “Deliverer” approach 3/10/08 Page 9 SOUTHERN CALIFORNIA EDISON SM Costs of Load-Based POR vs. “Deliverer” POR Load-Based Cap $/MWh “Deliverer” $/MWh Increased Bids to Recover Emissions Emissions Cost Costs Market Clearing Price Emissions Cost Market Clearing Price Nuclear, Hydro, Renewables Coal SCE Market Natural Purchases Gas (Net Short) MWh Nuclear, Hydro, Renewables Coal SCE Market Natural Purchases Gas (Net Short) MWh The cost of a load-based cap should equal the cost of the “Deliver” approach 3/10/08 Page 10 SOUTHERN CALIFORNIA EDISON SM Allocation of Emission Allowances • Significant financial impact to all entities – Overall costs: Over $10 billion/year for California • Two primary methods of allowance allocation – Auction – Simply place the allowances in an auction and allow entities to bid for them • Same issue as Carbon Tax – What is done with the revenue from the auction? – Free Allocation - Give them to selected entities • Allocate to generators based on emissions • Allocate to load serving entities based on load served • Allocations don’t necessarily go to the POR! SCE supports free allocation of allowances to entities that face economic harm 3/10/08 Page 11 SOUTHERN CALIFORNIA EDISON SM CPUC/CEC Proposed Decision (PD) • Recommendation to CARB • All IOUs, POUs, ESPs and CCAs should be subject to the same minimum requirements • Foundation for GHG reductions will be the continued use and strengthening of existing Command & Control measures (loading order) – Mandatory energy efficiency requirements for POUs (similar to those required of IOUs) – Expand Renewable Portfolio Standard to all retail providers (Consider 20% by 2015 or 2017, 33% pending further analysis) – Maintain the Emission Portfolio Standard • For further reductions the electric sector should be included in a market based, multi-sector, cap and trade system • The Point of Regulation (POR) should be the “Deliverer” SCE supports the PD 3/10/08 Page 12 SOUTHERN CALIFORNIA EDISON SM Regional Proposal • The Western Climate Initiative (WCI) – Formed in 2007 by a coalition of governors of Western States to develop a regional cap-and-trade program • Current partners include: – Arizona, British Columbia, California, Manitoba, Montana, New Mexico, Oregon, Utah, Washington – Timing is based on CARB schedule • Program design will be complete by August – WCI does not have any legal authority to implement GHG regulations – Key question: How will AB 32 integrate with the WCI? – Have acknowledged the a Federal program may supersede their efforts • Integration with a Federal Program is a key design element (as it is for California) • WCI is seeking to influence the Federal debate – “First Mover Advantage” 3/10/08 Page 13 SOUTHERN CALIFORNIA EDISON SM Electricity Procurement Objectives System Reliability • Resource adequacy • Local area reliability • Adequate transmission Price Stability • Cost minimization • Financial risk management • Optimization of commitments Environmental Considerations • More energy efficiency • Resources with lower greenhouse emissions • More efficient resources The goal is to balance these competing objectives in the regulatory environment 3/10/08 Page 14 SOUTHERN CALIFORNIA EDISON SM Following The Loading Order Energy Efficiency, Demand Response & Distributed Generation • Include the maximum amount that is costeffective and expected to be developed in the future • Add as transmission becomes available in order to meet the RPS goals • Include future contracts that have been announced as being pursued by a utility • Procure primarily through competitive solicitations to meet the remaining need on a best fit / least-cost basis RPS Eligible Resources Committed Conventional SupplySide Resources Future Conventional Generation AB 32 helps guide consideration of all potential resource options 3/10/08 Page 15 SOUTHERN CALIFORNIA EDISON SM Energy Efficiency Forecast 9 billion kWh (over 2006 levels) • This forecast is incremental to existing (2006) efficiency programs Planned energy efficiency programs will save an additional 9 billion kWh (cumulative) by 2016 9 billion kWh avoids roughly 4 million metric tons of GHG emissions – SCE’s 2006 GHG footprint is about 25 million metric tons Cumulative Savings • 1 billion kWh (over 2006 levels) • 2007 2016 3/10/08 Page 16 SOUTHERN CALIFORNIA EDISON SM Renewable Procurement Targets 23% Increase Required 13 billion kWh (1/6 of all U.S. renewable energy) 16 billion kWh • 2006 renewable procurement percentage = 16.8% (#1 in U.S.) • Transmission is critical for RPS energy delivery – $1.7 B Tehachapi Renewable Transmission Project (TRTP) – Pursuing other areas 2006 Actual Renewable Procurement 2010 Renewable Procurement Goal (20 percent of Retail Sales) • Flexible compliance options (in law) required until transmission available to support full RPS energy delivery 3/10/08 Page 17 SOUTHERN CALIFORNIA EDISON SM SCE Planning Under a GHG Reduction Paradigm • Resource Planning with GHG costs • • • • • • – Development of Abatement Curve and Pursuit of Clean Resource Options Expansion of EE potential Expansion of Demand Response Programs, much through deployment of SmartConnect New Clean technologies, including increased DG through the California Solar Initiative Replace SONGS Steam Generators Offsets/Voluntary Early Action Evaluation of New Clean Technologies, such as CHPG – Resource Planning Analysis under assumed GHG prices • Evaluation of Potential Impacts of Expanded RPS – Integration of Intermittent Resources – Transmission Planning Issues – Renewable Supply Curve • Reporting Emissions • Impacts on Markets – Development of new reporting capability – Electricity Market under GHG rules – Trading GHG allowances 3/10/08 Page 18 SOUTHERN CALIFORNIA EDISON SM Looking Ahead • Allowance Allocation will be a heavily contested issue • Will the state raise the RPS requirement to 33%? • Will the transportation sector be included in the cap-andtrade program? • X-Factor: What impact will the WCI have? • Integration of State Program with regional or federal market – how best to accomplish? 3/10/08 Page 19 SOUTHERN CALIFORNIA EDISON
"Greenhouse Gas Regulations"