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Greenhouse Gas Regulations
Southern California Edison Gary Stern

March 10, 2008
SOUTHERN CALIFORNIA EDISON

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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?

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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%
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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

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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

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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

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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
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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

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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? …

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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
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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
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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
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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
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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”

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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
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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
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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

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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

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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

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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?

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