CO2 Regulation Will Lead To Low Price Electricity
An observation on the greenhouse gas
policy debate: Excluding those who question whether we
need a GHG policy at all, the debate is fundamentally
one about where certainty is most important. Some think
the most important thing is low price electricity
certainty and argue for a tax. Others think the most
important thing is emissions certainty and argue for a
cap. Every lobbyist in Washington these days assures us
that the most important thing is path certainty and
argue for special diversions of resources to their pet
cause.
What all agree on is that uncertainty is unacceptable.
And so, not surprisingly, we get policies like
Waxman-Markey that are neither a pure cap nor a pure tax
nor a pure subsidy, but a bit of certainty scattered
hither and thither and a modicum of low price
electricity. Sausage making at it’s finest.
But do we really have that much uncertainty? At least in
the electric sector (which is, after all, responsible
for over 42% of US CO2 emissions), we have a fairly high
degree of certainty on two ponits: in the short term,
we’ll shift from coal to gas. And in the long-term, this
leads to low price electricity.
Which is probably sufficiently heretical to demand
explanation.
Near Term
So why can we be certain of a near term shift to gas?
That’s fairly easy: because we don’t have any other
choice.
The current US power mix is supplied by coal (49%),
natural gas (22%) and nuclear (19%). Everything else is
piddly. 6% hydro, 2% petroleum and 3% from all other
renewables combined. Given the 24+ month timeline
required to design, finance, build and commission any
new power plant, the only near term response to GHG
pricing is to shift the resource allocation amongst
those generators that are already built. And while
nuclear is a low-carbon power source, it can’t generate
any harder than it already is. As noted here (see Fig
4), the nuclear fleet is currently running at a 90%
capacity factor, and on historically trends, appears to
have pretty well maxed out. Which means that short of
building new nuclear plants - hardly a quick, near term
solution - there’s no way to swap coal-fired low price
electricity for nuclear.
The gas fleet, on the other hand, hardly runs at all. In
2006, the fleet had a 20% capacity factor. Roughly
speaking, this means that any given plant was shut down
for four days out of every five. Gas fleet capacity
factor bounces a bit from year to year, but generally
stays in the 20 - 30% range. Thus, if we immediately put
a price on carbon that immediately applies to all
generators (color me politically naive if you wish), the
immediate impact would be to shut some coal plants off
and run some gas plants a bit harder. It’s not a
long-term solution, and its cost depends solely on the
price spread between coal and natural gas. But as noted
here, it does have the potential to quickly and
massively lower the CO2 signature of the US electric
sector.
Long Term
Now to the heretical part.
Let’s extend our gaze sufficiently far into the future
that new capital has been deployed, facilitating the
retirement of the old dirty stuff. What’s it likely to
look like?
I’m not foolish enough to make technology-specific
predictions. But I will go out on one very small limb:
power plants deployed in response to GHG controls will
be less GHG-intensive than the ones we build today.
Wind, nuke, solar, CHP, biomass, geothermal… and
probably lots of other things we haven’t thought of (not
to mention lots of end-use conservation).
Here’s the unifying feature of all those technologies:
they cost less to operate on the margin than the stuff
we use today. That’s not to say that it lead immediately
to low price electricity. After all, many of the
technologies we will deploy in response to GHG
regulation are technologies that today are held back due
to high capital costs (solar, nuclear, etc.) But once a
power plant is installed, the decision to run it one
more hour isn’t based on capital cost recovery, but on
the marginal cost of production. If it costs me $2.50 to
make one more widget and I can sell it for $2.51, I’ll
make that widget regardless of how much the widget
factory cost me. That, in a nutshell is why our nuclear
fleet today runs all the time and the gas fleet doesn’t.
Inclusive of capital recovery, the gas plants have lower
all-in costs… but on the margin, the nuke plants make
more sense to run.
This point is key, and too often overlooked. We assume
that new, low-CO2 technologies are held back by
economics - but forget that those economics include both
capital and variable costs. And in the long-run, it is
only the variable cost that matters. Shifting to low-CO2
power is therefore a shift to low variable cost power.
Which in turn is a shift to low cost power.
I should emphasize that it may take a while to get to
this point, as initial prices from high-cost
construction have to be amortized. A comparison with
nuclear in the 1970s is instructive, when huge cost
overruns put upward pressure on prices until the
political will was broken and owners went bankrupt… but
the plants kept running, and today form the low price
electricity base for much of our grid. This will happen
again with new low-CO2 sources, for the simple reason
that CO2 sources (e.g., fossil fuel) cost money. Cut the
source, save the money, get low price electricity.
I should also note that there is one exception to the
low cost/low CO2 paradigm: Coal with CCS. It’s low CO2
(if it works) but high cost. Which is why it will never
matter. It won’t be built unless subsidized, and if it
is built, it won’t run. I’m certain.
Sean Casten
http://www.grist.org/article/why-co2-regulation-will-lead-to-lower-electricity-prices
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