Free Carbon Credits for Merchant Plants Could Cost Ratepayers $1.25 Billion

A study showing free allocation of carbon emissions allowances to merchant generators would raise electricity prices and create a windfall profit was a hot topic at the National Association of Regulatory Utility Commissioners’ summer meeting in Seattle last week. “The study seeks to quantify the impacts on consumers of allocating free emissions allowances to merchant generators,” said NARUC president Frederick Butler. “It was not our intent to criticize the value of competitive markets.” The Synapse study forecasts free allocation to merchant generators--as partially provided for in House-passed energy and climate change legislation--would raise the annual cost of power to consumers $1.25 billion a year in the California Independent System Operator territory. Nationwide, it would boost annual power bills by $27.2 billion, the study said. The Synapse study for NARUC said it would raise electricity bills less if the power industry simply was required to reduce emissions under direct regulations instead of being placed under a carbon cap-and-trade system. Direct regulation would raise the annual cost of power in the California grid operator’s area by $83 million a year, the study said. “The approach that yields the highest cost for consumers is allocation of allowances for free to generators,” said the report, which was the subject of a session July 19 at the association’s meeting. However, the Electric Power Supply Association--which represents independent generators and marketers--blasted the report. “The study’s sponsors want consumers in organized [i.e., competitive] markets to pay twice,” said John Shelk, association president. “First, by purchasing more allowances from them while they and most other generators outside organized markets receive them for free. Customers in organized markets would pay again to support investments by competitive suppliers in clean energy technologies.” Under H.R. 2454--the American Clean Energy & Security Act of 2009, which the House passed earlier this summer--local electricity distribution companies, mainly utilities, would get 30 percent of all the emission credits distributed under the bill’s carbon cap-and-trade program. Merchant coal generators would get 3.5 percent of the allowances and certain generators with long-term power sales contracts would get 1.5 percent of the allowances. The bill now is in the Senate for consideration. The study showed that free allocation of emissions rights to merchant coal generators alone and utilities would raise costs in California by $210 million a year, compared to $70 million a year if only utilities got free allowances. Nationwide, the total annual cost of power with free allocation both to utilities and independent coal plants would tally $18 billion, compared to $14 billion if only utilities received the credits for free, according to the study. Under the bill, utilities are to use their free allocations to help hold down power prices by using the proceeds from selling the emissions credits for energy efficiency and other consumer-oriented programs. Synapse’s report was funded by NARUC, the American Public Power Association, National Association of State Utility Consumer Advocates, and National Rural Electric Cooperative Association.

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Free Carbon Credits for Merchant Plants Could Cost Ratepayers $1.25 Billion

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