Cap & Trade May Threaten Hybrid Market

By Published On: June 18, 2010

As the California Air Resources Board struggles to shape a carbon cap-and-trade program, questions are emerging about whether it could tilt the playing field to favor investor-owned utilities at the expense of independent generators and ratepayers. The latest cap-and-trade plan by the Air Board would “erode competitive markets by subsidizing utility-owned generation and transmission at the expense of independent generators and transmission developers,” stated Western Power Trading Forum greenhouse gas consultant Clare Breidenich. Industry comments on the Air Board’s latest carbon trading concept to carry out the state’s greenhouse gas reduction law, AB 32, were filed June 7. Utilities praised the plan, but in their comments pushed to maximize how many free allowances they would receive. Southern California Edison attorneys, for instance, questioned whether the Air Board “will be able to allocate sufficient allowances for the electricity sector” to cover the rising cost of power under AB 32 carbon reduction policies. At issue is the Air Board’s plan released last month. It aims to give greenhouse gas emissions rights to utilities for free based on the historic emissions associated with the power they provide. Yet, under California’s hybrid market utilities generally rely on independent generators for power, which the carbon trading plan would require to cover their own emissions by buying carbon allowances from utilities. Initially utilities could use the proceeds only on behalf of their customers to offset the expected higher cost of power--which suddenly would include a carbon price under a cap-and-trade market. After a few years, though, the Air Board plans to allow utilities to use some of the proceeds to build their own renewable-fueled power plants and invest in energy efficiency programs in direct competition with independent providers (Current, May 21, 2010). Discussion on the Air Board’s plan isn’t limited to independent generators and investor-owned utilities. Ratepayer advocates expressed caution about potential impacts of a carbon market on consumers. Division of Ratepayer Advocates energy policy and procurement program manager Cynthia Walker questioned the Air Board’s intention to have utilities sell their emissions allowances to generators in a “double-sided auction” market. She noted that as sellers, utilities may not have the same incentive as buyers to keep the price of allowances down. Because higher priced carbon credits are expected to be passed on in monthly energy bills, DRA wants the Air Board to analyze how a double-sided auction might “inflate allowance prices.” In a conventional auction, utilities would put allowances on the block without a price and accept the highest bid. In a double-sided auction, multiple sellers would offer allowances at different prices and multiple buyers would bid at various prices. Sales would clear when matches occurred, but not when bid prices remained below asking prices.

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