Energy Agencies Send Air Board Plan to Cut Power Sector Carbon

By Published On: October 17, 2008

State energy officials unanimously approved a greenhouse gas reduction plan for the electricity and natural gas sectors but simultaneously loosened their embrace of a regional carbon cap-and-trading system following the global financial market meltdown. During back-to-back meetings October 16, the California Public Utilities Commission and Energy Commission gave their final green light to joint recommendations developed over the last two years for the California Air Resources Board. The joint agency plan continues to recommend that at the launch of a western-wide cap-and-trade market in 2012, 80 percent of the carbon allocations be given away for free and 20 percent auctioned. Every subsequent year, the amount of emissions rights auctioned would rise 20 percent. By 2016, all of the emission allocations would be auctioned. “We must not invest blind faith in the market to solve our problems,” said CPUC member Dian Grueneich. She urged the Air Board, which is charged with carrying out the state law that mandates curbing carbon emissions 30 percent by 2020, to keep a close watch on possible market manipulation of a multi-sector, greenhouse gas trading scheme proposed by California, several western states, and Canadian Provinces. The regional plan is being developed by the Western Climate Initiative. WCI released a trading blueprint September 22. CPUC member Tim Simon warned that ratepayers face energy price volatility risks in an expected multi-billion dollar carbon market. He called for a “reasonable cost cap” to contain the price of tradable carbon. CPUC member John Bohn, however, insisted that that regulators need to avoid “getting too caught up in the current market screw up” that causes them to disregard “the market’s ability to discipline” activity. The two energy agencies seek a 40 percent cut in the electricity sector’s global warming emissions via regulatory mandates and a carbon market to help the state meet its climate protection goals under state law, AB 32. The duet of approvals came a day after the Air Resources Board issued its AB 32 scoping plan for the transportation, electricity, and other major polluting sectors (see story at page 6). The CPUC and Energy Commission often butted heads during the development of the recommendations, with the two vying over turf. The CPUC used its regulatory clout to get its way, but the Energy Commission, which represents a broader base of stakeholders, fought to get its voice heard. The two agencies separately noted that much more work, research, and follow up modeling is needed to effectively implement the joint plan. Given market and other uncertainties, the agencies stated they will update the recommendations to the Air Board over the next two years to ensure changed circumstances are incorporated. According to CPUC president Mike Peevey, the energy agencies’ recommendations will increase ratepayers costs overall by only about one percent, largely because of anticipated savings from a doubling of energy efficiency. That figure does not include the cost of attaining major efficiency and renewable gains. However, that one percent increase is on par with the cost of meeting growing demand with more fossil fueled generation without curbing global warming gases, Peevey said. The investor-owned utilities and the Sacramento Municipal Utilities District welcomed the recommendations. The Los Angeles Department of Water & Power continued to blast the joint plan, saying it would create a “transfer of wealth.” The muni would be saddled with the highest costs of private and public utilities. That is because of the way carbon allocations would be distributed and because about half the muni’s power comes from coal-fired generation. Carbon allocations to utilities would be based on their historical power sales–and that includes sales of emissions lite nuclear and large hydro power. “Sales-based allowances take away from those who have to make the investments and give it to those who can’t or won’t make those investments in efficiency and renewables,” asserted Jim Caldwell, LADWP assistant general manager. Generators delivering power to the grid, however, would receive allocations that vary by the fuel type–with more going more for coal and less for lower polluting fuels used to make electricity. CPUC member Rachelle Chong worried that the fuel output allocation plan may distort the market, and encourage coal development. Revenue generated from a carbon auction is to be used to fund mandatory energy efficiency programs and lower ratepayer costs, particularly for low-income customers. The plan’s other key recommendations also have changed minimally since they were first released last March and updated last month. The joint plan seeks much of the carbon cuts–80 percent–from full blown energy efficient measures across the state and implementation of a 33 percent renewable energy target by 2020, with a small percentage to come from the state’s Million Solar Roofs initiative. The initiative provides $3 billion in subsidies to promote solar energy installations in California. The plan also calls for trading emission credits in a centralized auction run by the Air Board or an “independent agent.” Bohn and others warned that it would be difficult to keep state politicians’ hands out of the auction revenue pot given chronic shortfalls in the state General Fund. The plan also recommends establishing a three-year compliance period for demonstrating carbon emissions reductions. It does not set geographic limits on carbon emission offsets. In other CPUC action, the commission approved $108 million in incentives for installing solar power systems on multifamily affordable housing. Under the commission’s decision, all the power would flow into the grid on a net metered basis. The utility would credit the power bill for each customer on the premises, including the property owner for electricity use in common areas. Credits would be based on square footage and other factors. Building owners could obtain incentives for installations at the rate of $3.30/watt of capacity for systems offsetting electricity use in common areas and at $4/watt for systems offsetting power use in residential units. In addition, the commission reserved $20 million for potentially higher incentive payments in response to customized solar proposals that multifamily affordable housing owners submit. Peevey said the plan is aimed at “over-coming the split incentive,” in which building owners pay for solar systems, but their tenants get most of the utility bill savings. “This program will help a million solar roofs bloom on apartment houses in addition to single family homes all over California,” added Chong. “This allows those building owners and occupants to go solar too.” The commission also: -Adjusted its market price referent, which is used to determine whether utility renewable energy procurement contracts are cost-competitive or should be supported by state subsidies; and -Authorized investor-owned utilities to spend a total of $72.6 million a month as bridge funding for energy efficiency programs until the commission can complete action on their 2009-2011 energy efficiency program plans.

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