GUEST JUICE: Plugging AB 32’s Leaks

By Published On: December 2, 2013

By Steven Kelly It’s time for the California Air Resources Board’s to fix an apparent clear leak in the state carbon cap-and-trade vessel. It gives imported power an advantage over home grown, cleaner resources, undermining competition. The source of the leak is the agency’s “default emissions factor” for unspecified power imported from out of state. While greenhouse gas emissions from in-state generators are monitored at the stack, the agency uses a standard estimate of emissions for out-of-state power—where generators lie beyond California’s jurisdictional reach. Recent evidence shows the factor is grossly underestimating emissions. Because of this, the current emissions estimate for imported power from unspecified power plants outside the Golden State is threatening the integrity of the cap-and-trade program, fostering resource shuffling, and potentially creating an unfair competitive advantage for imported resources that compete to serve California load. That’s why updating California’s default emissions factor for out-of-state power based on new information annually should be required. Otherwise, the Air Board runs the risk of discriminating against cleaner in-state resources without delivering any additional greenhouse gas emission reductions. The Air Resources Board calculates and imputes the so-called “Default Emission Factor” for power imported into California that is “unspecified,” i.e., not linked to a specific generation resource. Accordingly, the default emissions factor lies at the heart of the things driving power-trading behavior. As one commenter correctly expressed to the Air Board, “. . . any seller of a generation resource that is cleaner than the default emission factor will have an incentive to take the necessary steps to become a specified source of power . . . any seller of a generation resource that is more carbon-intensive than the default emission factor will have an incentive to take steps to become an unspecified source of power.” In the end, because of this advantage, the relatively higher emitting (and higher GHG cost) generation unit located out-of-state will be dispatched ahead of the relatively lower emitting (and lower GHG cost) in-state generator in the CAISO markets. This type of behavior also undermines environmental improvement, the primary goal of AB 32, the state climate protection law. Essentially, what we have is a classic “leakage problem.” Others might term this behavior resource shuffling. Is there any evidence this behavior is actually occurring today? Yes. In May 2013, the Arizona Public Service Company (APS) announced that it would be only exporting unspecified, system power into California. As a result, the AB 32 carbon obligation for importers of APS power would be based on the default emissions factor currently employed by the California Air Board. This emissions factor is based essentially on a clean, modern natural gas unit. However, APS’s 2012 Integrated Resource Plan shows that 38 percent of APS’s energy mix is derived from coal resources and approximately 24 percent from natural gas resources. In light of these facts, IEP investigated the emissions associated with the APS generation portfolio. Our analysis, based on 2009 and 2012 data reported to the U.S. Environmental Protection Agency suggests that power imported from this portfolio may be as much as 16-40 percent higher than CARB’s default emission factor, depending on the resources assumed to be contributing to the supply mix imported into California from APS. It doesn’t take a rocket scientist to figure out what will occur here. Out-of-state sellers will move to expand their “unspecified” resource base for sale to California; importers will flock to bring in this power due to the clear cost advantages; and, the day-ahead and real-time markets operated by the California Independent System Operator will effectively displace generators with an in-state carbon compliance obligation. More importantly, California will take it on the chin in terms of jobs and its tax base and we will not be getting any greenhouse gas emissions reduction in return. AB 32 included a specific provision to minimize leakage. The current default emissions factor methodology undermines this AB 32 goal, because the default emissions factor does not accurately represent the emissions associated with unspecified imports. Rather than create incentives for parties to “hide” their actual emissions, the state Air Board should be working diligently to create a mechanism that fosters greater accuracy and disclosure of the resources behind imports. If it is true that APS is selling all its relatively clean power to California, then let APS announce to the folks in Phoenix that the clean stuff for which the ratepayers paid (e.g. nuclear, solar, etc.) is being exported and the good citizens of Phoenix are the beneficiaries of all the coal in the APS portfolio! I am certain they will breathe more deeply hearing this good news. —Steven Kelly is the Independent Energy Producers Association Policy Director, Edited By:

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