Regulators Take Up Baseline Carbon Allocations for Power Industry

By Published On: June 25, 2007

As state energy regulators turn toward setting a declining carbon dioxide emissions cap, or baseline, for the power industry and figuring out how to allot emissions rights to individual companies, they have set off early political jockeying for position under California’s climate change law, AB 32. The law specifies that by 2020 the state should reduce its current greenhouse gas emissions to 1990 levels. However, regulators must decide how much of that reduction—which equals about a 25 percent cut in statewide emissions—to earmark for the power industry. To kick off that effort, the California Energy Commission and California Public Utility Commission June 22 (at press time) plan a joint meeting on how to set baseline allocations for companies in the power sector. Some see the industry offering a big opportunity for reducing greenhouse gas emissions through improved energy efficiency, renewable energy, and cleaner gas power plants. “There are some differences between the electricity sector [and other parts of the economy] because they are regulated and they can pass through the cost to consumers,” said Mike Sandler, Climate Protection Campaign cofounder. While that could hurt low income ratepayers, utility rate adjustments that penalize profligate energy users could be used to fund rebates to those least able to pay higher electricity bills, he quickly added. Such ability to finance energy efficiency and renewable energy makes the power industry an attractive place to look for greenhouse gas reductions under AB 32. Regulators can help find those emissions reductions by figuring out how much renewable power “will be required to meet the state’s 2020 and 2050 global warming goals,” the Planning and Conservation League and other environmental groups told California Environmental Protection Agency secretary Linda Adams in a June 13 letter. Even the industry expects its emissions reduction target to be based on technological advances that have occurred since 1990, said Clare Breidenich, Western Power Trading Forum consultant on climate change policy. Phase-out of old inefficient gas, oil, and coal plants, coupled with new renewable energy and efficiency technologies, make possible an emission reduction baseline that would take the industry below its 1990 emissions level. “It’s going to be a political decision,” said Breidenich of how the industry baseline and company emissions allotments are determined. In making that decision, she said, regulators must address some key issues. These include how to handle projected growth in electricity demand and how to create a level playing field between power companies that rely on dirtier generating plants and those that rely on cleaner ones. California already has moved to phase out long-term coal power contracts and investments for both the state’s municipal and investor owned utilities. However, there is downside risk that further sudden changes effectively could create stranded assets under AB 32, warns at least one economist. Fairness would dictate that those who “suffer significant reductions in the value of their physical and human capital investments as a result of climate change policy should be made whole,” wrote Harvard economist Robert Stavins in a June 15 letter to the state’s Market Advisory Committee. He predicted that within the power industry “there will be significant variation in the extent to which individual generators or firms can pass on their costs.” Precipitous emission reduction requirements could result in “premature retirement” of some plants, according to Stavins. This could bring calls for reimbursement. Accordingly, Breidenich observed that pegging company baselines to historical emission levels likely will be “politically palatable” because of such problems. However, Calpine is backing what it calls an “output approach,” under which the baseline would be set based on a company’s power generation level, rather than its fuel use and historic emissions. Such performance based approaches would favor low emissions over high emissions generators, Breidenich observed.

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