A Mandatory US Federal Carbon Emissions Program (Kyoto-II) Will Reduce the Cost Advantage that Michigan Fossil Electricity has over Michigan Wind Electricity

A Mandatory US Federal Carbon Cap (Kyoto-II) will Help Reduce the Cost Advantage that Michigan (MI) Fossil Electricity has over MI Wind Electricity
Tues., 03/03/09 2:00-3:00pm
Cobo Hall Detroit, MI

The Conference

The Presenter Michael Stavy Consulting Energy Economist 432 N. Clark St. Suite 204 Chicago, Il 60654 USA 312-832-1631 www.michaelstavy.com [email_address]

The Lecture Handout
Download lecture handout with details and footnotes
At end of presentation provide webpage, username and password

The Disclaimer
While I prepared this presentation and I believe that it contains correct information, I make no warranty expressed or implied, nor do I assume any legal responsibility for the accuracy, completeness or usefulness of any information presented.
Presentation © 2009 Michael Stavy

The Global Problem

Increase in GHG emissions is causing an increase in the earth’s surface temperature
Global warming is an observed scientific fact
An increase in temperature will change life as usual (LAU)

Life as Usual Parc Montsouris, Paris 14 th

An OECD Coal Plant Life as Usual will not continue

Solutions to Global Warming

Suffer
Adjustment
Mitigation
The Kyoto Protocol is an attempt at mitigation
Windpower is a mitigating technology
Kyoto Protocol mitigating “Galbraithian” technostructure

The Lecture
Michigan wind-centric
Kyoto-I (and Kyoto-II) centric
Carbon reduction centric

The Kyoto Protocol

Protocol Basics
Tries to change the human economy so that it will produce the required output with less carbon
A treaty among sovereign nations
UNFCC Secretariat administers Protocol for signatory nations
Protocol only applies to signatory nations and their citizens

Protocol Basics
Only citizens of signatory countries can trade Protocol carbon units
No matter what the Annex B domestic architecture, Protocol trading is sovereign government to sovereign government

Protocol Basics
Sets a cap (ceiling) on carbon emissions in the Annex B signatory countries
U S A not currently a signatory
Protocol (Kyoto-I) used as model for future mandatory US federal carbon cap (Kyoto-II)

The Green House Gases
Protocol measures GHG in metric tons (t m ) of carbon dioxide (CO 2 ), the major GHG.
In the Protocol, the other GHG emissions (i.e. CH 4 , N 2 O, HFC, PFC, SF 6 ) are standardized into t m -CO 2 by their global warming potential (GWP).

Protocol Carbon Unit
Main GHG from burning fossil fuels (coal, natural gas, oil) to generate MI electricity is CO 2
t m -CO 2e or t m -CO 2 or t-CO 2
carbon emissions or C emissions

More on the Protocol Carbon Unit
A ssigned Carbon Emission A llowance U nit (AAU) is the basic Protocol carbon unit of measurement
AAU = 1 t m -CO 2
AAU are only issued by the UNFCC Secretariat

Protocol Carbon Cap
Carbon cap is maximum t-CO 2 /yr that a country is allowed emit into air
Base Year 1990-t 0
Emissions measured from base year
First Commitment Period 2008-2012
Period during which Annex B countries must reduce their carbon emissions by, on average, 5.2% from t 0

The Annex I Countries
Annex I countries are all the OECD countries plus CIT countries.
CIT are former East European countries that are transitioning from central planning to market economies
The developed countries

The Non-Annex I Countries
Countries under development

The Annex B Countries
Certain Annex I countries that have been assigned to reduce their emissions
Protocol assigns carbon cap in AAU (1 AAU = 1 t-CO 2 ) to each Annex B county
U S A is an Annex I country assigned to Annex B but is not a signatory

Kyoto-II Basics
US signatory to Kyoto-II
Except for certain parameters, Kyoto-II has same architecture as Kyoto-I
Base Year stays 1990-t 0
Second Commitment Period 2013-2017
Period during which Annex B countries must reduce their carbon emissions by, on average, another X % from t 0
Possible goal 385 ppm atmospheric CO 2

Carbon Control Architectures
Protocol allows each Annex B country to design its own regulatory structure to reduce its carbon footprint
Three most common are
1. Cap and command
2. Cap and trade
3. Carbon tax

US Cap and Command-C & C
Each MI fossil power plant given cap-maximum t-CO 2 /yr that it can emit
Based on historical emissions
Plant penalized if actual t-CO 2 /yr > cap
Not rewarded if actual t-CO 2 /yr < cap
Wind plants emit 0 t-CO 2 /yr

C & C used for HFC emissions caps under the Montréal Protocol
US Montréal Protocol signatory
Table # 1 below shows Kyoto-II C & C emissions data for 3 hypothetical MI fossil power plants

Fossil power plant 1 is even with cap
Plant 2 is below its cap
Plant 3 is above its cap
Current US state Renewable Portfolio Standards (RPS) are C & C architectures

US Cap and Trade-C & T
Basis for C & T is the “command” from
C & C
Used by EU ETS
EU ETS will be model for US Kyoto-II C & T
US voluntary emissions schemes do not significantly reduce CO 2 emissions -- not good for MI wind electricity
Each US power plant is given cap (max t-CO 2 /yr that it can emit)

EU ETS
Protocol allows countries next to each other to cap emissions under a joint emissions bubble
European Union Emission Trading Scheme (EU ETS) is one such bubble

Countries Under the ETS Bubble
25 EU Countries

EU ETS Specifics
Study EU ETS because it is currently the only major C & T market
Under EU ETS bubble, the AAU is called Eu ropean Carbon Emission A llowance (EUA)
Use AAU for US Kyoto-II carbon unit

EU ETS Specifics
EU Directorate administers the EU ETS
EU Directorate receives AAU from the UNFCC Secretariat
EU Directorate distributes EUA to EU ETS countries

EU ETS Specifics
Each EU ETS country decided which industrial sectors are capped during first commitment period
For now only look at carbon caps for EU ETS and US electric utility industries

Each US plant must have an AAU for each t-CO 2 /yr it emits up to its cap
Assigned cap based on historical emissions
Plants get AAU from US carbon market purchase, US government auction or US government distribution

US government will get Kyoto-II AAU from UNFCC Secretariat
US government auctions greatly increases US AAU price- very good for MI wind
Auctions also very good for planet Earth

Table # 2 below shows Kyoto-II C & T emissions data for same 3 MI fossil power plants
Plant 1 is even on AAU
Plant 2 is long AAU; sells AAU
Plant 3 is short AAU; buys AAU

If a power plant actual emissions < assigned cap, it is long , can sell its AAU in the US carbon market
If a power plant actual emissions > assigned cap, it is short , must buy AAU in the US carbon market

Cap and Trade Market Efficiency
A power plant long is more efficient
in reducing carbon emissions than a plant that is short
allowing short emitters to buy from long emitters increases economic efficiency

Kyoto-II C & T helps reduce US fossil electricity’s cost advantage over wind electricity by including the carbon cost of the fossil electricity ( US$/MWh)

Carbon Cost of Fossil Electricity
Under Kyoto-II C & T, the carbon content
(t-CO 2 /MWh) of US fossil electricity must be offset with AAU
US carbon cost of fossil electricity depends on its carbon content and the cost of an AAU
Higher the AAU price, the greater the carbon cost, the better it is for MI wind electricity

Carbon Cost of Fossil Electricity
Table # 3 below shows carbon cost for US coal, natural gas and wind electricity
Carbon cost of wind is given as a comparison
Carbon content of fossil electricity from my 2004 Global Wind Power Conference Paper

Price of US Kyoto-II AAU
EUA price is proxy for US AAU price
Currently no US market price for mandatory carbon
EUA is best mandatory market price for carbon

EU ETS has no public EUA markets with transparent prices for long-term contracts or for current (spot) trades
EUA prices and volumes not in public domain
European Climate Exchange (ECX) only provides public access to transparent prices for EUA futures and options

ECX EUA Dec 08 futures
30 Sept 08 month-end settlement price used as proxy EUA price
EUA price is proxy for US Kyoto-II AAU
EUA settlement price: 22.35 €

1 € = US$ 1.4445 ( 30 Sept 08)
Converted proxy EUA € price into US$ for use as proxy US Kyoto-II AAU price

Kyoto-II Reduces US Fossil Electricity's Cost Advantage
Table # 4 below shows the amount by which the after carbon cost of US fossil electricity is less (more) than MI wind electricity
Cost of generation is the levelized cost of generation; not the wholesale price (discussed below)
Cost of carbon is from Table # 3 above

Kyoto-II Reduces US Fossil Electricity's Cost Advantage
Total is the sum of the cost of generation and the cost of carbon
Fossil < wind is amount that MI fossil electricity total cost is less (more) than total cost of MI wind electricity
Hydro column without data requires further study

Cost of Generating Electricity
No public domain data (IEA, EIA) on the actual cost of generating EU (or US) fossil, wind and hydro electricity
Cost of generating electricity not transparent
Without transparent costs, the efficient market hypothesis (EMH) does not hold in these wholesale electric markets

Cost of Generating Electricity
Table # 5 below shows EU and US cost of coal, gas and wind generation converted from proxy € values published in January, 2008 Wind Power Monthly (WPM) article and graphs
Used WPM 8% cost of capital € values
Readers can use their own values

Fossil cost < wind cost

Reliable Cost Data

The Carbon Tax Architecture
Under Kyoto-II, US can also use a carbon tax to cap carbon
Tax is $/t-CO 2
The carbon content ( t-CO 2 /MWh) of fossil electricity is taxed
Must convert tax into $/MWh

The Carbon Tax Architecture
Table # 6 below uses a tax equal to above proxy price of Kyoto-II AAU $32.29/AAU (22.35 €/EUA)

Carbon Tax Computation

Carbon Tax Summary
Kyoto-II carbon tax is as efficient as C & T but historically unpopular in USA
No financial drivers behind it
Tax/MWh is the reduction in MI fossil electricity cost advantage over MI wind electricity
Carbon tax also very good for MI wind
Tax also reduces cost advantage of MI fossil electricity over MI wind electricity

The Conclusion
EU-ETS has not been able to reduce its carbon emissions to the % from the base year level required under Kyoto-I
Current carbon status quo only reduction of 0.6% by 2010
New steps in EU-ETS will need to take to reduce GHG by 20% in 2020

Some More Conclusions
Other “EU non C & T” Kyoto-I carbon reduction drivers have reduced EU fossil electricity's very large cost and institutional advantages
EU accelerating the increase in wind and other non-carbon electricity

Some “Non EU ETS” C & T Wind + & - & - Drivers
ETS country specific wind feed in tariffs (example DK, DE, IT, ES wind feed tariff) ++++++
Political parties with Green agenda +++++++++++++++++++++
Wind transmission dispatch & bottlenecks --------
Rising cost of wind turbines ------

Wind Transmission Dispatch
Merit dispatch of electric power is currently least costly generation including congestion pricing
Not enough transmission to handle all wind plants
Congestion pricing; paying economic rents
Merit dispatch should also be defined in terms of least carbon generation

Wind Facts to consider by MI when planning for Kyoto-II
World’s first wind feed-in-tariff was in California U S A under the first Governor Jerry Brown
EU transmission and siting regulations supported by EU Green Parties have allowed EU ETS wind to develop

MI Government Policies to Help MI Wind During “Kyoto-II”
Wind feed-in-tariffs
Community wind plants
Wind friendly grid access tariffs
Green siting statutes for wind plants
MI carbon cap with consequences

More LAU-Indiana Dunes U S A US ladybug wishes you good luck!

Download Lecture Handout
My website: www.michaelstavy.com
User Name: Detroit2009
Password: Mi1837
Must use capital D & M

My Contact Information
www.michaelstavy.com
[email_address]
312-832-1631
432 N Clark St., Suite 204,
Chicago, IL 60610 USA
3 March 2009

A Mandatory US Federal Carbon Emissions Program (Kyoto-II) Will Reduce the Cost Advantage that Michigan Fossil Electricity has over Michigan Wind Electricity

by Michael Stavy on Jun 27, 2010

Accessibility

Categories

Tags

Upload Details

Usage Rights

Statistics

A Mandatory US Federal Carbon Emissions Program (Kyoto-II) Will Reduce the Cost Advantage that Michigan Fossil Electricity has over Michigan Wind Electricity — Presentation Transcript