Remaking American Power - 1
Remaking American Power
Preliminary Results
John Larsen
Rhodium Group
Sarah Ladislaw
CSIS
Whit...
Remaking American Power - 2
Outline
 Overview of EPA Proposal
 Scope and Methodology
 Key Findings
 What Comes Next
 ...
Remaking American Power - 3
Overview of EPA’s Clean Power Plan
Remaking American Power - 4
Compliance:
 January 2020-December 2029: States meet interim CPP goal on average
 January 20...
Remaking American Power - 5
 Requires each state to achieve a state-wide “adjusted” emissions rate
(lbs./MWH) goals on av...
Remaking American Power - 6
CSIS – RHG Analysis: Scope and
Methodology
Remaking American Power - 7
EPA CPP Proposal
National Energy Modeling System (NEMS)
RHG/CSIS interpretation
of proposal
Ou...
Remaking American Power - 8
Policy Scenarios
National Cooperation Regional Fragmentation
No States Include EE in Plans Nat...
Remaking American Power - 9
We model tradable performance standards with emission rate goals based on EPA’s
CPP proposal.
...
Remaking American Power - 10
Crediting energy efficiency (EE)
Key assumptions in scenarios including energy efficiency:
 ...
Remaking American Power - 11
Preliminary results from the forthcoming CSIS/RHG full report
POLICY SCENARIOS
National Coope...
Remaking American Power - 12
Other factors that will shape the ultimate impact of the CPP
This analysis considers the CPP ...
Remaking American Power - 13
Key Findings
Remaking American Power - 14
Key Findings
1. The shale boom makes compliance
relatively affordable
Remaking American Power - 15
The shale boom has lowered the cost of gas-fired generation
Coal vs. natural gas, costs and g...
Remaking American Power - 16
COAL
NATURAL GAS
PETROLEUM
0
500
1,000
1,500
2,000
2,500
2005
2006
2007
2008
2009
2010
2011
2...
Remaking American Power - 17
EPA’s CPP proposal: small changes in incentives, big impact
US power generation, billion kWhs...
Remaking American Power - 18
Gas drives changes in capacity as well as generation
Change in capacity relative to 2010, GWs...
Remaking American Power - 19
Shifts in generation deliver significant CO2 emissions reductions
million metric tons
Source;...
Remaking American Power - 20
$12
$50
$37
$0
$10
$20
$30
$40
$50
$60
Costs Benefits* Net
4.1%
13.3%
0%
5%
10%
15%
Clean Pow...
Remaking American Power - 21
Key Findings
2. Including efficiency reduces both costs
and benefits
Remaking American Power - 22
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
2010
2011
2012
2013
2014
2015
2016
2017
20...
Remaking American Power - 23
432
714
274
528
0
100
200
300
400
500
600
700
800
2020 2030
Without EE With EE
… and also les...
Remaking American Power - 24
4.1%
2.8%
0.2%
5.4%
-2.4%
-1.4%
-4%
-2%
0%
2%
4%
6%
8%
Electric Rates Electricity Expenditure...
Remaking American Power - 25
Key Findings
3. Cooperation lowers costs
Remaking American Power - 26
Includes efficiency crediting, billion kWhs
Less cooperation means more fuel switching…
In ou...
Remaking American Power - 27
274
528
419
618
0
100
200
300
400
500
600
700
2020 2030
National Cooperation Regional Fragmen...
Remaking American Power - 28
Cooperation reduces both energy and compliance costs
Source: Rhodium Group/CSIS. * We use the...
Remaking American Power - 29
Key Findings
4. The energy market impacts of the CPP
are potentially significant
Remaking American Power - 30
The CPP could result in a large increase in natural gas demand…
Source: Rhodium Group/CSIS
Ch...
Remaking American Power - 31
-453 -463
-287 -299
-500
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
Production Consumption...
Remaking American Power - 32
Shale resources limit the price response to changes in demand
Source: Rhodium Group/CSIS
Chan...
Remaking American Power - 33
$32.0
$38.0
$5.9 $6.3
-$40
-$30
-$20
-$10
$0
$10
$20
$30
$40
$50
Producer Sales
Without EE Wi...
Remaking American Power - 34
Key Findings
5. Compliance costs are not the same as
economic impact
Remaking American Power - 35
Pacific
Mountain
West North
Central
West South Central
East North
Central
New England
Mid Atl...
Remaking American Power - 36
Compliance obligation is only part of the picture
EPA expected per capita emission reductions...
Remaking American Power - 37
Upstream impacts are important, and also vary by region
$0.0
-$2.1
-$4.3
-$0.3
-$2.9-$2.5
-$1...
Remaking American Power - 38
Including upstream impacts changes the economic picture
$0.0
-$2.1
-$4.3
-$0.3
-$2.9-$2.5
-$1...
Remaking American Power - 39
What Comes Next
Remaking American Power - 40
Additional analysis in the full report
POLICY SCENARIOS
National Cooperation w/ EE
National C...
Remaking American Power - 41
Appendix
Remaking American Power - 42
How EPA proposal elements are addressed
EPA CPP Proposal Element Analytical Treatment
State b...
Remaking American Power - 43
National Energy Modeling System (NEMS)
U.S. Energy Information Administration, Office of Ener...
Remaking American Power - 44
Overview the NEMS Electricity Market Module
Capacity
Planning
Fuel
Dispatch
Finance &
Pricing...
Remaking American Power - 45
Modeling a tradable performance standard
Coding enhancements in the Electric Market Module (E...
Remaking American Power - 46
NEMS Electricity Market Module regions
U.S. Energy Information Administration, Office of Ener...
Remaking American Power - 47
Crediting energy efficiency
NEMS is not capable of including EE as an explicit compliance opt...
Remaking American Power - 48
Rescaling NEMS fuel production output
Source: EIA and Rhodium Group/CSIS
Based on current dis...
Remaking American Power - 49
Calculating benefits
Climate Benefits
• Social Cost of Carbon (SCC) values were sourced from ...
Remaking American Power - 50
Remaking American Power
Preliminary Results
John Larsen
Rhodium Group
Sarah Ladislaw
CSIS
Whi...
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Remaking American Power - CSIS & Rhodium Group Preliminary Findings of EPA's CPP Plan

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On June 2 the federal Environmental Protection Agency (EPA) announced it's "kill coal" campaign which they dubbed the Clean Power Plan or CPP. Researchers at the Center for Strategic and International Studies (CSIS) and the Rhodium Group, both research organizations, combined forces to take a close look at how they believe the CPP will fundamentally change American power generation. These are their preliminary findings.

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Remaking American Power - CSIS & Rhodium Group Preliminary Findings of EPA's CPP Plan

  1. 1. Remaking American Power - 1 Remaking American Power Preliminary Results John Larsen Rhodium Group Sarah Ladislaw CSIS Whitney Ketchum Rhodium Group Michelle Melton CSIS Shashank Mohan Rhodium Group Trevor Houser Rhodium Group July 24, 2014
  2. 2. Remaking American Power - 2 Outline  Overview of EPA Proposal  Scope and Methodology  Key Findings  What Comes Next  Appendix
  3. 3. Remaking American Power - 3 Overview of EPA’s Clean Power Plan
  4. 4. Remaking American Power - 4 Compliance:  January 2020-December 2029: States meet interim CPP goal on average  January 2030: States must meet final CPP goal Implementation:  June 2016: Initial deadline for state plan submittal  June 2017: Extended deadline for state plan submittal at states’ request  June 2018: Extended deadline if states choose to submit multi-state plans Design:  October 16, 2014 (expected): EPA CPP comment period ends  December 2014 (expected): EPA finalizes New Source Performance Standards (NSPS)  June 2015 (expected): EPA finalizes CPP Process overview
  5. 5. Remaking American Power - 5  Requires each state to achieve a state-wide “adjusted” emissions rate (lbs./MWH) goals on average between 2020-2029 and final goal from 2030 onward  States may submit multi-state plans (“cooperation”)  States may implement virtually any program so long as they demonstrate that they can meet the goal and that standards are enforceable Clean Power Plan (CPP) key design elements Fuel Switching (Renewables/Nuclear) Energy Efficiency Coal Efficiency Fuel Switching (Gas) “Building Blocks”
  6. 6. Remaking American Power - 6 CSIS – RHG Analysis: Scope and Methodology
  7. 7. Remaking American Power - 7 EPA CPP Proposal National Energy Modeling System (NEMS) RHG/CSIS interpretation of proposal Our goal: assess the energy system impacts of EPA’s proposal • Industry standard multi-sector energy system model • Detailed data on US technology costs and performance, energy supply and demand, electric power markets, macroeconomic factors, etc. • Solves for the least-cost pathway to meet a given policy goal National, Regional and Sectoral Results RHG/CSIS analysis of outputs • Emissions rate targets • Building blocks • Compliance timeline
  8. 8. Remaking American Power - 8 Policy Scenarios National Cooperation Regional Fragmentation No States Include EE in Plans National w/o EE Regional w/o EE All States Include EE in Plans National w/ EE Regional w/ EE Scenarios Reference Case: AEO2014 plus EPA’s proposed New Source Performance Standards (coal plants must meet emissions rate of 1,100 lbs./MWh). Policy Scenarios: Given the uncertainty surrounding the final EPA guidelines and resulting State Implementation Plans, we analyze four scenarios to illustrate the potential economic and market impact of two particularly important variables – the level impacts of multi-state cooperation (national cooperation or regional fragmentation) and the inclusion of energy efficiency (w/ EE or w/o EE). The regional fragmentation w/o EE analysis was not completed in time for this presentation, but will be included in our full report released this fall, along with side-cases that explore different baseline energy price and demand scenarios.
  9. 9. Remaking American Power - 9 We model tradable performance standards with emission rate goals based on EPA’s CPP proposal. National cooperation vs. regional fragmentation U.S. Energy Information Administration, Office of Energy Analysis. NEMS Regions National Emission Rate Goals (lbs./MWh) 2020-2029 1,103 2030 and later 1,030 Regional Emission Rate Goals (lbs./MWh) Region 2020- 2029 2030 and later Region 2020- 2029 2030 and later 1 ERCT 853 791 12 SRDA 945 883 2 FRCC 794 740 13 SRGW 1,494 1,408 3 MROE 1,274 1,198 14 SRSE 993 923 4 MROW 1,389 1,338 15 SRCE 1,509 1,429 5 NEWE 614 565 16 SRVC 973 896 6 NYCW 635 549 17 SPNO 1,587 1,509 7 NYLI 635 549 18 SPSO 901 848 8 NYUP 635 549 19 AZNM 742 705 9 RFCE 1,030 913 20 CAMX 556 537 10 RFCM 1,227 1,161 21 NWPP 1,266 1,200 11 RFCW 1,499 1,394 22 RMPA 1,408 1,336
  10. 10. Remaking American Power - 10 Crediting energy efficiency (EE) Key assumptions in scenarios including energy efficiency:  Rely on EPA assumptions for EE deployment and costs with states ramping up to 1.5% incremental electricity savings by 2026 and then maintaining that level  All savings are assumed to be real and verifiable and count towards compliance from 2020 onward Incorporation into NEMS:  Adjust TPS target and NEMS electricity demand forecast to reflect EE credits from energy savings  Include the costs utilities incur in administering and implementing EE measures in endogenous NEMS electric rate calculations and low compliance cost estimates Additional calculations:  Calculate consumer share of first-year costs incurred when participating in utility EE programs and include in high compliance cost estimates More information on our approach to EE can be found in the appendix
  11. 11. Remaking American Power - 11 Preliminary results from the forthcoming CSIS/RHG full report POLICY SCENARIOS National Cooperation w/ EE National Cooperation w/o EE High Natural Gas Resource MARKET SENSITIVITIES Low Natural Gas Resource High Natural Gas Exports Energy Prices RESULTS Regional Fragmentation w/ EE Regional Fragmentation w/o EE Regional Cooperation Options Energy Efficiency Cost/Effectiveness Energy Expenditures Natural Gas Production/Revenue Coal Production/Revenue National GEOGRAPHIC DETAIL Power Generation/Capacity Compliance Costs/Benefits Census Region Power Market CSIS-RHGANALYSIS JULY24FALL2014FALL2014 JULY24FALL2014JULY24FALL2014
  12. 12. Remaking American Power - 12 Other factors that will shape the ultimate impact of the CPP This analysis considers the CPP proposal as currently constructed. The ultimate impact of the CPP could differ from this analysis for a number of reasons, including:  Changes in stringency due to:  EPA changes in the final rule  Severability of components of EPA’s assigned state goals  Possible delays in implementation (due to legal challenges or other reasons)  Differences between modeling assumptions and ultimate market developments:  Fuel resources and prices  Cost and performance of generation technologies  Energy demand  EE availability and costs
  13. 13. Remaking American Power - 13 Key Findings
  14. 14. Remaking American Power - 14 Key Findings 1. The shale boom makes compliance relatively affordable
  15. 15. Remaking American Power - 15 The shale boom has lowered the cost of gas-fired generation Coal vs. natural gas, costs and generation Source: EIA Assessing the potential economic impact of the CPP requires understanding the energy landscape into which it is being introduced. The dramatic growth in US shale gas production over the past decade has reduced the cost of power generated with natural gas, particularly from high-efficiency natural gas combined cycle (NGCC) plants, relative to the cost of coal- fired power. As a result, a growing share of US electricity supply in recent years has been powered by natural gas. The price- sensitivity of dispatch in the US power sector works both ways, of course. As natural gas prices have recovered a little over the past year and a half, so has coal-fired power generation. NOMINAL COST OF GENERATION, $/MWH MONTHLY GENERATION, MWH 0 20 40 60 80 100 120 140 160 180 200 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Coal Natural Gas 0 10 20 30 40 50 60 70 80 90 100 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Coal Steam Natural Gas Combined Cycle
  16. 16. Remaking American Power - 16 COAL NATURAL GAS PETROLEUM 0 500 1,000 1,500 2,000 2,500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Coal-gas switch has helped reduce US CO2 emissions Power sector CO2 emissions Source: EIA Annual Energy Review and Annual Energy Outlook 2014 HISTORICAL CURRENT POLICY (EXCLUDES CLEAN POWER PLAN) The price-driven switch from coal to natural gas shown in slide 15, along-side weak energy demand due to the recession and increased renewable energy deployment, contributed to a sharp drop in CO2 emissions from the US electric power sector between 2007 and 2012. As natural gas prices rose in 2013, so did US CO2 emissions. Absent additional policy, the EIA projects a modest increase in power sector CO2 emissions in the years ahead. The real significance of the shale boom from a climate change standpoint is not its direct impact on CO2 emissions, but how it changes the economic impact of climate policy, including the CPP.
  17. 17. Remaking American Power - 17 EPA’s CPP proposal: small changes in incentives, big impact US power generation, billion kWhs Under current policy (pre-CPP), the EIA projects US coal generation will remain relatively flat in absolute terms in the years ahead, with NGCC and renewables satisfying projected electricity demand growth (Reference). An emission-rate standard like that proposed in the CPP, has the potential to significantly alter this outlook by raising the effective cost of coal generation and lowering the effective cost of natural gas and renewable generation. At currently projected natural gas prices, switching from coal to gas is the most cost-effective means of meeting CPP requirements (at least on the generation side), as shown above in our National w/o EE scenario. For potential generation changes under other scenarios see slides 22 and 26. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Other Renewables Nuclear O&G Steam and CTs NGCC Coal Fossil w/CCS 46% 19% 20% 10% 38% 29% 17% 14% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 46% 19% 20% 10% 21% 43% 19% 15% REFERENCE NATIONAL W/O EE Source: EIA, Rhodium Group/CSIS
  18. 18. Remaking American Power - 18 Gas drives changes in capacity as well as generation Change in capacity relative to 2010, GWs Much of the increase in natural gas generation due to CPP implementation in our analysis comes from existing NGCC plants with spare generation capacity. The CPP-driven change in the relative cost of natural gas generation also incentivizes the construction of new NGCC capacity beyond what is projected to occur in our Reference scenario. Likewise, the CPP prompts additional coal and low-efficiency oil and gas plant retirements. This occurs in all implementation scenarios we analyzed, though is more pronounced when efficiency crediting is excluded (such as the National w/o EE scenario above). Changes in renewable capacity are more scenario-dependent (but relatively small compared to NGCCs). -200 -150 -100 -50 0 50 100 150 200 250 300 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Other Renewables Nuclear O&G Steam and CTs NGCC Coal Fossil w/CCS REFERENCE -200 -150 -100 -50 0 50 100 150 200 250 300 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 NATIONAL W/O EE Source; EIA and Rhodium Group/CSIS
  19. 19. Remaking American Power - 19 Shifts in generation deliver significant CO2 emissions reductions million metric tons Source; EIA, EPA, Rhodium Group/CSIS. Note: EPA data reflect the “Option 1- State” scenario. CPP-induced changes in dispatch, capacity additions and retirements can generate big reductions in power sector CO2 emissions. In the National w/o EE scenario shown above, power sector CO2 emissions fall to roughly 1,700 million metric tons by 2020 and 1,500 million metric tons by 2030, a 30% and 37% decline from 2005 levels respectively. Setting and meeting emission rate standards does not predetermine a specific emissions reduction pathway. Differences in policy implementation as well as market dynamics can impact the total emission reductions achieved under the CPP. For example, or National w/o EE scenario results in lower emissions than EPA’s own CPP projection (see slides 23 and 27). 0 500 1,000 1,500 2,000 2,500 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Historical Reference National w/o EE EPA CPP
  20. 20. Remaking American Power - 20 $12 $50 $37 $0 $10 $20 $30 $40 $50 $60 Costs Benefits* Net 4.1% 13.3% 0% 5% 10% 15% Clean Power Plan Waxman-Markey Electricity prices and compliance costs (and benefits) Source: EPA, Rhodium Group/CSIS; Note: Clean Power Plan and EPA Rate values are a simple average, Waxman-Markey Value is a generation weighted average. Range reflects the difference between EPA’s Option 1-State and Option 1-Regional scenarios. * We use the EPA’s methodology in calculating benefits, using their most conservative assumptions In the scenarios we analyzed, CPP implementation modestly increases electricity prices, from 4% to 10% depending on the scenario (above and slides 24 and 28). This is considerably lower than the projected impact of the 2009 Waxman-Markey legislation, though that bill would have covered the entire economy and delivered greater emission reductions than the CPP. In our National w/o EE scenario, total annual compliance costs average $12 billion between 2020 and 2030, compared to public health and climate benefits of $50 billion using EPA’s methodology. Compared to the EPA analysis, our National w/o EE scenario costs more, but also delivers larger emission reductions, and thus larger public health and climate benefits. EPA Range EPA Range 2020-2030 average, national cooperation without EE AVERAGE CHANGE IN ELECTRIC RATES, 2020-2030 CPP AVERAGE COSTS AND BENEFITS(BN 2012 USD)
  21. 21. Remaking American Power - 21 Key Findings 2. Including efficiency reduces both costs and benefits
  22. 22. Remaking American Power - 22 -1,000 -800 -600 -400 -200 0 200 400 600 800 1,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Fossil w/CCS Coal NGCC O&G Steam and CTs Nuclear Renewables Other National cooperation, billion kWhs Crediting efficiency leads to less fuel switching… Including energy efficiency (EE) as a compliance option reduces the amount of abatement that needs to occur through changes in sources of power generation. Fuel switching from coal to natural gas continues to occur, but to a lesser extent than in the National w/o EE case. The modest CPP-driven increase in nuclear and renewable generation in the National w/o EE scenario all but disappears when efficiency is credited. States could well design implementation plans that explicitly favor renewables over natural gas, which would lead to power sector outcomes different than those shown above which are intended to illustrate the most cost-effective solution at currently projected natural gas prices and renewable energy costs. Source: EIA, Rhodium Group/CSIS WITHOUT EE -1,000 -800 -600 -400 -200 0 200 400 600 800 1,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 WITH EE
  23. 23. Remaking American Power - 23 432 714 274 528 0 100 200 300 400 500 600 700 800 2020 2030 Without EE With EE … and also less abatement Source: Rhodium Group/CSIS Should states choose to meet their CPP emission rate targets in part by crediting efficiency improvements, total CO2 emission reductions could be lower, for two reasons. First, there is a risk states will claim credit for EE improvements that would have occurred absent the CPP (see appendix). Second, the EPA goal was designed assuming efficiency proportionally reduces other forms of generation. In our analysis, displacement is not proportional due to power market dynamics. National cooperation REDUCTION FROM REFERENCE, MN METRIC TONS REDUCTION FROM 2005, PERCENT 30% 37% 24% 29% 0% 5% 10% 15% 20% 25% 30% 35% 40% 2020 2030
  24. 24. Remaking American Power - 24 4.1% 2.8% 0.2% 5.4% -2.4% -1.4% -4% -2% 0% 2% 4% 6% 8% Electric Rates Electricity Expenditures Energy Expenditures Without EE With EE EE reduces energy expenditures (but not necessarily total costs) Source: Rhodium Group/CSIS. * We use the EPA’s methodology in calculating benefits, using their most conservative assumptions. Low EE costs only include utility EE costs, high EE costs include both utility and participant EE costs. See appendix for more information. CHANGE FROM REFERENCE TOTAL COSTS AND BENEFITS, BN 2012 USD Crediting EE could likely increase electricity prices, as utilities add the cost of efficiency programs to their customers’ electricity bills, but could decrease overall energy costs as those customers buy less electricity. Estimating total compliance costs when efficiency crediting is included requires accounting for increased spending on building efficiency improvements and energy efficient appliances alongside the resulting decrease in energy expenditures. There is wide variation in how such costs are calculated, as shown above. Additional discussion of this point is available in the appendix. 2020-2030 average, national cooperation $12 -$1 $19 $50 $37 $37$37 $38 $18 -$10 $0 $10 $20 $30 $40 $50 $60 Without EE With EE (Low) With EE (High) Costs Benefits Net
  25. 25. Remaking American Power - 25 Key Findings 3. Cooperation lowers costs
  26. 26. Remaking American Power - 26 Includes efficiency crediting, billion kWhs Less cooperation means more fuel switching… In our National Cooperation scenarios, all states are allowed to trade compliance credits. When such trading is excluded, and each of the 22 power market regions included in our analysis meet their CPP obligations independently, more coal-gas fuel switching is required to meet the CPP targets. Natural gas generation increases further to offset a slight decline in renewable generation, as the regions with the best renewable resources have less opportunity to utilize them in achieving combined state-level emission rate targets. NATIONAL COOPERATION REGIONAL FRAGMENTATION -800 -600 -400 -200 0 200 400 600 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Fossil w/CCS Coal NGCC O&G Steam and CTs Nuclear Renewables Other -800 -600 -400 -200 0 200 400 600 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Source: EIA, Rhodium Group
  27. 27. Remaking American Power - 27 274 528 419 618 0 100 200 300 400 500 600 700 2020 2030 National Cooperation Regional Fragmentation … and also more abatement Source: Rhodium Group/CSIS Greater fuel switching when interstate credit trading is excluded (Regional Fragmentation), along with higher electricity prices (see slide 28), yields emission reductions greater than in our National Cooperation scenario. This is particularly true in the first part of the compliance period. Includes efficiency crediting REDUCTION FROM REFERENCE, MN METRIC TONS REDUCTION FROM 2005, PERCENT 24% 29%30% 33% 0% 5% 10% 15% 20% 25% 30% 35% 2020 2030
  28. 28. Remaking American Power - 28 Cooperation reduces both energy and compliance costs Source: Rhodium Group/CSIS. * We use the EPA’s methodology in calculating benefits, using their most conservative assumptions. Low EE costs only include utility EE costs, high EE costs include both utility and participant EE costs. See appendix for more information. CHANGE FROM REFERENCE TOTAL COSTS AND BENEFITS, BN 2012 USD The increased abatement shown on slide 27 comes at a cost. CPP-driven changes in electric prices are higher, and potential EE-related energy cost savings lower, when the level of interstate cooperation is reduced. Total compliance costs are more than $10 billion higher, on average, between 2020 and 2030 in the Regional Fragmentation scenario relative to the National Cooperation case. While some fragmentation is likely under the CPP, the more state cooperate that occurs the lower the plan’s national cost will be. 2020-2030 average, includes energy efficiency -$1 $11 $19 $32 $37 $39 $37 $39$38 $28 $18 $7 -5 0 5 10 15 20 25 30 35 40 45 National Cooperation Regional Fragentation National Cooperation Regional Fragentation Costs Benefits Net LOW EE COSTS HIGH EE COSTS 5.4% -2.4% -1.4% 9.9% 0.6% -0.7% -4% -2% 0% 2% 4% 6% 8% 10% 12% Electric Rates Electricity Expenditures Energy Expenditures National Cooperation Regional Fragentation
  29. 29. Remaking American Power - 29 Key Findings 4. The energy market impacts of the CPP are potentially significant
  30. 30. Remaking American Power - 30 The CPP could result in a large increase in natural gas demand… Source: Rhodium Group/CSIS Change in average annual natural gas production and consumption, 2020-2030, national coordination vs. reference scenario BILLION CUBIC FEET PER DAY PERCENT 10.2 10.7 3.6 3.1 0 2 4 6 8 10 12 Production Consumption Without EE With EE 11.8% 13.8% 4.2% 4.0% 0% 2% 4% 6% 8% 10% 12% 14% 16% Production Consumption CPP-driven changes in the electric power sector have significant implications for the US energy market as a whole. Meeting EPA’s emission rate targets by switching from coal to natural gas – the most cost-effective generation solution at currently projected prices – results in a 14% average increase in US natural gas demand between 2020 and 2030 in our National w/o EE scenario. The vast majority of this is met through an increase in domestic production, with a small reduction in exports to Mexico and small increase in imports from Canada. Crediting efficiency, however, could reduce this increase in US gas demand by more than two thirds.
  31. 31. Remaking American Power - 31 -453 -463 -287 -299 -500 -450 -400 -350 -300 -250 -200 -150 -100 -50 0 Production Consumption Without EE With EE … and a large decrease in coal consumption Source: Rhodium Group/CSIS Change in average annual coal production and consumption, 2020-2030, national coordination vs. reference scenario MILLION SHORT TONS PERCENT -40.9% -46.9% -25.9% -30.3% -50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0% Production Consumption CPP implementation could result in a similarly large change in domestic US coal markets. In our National w/o EE scenario, domestic coal consumption falls by 47% on average between 2020 and 2030 relative to Reference. While increased exports (limited to currently available export infrastructure) offset some of the impact of this decline in domestic sales on US coal producers, total coal output still falls by 41%. Crediting efficiency mitigates coal production declines, with a 30% reduction in consumption and 26% reduction in production on average between 2020 and 2030 in our National w/ EE scenario.
  32. 32. Remaking American Power - 32 Shale resources limit the price response to changes in demand Source: Rhodium Group/CSIS Change in annual average natural gas and coal price, 2020-2030, national coordination vs. reference scenario NATURAL GAS COAL 8.8% 2.4% 1.1% -1.1%-2% 0% 2% 4% 6% 8% 10% Wellhead Delivered Without EE With EE 6.8% -2.9% 1.3% -4.4% -6% -4% -2% 0% 2% 4% 6% 8% 10% Mine-mouth Delivered Using current EIA estimates for shale gas resource availability and cost, the CPP-driven increase in gas demand shown in slide 30 results in a relatively modest increase in natural gas prices. In our National w/ EE scenario, wellhead prices rise by 9% on average between 2020 and 2030, while delivered prices increase by less than 3%. With efficiency crediting the change in price is even smaller. Lower thermal coal demand increases average mine-mouth coal prices, as high-value metallurgical coal accounts for a greater share of total coal production. Delivered coal prices, however, fall.
  33. 33. Remaking American Power - 33 $32.0 $38.0 $5.9 $6.3 -$40 -$30 -$20 -$10 $0 $10 $20 $30 $40 $50 Producer Sales Without EE With EE Upstream impacts are potentially larger than downstream effects Change in annual average natural gas and coal production revenue and total energy expenditures, 2020-2030, national cooperation vs. reference scenario, billion 2012 USD Source: Rhodium Group/CSIS -$20.6 -$27.8 -$13.9 -$19.1 -$40 -$30 -$20 -$10 $0 $10 $20 $30 $40 $50 Producer Sales $3.3 -$19.9 -$40 -$30 -$20 -$10 $0 $10 $20 $30 $40 $50 Economy-wide NATURAL GAS REVENUE COAL REVENUE ENERGY EXPENDITURES Meaningfully higher gas production, and slightly higher gas prices, boosts natural gas production revenue in our National w/o EE scenario by $32 billion on average between 2020 and 2030, a 20% increase relative to the Reference scenario. Including distribution costs, average annual natural gas sales revenue increases by $38 billion. This is matched by a similarly large decrease in coal production and sales revenue. From a regional economic standpoint, this shift in upstream fuel production revenue is potentially far more significant than changes in electricity prices or consumer energy costs.
  34. 34. Remaking American Power - 34 Key Findings 5. Compliance costs are not the same as economic impact
  35. 35. Remaking American Power - 35 Pacific Mountain West North Central West South Central East North Central New England Mid Atlantic South Atlantic East South Central Census Regions
  36. 36. Remaking American Power - 36 Compliance obligation is only part of the picture EPA expected per capita emission reductions by region, 2020-2030 average 0.8 1.1 1.2 1.5 2.1 0.6 3.1 1.0 0.1 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 New EnglandMiddle AtlanticEast North Central West North Central South AtlanticEast South Central West South Central MountainPacific Source: EPA EPA developed the state-level emission rate targets included in the CPP based on an assessment of the opportunity for cost-effective emission reductions in each state (the “building blocks” discussed on slide 5). This results in emission reduction expectations that are regionally uneven, as shown above, raising the prospect of regional disparities in the cost of CPP implementation and resulting changes in electricity prices and energy bills. A complete assessment of the regional economic impact of the CPP, however, requires looking at potential changes in upstream fuel supply, as well as downstream electricity costs.
  37. 37. Remaking American Power - 37 Upstream impacts are important, and also vary by region $0.0 -$2.1 -$4.3 -$0.3 -$2.9-$2.5 -$1.0 -$7.5 $0.0 $0.0 $5.3 $0.2 $1.5$1.6 $0.3 $17.7 $5.1 $0.3 -$10 -$5 $0 $5 $10 $15 $20 NewEngland Mid-Atlantic EastNorthCentral WestNorthCentral SouthAtlantic EastSouthCentral WestSouthCentral Mountain Pacific Natural Gas Coal WITHOUT EE $0.0 -$1.5 -$2.8 -$0.1 -$2.3-$1.7 -$0.6 -$4.9 $0.0 $0.0 $1.0$0.0$0.5$0.3$0.0 $4.0 $0.6 -$0.6 -$10 -$5 $0 $5 $10 $15 $20 NewEngland Mid-Atlantic EastNorthCentral WestNorthCentral SouthAtlantic EastSouthCentral WestSouthCentral Mountain Pacific Natural Gas Coal WITH EE Change in average annual production revenue, 2012 billion USD, 2020-2030, national cooperation Some parts of the country could see a significant increase in natural gas production revenue as a result of the CPP, benefiting not just gas companies and employees, but also private land owners, state budgets and sectors of the economy directly tied to natural gas production. The potential upside is largest in the West South Central region (Texas, Arkansas, Oklahoma and Louisiana) which also has the highest emission reduction expectations under the CPP. Likewise, some parts of the country could see a significant decline in coal production revenue, including Powder River and Illinois Basin producers. Source: Rhodium Group/CSIS.
  38. 38. Remaking American Power - 38 Including upstream impacts changes the economic picture $0.0 -$2.1 -$4.3 -$0.3 -$2.9-$2.5 -$1.0 -$7.5 $0.0 $0.0 $5.3 $0.2 $1.5$1.6 $0.3 $17.7 $5.1 $0.3 -$10 -$5 $0 $5 $10 $15 $20 NewEngland Mid-Atlantic EastNorthCentral WestNorthCentral SouthAtlantic EastSouthCentral WestSouthCentral Mountain Pacific Natural Gas Coal PRODUCTION REVENUE -$0.1 $0.1 $2.0 $3.6 $2.6$2.5$1.8$1.0 -$1.8 -$0.1 -$0.6-$0.5-$0.4 -$1.4-$0.9-$0.7 -$1.9 -$1.7 -$10 -$5 $0 $5 $10 $15 $20 NewEngland Mid-Atlantic EastNorthCentral WestNorthCentral SouthAtlantic EastSouthCentral WestSouthCentral Mountain Pacific Other Electricity ENERGY EXPENDITURES Change in average annual production revenue and energy expenditures, 2012 billion USD, 2020-2030, national cooperation without EE Source: Rhodium Group/CSIS. In some regions, these changes in coal and natural gas production revenue are considerably larger than potential CPP- driven changes in electricity and other energy costs. For example, in our National w/o EE scenario, the West South Central census region sees a $16.7 billion net increase in annual coal and gas production revenue relative to Reference vs. a $1.1 billion net increase in household and business energy costs. For the East North Central region, the decline in Illinois Basin coal production revenue is more than twice as large as the projected increase in region-wide energy expenditures.
  39. 39. Remaking American Power - 39 What Comes Next
  40. 40. Remaking American Power - 40 Additional analysis in the full report POLICY SCENARIOS National Cooperation w/ EE National Cooperation w/o EE High Natural Gas Resource MARKET SENSITIVITIES Low Natural Gas Resource High Natural Gas Exports Energy Prices RESULTS Regional Fragmentation w/ EE Regional Fragmentation w/o EE Regional Cooperation Options Energy Efficiency Cost/Effectiveness Energy Expenditures Natural Gas Production/Revenue Coal Production/Revenue National GEOGRAPHIC DETAIL Power Generation/Capacity Compliance Costs/Benefits Census Region Power Market CSIS-RHGANALYSIS JULY24FALL2014FALL2014 JULY24FALL2014JULY24FALL2014
  41. 41. Remaking American Power - 41 Appendix
  42. 42. Remaking American Power - 42 How EPA proposal elements are addressed EPA CPP Proposal Element Analytical Treatment State by state or multi-state implementation plans Implementation nationally or implementation in 22 separate regions depending on scenario State specific adjusted emission rate goals Aggregated state goals as appropriate for each scenario 2020-2029 and 2030 and later compliance periods Included Requirement that plans must contain enforceable standards on existing fossil generators that achieve state specified goals at a minimum Impose tradable performance standards on existing fossil generators to achieve state goals at least cost Market-based mechanisms in states plans is permitted National cases assumes nationwide trading of tradable performance standard compliance credits. Regional case allows trading within a region but not between regions Abatement Options Considered Heat rate improvements at coal plants Not included due to model limitations Dispatch shifts from coal to existing Natural Gas Combined Cycle (NGCC) plants Included, can count towards goals Displace existing fossil generation with zero-emitting generation (e.g. nuclear and renewables) Utility scale and distributed generation included, only utility scale generation receives credit towards goals Displace existing fossil generation with demand-side EE Included in EE scenarios (see appendix) using EPA’s assumptions and counts towards goals Anything else that displaces emissions from existing fossil generation CCS retrofits and displacement of existing fossil with new fossil are included but do not count towards goals
  43. 43. Remaking American Power - 43 National Energy Modeling System (NEMS) U.S. Energy Information Administration, Office of Energy Analysis. Captures the full impact of electric power sector policies by assessing the interactive effects of supply and demand across the entire US energy system
  44. 44. Remaking American Power - 44 Overview the NEMS Electricity Market Module Capacity Planning Fuel Dispatch Finance & Pricing Load and Demand Available Capacity Fuel Demand Electricity Prices Load Curves Capacity Additions Electricity Market Module Exogenous Inputs Financial data Tax assumptions Capital costs O&M costs Operating parameters Emission rates New technologies Existing facilities Transmission constraints Inputs from other modules Electricity sales Fuel prices Cogeneration Renewable technology parameters GDP Interest rates With perfect foresight Outputs Electricity prices Price components Fuel demand Capacity additions Capital requirements Emissions
  45. 45. Remaking American Power - 45 Modeling a tradable performance standard Coding enhancements in the Electric Market Module (EMM) in NEMS Electricity Capacity Planning Submodule Electricity Fuel Dispatch Submodule Electricity Load Demand Submodule Electricity Finance and Pricing Submodule Tradable Performance Standard (TPS) TPS credit price Available capacity Peak load demand Fuel costs O&M costs (includes constraint costs) Projected load curves • Generation constraint produces credit price • Shares assigned by plant type • Credit price share applied to VO&M • Plant shares assigned by emissions rate
  46. 46. Remaking American Power - 46 NEMS Electricity Market Module regions U.S. Energy Information Administration, Office of Energy Analysis.
  47. 47. Remaking American Power - 47 Crediting energy efficiency NEMS is not capable of including EE as an explicit compliance option that can be chosen endogenously by the model. Instead, an approach similar to the one used by EPA in its Regulatory Impact Analysis of the CPP was used. This approach was implemented in the following steps. Incorporate EPA’s cost and deployment assumptions into NEMS:  Include EPA’s cost values for first-year utility and participant costs including cost escalators as well as measure-life assumptions.  Include EPA’s assumption that all states ramp up to 1.5% incremental savings per year by 2026. Calculate savings by census region using retail sales weighted averages of EPA’s state-by-state annual targets.  Adjust incremental savings goals to account for implicit savings from state EE programs captured in the reference case. These adjustments vary from region to region but add up to .18% annual average incremental retail sales nationally.  All energy savings are assumed to be real and verfiable.  Adjust reference case NEMS electricity demand forecast to include EE program energy savings.  Adjust reference case NEMS electric rates to include first-year utility EE costs in rate recovery calculations. Credit EE energy savings in TPS  From 2020 onward, credits from energy savings (including implicit savings) are assumed to be used for compliance in the year the savings are achieved.  TPS targets are adjusted to account for EE credits Account for EE costs  Assume costs of implicit savings are already included in reference case electricity forecast  Low EE cost estimates: Reflect annual national utility EE cost rate recovery amount only. This amount will vary from the total first-year cost due to NEMS rate recovery calculations but all first year costs are typically recovered over two years.  High EE cost estimates: Include Low EE costs estimate plus all first-year participant costs, which are assumed to be incurred in year one and not financed.
  48. 48. Remaking American Power - 48 Rescaling NEMS fuel production output Source: EIA and Rhodium Group/CSIS Based on current distribution of mine production Differentiate by coal rank Based on current distribution of proven reserves Differentiate by resource type Coal Supply Regions Census Regions Oil & Gas Supply Regions All other regional output is reported by Census Region
  49. 49. Remaking American Power - 49 Calculating benefits Climate Benefits • Social Cost of Carbon (SCC) values were sourced from the latest guidance from the US Office of Management and Budget • Low estimates presented in this document relied on the 5% discount rate SCC values. High estimates based on the 2.5% discount rate SCC will be included in the final release. • Annual SCC values were multiplied by annual CO2 abatement output from NEMS to produce an annual climate benefits value. Public Health Benefits • National per-ton benefit values for SO2 and NOx abatement in the electric power sector were sourced from the latest relevant EPA technical support document. • Low estimates presented in this document relied on 7% discount rate, low mortality estimate values. High estimates based on 3% discount rate high mortality estimate values will be included in the final release. • Values were interpolated between reported years and multiplied by annual SO2 and NOx abatement output from NEMS to produce annual public health benefit values. All benefit values are reported in real 2012 dollars
  50. 50. Remaking American Power - 50 Remaking American Power Preliminary Results John Larsen Rhodium Group Sarah Ladislaw CSIS Whitney Ketchum Rhodium Group Michelle Melton CSIS Shashank Mohan Rhodium Group Trevor Houser Rhodium Group

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