California’s Climate and Energy Policies: Implications for Utilities

Ren Orans, Managing PartnerEnergy and Environmental Economics, Inc.

101 Montgomery Street, Suite 1600San Francisco, CA 94104

415-391-5100

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Energy and Environmental Economics, Inc. (E3)

San Francisco-based firm established in 1993 Electric and natural gas utility sectors Practice areas

Energy efficiency and building standards Distributed generation, demand response and CHP Integrated resource planning Transmission planning and pricing Retail rate design

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Topics

Quick CA-HI Comparison

Update on CA Climate & Energy Policy

Implementing CA’s GHG Law, AB32

Challenges and Opportunities for Utilities

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Greenhouse Gas Emissions by Sector: Hawaii and California

Sources: Hawaii GHG Emissions Inventory, updated May 2007California GHG Inventory, updated November 16th, 2007Note: States’ accounting of GHG emissions are not identical.

1990 Greenhouse Gas Emissions by Sector (% of State total)

4%

34%32%

24%

57%

35%

7%5%

0%

20%

40%

60%

80%

100%

Hawaii California

Non-Energy Sector

Transportation

Electric Utilities and IPPs

Residential, Commercial,Industrial

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Ambitious Greenhouse Gas Reduction Goals in Hawaii & CA Hawaii House Bill 226

Approved by Governor June 2007

State greenhouse gas emissions must fall to 1990 levels by 2020

Creates a ‘greenhouse gas emissions reduction task force’ to oversee implementation

CA Assembly Bill 32

Approved by Governor Aug. 2006

State greenhouse gas emissions must fall to 1990 levels by 2020

CA Air Resources Board over-sees implementation of law

Provides for ‘market-based’ mechanisms starting in 2012 to reduce emissions

California Policies Related to Climate Change

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Key California Laws and Initiatives on Climate Change and Clean Energy AB1493: Vehicle GHG emissions standard (2002)

SB1078: Renewables Portfolio Standard (2002)

Exec Order S-03-05: GHG reduction goals (2005)

SB1368: GHG Emissions Performance Standard (2006)

AB2021: Statewide energy efficiency targets (2006)

AB32: Global Warming Solutions Act (2006)

Exec Order S-1-07: Low Carbon Fuel Standard (2007)

Western Climate Initiative (2007)

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And that’s not all…

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SB 1368: The Greenhouse Gas Emission Performance Standard All new IOU power

procurement contracts over 5 years long: emissions must be less than or equal to a combined-cycle natural gas turbine (1,100 lbs CO2/MWh)

CEC adopted a similar rule for municipal-owned utilities

Coal-fired power plants must have carbon capture and sequestration to sign new long-term contracts with CA IOUs

Combined-Cycle Natural Gas Plant

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Renewable Portfolio Standard target of 33% Renewable by 2020

SB 107: 20% RPS target by 2010

and the Governor has proposed 33% by 2020

IOU RPS Procurement (% retail sales) 2005

Pacific Gas & Electric 11.9%

Southern California Edison 17.2%

San Diego Gas & Electric 5.2%

Source: CEC, RENEWABLES PORTFOLIO STANDARD 2005 PROCUREMENT VERIFICATION, August 2007

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No New Nuclear without Nuclear Waste Disposal Option1976 California state law:

No new nuclear power in-state…

…Unless federal govt. approves a demonstrated technology for the permanent disposal of spent fuel from nuclear facilities

Diablo Canyon Nuclear Power Plant

Source: http://flickr.com/photos/35237093637@N01/11040625

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EPA ruling against once-through cooling affects California 20,000MW affected Retrofits

are not always possible are expensive decrease efficiency and

capacity take units off-line

Significant reliability challenge for CA ISO

Incredible Fact 17 billion gallons of water

used in once-through cooling in the state per day

Generation Affected

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State Energy Efficiency Targets

IOUs have strong financial incentives to achieve aggressive EE targets (~70% economic EE potential)

CPUC adopted ‘Big, bold energy efficiency strategies’ All new residential construction in California will be zero net energy by

2020; All new commercial construction in California will be zero net energy by

2030; and Heating, Ventilation, and Air Conditioning industry will be reshaped to

ensure optimal equipment performance

AB 2021: requires POUs to identify all potentially achievable cost-effective electric EE savings and to establish annual targets for EE savings and demand reduction

Implementing the Global Warming Solutions Act

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California Global Warming Solutions Act (Assembly Bill 32) State must reduce total GHG emissions to 1990 levels

by 2020 (= 427 million metric tons CO2-equivalent, excludes interstate aviation and shipping)

Carbon regulation in CA will begin in 2012

Principal regulating agency is California Air Resources Board (CARB), with input from sector regulators

GHG caps for individual sectors to be determined by January 2009 - utility sector share still uncertain

Implementation architecture to be determined by January 2009 - possible multi-sector cap and trade

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AB32: Global Warming Solutions Act

Case 1, Natural Gas Build-out ~40MMT reduction to

meet sector target

Imported emissions takes up a lot of the cap

Case 1b, Existing Policy Build-out ~18MMT reduction to

meet sector target

Emissions level about flat

California Energy Commission Scenarios AnalysisGeneration and GHG Projections

GHG emissions from imports

1990 emission level

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1990 1995 2000 2005 2010 2015 2020

GW

h

0

20

40

60

80

100

120

140

MM

TC

O2

Total Generation (left-hand axis)

Electricity Sector Emissions (CARB Baseline)

CEC Scenarios: Natural Gas Build-out, BAU Case 1

CEC Scenarios: Existing Policy, BAU Case 1b

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AB32 Implementation Issues ‘Energy Deliverer’ (First-seller) v. Load-based GHG cap

Energy Deliverer: Power plants are regulated for in-state power production, the ‘deliverer’ of imported power is regulated for imported power. Supported in CPUC’s interim opinion (Feb. 8th ,2008)

Load-based: Load-serving entities (utilities), not generators, are regulated

Allocation of allowances Proposals for free allocation, auctions or sales of GHG permits

Trading Will trade of GHG emission permits be allowed between sectors

‘Offsets’ Disagreement over whether and how GHG reductions from outside the

regulated arena may be used to meet CA GHG reduction goals

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The Big Picture of California’s Climate Policies and the Electricity Sector

CA must bring CO2 emissions back to 1990 levels (~25% reduction from BAU); while adding 9,000 MW of generation;

new nuclear power not allowed until feds develop waste repository;

while retrofitting 20,000 MW of capacity to eliminate once-through cooling.

Agencies want to know how much AB32 will cost the electricity sector…

Preliminary Results from Utility Sector Analysis

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Project Overview Joint California PUC, Energy Commission, Air

Resources Board (ARB) effort to evaluate AB32 compliance options in California’s electricity and natural gas sectors

Model estimates the cost and rate impact of a variety of compliance strategies relative to two reference cases

Main Deliverables Non-proprietary, transparent, spreadsheet-based model

using publicly available data Report on results and sensitivities / scenarios

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Example CO2 Reduction PortfolioReductions from BAU Reference Case

Electricity Sector CO2 Supply Curve

-200

-100

0

100

200

300

400

500

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Tonnes CO2 Reduction per Year (000)(Reference Case - Target Case)

Net

Co

st $

per

To

nn

e

Energy Efficiency

Biogas

In-state Wind

Out of StateWind

CA CSP

Biomass

CA Geothermal

Solar PV

CA Small Hydro

Out of StateGeothermal

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Business-as-Usual Target Case Summary of

resources developed Energy efficiency;

75% economic potential

3,000 MW PV and 5% DR

Conventional adjustment for L&R balance

New Renewable Resources

Resource ZoneBAU Reference Case

(MW)BAU Target Case

(MW)CA - Distributed 900CFE 2163Geysers/Lake 719Imperial 2500 4000Mono/Inyo 243Northeast CA 404 1000Reno Area/Dixie Valley 2500Riverside 2000San Bernardino 2000San Diego 750Tehachapi 4500 4369TOTAL 7,404 20,644

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Business-as-Usual Reference and Target Case Preliminary Results

Summary Results Targets: 85,000 53,120 138,120 Elec Gen CHP Total Elec Gas Total

CO2 in 2020 (kTonnes): 77,705 5,900 83,605 54,523 138,128 Reduction from 2008 (%): 25% 0% 24% 0% 16%

-

20,000

40,000

60,000

80,000

100,000

120,000

2008 2020Ref

Case

2020UserCase

- 0.20 0.40 0.60

PG&E

SCE

SDG&E

SMUD

LADWP

NorCal

SoCal

Subtotal CA

37%

34%

34%

41%

33%

34%

0% 20% 40% 60%

PG&E

SCE

SDG&E

SMUD

LADWP

NorCal

SoCal

Subtotal CA

CO2 Levels

-

20,000

40,000

60,000

80,000

100,000

120,000

2008 2020Ref

Case

2020UserCase

CHP

SoCal

NorCal

LADWP

SMUD

SDG&E

SCE

PG&E

CO2 Intensity

- 0.20 0.40 0.60

PG&E

SCE

SDG&E

SMUD

LADWP

NorCal

SoCal

Subtotal CA

(tonnes / MWh)

2020 2008

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Business-as-Usual Reference and Target Case Preliminary Results

Costs RatesCost Increase (constant $2008)

37%

34%

34%

41%

33%

27%

27%

34%

2%

3%

4%

7%

9%

8%

8%

4%

0% 20% 40% 60%

PG&E

SCE

SDG&E

SMUD

LADWP

NorCal

SoCal

Subtotal CA

Δ from 2008 Δ from 2020 reference case

Rate Impact (constant $2008)

30%

21%

19%

34%

32%

18%

22%

25%

14%

11%

11%

19%

14%

10%

13%

12%

0% 10% 20% 30% 40%

PG&E

SCE

SDG&E

SMUD

LADWP

NorCal

SoCal

Subtotal CA

% Rate Increase in 2020

Δ from 2008 Δ from 2020 reference case

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Members: Governors of Arizona, California, New Mexico, Oregon, Utah and Washington, Premiers of British Columbia and Manitoba

Bring emissions down to 15% below 2005 GHG levels by 2020

Aug 2008 Goal: Design of market trading mechanism in place

Western Climate Initiative (WCI)

Opportunities Related to Climate Change

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Utility Business Opportunities

Customer service options

Grid modernization

Large-scale regional projects

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Contact Information

Energy and Environmental Economics, Inc. (E3)101 Montgomery Street, Suite 1600San Francisco, CA 94104Phone: 415-391-5100Fax: 415-391-6500Web: www.ethree.com

Ren Orans, Managing Partner (ren@ethree.com)