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

2009 Michigan Wind Conference-03/03/09

Michael Stavy, Consulting Energy Economist

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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 2:00-3:00pmCobo Hall Detroit, MI



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The Conference



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The PresenterMichael Stavy

Consulting Energy Economist432 N. Clark St. Suite 204

Chicago, Il 60654 USA312-832-1631

[email protected]



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The Lecture Handout

• Download lecture handout with details and footnotes

• At end of presentation provide webpage, username and password



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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



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The Global Problem



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• 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)



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Life as UsualParc Montsouris, Paris 14th



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An OECD Coal Plant Life as Usual will not continue



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Solutions to Global Warming



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• Suffer• Adjustment• Mitigation• The Kyoto Protocol is an attempt at

mitigation• Windpower is a mitigating

technology• Kyoto Protocol mitigating

“Galbraithian” technostructure



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The Lecture

• Michigan wind-centric

• Kyoto-I (and Kyoto-II) centric

• Carbon reduction centric



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The Kyoto Protocol



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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



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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



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Protocol Basics

• Sets a cap (ceiling) on carbon emissions in the Annex B signatory countries

• USA not currently a signatory• Protocol (Kyoto-I) used as model for

future mandatory US federal carbon cap (Kyoto-II)



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The Green House Gases

• Protocol measures GHG in metric tons (tm) of carbon dioxide (CO2), the major GHG.

• In the Protocol, the other GHG emissions (i.e. CH4, N2O, HFC, PFC, SF6) are standardized into tm-CO2 by their global warming potential (GWP).



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Protocol Carbon Unit

• Main GHG from burning fossil fuels (coal, natural gas, oil) to generate MI electricity is CO2

• tm-CO2e or tm-CO2 or t-CO2

• carbon emissions or C emissions



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More on the Protocol Carbon Unit

• Assigned Carbon Emission Allowance Unit (AAU) is the basic Protocol carbon unit of measurement

• AAU = 1 tm-CO2

• AAU are only issued by the UNFCC Secretariat



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Protocol Carbon Cap

• Carbon cap is maximum t-CO2/yr that a country is allowed emit into air

• Base Year 1990-t0

• 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 t0



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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



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The Non-Annex I Countries

• Countries under development



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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-CO2) to each Annex B county

• USA is an Annex I country assigned to Annex B but is not a signatory



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Kyoto-II Basics

• US signatory to Kyoto-II • Except for certain parameters, Kyoto-II

has same architecture as Kyoto-I

• Base Year stays 1990-t0

• Second Commitment Period 2013-2017• Period during which Annex B countries

must reduce their carbon emissions by, on average, another X % from t0

• Possible goal 385 ppm atmospheric CO2



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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



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US Cap and Command-C & C

• Each MI fossil power plant given cap-maximum t-CO2/yr that it can emit

• Based on historical emissions

• Plant penalized if actual t-CO2/yr > cap

• Not rewarded if actual t-CO2/yr < cap

• Wind plants emit 0 t-CO2/yr



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• 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



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• 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



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hypothetical C & C data plant 1 plant 2 plant 3

cap assigned t-CO2/ yr 10,000 10,000 10,000

actual t-CO2/ yr 10,000 9,000 12,000

carbon balance equal/ below/ above 0 1,000 -2,000

t-CO2/ yr below cap 1,000

t-CO2/ yr above cap 2,000

Table # 1 Kyoto-I I C & C Emissions Data f or 3 MI Fossil Power Plants



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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 CO2 emissions--not good for MI wind electricity

• Each US power plant is given cap (max t-CO2/yr that it can emit)



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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



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Countries Under the ETS Bubble

25 EU Countries



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EU ETS Specifics

• Study EU ETS because it is currently the only major C & T market

• Under EU ETS bubble, the AAU is called European Carbon Emission Allowance (EUA)

• Use AAU for US Kyoto-II carbon unit



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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



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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



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• Each US plant must have an AAU for each t-CO2/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



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• 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



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• 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



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hypothetical C & T data plant 1 plant 2 plant 3

AAU-given/ traded 10,000 10,000 10,000

actual t-CO2/ yr 10,000 9,000 12,000

AAU balance 0/ long/ short 0 1,000 2,000

AAU f or Sale 1,000

AAU must Buy 2,000

Table # 2 Kyoto-II C & T Emissions Data for 3 MI Fossil Power Plants



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• 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



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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



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• 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)



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Carbon Cost of Fossil Electricity

• Under Kyoto-II C & T, the carbon content

(t-CO2/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



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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



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hypothetical C & T data Coal Gas Wind

t-CO2/ MWh 0.996 0.372 0

€/ EUA 22.35 € 22.35 € 22.35 €

carbon cost-€/ MWh 22.26 € 8.31 € 0.00 €

US$/ AAU $32.29 $32.29 $32.29

carbon cost-US$/ MWh $32.16 $12.01 $0.00

Table # 3 Kyoto-II C & T Carbon Cost for US Coal, Gas and Wind Electricity



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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



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• 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



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• 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 €



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• 1 € = US$ 1.4445 (30 Sept 08)

• Converted proxy EUA € price into US$ for use as proxy US Kyoto-II AAU price



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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



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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



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hypothetical data coal gas wind hydro

1. cost of generation-€/ MWh 41.00 € 49.00 € 60.00 € 0.00 €

2. cost of carbon-€/ MWh 22.26 € 8.31 € 0.00 € 0.00 €

3. total- €/ MWh (1+2) 63.26 € 57.31 € 60.00 € 0.00 €

4. f ossil < wind-€/ MWh -3.26 € 2.69 € 0.00 € 0.00 €

1. cost of generation-US$/ MWh $61.66 $73.69 $90.24 $0.00

2. cost of carbon-US$/ MWh $32.16 $12.01 $0.00 $0.00

3. total-US$/ MWh (1-2) $93.82 $85.70 $90.24 $0.00

4. f ossil < wind-US$/ MWh ($3.58) $4.53 $0.00 $0.00

Table # 4 The eff ect of Kyoto-I I on US Fossil Electricity’s

Cost Advantage over MI Wind Electricity



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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



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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



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Fossil cost < wind cost



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Reliable Cost Data



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€/ US$ ↓0.6649 €

US$/ € ↓$1.50393

8% coal gas wind

€/ MWh 41.00 € 49.00 € 60.00 €

US$/ MWh $61.66 $73.69 $90.24

Table # 5 Estimated EU & US 2007 Cost of Generating Coal, Gas and

Wind Electrcity based on Published WPM Prices

2008 average F/ X rate



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The Carbon Tax Architecture

• Under Kyoto-II, US can also use a carbon tax to cap carbon

• Tax is $/t-CO2

• The carbon content (t-CO2/MWh) of fossil electricity is taxed

• Must convert tax into $/MWh



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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)



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Carbon Tax Computation

Coal Gas Wind

t-CO2/ MWh 0.996 0.372 0.000

tax-$/ tm-CO2 $32.29 $32.29 $32.29

tax-$/ MWh $32.16 $12.01 $0.00

Table # 6 Computation of US Kyoto-I I

Carbon Tax



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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



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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



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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



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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------



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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



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Wind Facts to consider by MI when planning for Kyoto-II

• World’s first wind feed-in-tariff was in California USA under the first Governor Jerry Brown

• EU transmission and siting regulations supported by EU Green Parties have allowed EU ETS wind to develop



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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



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More LAU-Indiana Dunes USA US ladybug wishes you good luck!



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Download Lecture Handout

• My website: www.michaelstavy.com

• User Name: Detroit2009

• Password: Mi1837

• Must use capital D & M



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My Contact Information

• www.michaelstavy.com• [email protected]• 312-832-1631• 432 N Clark St., Suite 204, Chicago, IL 60610 USA 3 March 2009

http://www.michaelstavy.com/

mailto:[email protected]

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

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