California Global Warming Solutions Act of 2006 (AB 32 and SB 1368) and the Electric Energy Industry Presenters: Marcus A. Wood, Stoel Rives LLP John A.

California Global Warming Solutions Act of 2006 (AB 32 and SB 1368) and

the Electric Energy Industry

Presenters:Marcus A. Wood, Stoel Rives LLPJohn A. McKinsey, Stoel Rives LLPThomas R. Wood, Stoel Rives LLPStephen C. Hall, Stoel Rives LLPSeth D. Hilton, Stoel Rives LLP

Thursday, September 21, 2006: 1:00-2:30 p.m. EST

(An Interactive Audio and Web-Based Seminar Hosted by Infocast)

The Basics

Seth D. HiltonStoel Rives LLP

111 Sutter Street, Suite 700San Francisco, CA 94104

[email protected]

The Basics of AB 32

• Background– Passed legislature on August 31, 2006

• Senate vote:23 to 14• Assembly vote:46 to 31

– Requires reduction in greenhouse gas emissions to 1990 levels by 2020

– Will result in a 25% reduction compared with currently projected levels

The Basics of AB 32 (cont.)

• Emissions Covered• Carbon dioxide• Methane• Nitrous oxide• Hydrofluorocarbons• Perfluorocarbons• Sulfur hexafluoride

The Basics of AB 32 (con’t.)

• Sources Covered

Any source or category of source whose emissions are at a level of significance . . . that its participation in the program . . . will enable the state board to effectively reduce greenhouse gas emissions and monitor compliance with the statewide greenhouse gas emissions limit


• Responsible Agencies– California Air Resources Board (“State

Board” or “CARB”)The State Air Resources Board is the state agency charged with monitoring and regulating sources of emissions of greenhouse gases that cause global warming in order to reduce emissions of greenhouse gases


• Responsible Agencies– California Public Utilities Commission

(“CPUC”)

The state board shall consult with the Public Utilities Commission in the development of the regulations as they affect electricity and natural gas providers in order to minimize duplicative or inconsistent regulatory requirements


• Implementation Timelines– Three elements to implementation:

• Reporting• Establishing limit 1990 emissions level• Reductions


• Timelines: Reporting

January 1, 2008: State Board is required to have adopted regulations that require reporting and verification of statewide greenhouse gas emissions


• Timelines: Establishing Limit

January 1, 2008: State Board shall determine what the statewide greenhouse gas emissions level was in 1990


• Timelines: Reductions– Early Action Measures

• June 30, 2007: State Board shall publish and make available to the public a list of discrete early action greenhouse gas emission reduction measures

• January 1, 2010: Early action measures shall be adopted before this date


• Timelines: Reductions– Emission Reduction Measures

• January 1, 2009: State Board must adopt scoping plan for achieving “maximum technologically feasible and cost effective reductions”

• January 1, 2011: State Board shall adopt limits and emission reduction measures by regulation

• January 1, 2012: Greenhouse gas emission regulations shall become operative

The Basics of SB 1368

• Background– Passed legislature on August 31, 2006

• Senate vote: 21 to 15• Assembly vote: 45 to 32

– Imposes greenhouse gas emissions standard on baseload generation

• Emissions Covered– Identical to those covered by AB 32

The Basics of SB 1368 (cont.)

• Responsible Agencies– California Public Utilities Commission

• By February 1, 2007, shall establish emission performance standard for utilities, ESPs, and CCAs

• Ongoing Rulemaking Proceeding 06-04-009 already considering performance standard

The Basics of SB 1368 (cont.)

• Responsible Agencies– California Energy Commission (“CEC”)

• By June 30, 2007, shall establish emission performance standard for local publicly owned electric utilities

Summary of Key Deadlines

Due Date Task AgencyFebruary 1, 2007

Establish emission performance standard for load- serving entities

CPUC

June 30, 2007 1. Publish list of early action emission reduction measures

2. Establish emission performance standard for local publicly owned electric utilities

CARB

CEC

January 1, 2008

1. Adopt reporting and verification regulations2. Determine 1990 baseline level

CARB

January 1, 2009

Approve scoping plan for maximum reductions by 2020

CARB

January 1, 2010

Adopt regulations for early action measures CARB

January 1, 2011

Adopt regulations on emissions limits and reduction measures

CARB

January 1, 2012

Regulations go into effect CARB

Potential Impacts on the Siting of New and Repowered Electric

Generation Facilities

John A. McKinseyStoel Rives LLP

770 L Street, Suite 800Sacramento, CA 95814

[email protected]

Effects of AB 32 and SB 1368

• Reduction Measures and Limits: AB 32 imposes greenhouse gas emission reduction measures that can impact the cost and operation of in-state and out of state electric generation facilities

• Performance Standards: SB 1368 will restrict the ability to sell the output of baseload electric generation facilities to electric service providers unless the facilities comply with to-be-established greenhouse gas emission performance standards

• Both of these provisions will affect development of new generation

Reduction Measures and Limits (AB 32)

• CARB must establish reduction measures and limits effective by January 1, 2012 (early measures effective by January 1, 2010)

• Can be thought of as “direct” regulation of greenhouse gas production

• Applicable to all new generation projects that receive permits after June 1, 2007, except perhaps a lower threshold for small generation sources

Performance Standards (SB 1368)

• CPUC, CEC and CARB will establish greenhouse gas emission performance standards that baseload generation facilities must meet

• Can be thought of as “indirect” regulation of greenhouse gas production

• The first performance standards will take effect February 1, 2007

• Must have greenhouse gas emissions no higher than natural-gas, combined-cycle power plant levels

New Combustion Generation Projects

• New generation must meet both the performance standards to be adopted and the emission reductions and limits

• Natural gas, combined cycle is clearly favored for baseload plants

• Biogas and biomass might have an advantage as well, given the provisions regarding consideration of whole-fuel-cycle net emissions

• Peaking power plants are exempt from performance standards but still must comply with emission reductions and limits

New Combustion Generation ― Uncertainty

• A project permitted between now and 2011 faces undefined restrictions and costs, as the reduction measures and limits will not be established until then

• Any baseload plant that is not a natural-gas, combined- cycle facility faces greater risk and uncertainty

• Financing these projects may prove to be difficult

• Even peaker projects face these potential burdens in the form of reductions in emission allowances

New Combustion Generation ― Uncertainty (cont.)

• Uncertainties– Actual limits to be imposed on CO2

emission rates are not known– Potential that all new CO2 emission

sources could require offsetting reductions of 100%

– Inability to reduce CO2 emissions from power plants may make compliance difficult and expensive

• Bottom line: potential for “chilling” effect on new generation

Repowering Existing Combustion Plants

• Existing power plants face future costs, regulation, and perhaps difficulty in obtaining sufficient emission allowances

• Repowering simple-cycle CGT and steam plants may be attractive– Repowering as combined-cycle CGT should allow

compliance with greenhouse gas performance standards– Reduction from historical greenhouse gas emission levels

might generate value if market-based trading systems recognize the benefits of such reductions

– Reduction from historical greenhouse gas emission levels might facilitate utility compliance with emission reduction requirements

New Generation ― Solar and Wind

• Renewable solar and wind power can benefit several ways

• They produce no greenhouse gases and thus will meet performance standards

• Might be able to obtain greenhouse gas offset credits if CARB adopts market-based programs that recognize wind and solar as “displacing” a certain level of CO2 emission from average combustion levels

New Generation ― Geothermal

• Geothermal emits some CO2 mostly in condensate evaporation in the cooling cycle

• Levels of emission per MWh are probably lower than combustion sources

• Emissions may be further reducible• Geothermal may thus benefit under

CO2 regulation

New Generation ― Biomass

• Biomass, because it combusts higher carbon content fuel, would normally present a significant greenhouse gas issue

• But SB 1368 contains provisions recognizing the net emission, whole-fuel-cycle character of biomass

• In consideration of the position of biomass in the carbon cycle, biomass may be given special treatment that eases its requirement to comply with performance standards and to meet emission reduction requirements and limits

Market-Based Compliance Options

Stephen C. HallStoel Rives LLP

900 SW Fifth Avenue, Suite 2600Portland, OR 97204

[email protected]

Command and Control vs. Market Mechanisms

• Command and Control– Decreased flexibility– Higher costs of compliance– “Leakage”– High cost of compliance increases political resistance to

greenhouse gas emission reduction goals• Market mechanisms (e.g., emissions trading)

– Greater flexibility– Lower cost of compliance– Achieves the same greenhouse gas reductions– Reduces “leakage” problem– Encourages technological innovation – Well-suited to greenhouse gas emissions– Proven track record

AB 32: Market-based Compliance Mechanisms

• AB 32 gives CARB the option to allow market-based compliance mechanisms

– “Market-based compliance mechanism” means either of the following:• A system of market-based declining annual aggregate emissions

limitations for sources or categories of sources that emit greenhouse gases

• Greenhouse gas emissions exchanges, banking, credits, and other transactions, governed by rules and protocols established by the State Board, that result in the same greenhouse gas emission reduction, over the same time period, as direct compliance with a greenhouse gas emission limit or emission reduction measure adopted by the State Board pursuant to this division

• CARB will make its recommendation regarding the use of market-based compliance mechanisms in its scoping plan

•By January 1, 2009, CARB must prepare and approve a scoping plan

•The scoping plan will identify and recommend market-based compliance mechanisms that CARB finds are “necessary or desirable to facilitate the achievementof the maximum feasible and cost-effective reductionsof greenhouse gas emissions by 2020”

Market-based Compliance Mechanisms: Emissions Trading

• Emissions trading is a key market-based compliance mechanism. One form of emissions trading, “cap and trade,” has been used successfully in the US and other countries

• What is “cap and trade”?– The “cap”

• An overall cap on emissions levels is set• The government establishes a certain number of allowances• The allowances (i.e., rights to emit) are distributed or sold to the

sources of such emissions, generally factories and power plants• The greenhouse gas emission sources subject to the cap are

required to surrender an allowance for every unit (e.g., ton) of CO2 they emit

• As annual caps on emissions are phased down, the government will distribute fewer allowances to sources of emissions

– The “trade”• If one entity needs more emission allowances to cover its emissions

in a year, it can purchase (i.e., “trade”) additional allowances from entities that have more allowances than they need

Other Market-Based Compliance Mechanisms: Banking and Offsets• Banking

– Facilities covered by the cap may “bank” unused emission allowances for use in future years

• Offsets– Defined as verified out-of-system reductions in emissions by

noncovered entities– Characteristics of offsets

• Real or additional• Quantifiable• Surplus of other regulatory requirements• Enforceable• Permanent

– Potential offsets • Carbon sequestration (in plants or underground storage)• Verifiable credits from the programs in other states or countries

with capped emissions• Repowering existing electric generation facilities• New clean energy sources

Potential Opportunities for Entities Subject to California’s

Emission Reduction Requirements• Comparative advantage

– In general, if CARB adopts market mechanisms that permit allowance trading, there will be potential opportunities for any company subject to AB 32 that can reduce emissions at a cost lower than the market price for the emission allowances

• Examples of ways to reduce emissions– Technological innovation/retooling– Smart technology– Conservation– Repower existing electric generation facilities– New clean energy sources– Other opportunities?

Some of the Key Matters That Will Be Addressed in Rulemakings

• How would allowances be distributed, e.g., will allowances be given to existing sources of emissions, or will such sources be required to purchase allowances through an auction-type process?

• Will any allowances be reserved for necessary new generation facilities?

• Will emission offset credits be granted for facility repowering or for low- or no-carbon electric generation facilities?

• How will baseline allowances be determined and what will be the baseline year for granting allowances?

Some of the Key Matters That Will Be Addressed in Rulemakings (cont.)

• Will emissions allowances be granted proportionally to baseline use, or will some uses or existing levels of emission efficiency be favored?

• Will in-state electric generation receive favorable treatment compared to out-of-state generation sold into California in the allocation of emission allowances or granting of emission offset credits?

• Other matters?

The Impacts on Ownership, Construction, and Marketing of Power from Electric Generation

Facilities

Marcus A. WoodStoel Rives LLP


[email protected]

Impacts on Existing Electric Generation Facilities

A. Who is impacted?- Investor-owned electric utilities local publicly owned electric utilities

B. What is the requirement?– Meet greenhouse gases emission

performance standard for all baseload generation

Impacts on Existing Electric Generation Facilities (cont.)

Who determines the greenhouse gases emission performance standard?- For investor-owned electric utilities,

CPUC, in consultation with CEC and CARB

- For publicly owned electric utilities, CEC, in consultation with CPUC and CARB


What is exempted?- All combined-cycle, natural-gas power plants that are in operation, or that have a CEC final permit decision to operate, as of June 30,

2007 are deemed in compliance- Certain primarily non-California electric

utilities are exempted - This portion of the statute does not apply to

IPPs making sales of electricity for resale


What are some critical rulemaking determinations?- Which existing facilities constitute baseload generation?- What is the rate of emissions of greenhouse gases for combined-cycle, natural-gas facilities (i.e., what type and vintage of facilities will the standard be based on)?- How will the net emissions standard apply to measure

the net greenhouse gases for biomass, biogas, or landfill gas energy facilities?- Will the standard apply to existing generation on a unit-by- unit basis, or in the aggregate for each owner?


Additional critical rulemaking determinations- When must the utility be in full compliance with the standard?- Who will effectively control the greenhouse gases emission performance standard determinations: CPUC, CEC, or CARB?- If a resource is ineligible for long-term sale to a California utility, will California try to burden or prevent the resource from operating for out-of-state power sales?

Impacts on Future Commitmentsfor Electric Generation

Who is impacted?- Any investor-owned electric utility- Any publicly owned electric utility- Owners of independent electric

generation facilities- Any electric service provider or

community choice aggregator- Out-of-state sellers of power into California

Impacts on Future Commitmentsfor Electric Generation (cont.)

What is required?- All new baseload generation in California must meet the greenhouse gases performance standard- All long-term (5-year or longer) financial

commitments for baseload generation facilities must comply with the greenhouse gases performance standard- All long-term (5-year or longer) financial

commitments for baseload power purchases must comply with the greenhouse gasesperformance standard


Who determines the greenhouse gases emission performance standard?- For investor-owned electric utilities,

electric service providers, and community choice aggregators, CPUC does- For publicly owned electric utilities, CEC does


What is exempted?- Certain primarily non-California utilities (as buyers of electricity, but not as sellers of

electricity for resale in California)- All combined-cycle, natural-gas power plants that are in operation, or that have a CEC final permit decision to operate, as of June 30, 2007 are deemed in compliance- Power contracts less than 5 years in duration- Non-baseload electric generation facilities


What are some critical rulemaking determinations?- Which existing facilities constitute baseload generation?- What is the rate of emissions of greenhouse gases for combined-cycle, natural-gas facilities (i.e., what type and vintage of facilities will the standard be based on)?- Who will effectively control the greenhouse gases emission performance standard determinations: CPUC, CEC or CARB?


Additional critical rulemaking determinations- Does the long-term financial commitment

standard apply to long-term peaking or intermediate power purchases, if sourced from baseload generation?- How will system power purchases be evaluated?- What types of “output” contracts will be treated as delivered from the generation resource so designated?

Impacts on Facilities Located Outside of California

- The greenhouse gases performance standard for existing generation gases applies to ownership of non- California generation by California utilities- The greenhouse gases performance standard applies to long-term financial commitments related to power generated outside of California, for resale in California- Under companion bill AB 32, owners of non-California generation will be required to provide greenhouse gas monitoring and results to California agencies in order to make long-term power sales into California- The legislation may change the relative economics of various interstate transmission projects now under consideration

Who May Benefit from the Performance Standards

- Already-permitted gas-fired, combined-cycle facilities may have greenhouse gases performance standards that are more favorable than are applied to new generation- The market price of electric generation may increase, to the benefit of existing combined-cycle facilities and existing and new low-carbon or no-carbon generation- Some California utilities may need to purchase more

low-carbon or no-carbon baseload resources to meet the greenhouse gases performance standard- The law may increase the value of biomass and biogas generation, by considering the carbon impacts of the

entire fuel cycle

Reporting and Monitoringof Greenhouse Gases

Thomas R. WoodStoel Rives LLP


[email protected]

CARB Monitoring Mandate

• Clear requirement for monitoring and reporting greenhouse gas emissions

• Applies initially to sources “that contribute

the most to statewide emissions”– Suggests subsequent phase-in of lower

emitting sources– All retail sellers of electricity included

• Includes requirement for annual report of greenhouse gas emissions

Who Gets the Data?

• Annual report to CARB– CARB directed to follow California

Climate Action Registry standards and protocols•Protocols likely to be key in establishing rules

– CARB to try to be consistent with international, federal and state greenhouse gas reporting programs

Who Gets the Data? (cont.)

• Record-keeping requirements for source– Source to maintain “comprehensive”

records– Details left to rules

What Is Monitored?

• Must monitor enumerated greenhouse gases– CO2– Methane– Nitrous oxide– Hydrofluorocarbons– Perfluorocarbons– Sulfur hexafluoride – Tracked in CO2 equivalents

• Tons GHG X GWP– Global warming potential

Utility Reporting

• Utilities must include direct and indirect greenhouse gas emissions – Direct: stationary source combustion

• What about mobile source combustion? Off-road engines?

– Indirect: line loss (T&D loss)• What about energy imported and used in

office buildings?• Climate Registry General Reporting protocol

says to include

Utility Reporting (cont.)

• Utilities must include greenouse gases from all electricity consumed in the state– Presumably includes any out-of-

state generation

Non-Utility Reporting

• Unclear to what extent non-utilities must include both direct and indirect greenhouse gas emissions

– Direct: clearly required• Mobile and stationary combustion, process

and fugitives• Includes fugitive refrigerant emissions

Non-Utility Reporting (cont.)

– Indirect: Climate Registry General Reporting Protocol says to include• Do I include my imported power usage? How

do I determine amount/source?– Protocol recognizes purchases of Renewable

Energy Credits (“RECs”)

• Clearly results in double counting

– Protocol indicates you must report all significant emissions• “Significant” = 95% of total

Biomass

• Reporting gets complex for sources such as biomass– Climate Registry protocol says not to report

CO2 emissions as greenhouse gas emissions• Still requires reporting as biogenic emissions

– Still need to report methane and nitrous oxide emissions as greenhouse gases

– If co-fire biomass and natural gas, need to separately account for fossil fuel greenhouse gas emissions

Leakage

• Two flavors:– Equipment leakage

• i.e., refrigerant leaks

– Capital flight• Moving operations out of state

• AB 32 tasks CARB with minimizing “leakage”• Climate registry protocol penalizes company

if ≥10% of direct plus indirect emissions move out of state

• How to monitor?

What Will Likely Be Necessary to Prepare Emissions Report?

• Power plants– Most are subject to part 75 (acid rain)

requirements– Diluent monitors already required

(CO2 or O2)– CO2 can either be measured directly

or estimated from O2

– What about other greenhouse gases?

What Will Likely Be Necessary to Prepare Emissions Report? (cont.)

• Other sources– Requirement for CO2 CEM

installation possible on large sources

– Those with NOx CEMs likely to already have diluent gas CEM

What Will Likely Be Necessary to Prepare Emissions Report? (cont.)

• Climate Registry protocol allows for use of emission factors in lieu of CEMs

How Will Reports Be Submitted?

• Likely to be electronic reporting system– Clean Air Markets Division – Climate Registry

• CARROT (online reporting tool) system already in place

California Global Warming Solutions Act of 2006 (AB 32 and SB 1368) and

the Electric Energy Industry

Presenters:Marcus A. Wood, Stoel Rives LLPJohn A. McKinsey, Stoel Rives LLPThomas R. Wood, Stoel Rives LLPStephen C. Hall, Stoel Rives LLPSeth D. Hilton, Stoel Rives LLP

Thursday, September 21, 2006: 1:00-2:30 p.m. EST

(An Interactive Audio and Web-Based Seminar Hosted by Infocast)

California Global Warming Solutions Act of 2006 (AB 32 and SB 1368) and the Electric Energy Industry Presenters: Marcus A. Wood, Stoel Rives LLP John A.

Documents

basics of ab

basics seth

basics of sb

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infocast slide

date slide

state air resources

sources of emissions