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The future of energy and the environment: Policy implications for electric power
CES FOCUS A STRATEGIC FOCUS ON CUSTOMER CHOICE AND THE ENVIRONMENT FOR THE ELECTRIC UTILITIES SECTOR
The Future of Energy and the Environment: Policy Implications for Electric Power by Michael Jung and Manoj K. Guha
Balancing environmental responsibility while pomoting efficient restructuring of the electric power sector is a @may challenge facing energy companies such as American Electric Power (AEP). These are issues that transcend the confines of business operations or regulatory procedures, belonging instead at the forefront of national (and global) policy on energy and the environment. Aligning effective car-orate environmental stratea with good business sense relies upon a sound policymaking framework, and toward this end, a recent AEP analysis reveabd several unrealistic assumptions and undesirable economic impacts of the emerging direction of environmental policy in the power sector This study also identltfied numerous policy options that could bad to more feasible and sustainable alternatives for an environmen tally conscious, jn-os@rous future.
Vol. 6, No. 4 1999 1066.7936/99/$ seefront
matter 0 1999 Published by Elsevier Science Inc. All rights reserved.
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Environmental Strategy 6 (1999) 355-367 www.corporate-env-strategy.com
CES FOCUS A STRATEGIC FOCUS ON CUSTOMER CHOICE AND THE ENVIRONMENT FOR THE ELECTRIC UTILITIES SECTOR
The Future of Energy and the Environment: Policy Implications for Electric Power by Michael Jung and Manoj K. Guha
T
he passage of the 1970 Clean Air Act began a major reversal of deterioration of national air quality that had arisen from strong economic growth and low environmental priorities during the 1950s and 1960s. Directed by Congress to safeguard the natural environment and protect human health, the Environmental Protection Agency (EPA) has developed an influential control system that has helped bring about remarkable environmental improvements in recent decades. As effective as this system has been, it must, however, continue to evolve as scientific and public policy research ,progress.
From its beginnings, environmental policy has tended to focus on the largest and most visible sources of pollution. The electric power industry has long proved an easy target for environmental control, due to the historically regulated nature of the power sector, the sheer size of centralized power stations, and the magnitude of these facilities’ emissions. Consequently, the electric power sector has produced some of the nation’s most important environmental achievements. Air quality has benefited greatly from power industry efforts such as the dramatic reduction of acid rain precursor emissions, the effective removal of airborne particulate matter, and the rapid development of emission-free nuclear and emerging renewable energy technologies.
Michael Jung is a graduate
Cleaner air has not come without a price, however. Several billions of dollars have already been spent by the power sector to achieve regulatory compliance, contributing to the $1,850 per household Americans have paid annually throughout most of the 1990s for improved air quality.1 Because much of the “low-hanging fruit” has been harvested, this figure will likely grow as ambitious, expensive new regulations emerge; more than $11 billion is projected to be spent over the next five years for new power sector pollution controls required to meet more stringent air quality standards. 2 What’s more, addressing potential global climate change will be an even more formidable challenge, both for corporate strategists and the regulated community in general.
of Yale University with Bachelor degrees in Environmental Studies and East Asian Studies. Following a year in South Korea as a Fulbright Scholar, he began working at American Electric Power as an environmental policy analyst. He plans to return to school at Harvard University for graduate study in energy and environmental issues. Manoj K. Guha is the Manager of Special Projects and Technology Applications at American Electric Power Company. He holds a MS. in Materials Science from the Brown University as well as a B.Sc (Hons.) in Chemistry, a B.A. in Economics and a B.S. in Metallurgical Engineering from the University of Calcutta in India. He is a fellow of the American Association for the Advancement of Science and American Management Association.
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356 1066-7936/99/$
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ENVIRONMENTAL
STRATEGY
matter 0 1999 Published by Elsevier Science Inc. All rights reserved.
The Future of Energy and the Environment
Michael Jung and Manoj K. Guha
The electricpower industry has long proved an easy targetfor environmental control, due to the historicallyregulated nature of the power sect05 the sheersize of centralizedpower stations, and the magnitude of thesefacilities ’ emissions In the past, environmental control costs in the power sector have been absorbed into the regulated mechanisms that have long governed the industry. According to this system, the prudence of investments was decided by public utility commissions and the costs incurred were passed on to captive customers by raising electricity rates. Recent years, however, have witnessed the advent of forces determined to introduce market effciencies into the power industry. How restructuring of the electric power sector will interact with emerging environmental priorities is the subject of much debate. Some argue that it will encourage polluting activities while others trust that free markets will enhance environmental performance. One certainty, however, is that past methods of environmental regulation are falling out of step with the evolving dynamics of the electric power industry. The first step is to document the different priorities faced by the electric power sector.
Conflicting Priorities & Mounting Pressures ,titer decades of strict environmental controls. the “easy” gains from obvious sources of pollution have been made. Still, the emerging direction of current environmental policy continues to target Vol. 6, No. 4 1999
the power industry. Among the myriad issues which energy companies and environmental agencies are currently debating, the top concerns are result from recent efforts to 1) further tighten air quality standards and 2) mitigate the human impact on global climate in the midst of the power industry’s transition to a market-driven system. Air Quality Challenges. Recent actions taken by the current Administration reflect the environmental agenda’s aggressiveness toward the power sector regarding air quality (See Exhibit 1) . New regulations governing various power plant emissions have been promulgated, even as electric utilities are busy complying with recently promulgated rules such as the Acid Rain Program. The emerging initiatives generally supersede existing standards and cover a broad range of issues to form a veritable phalanx of environmental controls for electric powel generation. On its own, the combination of these multiple emerging initiatives presents a sizable challenge for the power sector. The main obstacle is not technical though, for control technologies. albeit expensive, do exist to address most issues of air quality arising from power plant emissions. Rather, the difficulty lies in the timing of implementing these requirements. Many billions of dollars in power plant pollution control investments could potentially be mandated for implementation by 2008. In addition, the economic viability of much of these investments is jeopardized by the current lack of clarity and consensus on policies addressing the human impact on global climate change. The present Administration signed the Kyoto Protocol on November 12, 1998, outlining an environmental agenda intent on tackling the specter of global climate change. However, debate on everything ranging from the very existence of a climate change problem to intricate details of the mechanisms necessary to even begin mitigating the human impact on the greenhouse effect have stalled momentum in developing concrete U.S. climate change policies. Climate
Change
Challenges.
357
The Future of Energy and the Environment
Michael
Jung
and Manoj
K. Guha
Emerging Direction of Environmental Policy Affecting the Power Sector Air Emissions
Issue
Regulatolr Action
Declared Reason for
Electric Power Sector
Compliance
Regulatory Action
Compliance Method
Date
NO, SIP Call
Limit regional transport of NO, to reduce smog in Northeast
Low-NO, burners, catalytic & non-catalytic reduction
2993 1
PM2.5
Reduce fine particulates ambient air to improve respiratory health
Low sulfur coal, gas fuel switch, flue gas desulfurization
2008-2010 2
~-HOW Ozone
Reduce ozone levels in ambient air to improve respiratory health
Similar to NO, SIP Call
2007 2,s
Regional Haze
Improve visibility in national parks & wilderness areas
Similar to PM2.5 and NO, SIP Call
???? eeee 4
New Source ReGw
Bring all existing plants up to new source emission standards
Extensive pollution control retrofits for NO, and Sop
n/a
Air Toxics
Reduce emissions of potential air toxics
Toxic Release Inventory (TRI) reporting & voluntary reductions
1999
Kyoto Protocol
Limit carbon dioxide emissions to counter climate change
Reduce coal-fired power in favor of gas, nuclear, renewables
20082012 5
Standard
Air
Qdty
Climate
Change
in
‘Recent court decision a!elayed submittal date of implementation plans until legality is determined, ultimate compliance date likely to be delayed 2 PM2.5 and ~-HOW ozone standards remanded by court, sent back to IZA for redrafting jr Declared unenforceable by courts 4 Long-term goal is to be achieved in 60 years; schedule for interim compliance step uncertain 5 Ratafication of Kyoto Protocol by U.S. Senate required before GHG reduction program can be established; uncertain whether 2008-2012 compliance period will apply to U.S.
Source: American Electric Power, 1999
Exhibit 1
353
CORPORATE
ENVIRONMENTAL
STRATEGY
Michael
Jung and Manoj K. Goha
This issue concerns the increasing human contribution to the greenhouse gases (GHGs) that trap warmth in the lower atmosphere. Science suggests that rising levels of carbon dioxide, a major GHG, may enhance the greenhouse effect, and a leading human source of carbon dioxide emissions is fossil fuel combustion, which thus implicates the electric power sector worldwide as a culprit in increasing the concentration of atmospheric GHGs. Among the many theoretical consequences from the projected resulting rise in atmospheric temperatures is the possibility of large-scale climatic disturbances. In response to this potential hazard, extensive international negotiations have produced the Kyoto Protocol which requires many of its signatory nations to reduce GHG emission rates to below 1990 levels by a 2008-2012 compliance period, with further reductions expected in the following decades under successor programs. Tapping the power of market mechanisms to reduce the cost of GHG abatement, a number of flexibility instruments have been proposed. Two such systems are 1) international GHG credit trading, where nations could purchase GHG abatement credits from other countries for a lower price than domestic reductions might cost, and 2) the Clean Development Mechanism which would permit developed countries to earn GHG abatement credits for actions that reduce or avoid GHG emissions in developing nations. Such tools would enable economic forces, rather than command-and-control systems, to guide global GHG emissions reductions down a path of higher economic efficiency. However, the short time frame by which GHG abatement must occur and the long lead time for the major infrastructure changes that must take place to accomplish Kyoto reductions have many questioning the usefulness of such mechanisms. Considering the half-century that has been invested into forging the World Trade Organization, it is difficult to imagine full maturation of flexibility mechanisms by the 2008-2012 compliance period. Furthermore, lack of participation from populous, rapidly developing nations such as China and India diminishes hopes that the Kyoto Protocol would Vol. 6, No. 4 1999
The Future of Energy and the Environment
ultimately deter potential change.
human-induced
climate
In the absence of effective GHG trading institutions and developing nation cooperation, the burden of GHG reductions will fall heavily on the individual industrialized nations. In the U.S., this would require the electric power sector to undergo a rapid, massive change in the fuel mix for power generation, one that would prove enormously difficult to meet by the 2008-2012 deadline. Power plants across the nation already retrofitted for air quality compliance in the years preceding climate change action could suddenly be rendered obsolete, and these generating facilities would have to be replaced quickly at great cost. This effectively allows environmental policy to dictate the develop ment of the national energy system and erases any economic efficiency savings to be gained from electric power industry restructuring. R&r&a&g Challenges. Sweeping changes are transforming the power sector from a staid industry into a dynamic market. Once composed of vertically integrated monopolies permitted by public utilities commissions to invest massive amounts of capital to construct the national electricity infrastructure in exchange for the obligation to serve all customers at the lowest cost, the electric power industry now stands at the crossroads of restructuring. Driven by new technologies and the desire to achieve lower costs, public policy has engendered a world where integration is giving way to “unbundling”, where the functions of electricity generation and transmission/distribution are separated, and where defined service territories are being erased by the advent of inter-system energy trading. Utilities have also been quick to capitalize on large-scale trends, joining in the globalization of the international economy and exploring the possibilities of internet technologies. In short, the power sector is eagerly awakening from the slumber of regulated monopoly and jumping headfirst into the dizzying pace of the competitive business world. The unifying theme in the turbulence of restructuring is that the discipline of the market 359
The Future of Energy and the Environment
will enhance economic efficiency by introducing new profit incentives into an industry long driven by regulatory requirements. The business of electric power generation is a highly capital-intensive one, representing more than $350 billion in the U.S. alone. 3 While the transition from guaranteed recovery of power plant investments to market-driven deployment of power generation resources presents many opportunities for improving the efficiency of the industry, the growing aversion to capital risk that may result from restructuring could reduce private sector investment in long-term energy R&D, narrowing future energy options. Furthermore, the high degree of uncertainty in the current policy environment introduces an increased likelihood of inefficient decision-making about capital investments in long-lived power plants (50-65 year projected operating lives). The conflicting messages sent out by air quality improvement goals and climate change mitigation priorities will challenge the power generation industry’s ability to restructure efficiently.
The Scenarios: Three Key Pathways As the scope of environmental regulation has increased, it has also become more influential in determining the shape of the national energy system. As a tool for understanding the strategic implications of various environmental policy outcomes for the electric power generation sector, a number of scenarios depicting possible futures were developed. The cases are straightforward in design and serve primarily to illustrate potential environmental policy impacts on fuel diversity in electric power generation. The first scenario takes the Energy Information Administration’s (EIA) Annual Energy Outlook 1999 forecast, which is based on results from the EIA National Energy Modeling System (NEMS), and incorporates assumptions on increased energy conservation. It also extends projections beyond the 2020 parameter of the NEMS model out to the year 2050 in order to capture the longevity of power generation capital assets. 360
Michael
Jung and Manoj K. Guha
Next, an upper limit on carbon dioxide emissions equivalent to the levels agreed to in the Kyoto Protocol (1990 levels minus seven percent) is implemented in the electricity supply sector. This is a conservative assumption, as many other studies indicate that the power sector would carry a disproportionate share of GHG reduction obligations. GHG emission limits are the determining factor in the choice of fuels used to generate electric power. Coal contains the highest carbon content and is affected first as limits are imposed. Oil is second in carbon intensity, and natural gas presents the most favorable GHG profile of the fossil fuels, emitting roughly half as much carbon dioxide as coal when used in combined cycle operation. Natural gas combined cycle (NGCC) refers to a combination of a high efficiency gas turbine, similar to a jet engine, followed by a heat recovery steam turbine cycle which is commonly found in coal-fired power plants. Nuclear, hydroelectric, and non-hydroelectric renewable facilities emit no direct or net GHGs. Thus, the alternative futures examined here demonstrate the maximum shares of various fossil fuels that could be utilized for electric power generation in a greenhouse gas-constrained world. The major variables in this study that affect the amount and types of fossil fuels deployed are: 1. the future viability of nuclear power 2. the possibility of international permit trading
carbon dioxide
3. the timing of air quality and GHG reduction requirements.
Cruise Control Near-term air quality regulations take effect, but consensus on long-term climate change fails to materialize. Despite continued improvements in end-use energy efficiency, overall demand for electric power (and therefore, carbon dioxide emissions) in the “Cruise Control” scenario is expected to rise in the absence of climate change regulations CORPORATE ENVIRONMENTAL STRATEGY
Michael
The Future of Energy and the Environment
Jung and Manoj K. Guha
Some Power Industry Jargon Electric power supply industry includes baseload, intermediate, and peaking power. Demand for electricity varies throughout the day, typically reaching its highest points during weekday afternoons. The electric energy that satisfies the steady minimum daily demand is called baseloud power and is usually provided by large, coal-fired, hydroelectric, and nuclear facilities due to their low marginal costs and high reliability. As demand increases, utilities next turn to intermediate power, supplied by either small coal or natural gas facilities which are more expensive to operate than baseload plants. At times of highest demand, peaking power is activated from sources such as gas turbines or pumped storage hydroelectric dams. Intermittent power refers to generation that cannot be activated on command and usually refers to renewable energy from solar and wind sources. Viable storage technologies for intermittent sources do not currently exist, making them an unreliable source of power for mainstream applications. 4
Typical Summer Weekly Load _. -. _.
sou
-’
-----jc
Peaking-__
-
._- . -.__ ^_
I. b* A nerican Electric Power, 1999
(See Exhibit 3). This trend is driven by low energy prices, increasing electrification in the modern service economy, rising use of industrial application of electrotechnologies, and the overall strength of the U.S. economy. Due to low fuel costs, restrictions on the use of petroleum and natural gas during the 1970’s energy crises, and the long operating lives of generating Vol. 6, No. 4 1999
. .-..
units, coal provides over half of the nation’s electricity today, with nuclear coming in second with about twenty percent market share. High levels of existing capital investment, assured fuel supply, and impressive reliability suggest that coal will continue to leverage its strengths to remain a major source of baseload power generation for decades to come. However, few coal-fired new plants will be built due to increasing aversion to capital risk in a restruc361
The Future of Energy and the Environment
Michael
Jung and Manoj K. Guha
Cruise Control: Increasing U.S. Electric Power Generation and CO* Emissions
7ow. 3500 *
m
6000.
0
Oil
0@ .3000
8
-
-TotalCOz
Exhibit 3
Deep Green: Net COOEmissions from Power Generation 7% Below 1990 Levels by 2010
woo
E 4ooo B f 8
(I-c
woo 2000
m
Renewable
m
Nuclear
0
Gas
m
coal
-
-Total
CO2
SarCe: 16952ooo. EIA AEOW,gB iQCWXX0. AEP Pmjeclim
Y88r
Exhibit 4
362
CORPORATE ENVIRONMENTAL STRATEGY
Michael
The Future of Energy and the Environment
Jung and Manoj K. Guha
tured industry uncertainties.
and
environmental
regulatory
Instead, the majority of new growth in the generation sector is expected to be fueled by natural gas, primarily in peaking and intermediate applications, but also contributing to baseload power. Technological advances coupled with changes in industry regulation have unleashed new potential for natural gas in the power sector, driven by falling fuel prices, favorable capital costs, short construction times, high efficiency, and environmentally desirable attributes. Hampered by lack of R&D and negative public opinion, nuclear generation declines steadily as plant licenses expire and competitive pressures increase. Hydropower remains fairly constant due to low marginal costs, but environmental concerns prevent new facility construction. Renewables enjoy continued support from the government and consequently exhibit strong growth. Output increases by nearly sixfold between 1995 and 2050, but renewables still account for only a small share of the total market, restrained by high capital costs and lack of energy storage technologies for intermittent generation.
Deep Green The “Deep Green” scenario represents the outcome of various policy decisions, foremost of which are carbon dioxide emission reductions mandated by the Kyoto Protocol by 2008-2012 and near-term air quality regulations between 2003-2010 (See Exhibit 4). The short time frame for GHG reductions does not provide sufficient time for GHG trading and the Clean Development Mechanism to develop, forcing the U.S. to undertake massive domestic GHG reductions. We make the conserva tive assumptions that the power sector will mirror the national commitment and reduce carbon dioxide emissions to seven percent below 1990 levels by 2010. We also assume that companies can foresee the GHG reduction requirements of Kyoto prior to committing to approaches for air quality compliance. Vol. 6, No. 4 1999
In this future, environmental priorities command the direction of national energy policy. Air quality issues requiring extensive control technology investments just prior to the Kyoto Protocol (and the steep carbon dioxide reduction requirements that follow) lead to premature retirement of billions of dollars of operational coal-fired generation assets across the nation. Environmentally aggressive public opinion calls for the costly phase-out of nuclear power by retiring facilities as licenses expire and preventing new nuclear plant construction. Hydroelectric power generation also declines by fifty percent due to environmental opposition. High efficiency, low capital cost, and low carbon intensity of natural gas-fired generation forces the fuel to make up for both lost coal, nuclear, and hydroelectric power to become the dominant source of electric power generation. This outcome demands unprecedented, perhaps even impossible, activity in the infrastructures required to support natural gas power generation, such as turbine manufacturing, gas exploration and production, and pipeline expansion. This explosion of investment in natural gas creates many undesirable outcomes. It will severely test the limits of an already-growing industry, challenge reliability of the electricity supply system, commit the nation to one fuel with uncertain long-term reserves, and lock in a single generation of electric supply technology rather than allowing for more gradual phasing-in of an array of generating options. There are long-term implications for this nearterm solution. The perceived urgency of the environmental agenda and the primacy of natural gas to meet near-term goals unfortunately also hinder research, development, and deployment of cuttingedge energy technologies, such as renewable, advanced nuclear, clean coal, and fuel cell systems. Consequently, the U.S. electric energy system will remain dependent on fossil fuels for the next several decades, due to the longevity of power plants. Furthermore, despite these herculean efforts to control GHG emissions from the power sector, this reliance on a single generation of natural gas technologies will cause GHG emissions from electric 363
The Future of Energy and the Environment
Michael
Jung and Manoj K. Guha
Good Luck: Net U.S. COP Emissions from Power Generation 7% Below 1990 Levels by 2010 with Nuclear and CO* Trading (250 MMT/year) 7oo0,
3sw m
6cw.
--~_.-__--
.3ow
mttydm
m
Renewable
m
Nuclear
25ooc P
1995
2ooo
2010
2020
2030
2040
Oil
2050
Year
Exhibit 5
power generation to begin to rise again from 1990 minus seven percent levels by 2050. In short, while near-term targets might be met, long-term environmental and economic sustainability remains elusive.
Good Luck optimistically The “Good Luck” scenario demonstrates the simultaneous outcome of several policy synergies (See Exhibit 5). It is envisioned that good fortune allows an efficient international market for carbon emissions credits to arise through instruments such as global greenhouse gas allowance trading and/or institutions that permit wealthier nations to earn credit for supporting environmentally sustainable infrastructure in developing countries (i.e. Kyoto Protocol’s Clean Development Mechanism). Such developments will enable the U.S. to reduce its domestic power sector reduction obligations. Here, we estimate some 250 million metric tons (MMT) of carbon dioxide credits to be purchased annually for price lower than the cost of domestic abatement. This development 364
effectively raises the power sector’s allowable carbon dioxide emissions from 1649 to 1899 MMT/year. At the same time, nuclear power revives its public credibility by promoting its environmentally desirable attributes and somehow manages to overcome its regulatory problems, sparking a renaissance driven by new nuclear research and development. Nuclear power thus maintains a significant, non-GHGemitting presence in the fuel mix at around twenty percent of total generation, resulting in a nearly twofold increase in generation output between 2000 to 2050. Coal generation steadily declines in energy output, but because of low fuel costs and technical innovation, this fuel still provides a major contribution to baseload generation. Pollution controls installed for near-term air quality regulations allow many existing facilities to reach the end of their operating lives, and continued research and development efforts bring about highly advanced technologies such as carbon capture by 2040 that subCORPORATE ENVIRONMENTAL STRATEGY
Michael
The Future of Energy and the Environment
Jung and Manoj K. Guha
stantially
sector with newer, more environmentally sustainable technologies in an economically efficient manner (See Exhibit 6).
reduce the potential air quality and climate change impacts of coal-derived energy. Natural gas remains a clear winner in this scenario, experiencing impressive growth rates and taking up a larger share of the electricity supply fuel mix. The less dramatic changes in the fuel mix also encourage investment in renewable energy. By 2050, it is highly possible that breakthroughs (not shown) in renewables and/or energy storage technologies will have emerged that would further strengthen the growing positions of solar, wind, and biomass technologies in the power generation market.
The impact of atmospheric carbon dioxide on the greenhouse effect is one of total stock, rather than annual rates of emission. A ten-year delay in GHG reductions requirements, then, has only a minor effect on what is generally recognized to be an issue to be understood in terms of decades, even centuries. 5 More important is the development of effective institutions and broad-based agreements that will ensure long-term commitment to climate change mitigation.
Turnover The time gained by delaying GHG reductions allows for larger and more sustained investment in currently underfunded, yet critical energy R&D, demonstration, and deployment. ti This in turn enables advances that render nuclear power competitive through relicensing and new designs, enhances the penetration of renewable technologies through innovation, and ensures continued
In Turnover, implementation of near-term domestic air quality requirements occur, a ten-year delay in global GHG reduction goals is implemented, and alongside environmental goals, priority is also given to allowing forces unleashed by the restructured market to retire older, high-environmental-impact generating facilities in the power
Turnover: Net U.S. COOEmissions from Power Generation 7% Below 1990 by 2020 with Nuclear and COP Trading (250 MMT/yr) 7wnl
( 3500
zoo0
2010
2ozo
2040
2030
m
Oil
m
Renewable
2500-c b
m
Nuclear
zooas
-
Gas
1 1500 Q UJ
m
Coal
_ . _ Total coz
8 ‘WC2
_
-Netcop
2050
Year Exhibit
Vol. 6, No. 4 1999
6
365
The Future of Energy and the Environment
progress in developing less environmentally intrusive uses for generating power from fossil fuels (for example, advanced turbines, gasification, fuel cell technologies). Alongside R&D will come the steady retirement of existing fossil fuel power generation facilities. By allowing these aging plants to recover the costs of near-term air pollution controls and then phasing them out in favor of “greener” technologies according to market forces, reliable supply of electricity is ensured and economic efficiency of a restructured industry will not be compromised. Furthermore, an array of several different sustainable energy technologies will compete for market penetration over a longer period of time than would be the case without a ten-year extension of GHG reduction requirements. In addition, these extra years increase the likelihood of the successful emergence of instruments such as international GHG emissions trading and the Clean Development Mechanism. Such systems would serve as markets for emissions reductions, reducing the costs of compliance by more efficiently allocating capital than command-and-control techniques would dictate while achieving identical overall reductions. Here, the low energy-intensity of the U.S. economy makes it more justifiable to purchase some 250 million metric tons (MMT) of GHG credits annually on the world market than to pursue domestic reductions. Ten more years will no doubt improve the level of scientific understanding about global climate and other environmental concerns, equipping policymakers with better information. Perhaps most importantly, this valuable time also will permit developing nations, especially China and India, to reach a level of prosperity, knowledge, and global integration where they will become willing to cooperate in international efforts to address climate change. The ultimate outcome of the climate change issue will hinge on the elusive cooperation of the developing world, led by these two nations.
Facing the Future The success of electricity 366
sector restructuring
Michael
Jung and Manoj K. Guha
depends on the extent to which the power industry is endowed with choices that will optimize the utilization of existing (and future) assets through market forces. However, attractive the prospect of power sector economic efficiency might be, though, policymakers must recognize that the existing infrastructure consists mainly of large, capital-intensive facilities with long projected operating lives (i.e. fifty to sixty years). These facilities’ origins lie in an era of rapid growth for electric power followed by a world shaken by the energy crises of the 1970s. Their service careers have been driven by a regulatory system primarily interested in ensuring reliability of and access to electricity at the lowest cost. Charting a new course for the national fleet of power plants is akin to steering a large seaborne transport vessel. Deliberate, gradual change, rather than an abrupt shift in direction, will ultimately prove more safe and successful at changing course. In this case, the desired destination of the power generation infrastructure is a market-driven, environmentally benign future. However, the method of reaching this target can take any number of paths. The first scenario, “Cruise Control”, the electric power industry will be enabled to develop into an efficient market, and departure from regulated allocation of capital will enable economically optimized turnover of generating technologies. However, absence of climate change policy may fail to adequately address some environmental concerns. Without steps taken to hedge uncertainty about the human influence on the global climate, long-term environmental risks could be increased. In short, though comfortable, we may be cruising into troubled waters. At the other extreme is the “Deep Green” scenario, which represents the direction advocated by many in the environmental community. Such a plan would heavily penalize existing generation assets for their environmental attributes and will force the industry to embark on a massive, disruptive change in fuel mix over the coming decade. This will likely bring about many negative consequences, sacrificing much of the economic efficiencies that stand to be gained from restructuring, CORPORATE ENVIRONMENTAL STRATEGY
Michael
The Future of Energy and the Environment
Jung and Manoj K. Guha
discouraging long-term energy R&D, and committing the nation to a single generation of energy technologies. And despite taking such strong medicine in the name of environmental salvation, little certainty is gained that these far-reaching domestic policies will succeed in averting potential global climate change. Such a course of action equates to turning the ship too quickly, risking unforeseen hazards and creating unnecessary structural stresses in a bold effort to avoid a theorized collision. Fortunately, more positive courses of action also emerged from this AEP study, ones that can help break the current impasse and initiate progress toward an agreeable energy & environmental policy outcome. In this future, both near- and longterm environmental concerns are addressed in a coordinated fashion while also allowing for the development of an efficient, marketdriven electric power sector. The ship does not veer violently off course, nor will it steam ahead blindly. Instead, prudent decision-making keeps its hands firmly on the wheel, gently steering the ship away from distant shadows, yet always ready to correct course as better information becomes available.
(fossil, renewable, nuclear, and not-yet-imagined) encouraging development of a liberalized, market-driven electric power sector
??
facilitating turnover of existing power generation assets at the end of their economic lives in favor of a range of newer electricity technologies with lesser environmental impacts ??
Good corporate environmental strategy should amount to more than just compliance. AEP’s position at the intersection between environmental policy and electric power restructuring has led the company to become involved in the policy debate. By identifying risks in emerging policy directions and developing measures that will address these issues, AEP seeks to promote economic efficiency in the restructuring electric power sector while protecting the local and global environment for ourselves and for our posterity. %
Endnotes 1. David Schoenbrod,
Time jbr the Federal Environmental
Aristocracy to Give Up Power. Center
Key components of a workable, reasonable plan can be found in the “Good Luck” and “Turnover” scenarios. They include:
American Business, 1998. 2. Dennis
Wamsted,
achieving sustained, cumulative near-term reductions of pollutants to improve air quality for action
in
?? creating successful systems to foster the cooperation of developing nations
?? establishing institutions such as GHG trading and the Clean Development Mechanism to encourage economically efficient emissions reductions
securing large-scale, sustained public/private investment in climate change research and R&D for the development and deployment of a range of environmentally sustainable energy technologies ??
Vol. 6, No. 4 1999
Solutions
to Clean Air
46. 3. Energy Information
?? developing effective incentives reducing GHG emissions
“Cleaner
Enron Exchange, Summer 1999, Vol. 7, pp.
Compliance,” ??
for the Study of
of Major
Administration,
U.S. Investor-Owned
Financial Statistics
Utilities 1996, December,
1997. 4. John
Turner,
“A Realizable
Renewable
Energy
Future,” Science, Vol. 285, pp. 687-689. 5. William
Pizer, Choosing Price or Quantity Controls jbr
Greenhouse
Guss,
Resources
for the Future,
Climate
Issues Brief No. 17, July, 1999. 6. President’s
Technology
Committee
of Advisors on Science and
(PCAST), Powerful Partnerships:
Role in International
Cooperation
The Federal
on Energy Innovation,
June, 1999. 367
The Future of Energy and the Environment: Policy Implications for Electric Power by Michael Jung and Manoj K. Guha
Balancing environmental responsibility while pomoting efficient restructuring of the electric power sector is a @may challenge facing energy companies such as American Electric Power (AEP). These are issues that transcend the confines of business operations or regulatory procedures, belonging instead at the forefront of national (and global) policy on energy and the environment. Aligning effective car-orate environmental stratea with good business sense relies upon a sound policymaking framework, and toward this end, a recent AEP analysis reveabd several unrealistic assumptions and undesirable economic impacts of the emerging direction of environmental policy in the power sector This study also identltfied numerous policy options that could bad to more feasible and sustainable alternatives for an environmen tally conscious, jn-os@rous future.
Vol. 6, No. 4 1999 1066.7936/99/$ seefront
matter 0 1999 Published by Elsevier Science Inc. All rights reserved.
Corporate
Environmental Strategy 6 (1999) 355-367 www.corporate-env-strategy.com
CES FOCUS A STRATEGIC FOCUS ON CUSTOMER CHOICE AND THE ENVIRONMENT FOR THE ELECTRIC UTILITIES SECTOR
The Future of Energy and the Environment: Policy Implications for Electric Power by Michael Jung and Manoj K. Guha
T
he passage of the 1970 Clean Air Act began a major reversal of deterioration of national air quality that had arisen from strong economic growth and low environmental priorities during the 1950s and 1960s. Directed by Congress to safeguard the natural environment and protect human health, the Environmental Protection Agency (EPA) has developed an influential control system that has helped bring about remarkable environmental improvements in recent decades. As effective as this system has been, it must, however, continue to evolve as scientific and public policy research ,progress.
From its beginnings, environmental policy has tended to focus on the largest and most visible sources of pollution. The electric power industry has long proved an easy target for environmental control, due to the historically regulated nature of the power sector, the sheer size of centralized power stations, and the magnitude of these facilities’ emissions. Consequently, the electric power sector has produced some of the nation’s most important environmental achievements. Air quality has benefited greatly from power industry efforts such as the dramatic reduction of acid rain precursor emissions, the effective removal of airborne particulate matter, and the rapid development of emission-free nuclear and emerging renewable energy technologies.
Michael Jung is a graduate
Cleaner air has not come without a price, however. Several billions of dollars have already been spent by the power sector to achieve regulatory compliance, contributing to the $1,850 per household Americans have paid annually throughout most of the 1990s for improved air quality.1 Because much of the “low-hanging fruit” has been harvested, this figure will likely grow as ambitious, expensive new regulations emerge; more than $11 billion is projected to be spent over the next five years for new power sector pollution controls required to meet more stringent air quality standards. 2 What’s more, addressing potential global climate change will be an even more formidable challenge, both for corporate strategists and the regulated community in general.
of Yale University with Bachelor degrees in Environmental Studies and East Asian Studies. Following a year in South Korea as a Fulbright Scholar, he began working at American Electric Power as an environmental policy analyst. He plans to return to school at Harvard University for graduate study in energy and environmental issues. Manoj K. Guha is the Manager of Special Projects and Technology Applications at American Electric Power Company. He holds a MS. in Materials Science from the Brown University as well as a B.Sc (Hons.) in Chemistry, a B.A. in Economics and a B.S. in Metallurgical Engineering from the University of Calcutta in India. He is a fellow of the American Association for the Advancement of Science and American Management Association.
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matter 0 1999 Published by Elsevier Science Inc. All rights reserved.
The Future of Energy and the Environment
Michael Jung and Manoj K. Guha
The electricpower industry has long proved an easy targetfor environmental control, due to the historicallyregulated nature of the power sect05 the sheersize of centralizedpower stations, and the magnitude of thesefacilities ’ emissions In the past, environmental control costs in the power sector have been absorbed into the regulated mechanisms that have long governed the industry. According to this system, the prudence of investments was decided by public utility commissions and the costs incurred were passed on to captive customers by raising electricity rates. Recent years, however, have witnessed the advent of forces determined to introduce market effciencies into the power industry. How restructuring of the electric power sector will interact with emerging environmental priorities is the subject of much debate. Some argue that it will encourage polluting activities while others trust that free markets will enhance environmental performance. One certainty, however, is that past methods of environmental regulation are falling out of step with the evolving dynamics of the electric power industry. The first step is to document the different priorities faced by the electric power sector.
Conflicting Priorities & Mounting Pressures ,titer decades of strict environmental controls. the “easy” gains from obvious sources of pollution have been made. Still, the emerging direction of current environmental policy continues to target Vol. 6, No. 4 1999
the power industry. Among the myriad issues which energy companies and environmental agencies are currently debating, the top concerns are result from recent efforts to 1) further tighten air quality standards and 2) mitigate the human impact on global climate in the midst of the power industry’s transition to a market-driven system. Air Quality Challenges. Recent actions taken by the current Administration reflect the environmental agenda’s aggressiveness toward the power sector regarding air quality (See Exhibit 1) . New regulations governing various power plant emissions have been promulgated, even as electric utilities are busy complying with recently promulgated rules such as the Acid Rain Program. The emerging initiatives generally supersede existing standards and cover a broad range of issues to form a veritable phalanx of environmental controls for electric powel generation. On its own, the combination of these multiple emerging initiatives presents a sizable challenge for the power sector. The main obstacle is not technical though, for control technologies. albeit expensive, do exist to address most issues of air quality arising from power plant emissions. Rather, the difficulty lies in the timing of implementing these requirements. Many billions of dollars in power plant pollution control investments could potentially be mandated for implementation by 2008. In addition, the economic viability of much of these investments is jeopardized by the current lack of clarity and consensus on policies addressing the human impact on global climate change. The present Administration signed the Kyoto Protocol on November 12, 1998, outlining an environmental agenda intent on tackling the specter of global climate change. However, debate on everything ranging from the very existence of a climate change problem to intricate details of the mechanisms necessary to even begin mitigating the human impact on the greenhouse effect have stalled momentum in developing concrete U.S. climate change policies. Climate
Change
Challenges.
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The Future of Energy and the Environment
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Jung
and Manoj
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Emerging Direction of Environmental Policy Affecting the Power Sector Air Emissions
Issue
Regulatolr Action
Declared Reason for
Electric Power Sector
Compliance
Regulatory Action
Compliance Method
Date
NO, SIP Call
Limit regional transport of NO, to reduce smog in Northeast
Low-NO, burners, catalytic & non-catalytic reduction
2993 1
PM2.5
Reduce fine particulates ambient air to improve respiratory health
Low sulfur coal, gas fuel switch, flue gas desulfurization
2008-2010 2
~-HOW Ozone
Reduce ozone levels in ambient air to improve respiratory health
Similar to NO, SIP Call
2007 2,s
Regional Haze
Improve visibility in national parks & wilderness areas
Similar to PM2.5 and NO, SIP Call
???? eeee 4
New Source ReGw
Bring all existing plants up to new source emission standards
Extensive pollution control retrofits for NO, and Sop
n/a
Air Toxics
Reduce emissions of potential air toxics
Toxic Release Inventory (TRI) reporting & voluntary reductions
1999
Kyoto Protocol
Limit carbon dioxide emissions to counter climate change
Reduce coal-fired power in favor of gas, nuclear, renewables
20082012 5
Standard
Air
Qdty
Climate
Change
in
‘Recent court decision a!elayed submittal date of implementation plans until legality is determined, ultimate compliance date likely to be delayed 2 PM2.5 and ~-HOW ozone standards remanded by court, sent back to IZA for redrafting jr Declared unenforceable by courts 4 Long-term goal is to be achieved in 60 years; schedule for interim compliance step uncertain 5 Ratafication of Kyoto Protocol by U.S. Senate required before GHG reduction program can be established; uncertain whether 2008-2012 compliance period will apply to U.S.
Source: American Electric Power, 1999
Exhibit 1
353
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ENVIRONMENTAL
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Michael
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This issue concerns the increasing human contribution to the greenhouse gases (GHGs) that trap warmth in the lower atmosphere. Science suggests that rising levels of carbon dioxide, a major GHG, may enhance the greenhouse effect, and a leading human source of carbon dioxide emissions is fossil fuel combustion, which thus implicates the electric power sector worldwide as a culprit in increasing the concentration of atmospheric GHGs. Among the many theoretical consequences from the projected resulting rise in atmospheric temperatures is the possibility of large-scale climatic disturbances. In response to this potential hazard, extensive international negotiations have produced the Kyoto Protocol which requires many of its signatory nations to reduce GHG emission rates to below 1990 levels by a 2008-2012 compliance period, with further reductions expected in the following decades under successor programs. Tapping the power of market mechanisms to reduce the cost of GHG abatement, a number of flexibility instruments have been proposed. Two such systems are 1) international GHG credit trading, where nations could purchase GHG abatement credits from other countries for a lower price than domestic reductions might cost, and 2) the Clean Development Mechanism which would permit developed countries to earn GHG abatement credits for actions that reduce or avoid GHG emissions in developing nations. Such tools would enable economic forces, rather than command-and-control systems, to guide global GHG emissions reductions down a path of higher economic efficiency. However, the short time frame by which GHG abatement must occur and the long lead time for the major infrastructure changes that must take place to accomplish Kyoto reductions have many questioning the usefulness of such mechanisms. Considering the half-century that has been invested into forging the World Trade Organization, it is difficult to imagine full maturation of flexibility mechanisms by the 2008-2012 compliance period. Furthermore, lack of participation from populous, rapidly developing nations such as China and India diminishes hopes that the Kyoto Protocol would Vol. 6, No. 4 1999
The Future of Energy and the Environment
ultimately deter potential change.
human-induced
climate
In the absence of effective GHG trading institutions and developing nation cooperation, the burden of GHG reductions will fall heavily on the individual industrialized nations. In the U.S., this would require the electric power sector to undergo a rapid, massive change in the fuel mix for power generation, one that would prove enormously difficult to meet by the 2008-2012 deadline. Power plants across the nation already retrofitted for air quality compliance in the years preceding climate change action could suddenly be rendered obsolete, and these generating facilities would have to be replaced quickly at great cost. This effectively allows environmental policy to dictate the develop ment of the national energy system and erases any economic efficiency savings to be gained from electric power industry restructuring. R&r&a&g Challenges. Sweeping changes are transforming the power sector from a staid industry into a dynamic market. Once composed of vertically integrated monopolies permitted by public utilities commissions to invest massive amounts of capital to construct the national electricity infrastructure in exchange for the obligation to serve all customers at the lowest cost, the electric power industry now stands at the crossroads of restructuring. Driven by new technologies and the desire to achieve lower costs, public policy has engendered a world where integration is giving way to “unbundling”, where the functions of electricity generation and transmission/distribution are separated, and where defined service territories are being erased by the advent of inter-system energy trading. Utilities have also been quick to capitalize on large-scale trends, joining in the globalization of the international economy and exploring the possibilities of internet technologies. In short, the power sector is eagerly awakening from the slumber of regulated monopoly and jumping headfirst into the dizzying pace of the competitive business world. The unifying theme in the turbulence of restructuring is that the discipline of the market 359
The Future of Energy and the Environment
will enhance economic efficiency by introducing new profit incentives into an industry long driven by regulatory requirements. The business of electric power generation is a highly capital-intensive one, representing more than $350 billion in the U.S. alone. 3 While the transition from guaranteed recovery of power plant investments to market-driven deployment of power generation resources presents many opportunities for improving the efficiency of the industry, the growing aversion to capital risk that may result from restructuring could reduce private sector investment in long-term energy R&D, narrowing future energy options. Furthermore, the high degree of uncertainty in the current policy environment introduces an increased likelihood of inefficient decision-making about capital investments in long-lived power plants (50-65 year projected operating lives). The conflicting messages sent out by air quality improvement goals and climate change mitigation priorities will challenge the power generation industry’s ability to restructure efficiently.
The Scenarios: Three Key Pathways As the scope of environmental regulation has increased, it has also become more influential in determining the shape of the national energy system. As a tool for understanding the strategic implications of various environmental policy outcomes for the electric power generation sector, a number of scenarios depicting possible futures were developed. The cases are straightforward in design and serve primarily to illustrate potential environmental policy impacts on fuel diversity in electric power generation. The first scenario takes the Energy Information Administration’s (EIA) Annual Energy Outlook 1999 forecast, which is based on results from the EIA National Energy Modeling System (NEMS), and incorporates assumptions on increased energy conservation. It also extends projections beyond the 2020 parameter of the NEMS model out to the year 2050 in order to capture the longevity of power generation capital assets. 360
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Next, an upper limit on carbon dioxide emissions equivalent to the levels agreed to in the Kyoto Protocol (1990 levels minus seven percent) is implemented in the electricity supply sector. This is a conservative assumption, as many other studies indicate that the power sector would carry a disproportionate share of GHG reduction obligations. GHG emission limits are the determining factor in the choice of fuels used to generate electric power. Coal contains the highest carbon content and is affected first as limits are imposed. Oil is second in carbon intensity, and natural gas presents the most favorable GHG profile of the fossil fuels, emitting roughly half as much carbon dioxide as coal when used in combined cycle operation. Natural gas combined cycle (NGCC) refers to a combination of a high efficiency gas turbine, similar to a jet engine, followed by a heat recovery steam turbine cycle which is commonly found in coal-fired power plants. Nuclear, hydroelectric, and non-hydroelectric renewable facilities emit no direct or net GHGs. Thus, the alternative futures examined here demonstrate the maximum shares of various fossil fuels that could be utilized for electric power generation in a greenhouse gas-constrained world. The major variables in this study that affect the amount and types of fossil fuels deployed are: 1. the future viability of nuclear power 2. the possibility of international permit trading
carbon dioxide
3. the timing of air quality and GHG reduction requirements.
Cruise Control Near-term air quality regulations take effect, but consensus on long-term climate change fails to materialize. Despite continued improvements in end-use energy efficiency, overall demand for electric power (and therefore, carbon dioxide emissions) in the “Cruise Control” scenario is expected to rise in the absence of climate change regulations CORPORATE ENVIRONMENTAL STRATEGY
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The Future of Energy and the Environment
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Some Power Industry Jargon Electric power supply industry includes baseload, intermediate, and peaking power. Demand for electricity varies throughout the day, typically reaching its highest points during weekday afternoons. The electric energy that satisfies the steady minimum daily demand is called baseloud power and is usually provided by large, coal-fired, hydroelectric, and nuclear facilities due to their low marginal costs and high reliability. As demand increases, utilities next turn to intermediate power, supplied by either small coal or natural gas facilities which are more expensive to operate than baseload plants. At times of highest demand, peaking power is activated from sources such as gas turbines or pumped storage hydroelectric dams. Intermittent power refers to generation that cannot be activated on command and usually refers to renewable energy from solar and wind sources. Viable storage technologies for intermittent sources do not currently exist, making them an unreliable source of power for mainstream applications. 4
Typical Summer Weekly Load _. -. _.
sou
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-
._- . -.__ ^_
I. b* A nerican Electric Power, 1999
(See Exhibit 3). This trend is driven by low energy prices, increasing electrification in the modern service economy, rising use of industrial application of electrotechnologies, and the overall strength of the U.S. economy. Due to low fuel costs, restrictions on the use of petroleum and natural gas during the 1970’s energy crises, and the long operating lives of generating Vol. 6, No. 4 1999
. .-..
units, coal provides over half of the nation’s electricity today, with nuclear coming in second with about twenty percent market share. High levels of existing capital investment, assured fuel supply, and impressive reliability suggest that coal will continue to leverage its strengths to remain a major source of baseload power generation for decades to come. However, few coal-fired new plants will be built due to increasing aversion to capital risk in a restruc361
The Future of Energy and the Environment
Michael
Jung and Manoj K. Guha
Cruise Control: Increasing U.S. Electric Power Generation and CO* Emissions
7ow. 3500 *
m
6000.
0
Oil
0@ .3000
8
-
-TotalCOz
Exhibit 3
Deep Green: Net COOEmissions from Power Generation 7% Below 1990 Levels by 2010
woo
E 4ooo B f 8
(I-c
woo 2000
m
Renewable
m
Nuclear
0
Gas
m
coal
-
-Total
CO2
SarCe: 16952ooo. EIA AEOW,gB iQCWXX0. AEP Pmjeclim
Y88r
Exhibit 4
362
CORPORATE ENVIRONMENTAL STRATEGY
Michael
The Future of Energy and the Environment
Jung and Manoj K. Guha
tured industry uncertainties.
and
environmental
regulatory
Instead, the majority of new growth in the generation sector is expected to be fueled by natural gas, primarily in peaking and intermediate applications, but also contributing to baseload power. Technological advances coupled with changes in industry regulation have unleashed new potential for natural gas in the power sector, driven by falling fuel prices, favorable capital costs, short construction times, high efficiency, and environmentally desirable attributes. Hampered by lack of R&D and negative public opinion, nuclear generation declines steadily as plant licenses expire and competitive pressures increase. Hydropower remains fairly constant due to low marginal costs, but environmental concerns prevent new facility construction. Renewables enjoy continued support from the government and consequently exhibit strong growth. Output increases by nearly sixfold between 1995 and 2050, but renewables still account for only a small share of the total market, restrained by high capital costs and lack of energy storage technologies for intermittent generation.
Deep Green The “Deep Green” scenario represents the outcome of various policy decisions, foremost of which are carbon dioxide emission reductions mandated by the Kyoto Protocol by 2008-2012 and near-term air quality regulations between 2003-2010 (See Exhibit 4). The short time frame for GHG reductions does not provide sufficient time for GHG trading and the Clean Development Mechanism to develop, forcing the U.S. to undertake massive domestic GHG reductions. We make the conserva tive assumptions that the power sector will mirror the national commitment and reduce carbon dioxide emissions to seven percent below 1990 levels by 2010. We also assume that companies can foresee the GHG reduction requirements of Kyoto prior to committing to approaches for air quality compliance. Vol. 6, No. 4 1999
In this future, environmental priorities command the direction of national energy policy. Air quality issues requiring extensive control technology investments just prior to the Kyoto Protocol (and the steep carbon dioxide reduction requirements that follow) lead to premature retirement of billions of dollars of operational coal-fired generation assets across the nation. Environmentally aggressive public opinion calls for the costly phase-out of nuclear power by retiring facilities as licenses expire and preventing new nuclear plant construction. Hydroelectric power generation also declines by fifty percent due to environmental opposition. High efficiency, low capital cost, and low carbon intensity of natural gas-fired generation forces the fuel to make up for both lost coal, nuclear, and hydroelectric power to become the dominant source of electric power generation. This outcome demands unprecedented, perhaps even impossible, activity in the infrastructures required to support natural gas power generation, such as turbine manufacturing, gas exploration and production, and pipeline expansion. This explosion of investment in natural gas creates many undesirable outcomes. It will severely test the limits of an already-growing industry, challenge reliability of the electricity supply system, commit the nation to one fuel with uncertain long-term reserves, and lock in a single generation of electric supply technology rather than allowing for more gradual phasing-in of an array of generating options. There are long-term implications for this nearterm solution. The perceived urgency of the environmental agenda and the primacy of natural gas to meet near-term goals unfortunately also hinder research, development, and deployment of cuttingedge energy technologies, such as renewable, advanced nuclear, clean coal, and fuel cell systems. Consequently, the U.S. electric energy system will remain dependent on fossil fuels for the next several decades, due to the longevity of power plants. Furthermore, despite these herculean efforts to control GHG emissions from the power sector, this reliance on a single generation of natural gas technologies will cause GHG emissions from electric 363
The Future of Energy and the Environment
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Good Luck: Net U.S. COP Emissions from Power Generation 7% Below 1990 Levels by 2010 with Nuclear and CO* Trading (250 MMT/year) 7oo0,
3sw m
6cw.
--~_.-__--
.3ow
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m
Renewable
m
Nuclear
25ooc P
1995
2ooo
2010
2020
2030
2040
Oil
2050
Year
Exhibit 5
power generation to begin to rise again from 1990 minus seven percent levels by 2050. In short, while near-term targets might be met, long-term environmental and economic sustainability remains elusive.
Good Luck optimistically The “Good Luck” scenario demonstrates the simultaneous outcome of several policy synergies (See Exhibit 5). It is envisioned that good fortune allows an efficient international market for carbon emissions credits to arise through instruments such as global greenhouse gas allowance trading and/or institutions that permit wealthier nations to earn credit for supporting environmentally sustainable infrastructure in developing countries (i.e. Kyoto Protocol’s Clean Development Mechanism). Such developments will enable the U.S. to reduce its domestic power sector reduction obligations. Here, we estimate some 250 million metric tons (MMT) of carbon dioxide credits to be purchased annually for price lower than the cost of domestic abatement. This development 364
effectively raises the power sector’s allowable carbon dioxide emissions from 1649 to 1899 MMT/year. At the same time, nuclear power revives its public credibility by promoting its environmentally desirable attributes and somehow manages to overcome its regulatory problems, sparking a renaissance driven by new nuclear research and development. Nuclear power thus maintains a significant, non-GHGemitting presence in the fuel mix at around twenty percent of total generation, resulting in a nearly twofold increase in generation output between 2000 to 2050. Coal generation steadily declines in energy output, but because of low fuel costs and technical innovation, this fuel still provides a major contribution to baseload generation. Pollution controls installed for near-term air quality regulations allow many existing facilities to reach the end of their operating lives, and continued research and development efforts bring about highly advanced technologies such as carbon capture by 2040 that subCORPORATE ENVIRONMENTAL STRATEGY
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The Future of Energy and the Environment
Jung and Manoj K. Guha
stantially
sector with newer, more environmentally sustainable technologies in an economically efficient manner (See Exhibit 6).
reduce the potential air quality and climate change impacts of coal-derived energy. Natural gas remains a clear winner in this scenario, experiencing impressive growth rates and taking up a larger share of the electricity supply fuel mix. The less dramatic changes in the fuel mix also encourage investment in renewable energy. By 2050, it is highly possible that breakthroughs (not shown) in renewables and/or energy storage technologies will have emerged that would further strengthen the growing positions of solar, wind, and biomass technologies in the power generation market.
The impact of atmospheric carbon dioxide on the greenhouse effect is one of total stock, rather than annual rates of emission. A ten-year delay in GHG reductions requirements, then, has only a minor effect on what is generally recognized to be an issue to be understood in terms of decades, even centuries. 5 More important is the development of effective institutions and broad-based agreements that will ensure long-term commitment to climate change mitigation.
Turnover The time gained by delaying GHG reductions allows for larger and more sustained investment in currently underfunded, yet critical energy R&D, demonstration, and deployment. ti This in turn enables advances that render nuclear power competitive through relicensing and new designs, enhances the penetration of renewable technologies through innovation, and ensures continued
In Turnover, implementation of near-term domestic air quality requirements occur, a ten-year delay in global GHG reduction goals is implemented, and alongside environmental goals, priority is also given to allowing forces unleashed by the restructured market to retire older, high-environmental-impact generating facilities in the power
Turnover: Net U.S. COOEmissions from Power Generation 7% Below 1990 by 2020 with Nuclear and COP Trading (250 MMT/yr) 7wnl
( 3500
zoo0
2010
2ozo
2040
2030
m
Oil
m
Renewable
2500-c b
m
Nuclear
zooas
-
Gas
1 1500 Q UJ
m
Coal
_ . _ Total coz
8 ‘WC2
_
-Netcop
2050
Year Exhibit
Vol. 6, No. 4 1999
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The Future of Energy and the Environment
progress in developing less environmentally intrusive uses for generating power from fossil fuels (for example, advanced turbines, gasification, fuel cell technologies). Alongside R&D will come the steady retirement of existing fossil fuel power generation facilities. By allowing these aging plants to recover the costs of near-term air pollution controls and then phasing them out in favor of “greener” technologies according to market forces, reliable supply of electricity is ensured and economic efficiency of a restructured industry will not be compromised. Furthermore, an array of several different sustainable energy technologies will compete for market penetration over a longer period of time than would be the case without a ten-year extension of GHG reduction requirements. In addition, these extra years increase the likelihood of the successful emergence of instruments such as international GHG emissions trading and the Clean Development Mechanism. Such systems would serve as markets for emissions reductions, reducing the costs of compliance by more efficiently allocating capital than command-and-control techniques would dictate while achieving identical overall reductions. Here, the low energy-intensity of the U.S. economy makes it more justifiable to purchase some 250 million metric tons (MMT) of GHG credits annually on the world market than to pursue domestic reductions. Ten more years will no doubt improve the level of scientific understanding about global climate and other environmental concerns, equipping policymakers with better information. Perhaps most importantly, this valuable time also will permit developing nations, especially China and India, to reach a level of prosperity, knowledge, and global integration where they will become willing to cooperate in international efforts to address climate change. The ultimate outcome of the climate change issue will hinge on the elusive cooperation of the developing world, led by these two nations.
Facing the Future The success of electricity 366
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Michael
Jung and Manoj K. Guha
depends on the extent to which the power industry is endowed with choices that will optimize the utilization of existing (and future) assets through market forces. However, attractive the prospect of power sector economic efficiency might be, though, policymakers must recognize that the existing infrastructure consists mainly of large, capital-intensive facilities with long projected operating lives (i.e. fifty to sixty years). These facilities’ origins lie in an era of rapid growth for electric power followed by a world shaken by the energy crises of the 1970s. Their service careers have been driven by a regulatory system primarily interested in ensuring reliability of and access to electricity at the lowest cost. Charting a new course for the national fleet of power plants is akin to steering a large seaborne transport vessel. Deliberate, gradual change, rather than an abrupt shift in direction, will ultimately prove more safe and successful at changing course. In this case, the desired destination of the power generation infrastructure is a market-driven, environmentally benign future. However, the method of reaching this target can take any number of paths. The first scenario, “Cruise Control”, the electric power industry will be enabled to develop into an efficient market, and departure from regulated allocation of capital will enable economically optimized turnover of generating technologies. However, absence of climate change policy may fail to adequately address some environmental concerns. Without steps taken to hedge uncertainty about the human influence on the global climate, long-term environmental risks could be increased. In short, though comfortable, we may be cruising into troubled waters. At the other extreme is the “Deep Green” scenario, which represents the direction advocated by many in the environmental community. Such a plan would heavily penalize existing generation assets for their environmental attributes and will force the industry to embark on a massive, disruptive change in fuel mix over the coming decade. This will likely bring about many negative consequences, sacrificing much of the economic efficiencies that stand to be gained from restructuring, CORPORATE ENVIRONMENTAL STRATEGY
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discouraging long-term energy R&D, and committing the nation to a single generation of energy technologies. And despite taking such strong medicine in the name of environmental salvation, little certainty is gained that these far-reaching domestic policies will succeed in averting potential global climate change. Such a course of action equates to turning the ship too quickly, risking unforeseen hazards and creating unnecessary structural stresses in a bold effort to avoid a theorized collision. Fortunately, more positive courses of action also emerged from this AEP study, ones that can help break the current impasse and initiate progress toward an agreeable energy & environmental policy outcome. In this future, both near- and longterm environmental concerns are addressed in a coordinated fashion while also allowing for the development of an efficient, marketdriven electric power sector. The ship does not veer violently off course, nor will it steam ahead blindly. Instead, prudent decision-making keeps its hands firmly on the wheel, gently steering the ship away from distant shadows, yet always ready to correct course as better information becomes available.
(fossil, renewable, nuclear, and not-yet-imagined) encouraging development of a liberalized, market-driven electric power sector
??
facilitating turnover of existing power generation assets at the end of their economic lives in favor of a range of newer electricity technologies with lesser environmental impacts ??
Good corporate environmental strategy should amount to more than just compliance. AEP’s position at the intersection between environmental policy and electric power restructuring has led the company to become involved in the policy debate. By identifying risks in emerging policy directions and developing measures that will address these issues, AEP seeks to promote economic efficiency in the restructuring electric power sector while protecting the local and global environment for ourselves and for our posterity. %
Endnotes 1. David Schoenbrod,
Time jbr the Federal Environmental
Aristocracy to Give Up Power. Center
Key components of a workable, reasonable plan can be found in the “Good Luck” and “Turnover” scenarios. They include:
American Business, 1998. 2. Dennis
Wamsted,
achieving sustained, cumulative near-term reductions of pollutants to improve air quality for action
in
?? creating successful systems to foster the cooperation of developing nations
?? establishing institutions such as GHG trading and the Clean Development Mechanism to encourage economically efficient emissions reductions
securing large-scale, sustained public/private investment in climate change research and R&D for the development and deployment of a range of environmentally sustainable energy technologies ??
Vol. 6, No. 4 1999
Solutions
to Clean Air
46. 3. Energy Information
?? developing effective incentives reducing GHG emissions
“Cleaner
Enron Exchange, Summer 1999, Vol. 7, pp.
Compliance,” ??
for the Study of
of Major
Administration,
U.S. Investor-Owned
Financial Statistics
Utilities 1996, December,
1997. 4. John
Turner,
“A Realizable
Renewable
Energy
Future,” Science, Vol. 285, pp. 687-689. 5. William
Pizer, Choosing Price or Quantity Controls jbr
Greenhouse
Guss,
Resources
for the Future,
Climate
Issues Brief No. 17, July, 1999. 6. President’s
Technology
Committee
of Advisors on Science and
(PCAST), Powerful Partnerships:
Role in International
Cooperation
The Federal
on Energy Innovation,
June, 1999. 367