Carbon Limits and Texas

8 Now there arose a new king over Egypt, who did not know Joseph. 9 And he said to his people, “Behold, the people of Israel are too many and too mighty for us. 10 Come, let us deal shrewdly with them, lest they multiply, and, if war breaks out, they join our enemies and fight against us and escape from the land.” 11 Therefore they set taskmasters over them to afflict them with heavy burdens. They built for Pharaoh store cities, Pithom and Raamses. 12 But the more they were oppressed, the more they multiplied and the more they spread abroad. And the Egyptians were in dread of the people of Israel. 13 So they ruthlessly made the people of Israel work as slaves 14 and made their lives bitter with hard service, in mortar and brick, and in all kinds of work in the field. In all their work they ruthlessly made them work as slaves.

ERCOT

Analysis of Potential Impacts of

CO2 Emissions Limits on

Electric Power Costs in the ERCOT Region

May 12, 2009

Executive Summary

The Electric Reliability Council of Texas (ERCOT) was requested by Public Utility

Commission of Texas (PUCT) leadership to conduct an “analysis of the likely effects of

proposed climate change legislation on electricity prices in the ERCOT market.”

Consistent with a similar study conducted by the PJM Interconnection, ERCOT focused

on the near-term impacts of this potential legislation. Longer-term effects, such as

changes in the installed generation capacity as a result of the impacts of the legislation,

were not studied. Changes to the transmission system and related costs that might be

warranted due to changes in generation dispatch as a result of the imposition of carbon

allowance costs or decreases in system load were not evaluated or included. The

analysis assumes that the goals of the legislation must be met directly by reductions in

carbon emissions by ERCOT-region generation. ERCOT has not attempted to determine

the equilibrium price of allowances or the appropriate level of tax to result in the level

of reduction targeted in proposed climate-change legislation.

ERCOT performed this analysis by simulating the cost-based, hourly dispatch of all

existing and committed generation in ERCOT region to serve the electric load in the

region for the year 2013. The generation was dispatched according to its variable cost,

including carbon emissions allowance costs, while adhering to the limitations of the

transmission system and other reliability requirements. Because the economic dispatch

used in the simulations performed for this study is cost-based, it does not include any

market-driven bidding behavior or scarcity pricing, and the wholesale prices and

wholesale market costs reported from the simulations are also cost-based as a result.

The simulations were performed for several scenarios defined by: 1) the level of natural

gas prices ($7 and $10 per MMBtu); 2) the size of potential reduction in energy use as

compared to the forecasted load for 2013 (0%, 2% , 5% and 10% reductions); and, 3)

the amount of installed wind generation (the approximately 9,400 MW of existing and

committed wind generation capacity and the 18,456 MW of total wind generation

capacity for which the PUCT has ordered a transmission plan to be constructed in the

Competitive Renewable Energy Zones (CREZ) Docket 33672). For each scenario,

simulations were performed at increasing carbon allowance costs of $0, $10, $25, $40,

$60 and $100 per ton of CO2.

The change in total annual wholesale power costs (the costs paid by consumers) and

wholesale prices (expressed as load-weighted average locational marginal prices or

LMPs), production costs, total CO2 emissions and similar output variables were noted for

each scenario. The following insights can be obtained from the results of this analysis:

• In the reference case, with $7/MMBtu natural gas prices, expected load levels and the existing and committed level of wind and other generation, the carbon

allowance costs must rise to between $40 and $60 per ton in order to reduce

carbon emissions from electric generation in ERCOT to 2005 levels by 2013. This

level of allowance costs would result in an annual increase in wholesale power costs of approximately $10 billion and would increase a typical consumer’s
monthly bill by $27;

• At higher natural gas prices, brought about by increased demand for natural gas
due to carbon dioxide emission limitations or other reasons, allowances would rise
to a higher cost (well over $60/ton in the case of $10/MMBtu natural gas prices) in
order to achieve the desired reductions. At this higher gas price, the annual
increase in wholesale power costs to meet the 2005 level of emissions through
reductions by generators in the ERCOT region would be in the range of $20
billion;
• Increases in wholesale power costs due to carbon emissions limits may result in
lower energy demand. These reductions in system energy use have the potential
to allow the emission reduction targets to be met at a lower allowance cost. Total
CO2 emissions are reduced below 2005 levels at a carbon allowance price between
$40 and $60 per ton for expected load levels at $7/MMBtu natural gas, but fall
below 2005 levels between $25 and $40 per ton if total energy use was reduced
by 10%. This level of allowance costs would result in an annual increase in
wholesale power costs of approximately $7 billion, a savings of $3 billion over the
cost of meeting the 2005 levels of CO2 emissions in the reference case. At this
allowance cost, a typical consumer’s monthly bill would increase by $17, a
monthly savings of $10 over the reference case;
• The additional wind generation envisioned by the CREZ plan (up to a total of
18,456 MW) reduces carbon emissions by 17.6 million tons above the reduction
due to existing and committed wind generation even with no carbon emissions
limits imposed by climate-change legislation;

• The additional CREZ wind generation allows the targeted emissions reductions to
be met at a lower allowance cost. At $7/MMBtu gas, the 2005 carbon emissions
levels are met at an increase in annual wholesale power costs of approximately $7
billion, which is a $3 billion savings compared to the reference case. At this
allowance cost, the increase in a typical consumer’s monthly bill would be $22;
• The combination of additional CREZ wind and lower energy usage results in
smaller increases due to CO2 emissions limits in both wholesale power costs and
the typical consumer’s monthly bill at a $7/MMBtu gas price, as compared to the
reference case;
• The combination of additional CREZ wind generation and 2% lower energy usage
does not offset the impact of an increase of natural gas prices from $7/MMBtu to
$10/MMBtu on the level of allowance costs at which emissions reductions targets
would be met.