Sunday, May 4, 2008

How CO2 Regulations Will Affect the Texas Electric Grid

I was interested in quantifying some of the effects that CO2 emissions regulations would have on Texas's electric grid, specifically in the Electric Reliability Council of Texas (ERCOT) region. I look at some of the features of command and control regulations, a CO2 tax. or a cap and trade system, then I show results of a model I created to add a CO2 cost to each generation facility in ERCOT and look at how the CO2 cost affects plant dispatch, CO2 emissions, and electricity cost.

I have a lot of results in graphical form that would take too much space to explain here, but the gist is that at relatively low CO2 prices, the price of natural gas for fuel will keep coal-fired plants cheaper to operate, so coal-fired facilities will remain running all the time as base load generation, albeit with much smaller profit margins. It takes a very high CO2 price to result in switching from coal to efficient natural gas for base load generation, and this threshold CO2 price is pushed higher by high natural gas prices. So if CO2 regulations cause a shift towards natural gas-fired generation, and this increased natural gas demand drives up natural gas prices, then electricity costs go up from both the added CO2 cost and the increased natural gas costs. Of course we would also be switching to more renewables, but until these sources make up a large percent of total generation (they were 3% of generation in 2006), the effect on electricity prices will be minimal.

There isn't enough room to explain the assumptions behind the specific values I calculated, so if you are interested, I hope that you take a look at my report. It's relatively long, so if you're short on time, the results section is the best part.

One point that I omitted from my report for conciseness is how the supply chain location where a CO2 tax is applied will affect its impacts on the electricity industry. If the CO2 tax is levied upstream at fossil fuel suppliers, fossil fuel based electricity generators will see this cost as increased fuel prices, which are a market traded commodities. Thus, upstream application of a CO2 tax would affect electricity generators similarly to a regime where CO2 is traded on its own commodity market (i.e. cap and trade). I read some economics oriented reports arguing that upstream application should more cost-effectively reduce emissions, but this approach could reduce the economic viability of technologies such as carbon dioxide capture and sequestration (CCS) that significantly reduce emissions rates without decreasing fuel use. Do we regulate at the source of the carbon, or the source of the emissions? I think the source of emissions makes more sense, but one could argue either way.

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