The Regional Greenhouse Gas Initiative (RGGI), taking effect in 2009, will pose CO2 emission constraints upon the fossil fuel-fired power generators in the 10-state RGGI region. With the first auction of RGGI CO2 allowances coming up on September 25, many in the industry are scrambling to figure out what an allowance will (or should) cost and what will be the impact on power plants and power markets.

 

My colleagues and I, energy consultants at Webb, Scott & Quinn, have our own estimate. Short-term volatility notwithstanding, the long-term equilibrium price should be based on the concept of economic ambivalence. That is, a power producer should be willing to pay for an emissions allowance a levelized price that has the same cost as avoiding the emission itself.

 

While there are established control technologies for SO2 and NOx, there are no existing practical options for capturing CO2. However, reductions in CO2 production can be made by fuel-switching from coal to gas from time to time. Thus, our cost estimates are based on this operational approach.

 

Bear with me on these assumptions and estimates…they are for illustrative purposes… contact me for details:

 

A typical coal plant at issue here may dispatch at about $40/MWh and produce CO2 at a rate of 1.03 ton/MWh. While gas-firing, the plant would have a dispatch cost of about $95/MWh and a CO2 emission rate of 0.59 tons/MWh. This reflects a cost differential of $55/ton and an emissions differential of -0.44 tons/MWh. So, with this short-term tactic, you can reduce CO2 emissions for a cost of $125/ton (55/0.44=125). Beware, this is NOT what a CO2 allowance is worth!

 

Since RGGI caps CO2 emissions at current levels for the next several years, and doesn’t actually reduce them, the only MWhs “at issue” are those associated with load growth, which for PJM is expected to be 1.6%. So the price for RGGI CO2 allowances should be $125/ton multiplied by 1.6%.

 

For this reason, $2 per ton is a reasonable estimate of what a RGGI CO2 allowance is really “worth” in 2009. This is an equilibrium price and it does not reflect short-term supply and demand constraints that can cause large price spikes. In subsequent years, this number is pressured upwards by compounding load growth and, eventually, by reductions in annual CO2 limits. Of course, the spread between coal and gas prices will also be a factor, in one direction or the other.

 

Adding $2/ton to a coal plant has the effect of adding about $2/MWh to dispatch cost. While important, this value is certainly not anything to indicate that a “sky is falling” scenario is on the horizon.

 

The impact on power plant values will vary. Coal plants may take a small hit, and gas-fired plants even less. On the other hand, RGGI will be a small windfall for nuclear, hydro and renewable generation as price takers. They will capitalize on the small market price increases resulting from the increased costs of fossil plants.  WS&Q will be calculating power plant valuation impacts with the GenMetric™ model.

 

Please note that the RGGI states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

James Letzelter

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