News Release

May 12, 2009

Analysis of Potential Impacts of CO2 Emissions Limits on Electric Power Costs in ERCOT Region

In response to a request from Public Utility Commission Chairman Barry T. Smitherman, ERCOT staff completed an analysis of likely effects of proposed climate change legislation on electricity prices in the ERCOT market.  Below is the executive summary from the 35-page analysis.  The report is posted on the ERCOT website at this link and also on the PUC website.  

Analysis of Potential Impacts of CO2 Emissions Limits on
Electric Power Costs in the ERCOT Region

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.

 

The Electric Reliability Council of Texas (ERCOT) manages the flow of electric power to more than 26 million Texas customers -- representing about 90 percent of the state’s electric load. As the independent system operator for the region, ERCOT schedules power on an electric grid that connects more than 46,500 miles of transmission lines and 710+ generation units. It also performs financial settlement for the competitive wholesale bulk-power market and administers retail switching for nearly 8 million premises in competitive choice areas.

ERCOT is a membership-based 501(c)(4) nonprofit corporation, governed by a board of directors and subject to oversight by the Public Utility Commission of Texas and the Texas Legislature. Its members include consumers, cooperatives, generators, power marketers, retail electric providers, investor-owned electric utilities, transmission and distribution providers and municipally owned electric utilities.

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