Insights on Economic Impacts of Utility Mercury and CO 2 Controls

1. Insights on Economic Impacts of Utility Mercury and CO2 Controls Anne SmithCharles River Associates North Carolina DENR/DAQ Workshopon Mercury and CO2Raleigh, NCApril 20, 2004

2. Mercury Controls and Costs

3. Mercury Sources and Control Options • Hg comes primarily from coal generation • Various retrofit controls are possible • “Co-benefits” from PM, SO2 and NOx control equipment, especially for bituminous (eastern) coals: • CESP removes ~35% of Hg; FF removes 75-90% of Hg • Wet FGD + CESP removes 60-70% of Hg • SCR with WFGD + CESP removes 85-90% of Hg • Activated carbon injection (ACI) • Cheap to install, expensive to operate, for removals of 60-80% • ACI with small baghouse • Substantial capital cost, but lower operating costs • 85%-90% removal appears possible • All Hg controls still have uncertain removal potentials • Co-benefits are likely, but magnitude still speculative • ACI still being developed; not “commercialized” yet

4. $/kwh Supply Gas Wholesaleprice Demand Coal Nuc, Hydro Q of Electricity Hg Controls May Not Increase Projected Electricity Prices Much…But They Will Affect:Average Costs of Generation Regulated Electricity Rates Asset Values of Coal-fired Units

5. CSA ~ .5% increasein totalCOS ~ 2% increasein totalCOS 2020 $1,425 $394 Annual Costs ($ millions) -- CSA vs. 2.2 #/tBtu MACT 2.2 #/tBtu MACT 2008 $278 $4,574 2010 $1,129 $4,016 2012 $1,083 $3,913 2015 $1,450 $3,275 2018 $2,225 $2,002 Source: A Framework for Assessing the Cost-Effectiveness of Electric Power Sector Mercury Control Policies, (# 1005224), EPRI, Palo Alto, California, May 2003

6. Co-Benefits May Be “Cheap” But Require Flexibility in Timing Projected Hg Co-Benefits from Proposed IAQR 1999 Emissions(ICR-based estimate) 50 AnnualTons Hg FromElectricityGeneration 45 40 35 Industry 30 EPA (approx.) 25 20 15 10 5 0 2004 2006 2008 2010 2012 2014 2016 2018 2020

7. Hg Trading Is Very Cost-Effective Compared to Hg Unit-Specific Targets • EPA’s proposed MACT would cost 5-10 times more than its proposed Hg Cap on NPV basis • Hg trading is far more cost-effective: • MACT achieves ~32 tons by 2008 • Hg Cap achieves 15 tons by 2020 (32 tons at ~2012) • Cost-effectiveness advantages of proposed trading rule would be heightened by technical improvements in Hg control options • Timing flexibility gives opportunities for technology to improve before it must be implemented broadly • Trading “places a price” on Hg emissions which also incentivizes technical improvements better than MACT

8. Hg Trading Tends to Concentrate Reductions on the Largest Sources CSA Deposition Change -6% -4% -2% 0% 0% Shaded area:Deposition underCSA is reduced morethan under 2.2# MACT 2.2 #/tBtuMACT Deposition Change TX21 WI31 -2% -4% -6% Source: A Framework for Assessing the Cost-Effectiveness of Electric Power Sector Mercury Control Policies, (# 1005224), EPRI, Palo Alto, California, May 2003

9. CO2 Controls and Costs

10. CO2 Sources and On-System Control Options • CO2 comes from coal, oil and natural gas generation • But coal emits roughly 2x more CO2 per kwh than natural gas • Retrofit controls are the most costly control option • Switch coal to gas: ~$30-50/tonne C for first few %(**) • Switch coal to renewables: >$100/tonne C for first few %(**) • Remove CO2 from stack: ~$300/tonne C (large reductions) • On-system controls are expensive even for new generation • Build IGCC with C-sequestration: ~$100/tonne C • Large reductions possible, but only with decadesof lead-time (**) See next slide for further explanation

11. Switching from Current Coal Generation Has Very Limited Potential • Coal-to-Gas:A 20% reduction in current coal MWh: • Would require a 50% increase in current gas generation • Would require even more new gas plants to be built • Would drive natural gas prices up (affecting other industry) • Would reduce national CO2 emissions <3% • Coal-to-Renewables:A 10% reduction in current coal MWh: • Would require >5-fold increase in renewable capacity • Would reduce national CO2 emissions <3% • Both would drive $/tonne higher than the estimates on previous slide for “first few %” of reductions • A multi-decade approach is required to achieveon-system reductions at less than $100/tonne C

12. What About “Offsets”? • “Offsets” are reductions in carbon that do not occur on-system • Usually associated with • Changes in land use practices • Changes in forestry practices • Energy demand-reduction projects • Projects in other countries that reduce their CO2 baseline • Are currently much cheaper (<$10/tonne C) • Issues • Are these real reductions from baseline? • Are these permanent reductions? • Will they remain cheap once there is a real demand for them?

13. $/kwh Supply Wholesaleprice Gas Demand Coal Nuc, Hydro Q of Electricity Implications for Electricity Prices • CO2 policy will increases wholesale power prices, as well as raise cost-of-service and reduce asset values • On-system reductions will cause large price increases • This stands in direct contrast to SO2, NOx and Hg control impacts.

14. What Do These Carbon Prices Mean to the Consumer? • $100/tonne C: • Cost of coal-fired generation doubles • Cost of gas-fired generation increases by 35% • Average cost of all generation increases ~60% • Average retail electricity rates increase by ~30% • $10/tonne C: • Average retail electricity rates increase by ~3% ~ 5-15% Generation emissionsreductions (2-5% change in national emissions) ~ 0% Generation emissionsreductions (? change in national emissions)

15. Regional Competitive Impacts Also Need to Be Considered • Unilateral NC State Policy • Power may be wheeled in from states without carbon cap • Costs of power and costs of gas will rise to NC industry • Industry that can move will do so, reducing NC jobs • Consumers in NC will face cost-of-living increases • National emissions will not be reduced • As part of a unified national carbon policy • Inter-regional competitive issues are diminished • Concern is competition from international sources • Some emissions will still “leak” and reappear elsewhere globally • NC economy appears to face impacts similar to US-wide average impacts if the policy is nationally applied.

16. Examples of Estimates of CO2 Cap Costs to NC Economy (Kyoto Caps) North Carolina Global Trade Annex B Trade (2) Trade only in US 1 - Annex B Trade 2 - Annex B Trade w/No Hot Air 3 - No Trade 4 - Global Trade Source: Charles River Associates’ SIAM Model Simulation

17. Change in GSP in Different States (Scenario: Kyoto with Annex B Trade - No Hot Air) California North Carolina Tennessee 9 - North Carolina 10 - Tennessee 11 - California Source: Charles River Associates’ SIAM Model Simulation

18. Estimated NC & US GSP Impacts Under McCain-Lieberman Bill (S.139) 1.00 Gross Regional Product (% change from baseline) 0.50 0.00 2005 2015 2025 2035 -0.50 Phase I only -- NC -1.00 Phase I only -- US -1.50 Phases I & II -- US Phases I & II -- NC -2.00 -2.50 Source: Costs to the State of North Carolina if EPA Regulated Carbon Dioxide Emissions Under the Clean Air Actby P. Bernstein and D. Montgomery, Charles River Associates, November 4, 2003.

19. Estimated Impacts to NC SectorsUnder McCain-Lieberman Bill (S.139) North Carolina Sectoral Impacts 2.00 Agriculture EIS Manufacturing Services Electricity 0.00 -2.00 -4.00 2010-Amended Industrial Output (% change from baseline) 2010-Original 2020-Amended 2020-Original -6.00 -8.00 -10.00 -12.00 Source: Costs to the State of North Carolina if EPA Regulated Carbon Dioxide Emissions Under the Clean Air Actby P. Bernstein and D. Montgomery, Charles River Associates, November 4, 2003.

20. Impacts to NC’s economy would be far worse than the preceding estimates if NC were to act on its own.

21. Boston, Washington DC, Los Angeles, Philadelphia, Berkeley, Palo Alto, Salt Lake City, Austin, HoustonLondon, Brussels, Toronto, Mexico City, Wellington, Brisbane, Melbourne