1. Capturing the Cost of Carbon in Electricity Markets Clare Breidenich Consultant Western Power Trading Forum CPUC Reporting Workshop San Francisco, CA April 13, 2007

2. Trade association started in March 1998 Promotes trading of power and ancillary products throughout the Western States Currently 55 members: Investor-owned and public utilities, power marketing companies, banks and financial institutions www.wptf.org Presentation does not necessarily represent the views of WPTF

3. Overview Importance of Price Signal How a source-based system captures price signal Load-based approach Problems with contract-path model in load-based approach An alternative model

4. Issues for the Electricity Sector General concerns: Clear rules to provide certainty for investment Long-term policy direction to enable investment decisions Broad sectoral coverage and linkage to other markets Does not interfere with electric system reliability or competitiveness of electricity markets Price signal key

5. Two different approaches Source-based cap & trade Emission responsibility falls on generators EU ETS, RGGI Load-based cap and trade Emission responsibility falls on load-serving entities (LSEs), e.g. utilities, energy service providers California Public Utilities Commission, Oregon Governor’s Initiative Western Regional Climate Action Initiative?

6. Price Signal in Source-based Cap Allowance price increases variable cost of generation for dirty generators Higher market prices required to dispatch Reduces variable cost differential between dirtier and cleaner generators (i.e. coal and gas) Cleaner generators dispatch more frequently compared to BAU, displacing dirtier generation

7. Oregon Model (Contract-path) Attribute emissions to load based on mix of generators supplying load Generator-specific emission rate for specified contracts Average emission rate for system power Emissions rate of residual (non-contracted) power in Northwest Power Pool

8. Problem with Contract-path Model Contracts do not determine which generators actually dispatch LSEs can meet target through contract shuffling of imported power Forcing generation to follow contracts will add cost and inefficiency to electricity markets Carbon price not captured for system power Clean and dirty generators have same rate Dirty generation can hide behind system emission rate

9. An alternative model: Tradable Emission Attribute Certificates (TEACs) Emission attributes of generators used as tracking mechanism rather than contract- path Certificates reflect an emission rate per MWH, sold in MWH increments, e.g: 1100 lbs/MWH gas generator 0 lbs/MWH renewable or hydro Tracking capacity in existing and planned systems, e.g. NEPOOL, PJM GATS, WREGIS

10. TEACs in Load-based caps LSEs must surrender allowances for all emissions attributed to load-served All load assigned a high default emission rate, e.g. 2250 lbs/MWH LSEs can reduce emission budget by purchasing TEACs from less GHG-intensive generators TEAC rate applied to corresponding MWH Decreases quantity of allowances the LSE must surrender

11. LSE Compliance Example Default emission rate: 2,250lbs CO 2 /MWH Load-served: 100 MWH Starting obligation: 225,000 lbs (100 MWH * 2,250 lbs/MWH) TEACs purchased and surrendered: 50 gas certificates at 1100lbs/MWH 20 hydro certificates at 0 lbs/MWH Allowances surrendered: (50 MWH * 1100 lbs/MWH) + (20 MWH * 0 lbs/MWH) + (30 MWH * 2250 lbs/MWH) = 122,500 lbs

12. Relationship of Certificate to Allowance Prices Maximum Certificate price = Allowance Price (Default emission rate – certificate emission rate)

13. Advantages of TEAC Approach Captures value of carbon at generator level for all power sales Less GHG-intensive generators get additional revenue stream from certificates Allows cleaner generators to dispatch at lower market prices Encourages shift to cleaner generation

14. Challenges Supply of certificates (i.e. certified generation) should be approximately equal to load-served in capped area If supply of emission certificates too large, then certificate prices will be driven too low to encourage displacement Determining appropriate default emission rate Higher emission rate provides better incentive LSEs will prefer lower rate

15. Thank you