California GHG policy and implications for the power sector APEX Sydney Conference October 13, 2008 Anjali Sheffrin, PhD.

2 California taking leadership in limiting greenhouse gas emissions A. Renewable Portfolio Standard California 20% State Renewable Portfolio Standard (RPS) by 2010; support building for 33% RPS (and beyond) B. Once-Through Cooling/Older Thermal Plant Retirement/Repowering Draft proposed schedule sets targets from C. Greenhouse Gas (GHG) Policy California Legislative target from AB 32 to reduce GHG emissions to 1990 levels by 2020

3 California Generation mix by fuel type Year ,563 MW Year ,436 MW

4 Reliance on older and inefficient generation has been steadily declining. Units built before 1979 ran on average 26% of the time. California environmental policies and the age of these facilities will require a long-term plan for phasing them out.

California GHG emissions were 469 MMTCO 2 E

6 The challenge is to achieve 169 The challenge is to achieve 169 MMTCO 2 E of reduction by Emission Baseline ~169 MMT CO 2 e Reduction 80% Reduction ~341 MMT CO 2 e

7 Majority of reductions to come from capped sectors: transportation, electricity, and natural gas Total GHG Reductions from Capped sectors 2020 Capped Sector GHG emissions limit 2020 Capped Sector Business as Usual GHG emissions GHG reductions from recommended measures in capped sectors Additional GHG reductions from capped sectors GHG Emissions (MMTCO 2 E) Projected Business as Usual Total GHG emissions

8 Electricity sector contributes 25% of GHG emissions but will be required to achieve 50% of the reduction 20%80% 37% 45% 18%

9 Strategy to combine market mechanisms, regulations, voluntary measures, and fees for the electricity and natural gas sectors 1.Increase utility-based energy efficiency programs 2.Achieve 33 percent renewables for all utilities 3.More stringent building and appliance standards 4.Million Solar Roofs Program (California Solar Initiative) 5.Residential solar water heaters 6.Encourage combined heat & power 7.California cap and trade program linked to WCI

10 Use of market mechanisms coordinated with other regional and global efforts California emissions greatly influenced by other sources and states in the region Western Climate Initiative can result in lower cost reductions Need to preserve states as laboratories of innovation  California and regional leadership can pave the way nationally International participation is crucial for global success  International Carbon Action Partnership

11 Western Climate Initiative membership

12 California cap and trade to be linked to regional market under the Western Climate Initiative Partners: 7 US states, 4 Canadian provinces; Observers include 6 US states, 1 Canadian province, 6 Mexican states Multi-sector cap-and-trade is central component Specific Partner allowance budget under cap not yet defined Point of regulation in electric power will be generation sources and imports (called “first jurisdictional deliverer”)  Different from the eastern US Regional Greenhouse Gas Initiative (RGGI), which does not regulate imports

13 WCI – First Jurisdictional Deliverer “Deliverer” refers to the first entity that delivers power into a WCI Partner: either a generator within the Partner territory or the entity that schedules an import (i.e., first jurisdiction that the import from a non-Partner crosses) Will require the first jurisdictional WCI Partner to be responsible for assigning the obligation to retire a GHG allowance to imports A number of WCI boundary utilities (some with territory in member states and non-member states) are concerned over regulatory burden WCI is evaluating whether membership is sufficient to allow regulation of point sources only (i.e., ignore imports)

14 California cap and trade to be linked to regional market Enforceable cap over GHG emissions from sources beginning in 2012 Cap declines over time to meet 2020 targets; can be adjusted for 2050 target State distributes “allowances” equal to total emissions allowed in the cap Limited use of offsets Strong enforcement and monitoring Must include safeguards for regional and local co-pollutants

15 Key elements of California cap and trade program for the electricity sector 1. Allowance Allocation and Auction within the Electricity Sector  Large part to be allocations. Grants based on historical portfolio emissions to sales basis by 2020 to allow transition time for retail providers with high emissions. Allocation changes over time.  Starts with 10% being auctioned  Retail providers required to sell allowances in an independent, centralized auction 2. Use of Auction Revenues Revenue from allowances auctioned by retail providers should be used to support investments in renewable energy, efficiency, new energy technology, infrastructure, bill relief for consumers Retain small portion of revenues for statewide energy sector programs

16 Challenges of integrating California’s renewable portfolio standards CaseGWhAvg. MwNameplate Mw 20% RPS55,6576,35313,614 33% RPS~ 93,00010,50026,000 Achieving 33% requires us to meet two times load growth with renewables between now and 2020 The increase in need for capacity, ramping, and regulation to achieve 33% RPS is not linear – it is much greater Regional diversification is important technically and economically Key questions are:  Can we retain and invest in more non base-load facilities?  Does retirement of older plants or replacement make sense?

17 Organized power markets are uniquely situated to offer the products and services required to efficiently meet emission reductions Capability to define market products such as new ancillary services required to integrate renewable. Transparent locational marginal prices that provide revenues tailored for new technologies (DR, storage) CAISO strives to provide the policy, reliability and planning analysis to support State goals