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July 22, 2010

Rogers To Reid: Utility Climate Bill Is A Winner

Climate legislation that imposes a greenhouse gas emissions cap first on electric utilities would lower ratepayers’ monthly bills and boost the nation’s gross domestic product by 2030 compared to a business-as-usual scenario with no utility cap, Duke Energy Chairman, President and CEO James Rogers said in a Wednesday letter to Senate Majority Leader Harry Reid.

Rogers said recent economic modeling of a “utility first” bill by Duke using a set of models developed by corporate consultant McKinsey & Co. indicate that while a cap on utility emissions would increase electricity rates by making fossil fuels more expensive, the higher rates would be more than offset by emission allowance allocations to ratepayers and energy efficiency improvements mandated by the bill that would reduce electricity demand.

In the letter, obtained by The Energy Daily, Rogers referred to recent announcements by the U.S. steel and chemical industries opposing a “utility-first” approach because of its likely impact on power prices and because it may force utilities to replace much of their coal-fired generation with natural gas-fired plants, potentially driving up the cost of gas and increasing costs for industrials that depend on gas.

But Rogers told Reid (D-Nev.)—who is trying to decide whether to include climate provisions in legislation focused on the Gulf of Mexico oil spill and clean energy and efficiency—that omitting carbon regulation likely would lead to the very “dash to gas” by utilities that worries industrials.

“I think our friends in the industrial sector have little recognition of the challenges the power sector faces whether we address greenhouse gas emissions or not,” Rogers said.

“Today more than 70 percent of the U.S. coal fleet is over 30 years old and 33 percent of the fleet is more than 40 years old. As [the Environmental Protection Agency] implements new regulations for smog, soot mercury, etc., over the new few years, we expect that these regulations (combined with the age of the fleet) will force as much as one-third of U.S. coal plants to close. Without resolution of the carbon risk, we will not be able to replace this existing capacity with new coal plants. And without a carbon price, it is very difficult to justify nuclear power.

“Without resolution of the carbon issue for our sector, our ‘business as usual’ future will include no nuclear plants and no new coal plants—this makes the ‘dash to gas’ the industrials so fear much more likely.”

Rogers is one of several utility CEOs that have met repeatedly with environmentalists to try to strike a deal that would combine a “utility first” carbon cap with an agreement that gives the industry flexibility in complying with looming EPA regulations tightening emission limits for sulfur dioxide, nitrogen oxides and mercury.

But without a deal on carbon, the default compliance strategy for many utilities would be to use more natural gas—and less coal—to meet the EPA regulations, Rogers told The Energy Daily Wednesday.

“My number one fear is that if we don’t solve the carbon issue, the business as usual is going to translate to no new coal plants and no new nuke plants in a continuation of the dash to gas,” he said. “I am trying to keep the momentum going on this utility-first idea, and the McKinsey study is an interesting study. It’s the only study they have done that shows that carbon legislation is positive for GDP.”

The Duke-McKinsey analysis modeled a hypothetical “utility first” emissions cap drawn from the utility sections of the American Power Act, the comprehensive climate legislation drafted by Sens. John Kerry (D-Mass.) and Joseph Lieberman (I-Conn.).

These provisions would cap utility emissions in 2013 and require a 42 percent reduction from 2005 levels by 2030. The provisions would allow the use of 800 million tons of emissions offsets per year and include an allowance price collar with an initial floor of $12 per ton and an initial ceiling of $25—both rising annually by the rate of inflation plus 5 percent. If prices exceed the ceiling, utilities could purchase extra allowances from a reserve pool. Allowances would be distributed to utility local distribution companies who would be required to pass the value of the allowances through to customers. The bill also would provide free allowances to merchant coal plants.

The utility-first scenario examined in the modeling includes the national building code improvements, appliance energy efficiency standards and industrial efficiency programs included in the Kerry-Lieberman legislation. It also assumes that final legislation will establish a 10-year, $20 billion wires charge to finance early deployment of carbon capture and storage (CCS) technology and expanded loan guarantees for new nuclear plants but does not include a renewable electricity standard for utilities.

The analysis shows that allowance prices would reach $35 per ton by 2030, and that the average monthly per household electricity bill would drop from a business-as-usual level of $95 to $88 under a utility emission cap—with most of the bill savings attributable to the allowance pass-throughs. The average household would use slightly less electricity under the cap—thanks to the improved efficiency the bill would mandate.

The analysis also found that U.S. GDP and employment would increase slightly by 2030. The GDP improvement would stem from significant energy savings in the buildings sector; utility fuel savings by switching from traditional fossil-based resources to renewables; increased investments across the economy in green energy and efficiency; and increased exports and other ancillary benefits.

The analysis also assumes that opportunities to achieve efficiency improvements can be achieved cost effectively; clean energy technologies continue to develop; CCS is available at roughly $50 per ton of carbon dioxide sequestered; nuclear regulatory barriers and costs are reduced; and solar and wind “learning curves” are maintained.

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