3. GHG Policies for the Electricity Sector
In this section, we consider policies for the regulation of GHG emissions in the electricity sector. As we explained in D.07-09-017, AB 32 governs statewide GHG emissions including electricity consumed in California (including imports) and in-state generation that is exported out of California. Thus, as a starting point, we consider all such electricity to be within the electricity sector. Because power that is wheeled through California does not fall within the purview of AB 32,7 we do not include power wheeled through California in the electricity sector for purposes of establishing GHG regulations.
The proposed decision suggested that power delivered to the California grid from CHP facilities be regulated as part of the electricity sector. In Section 4.2.2, we defer a determination of the proper treatment of GHG emissions from CHP facilities pending further analysis. Thus, we have not decided yet whether the recommendations developed in this decision for the electricity sector should apply, in whole or part, to electricity generated by CHP facilities.
3.1. Overview of Approaches Considered
In Phase 2, we have considered a variety of approaches to GHG regulation in the electricity sector. All approaches are based on a foundation of mandatory GHG emission reduction programs, including cost-effective energy efficiency and investment in renewable resources. Before describing the positions of the parties, it is useful to provide a brief overview of the major alternatives that have been examined.
First, the type of regulation appropriate to the sector has been considered. By this we mean whether the regulation is of the direct/mandatory type or whether it is market-based. Second, for the market-based options, the point of regulation has been considered. By this we mean the entity with responsibility for compliance with the regulation.
The type of regulation options considered (some in more detail than others) include a carbon tax, upstream regulation of emissions from fossil fuel combustion, a downstream cap (with or without trading), and additional direct mandatory requirements.
The point of regulation options considered include retail providers of electricity, in-state generators (with no direct provision for imported power in the cap-and-trade program), deliverers of electricity to the California grid, and a hybrid in which the point of regulation would be generators for in-state power and retail providers for imports.
In addition, we consider options for the distribution of GHG emissions allowances, should a cap-and-trade system be adopted for California that includes the electricity sector.
3.2. Types of GHG Regulation
In this section, we address various types of GHG regulation for the electricity sector in California.
As described in an Assigned Commissioner ruling revising the scoping memo for this proceeding, we have examined options for further direct programmatic regulations for the electricity sector:
"Regardless of whether a market-based system for GHG regulation is adopted,... regulatory and other strategies will continue to be employed to reduce GHG emissions in the electricity and natural gas sectors in California. In particular,...currently mandated programs such as energy efficiency programs, renewable portfolio standards, and building and appliance efficiency standards will continue. Such programs also may be expanded if such expansion is found to be desirable relative to other emission reduction strategies. Additional emission-reducing mandates could also be imposed. For example, efforts could be undertaken to expand the emission performance standard to apply to short-term contracts and/or non-baseload power. In addition, ARB could impose other emission reduction measures, e.g., on generators in California."8
In particular, we evaluate the requirement that all retail providers of electricity in California be required to provide a minimum level of cost-effective energy efficiency programs and renewable energy delivery.
We also consider the alternative of capping GHG emissions from retail providers, without introducing an emissions trading component. In this approach, California would rely only on strategies not involving emissions trading to reduce emissions toward AB 32 goals, pending implementation of a regional and/or national GHG program. Such a strategy could involve setting entity-specific caps to ensure and track progress toward AB 32 goals in the absence of an emissions trading program.
We also consider the adoption of various forms of a cap-and-trade system that includes California's electricity sector. Options include upstream regulation of fossil fuel combustion, inclusion in a regional and/or a national cap-and-trade system, or inclusion in a multi-sector cap-and-trade system in California.
The Market Advisory Committee, in its recommendations to ARB, presented an option for upstream regulation of fossil fuel combustion in California.9 This model is also currently under consideration in the United States Congress.
As mentioned above, we also consider deferring consideration of a California cap-and-trade system pending implementation of a regional and/or national program. We also consider options for a California cap-and-trade system to coexist with or transition to a regional and/or national system.
In this section, we summarize the input received from parties on the subject of the type of regulation appropriate for the electricity sector in California.
Most parties support a market-based cap-and-trade system for the electricity sector, including PG&E, SDG&E/SoCalGas, Calpine, IEP, EPUC/CAC, Powerex, Constellation, SMUD, SCPPA, NRDC/UCS, Environmental Defense, Morgan Stanley, WPTF, and AREM.10 They have differing opinions, however, regarding the possible need to wait until a regional and/or national trading system can be implemented. Other parties including LADWP assert that additional information is needed before the desirability of a cap-and-trade system can be determined.
Supporters of a market-based compliance program for the electricity sector in California assert that a well-designed cap-and-trade program would yield numerous benefits.
Supporters submit that, by establishing a market price for carbon (PG&E), providing price visibility and access to the global marginal price of abatement (SDG&E/SoCalGas), and giving the right price signals (DRA, IEP, and EPUC/CAC), a cap-and-trade system would provide the least-cost method of obtaining emission reductions.
Parties submit the following additional reasons for supporting a cap-and-trade program for the electricity sector:
· Emissions trading would maximize flexibility in achieving emissions targets (Calpine).
· The compliance flexibility would direct capital investment to the lowest cost opportunities (PG&E and Morgan Stanley) and allow entities to make the most cost-effective choices (SDG&E/SoCalGas).
· Cap-and-trade would harness the ingenuity of the market to identify the best ways to meet the goal (Morgan Stanley).
· Emissions trading would reward innovation (Calpine) and efficiencies (Powerex).
· Entities would be likely to reduce emissions more (SDG&E/SoCalGas) and sooner (Calpine, IEP) than they would under regulatory mandates. SCPPA views the purpose, however, as achievement of mandated GHG reductions at a reduced cost, not additional emissions reductions.
· Cap-and-trade would advance abatement technology research and accelerate the introduction of leading-edge carbon reduction technologies (PG&E and IEP), and would lead to operational improvements (IEP).
· Cap-and-trade would internalize externalities and consumers would face the proper incentive to curtail electricity use (IEP).
· Cap-and-trade would allow market participants to manage the risks associated with GHG emissions reduction compliance (Constellation).
· It would give options to meet targets given operational and demand fluctuations and would help manage the "blocky" nature of emission reduction measures (SMUD).
· Cap-and-trade would efficiently distribute the cost of greenhouse gas reductions across capped entities (WPTF) and would provide allocative and productive efficiencies (AREM).
PG&E and Morgan Stanley stress that a cap-and-trade approach would help ensure environmental integrity. They assert that a cap-and-trade approach with a specific reduction target would provide a high degree of certainty that the AB 32 reduction goals will be met.
According to Morgan Stanley, a market-based approach may be less complex to administer than command-and-control.
Several parties argue that California should put its primary efforts into collaborating at the regional and national levels in order to develop an effective program. The CAISO submits that a fully-effective GHG policy for the electricity sector must cover the bulk of the electricity sector in the western United States. The CAISO submits that a major goal of California policy should be to facilitate the establishment and implementation of federal or other West-wide policies. Environmental Defense asserts that California needs to take a leadership role in designing an effective cap-and-trade system to shape future federal regulation. Constellation argues that California's development of a well-designed framework for a market-based cap-and-trade program can serve as a model for the development of regional and national systems. Finally, PG&E points out that momentum is building to pass federal cap-and-trade legislation and State actions will help to build this momentum.
Amount of Reductions due to Cap-and-Trade
Several parties recognize that a cap-and-trade system is likely to provide only a relatively small portion of the overall emissions reductions needs. NRDC/UCS stress, however, that it would reduce emissions lower than could be achieved through existing regulatory programs alone. The CAISO comments that most of the GHG reductions that would be achieved in the electricity sector in the short term likely would result from existing renewable energy and energy efficiency programs. WPTF states similarly that, in the short term, emissions reductions from a market-based approach are not likely to be much larger than those deriving from committed regulatory programs, citing the potential for leakage as one reason. WPTF asserts, however, that a cap-and-trade program has greater potential for greater emission reductions in the long term.
7 This is consistent with our determination in D.07-09-017 that AB 32 would not regulate emissions associated with power wheeled through California. We did, however, recommend in that decision that marketers be required to report imports that are wheeled through California. (D.07-09-017, mimeo., pp. 7, 49, 59 (Conclusion of Law 2), and Attachment A, p. A-14.)
8 Assigned Commissioner's Ruling Modifying the Phase 2 Scoping Memo and Updating the Phase 2 Schedule, December 20, 2007, p. 6.
9 "Recommendations for Designing a Greenhouse Gas Cap-and-Trade System for California, Recommendations of the Market Advisory Committee to the California Air Resources Board," (Market Advisory Committee report) June 30, 2007, pp. 27-32.
10 Attachment A contains a list of parties that have filed comments in Phase 2, and associated acronyms used in this decision.
