The Climate Bill’s effects upon utilities explained and modeled-

Potential debate has been shelved until March, but it isn’t too early to evaluate what the current legislation will do. A dry analysis, free of political stumping, is what I am going to attempt. We know enough about the allowance schedule, likely CO2 permit pricing and data from EIA to tell us where we’re headed. It’s all there and not likely to become more expensive as buy-in is sought from fence-sitting Senators.

As a collegial effort from an increasingly independent, formerly republican voter, I invite both sides to critique the accuracy of this presentation. The numbers aren’t perfect, but should be sufficiently accurate to paint the picture. Some basics to start:

U.S. 2005 CO2 emissions: 5,975 million tons
Utility 2005 CO2 emissions: ~2,400 million tons
Utility 2006 MWH sold: 4,123 million (or 4.123 bb Megawatt hours, if you like)
2005 fuel mix: 49% coal, 18% natural gas, 33% non or negligible CO2
Carbon price per ton: $15, contingent upon Sen. A. Spector’s cap

The allowance formula:
Total allowances equal one for every ton of carbon emitted in 2005, or 5,975 billion
30% allocation to utilities is (.3)*(5,975)=1793bb
This 30% “giveaway” is broken into two parts:
15% according to pro-rata sales, or Utility MWH / National MWH sold
15% according to the pro-rata 2005 emissions rate, or Utility CO2 / National Utility CO2

Before flowing the numbers, its important to understand how watered down the bill has become and why it has lost support from Greenpeace, for instance. With the coal states heard, the $50 per ton prices included in previous bills, as well as the 60, or $80, figures modeled by utilities, are history. Arlen Spector (Sen-PA) has conservatively introduced a suggested cap of $15 per ton, which would go a long way to providing utilities the certainty of cost which is so important in this business. Some kind of cap will likely gain political support in the final bill and this maximum number forms the basis for costs in my model.

Using the above, we can apply the costs of emissions across various utilities. It follows intuitively that under Cap & Trade, if you don’t exceed your individual cap, you pay only for those allowances not already given to you. EIA data above suggest utilities emit 40% of carbon (2400/5975). Hence, 40%-30%, or 10% must be paid for under a status quo. Further application of the allowance formula makes the number to be purchased rise, or fall, based upon how carbon intensive the individual utility has become, or always was. Since coal and natural gas add up to roughly 70% of total electricity production, any utility that is ~50% coal and ~20% natural gas, will roughly break even with other utilities when it comes to the credits (permits, allowances). But what about Midwestern utilities that are 80% coal intensive? A few exceed this, but the common variation in the public sector falls over a range of about 40-80% coal (WV’s 98% notwithstanding).

Two points deserving focus are the point at which carbon intensiveness represents a cost and the specific intensiveness of any given utility, which tells us what that cost will be. It would be simple if it were only coal that was a formidable carbon source, but we have to include natural gas’ emissions rate which is half as much as coal. Adding half of the 20% US production that is gas to the 50% that is coal gives us a ~60% average carbon intensiveness across the country. Utilities exceeding this will pay and those beneath this, after having paid for the allowances not given away, will profit. That’s the simple reality behind the sales aspect of the formula which has come under dispute.

An example: At 80% carbon intensiveness (or coal) I arrived at Southern Minnesota Municipal Power Agency’s expected cost of $3.7mm to continue emitting carbon at its 2006 rate. How does this cost flow through its utility rates? Well, they sold 3.358mm megawatt hours in 2006. Not accounting for variations in sales, or fuel mix, since 2005, which is somewhat reasonable, this cost washes down to a 1.1 cent increase in per kwh rates across all commercial, residential and industrial accounts.

Here’s the kicker. To those of us on the East/West coasts, who pay 20 cents per kwh, this is small in percentage terms. On the other hand, when you are a SMMPA customer paying 4.8 cents per kwh, its represents an almost 25% hike in your bill. Not a double, as some politicians would have us believe, and not a whole lot in absolute terms either. If a cap on carbon’s price isn’t established, it isn’t impossible to see a 4.8 cent per kwh rate doubling. But part of this whole illustration is to demonstrate that its how you spin it.