California’s Climate and Energy Policies: Implications for Utilities Ren Orans, Managing Partner Energy and Environmental Economics, Inc. 101 Montgomery Street, Suite 1600 San Francisco, CA

2 Energy and Environmental Economics, Inc. (E3) San Francisco-based firm established in 1993 Electric and natural gas utility sectors Practice areas  Energy efficiency and building standards  Distributed generation, demand response and CHP  Integrated resource planning  Transmission planning and pricing  Retail rate design

3 Topics Quick CA-HI Comparison Update on CA Climate & Energy Policy Implementing CA’s GHG Law, AB32 Challenges and Opportunities for Utilities

4 Greenhouse Gas Emissions by Sector: Hawaii and California Sources: Hawaii GHG Emissions Inventory, updated May 2007 California GHG Inventory, updated November 16th, 2007 Note: States’ accounting of GHG emissions are not identical.

5 Ambitious Greenhouse Gas Reduction Goals in Hawaii & CA Hawaii House Bill 226 Approved by Governor June 2007 State greenhouse gas emissions must fall to 1990 levels by 2020 Creates a ‘greenhouse gas emissions reduction task force’ to oversee implementation CA Assembly Bill 32 Approved by Governor Aug State greenhouse gas emissions must fall to 1990 levels by 2020 CA Air Resources Board over- sees implementation of law Provides for ‘market-based’ mechanisms starting in 2012 to reduce emissions

California Policies Related to Climate Change

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8 Key California Laws and Initiatives on Climate Change and Clean Energy AB1493: Vehicle GHG emissions standard (2002) SB1078: Renewables Portfolio Standard (2002) Exec Order S-03-05: GHG reduction goals (2005) SB1368: GHG Emissions Performance Standard (2006) AB2021: Statewide energy efficiency targets (2006) AB32: Global Warming Solutions Act (2006) Exec Order S-1-07: Low Carbon Fuel Standard (2007) Western Climate Initiative (2007)

9 And that’s not all…

10 SB 1368: The Greenhouse Gas Emission Performance Standard All new IOU power procurement contracts over 5 years long: emissions must be less than or equal to a combined-cycle natural gas turbine (1,100 lbs CO2/MWh) CEC adopted a similar rule for municipal-owned utilities Coal-fired power plants must have carbon capture and sequestration to sign new long-term contracts with CA IOUs Combined-Cycle Natural Gas Plant

11 Renewable Portfolio Standard target of 33% Renewable by 2020 SB 107: 20% RPS target by 2010 and the Governor has proposed 33% by 2020 IOU RPS Procurement (% retail sales)2005 Pacific Gas & Electric11.9% Southern California Edison17.2% San Diego Gas & Electric5.2% Source: CEC, RENEWABLES PORTFOLIO STANDARD 2005 PROCUREMENT VERIFICATION, August 2007

12 No New Nuclear without Nuclear Waste Disposal Option 1976 California state law: No new nuclear power in-state… …Unless federal govt. approves a demonstrated technology for the permanent disposal of spent fuel from nuclear facilities Diablo Canyon Nuclear Power Plant Source:

13 EPA ruling against once-through cooling affects California 20,000MW affected Retrofits  are not always possible  are expensive  decrease efficiency and capacity  take units off-line Significant reliability challenge for CA ISO Incredible Fact  17 billion gallons of water used in once-through cooling in the state per day Generation Affected

14 State Energy Efficiency Targets IOUs have strong financial incentives to achieve aggressive EE targets (~70% economic EE potential) CPUC adopted ‘Big, bold energy efficiency strategies’  All new residential construction in California will be zero net energy by 2020;  All new commercial construction in California will be zero net energy by 2030; and  Heating, Ventilation, and Air Conditioning industry will be reshaped to ensure optimal equipment performance AB 2021: requires POUs to identify all potentially achievable cost- effective electric EE savings and to establish annual targets for EE savings and demand reduction

Implementing the Global Warming Solutions Act

16 California Global Warming Solutions Act (Assembly Bill 32) State must reduce total GHG emissions to 1990 levels by 2020 (= 427 million metric tons CO 2 -equivalent, excludes interstate aviation and shipping) Carbon regulation in CA will begin in 2012 Principal regulating agency is California Air Resources Board (CARB), with input from sector regulators GHG caps for individual sectors to be determined by January utility sector share still uncertain Implementation architecture to be determined by January possible multi-sector cap and trade

17 AB32: Global Warming Solutions Act Case 1, Natural Gas Build-out  ~40MMT reduction to meet sector target  Imported emissions takes up a lot of the cap Case 1b, Existing Policy Build-out  ~18MMT reduction to meet sector target  Emissions level about flat California Energy Commission Scenarios Analysis Generation and GHG Projections GHG emissions from imports 1990 emission level 0 50, , , , , , , , GWh MMTCO2 Total Generation (left-hand axis) Electricity Sector Emissions (CARB Baseline) CEC Scenarios: Natural Gas Build-out, BAU Case 1 CEC Scenarios: Existing Policy, BAU Case 1b

18 AB32 Implementation Issues ‘Energy Deliverer’ (First-seller) v. Load-based GHG cap  Energy Deliverer: Power plants are regulated for in-state power production, the ‘deliverer’ of imported power is regulated for imported power. Supported in CPUC’s interim opinion (Feb. 8 th,2008)  Load-based: Load-serving entities (utilities), not generators, are regulated Allocation of allowances  Proposals for free allocation, auctions or sales of GHG permits Trading  Will trade of GHG emission permits be allowed between sectors ‘Offsets’  Disagreement over whether and how GHG reductions from outside the regulated arena may be used to meet CA GHG reduction goals

19 The Big Picture of California’s Climate Policies and the Electricity Sector CA must bring CO2 emissions back to 1990 levels (~25% reduction from BAU);  while adding 9,000 MW of generation;  new nuclear power not allowed until feds develop waste repository;  while retrofitting 20,000 MW of capacity to eliminate once- through cooling. Agencies want to know how much AB32 will cost the electricity sector…

Preliminary Results from Utility Sector Analysis

21 Project Overview Joint California PUC, Energy Commission, Air Resources Board (ARB) effort to evaluate AB32 compliance options in California’s electricity and natural gas sectors Model estimates the cost and rate impact of a variety of compliance strategies relative to two reference cases Main Deliverables  Non-proprietary, transparent, spreadsheet-based model using publicly available data  Report on results and sensitivities / scenarios

22 Example CO2 Reduction Portfolio Reductions from BAU Reference Case

23 Business-as-Usual Target Case Summary of resources developed  Energy efficiency; 75% economic potential  3,000 MW PV and 5% DR  Conventional adjustment for L&R balance New Renewable Resources

24 Business-as-Usual Reference and Target Case Preliminary Results

25 Business-as-Usual Reference and Target Case Preliminary Results CostsRates

26 Members: Governors of Arizona, California, New Mexico, Oregon, Utah and Washington, Premiers of British Columbia and Manitoba Bring emissions down to 15% below 2005 GHG levels by 2020 Aug 2008 Goal: Design of market trading mechanism in place Western Climate Initiative (WCI)

Opportunities Related to Climate Change

28 Utility Business Opportunities Customer service options Grid modernization Large-scale regional projects

29 Contact Information Energy and Environmental Economics, Inc. (E3) 101 Montgomery Street, Suite 1600 San Francisco, CA Phone: Fax: Web: Ren Orans, Managing Partner