1. 1 CPUC Avoided Cost Workshop Environmental Externality Avoided Cost

2. 2 Emissions Comment Areas Value of emissions is being double-counted Avoided costs should not include a value for reduced CO2 emissions

3. 3 Emissions Evaluation Framework 2004200620082023 Electric Forward data CO2 added Gas Futures data CO2 added Long Run Marginal Cost (CCGT) Capital cost includes control technology Offset cost for NOx, PM-10 added for remaining emissions CO2 added Methodology does not double count

4. 4 Air Pollutants Considered  Working Group Recommendation  Focus on NOx, CO 2 and PM-10  NOx is most actively traded emission species in CA, <6% from power plants, direct gas  CO 2 is not regulated in US (yet), int’l trade emerging, about 30% from power plants, gas  PM-10 increase due to CT generation, <1% from power plants, PM-2.5 may be an issue  SO 2, CO, HCs not likely to be significant Methodology

5. 5 Calculating the Externality Adder Environmental Adder =  tons/MWh * $/ton (emission intensity * externality value) Emission intensity depends on the energy source that is at the margin (short-term and/or long-term), in terms of fuel source, plant age, heat rate, and emission control technology The marginal source is determined by the other proposed analytic methods

6. 6 Calculating the Externality Adder $/MWh Electricity Price Hour of Day 0 24 12 Price Shape used to develop hourly proxy heat rate High Emissions

7. 7 Level of Adder for Emissions Resulting Emissions Adder by Heat Rate

8. 8 Approach to CO 2 Emission Cost Value CO 2 emission costs are not externalities, but rather a present value of projected future emission costs Direct emission abatement not feasible at present Emission reduction costs range from $50/ton-CO 2 (solar power) Markets emerging, not yet mature, especially in U.S. Recent market costs: EU ETS $7-14/ton-CO 2, UK ETS $4-20/ton-CO 2, Dutch CERs $4-8/ton-CO 2, World Bank PCF $3-12/ton-CO 2 Oregon CT $1-4/ton-CO 2 Must also rely on studies that project future marginal costs and market trading prices Model estimates of emission stabilization (no trading) and Kyoto compliance (with trading) range from $5 to $69/ton-CO 2, with a median value around 17 /ton-CO 2 Discounting a future stream of project emission cost values back to 2004 resutls in a value of $8/ton-CO 2

9. 9 Why Include CO2 for Efficiency? Likely development of CO2 emissions limits on stationary sources over the timeframe of efficiency measures (as long as 20 years) Assuming a zero value for 20 years implies a 100% probability of not having any CO2 limit This would be an extreme assumption This could lead to financial risk of having to offset more CO2 emissions in the future Precedent in existing efficiency avoided costs Resulting value for CO2 is a low estimate of CO2 Value Report cites ranges from $5 to $69/ton-CO2 Analysis uses $8/ton-CO2