1. Addressing Climate Change while Protecting Consumers (…and a New Idea) NASUCA Annual Meeting November 16 2010 Ezra D. Hausman, Ph.D. www.synapse-energy.com | ©2010 Synapse Energy Economics Inc. All rights reserved.

2. 2 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 2 From America’s Finest News Source… Report: Global Warming Issue From 2 Or 3 Years Ago May Still Be Problem The Onion, November 10 2010

3. 3 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 3 Basic Assertions Human-caused, global climate change is a serious environmental, economic, social, and national security issue Climate change will have significant and harmful impacts on our lives and on our children’s lives The severity of this threat will become increasingly obvious and difficult to dismiss over the next decade The U.S. Government will ultimately take action to progressively and severely restrict the emissions of greenhouse gases into the atmosphere Consumer advocates and commissions have a role to play TODAY to protect consumers’ interest as this debate moves forward

4. 4 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 4 Basic Assertions “If the climate-deniers are right—but we combat climate change anyway—we’ll have slightly higher energy prices but cleaner air, more renewable energy, a stronger dollar, more innovative industries and enemies with less money. If the climate deniers are wrong, and we do nothing…” -Thomas Friedman, NY Times, November 14 2010

5. 5 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 5 …There Have Been some Setbacks

6. 6 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 6 Cap and Trade Works for Acid Rain… DAILY PRICING SPEC TERMBID PRICE OFFER PRICE SO22009$8.000$10.000 SO22010$5.000$9.000 Annual NOx2010$300.000$320.000 Seasonal NOx 2010$45.000$50.000

7. 7 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 7 Taxes Worked for Cigarettes…

8. 8 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 8 …But CO 2 is Different

9. 9 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 9 Regulatory/Market Innovations Renewable Portfolio Standards Production and Investment Tax Credits Feed-in Tariffs Renewable Power Authority Requirements or prudence determinations for long-term contracts Each of these provides benefits, but none has the broad, market-based impact of cap-and-trade or a carbon tax

10. 10 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 10 A New Idea… CO 2 RCs (“Corks” – Named by Steve Michel of WRA) …or ZEEKs (ala Jeremy Fisher) Tradable, technology-independent low-carbon generation attributes Based on a CO 2 emissions threshold of 1 ton per MWh (“efficient coal generation”) ZEEKs are earned (or burned) for deviating from the threshold with each MWh of energy generated A zero-CO 2 MWh produces 1 ZEEK, while a gas CC might produce 0.5 ZEEK per MWh; inefficient coal would have to buy ZEEKs down to the threshold ZEEKs would be fully fungible and separable from energy deliveries

11. 11 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 11 ZEEKs vs. Renewable Portfolio Standards Pretty similar, actually. LSEs must “hold certificates” based on a regulated percentage of electricity sales – compliance obligation is on load We expect (hope?) that ZEEKs would be more standardized, less beholden to parochial interests, independent of deliverability requirements, and more fully fungible Not Technology-Specific: and certifiable low-carbon source can qualify, including demand resources—market picks technology winners and losers (May be some vintaging restrictions, as with RPS) More directly targeted to produce GHG-displacement impacts (this is a secondary benefit of RPS)

12. 12 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 12 ZEEKs vs. Cap and Trade: Similarities Effectively places a price on greenhouse gas emissions, i.e., internalizes the externality Provides a strong incentive for producers of low-carbon electricity Market-based, fully tradable, allows “the market” to find the least cost sources of low-carbon energy Sets a specific quantitative target for CO 2 emissions from the power sector and allows the market to find the lowest price/cost

13. 13 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 13 ZEEKs vs. Cap and Trade: Differences ZEEKs do not increase the price of electric energy—although their cost does get passed on to ratepayers Emissions allowances (Cap-and-Trade) or taxes increase the energy clearing price in electricity markets because they increase the variable cost of production. ZEEKs actually decrease the variable cost of production for lower-carbon generators (i.e., gas) because they create a secondary source of revenue for these generators. Price-takers (i.e., nuclear, hydro, renewables, often coal) receive a lower price for their energy, making higher-emissions generation less economically viable ZEEK-eligible resources make up the revenues in ZEEK sales (or, for IOUs, obviated purchases)

14. 14 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 14 ZEEKs vs. Cap and Trade: Differences 2 Uncle Sam does not produce ZEEKs – generators do Uncle Sam does not sell or allocate ZEEKs – no fighting over money or allowances, nor are there opportunities to pilfer Identical (?) impacts (on consumers) in regulated and deregulated electricity markets ZEEKs are electricity-specific, although there is no reason that they could not be a part of an economy-wide cap-and-trade system or carbon tax. ZEEKs target consumer funds towards GHG mitigation, not to windfalls and payoffs

15. 15 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 15 ZEEKs: Some Numbers Total US Electric Sector Energy: 3.8 Billion MWh/year Total US Electric Sector CO 2 Emissions: 2.3 Billion Tons Pre-Policy ZEEKs: 3.8 - 2.3 = 1.5 Billion (assumes all generation qualifies) Total ZEEKs required for 20% reduction in electric sector emissions: 3.8 – (0.8 * 2.3) = 1.96 Billion  A 31% Increase in ZEEKs  0.46 Billion MWh of carbon-free electricity, or  0.92 Billion MWh at half-ZEEK levels

16. 16 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 16 ZEEK Numbers: Some Perspective Total natural gas generation in the US: 0.85 Billion MWh – doubling this (and displacing coal) would almost meet 20% reduction target A new 1000 MW nuclear plant would add 8.3 Million ZEEKs per year –55 new such plants (replacing coal) would meet 20% reduction target So would 55,000 3MW wind turbines replacing coal, operating at 33% capacity factor So would reducing load by 1%/year for 20 years (if displacing coal)

17. 17 www.synapse-energy.com | ©2008 Synapse Energy Economics Inc. All rights reserved. 17 Wrap-up ZEEKs (or CO 2 RCs) represent a way to price carbon and directly support EE, renewables, and any other source of energy that is truly low-carbon. Would replace hodgepodge of state, regional, and federal incentives with a single, market-based approach while avoiding many pitfalls Steady ramp-up of requirement would provide a stable price signal for low-carbon resources in a large, liquid market Not the only idea out there for regulating carbon, but perhaps the best?