1. 1050 Thomas Jefferson Street, NW Seventh Floor Washington, DC 20007 (202) 298-1800 Millenium Tower 719 Second Avenue, Suite 1150 Seattle, Washington 98104 (206) 623-9372 Federal Climate Change Legislation: Potential Impacts on Hydropower Kyle Danish Van Ness Feldman, P.C. Northwest Hydroelectric Association Annual Conference Portland, Oregon February 19, 2008

2. 2 Overview Potential timing and form of federal GHG legislation Potential impacts on hydropower o Market impacts Higher prices for fossil fuel-fired generation o Allowance impacts On the basis of load o Funding impacts For new zero-carbon generation

3. 3 Emerging Federal Legislation Question has shifted from if to when and how Drivers o Science o Public opinion o Democratic takeover of Congress o Supreme Court decision in Massachusetts v. EPA o State and regional action Possible timing o Enactment: 2009, 2010, 2011 o Effective date: 2012, 2013, 2014

4. 4 Status of Legislation House of Representatives o Focal point Energy and Commerce Committee –Chairman John Dingell Air Quality and Energy Subcommittee –Chairman Rick Boucher Senate o Lieberman-Warner Climate Security Act of 2007 Reported out of the Environment & Public Works Committee in December 2007 Possible Senate vote in May-June Not clear that it will pass, but L/W bill is current template for consideration.

5. 5 Cap-and-Trade Basics Set a cap on emissions for group of sources o Can decline over time Distribute allowances equal to the cap o Each allowance equals a right to emit one ton Sources must submit allowances for their emissions Sources can buy and sell allowances o High cost sources buy allowances from low cost sources o Cap is met through lowest-cost combination of actions

6. 6 Design of Lieberman-Warner Cap-and-trade with annually declining cap o 2012 = 2005 level of emissions o 2020 = 1990 level of emissions o 2050 = 70% below 2005 level of emissions Points of regulation o Consumers of coal (submit allowances for direct CO 2 emissions) o Natural gas processors and importers (submit allowances for CO 2 emissions imputed to use of product) o Petroleum refiners (submit allowances for CO 2 emissions imputed to use of product) o Sources and producers of non-CO 2 gases o No allowance submission requirements for hydropower Distribution of allowances o Mix of auction / free allocation Trade sanctions for imports from uncapped countries

7. 7 Cost Containment Under Lieberman-Warner Trading of allowances o Banking o Borrowing Limited credit for pre-program emission reductions Ability to use “offsets” for compliance o Emission reduction projects at sources not reached by the cap Can use reductions from domestic projects to meet up to 15% of compliance obligation –Under Lieberman-Warner definition, hydropower capacity additions would not generate offset allowances Can use international allowances to meet up to 15% of compliance obligation Carbon Market Efficiency Board o Can intervene if allowance prices turn out to be higher than expected

8. 8 Stringency of Lieberman- Warner McCain/Lieberman No Controls Bingaman/Specter Sanders/Boxer 1990 U.S. Emissions Kerry/Snowe Lieberman/Warner

9. 9 Impacts on Electric Power Sector Compare to McCain-Lieberman bill o Less stringent than Lieberman-Warner bill DOE EIA study of McCain-Lieberman o Allowance Prices $22.20/tonCO 2 e in 2020 $47.90/tonCO 2 e in 2030 o Electricity prices 6-14% higher than the base case in 2020 16-25% higher than the base in 2030 o Delivered energy prices in 2020 Natural = 13.8% higher than base case Coal = 128% higher than base case

10. 10 EIA findings: “Non-hydro Renewables” Overall o 2030 base case = 9% of total generation o 2030 McCain-Lieberman = 24-31% of total generation Biomass o >300% increase over base case by 2020 o >800% increase over base by 2030 Wind o >200% increase over base case by 2020 o >250% increase over base case by 2030 Implications for hydropower o Value of hydropower should increase, particularly in wholesale markets

11. 11 Allowance distribution The $120 billion question o Assume approx. 6 billion tons at approx. $20/ton “Old school” o Acid Rain program Distribute <90% of allowances for free to regulated generators “New School” o Emphasis on auction Phase-down free allocation in favor of auction over time o Use of allowances like money Transitioning fossil generators Promotion of clean energy Moderate impacts on rate payers

12. 12 Allowance Allocations in Lieberman-Warner Proposal

13. 13 Fine Print on Lieberman-Warner Power Sector Allocations Fossil-fired generators receive a 20% allocation that declines to zero in 2031 o Rural electric coops are first in line to receive allowances, specifically a 1% allocation with a special set aside for Virginia and Montana coops o New entrants (including coops) are second in line to receive allowances based on a national CO 2 rate achieved by all fossil-fired generators during 5-year period o Existing generators (including coops) are last in line to receive allowances based on historic CO 2 emissions achieved during 3-year period o Hydropower does not qualify. Load-serving entities (LSEs) receive a permanent 9% allocation o Allocation is based on electricity delivered (similar to output standard). o Allowances must be used to mitigate rate impacts for low- and middle- income consumers or promote energy efficiency among consumers. o Hydropower does qualify.

14. 14 Lieberman-Warner: U.S. Cap and EGU Allocations Incumbent Allocation New Entrant US CAP Load Serving Entities Rural Electric

15. 15 Allowance Allocations in Lieberman-Warner Proposal

16. 16 - 5 10 15 20 25 30 35 40 45 50 2020203020402050 Subsidy, $B/year CCS Bonus allowances Adv Transportation Cellulosic Ethanol Adv Coal/CCS Zero/Low carbon Total Value: $1.3 Trillion 83 535 333 83 238 * Approximate values based on Bingaman “safety value” prices Value of Technology Subsidies* Potential funding for new hydro?

17. 17 Subsidies for Zero/Low- Carbon Energy Technology Climate Change Credit Corporation receives and distributes allowance auction revenues Share of revenues for “production of electricity from new zero- or low-carbon generation” o Defined as a unit placed into service after enactment of the Act Appears to exclude capacity additions at existing units Award is a contract to provide annual production payment for 1 st 10 years of service o Based on competitive bidding process / reverse auction

18. 18 Questions? Kyle Danish kwd@vnf.com (202) 298-1876