1. American Public Power Association Pre-Rally Workshop February 28, 2006 Washington, D.C. Climate Change: Making Community-Based Decisions in a Carbon Constrained World

2. Assessing the Risk of Future Carbon Constraints February 2006 APPA Meeting Washington, D.C. Kevin Wanttaja, SRP

3. February 2006 Purpose of Carbon Study Identify the compliance requirements of potential national polices Identify a range of strategies for controlling carbon Estimate the financial risks under various polices Determine critical elements of a long-term carbon management program Identify actions that should be taken now

4. February 2006 General Approach to Quantifying Carbon Risk Translate policies into estimates of future carbon allocations Quantify “gap” between projected carbon emissions versus allocations Assess potential changes to resource mix to meet carbon allocations Estimate cost of buying carbon credits to achieve compliance Financial risk falls between costs of changing resource mix to purchasing credits

5. February 2006 Climate Change Recent National Policy Developments Bush Global Climate Challenge Initiative –18% Reduction in GHG Intensity by 2012 –Greater investment in science and technology –Voluntary incentive based programs (Power Partners) McCain/Lieberman Climate Stewardship Act –Caps CO2 Emissions to 2000 levels by 2010 –Allowances distributed based on historical emissions –Administered by EPA –Severe penalties for exceeding allowances (3 x market rate)

6. February 2006 Climate Change Recent National Policy Developments Senator Bingaman 2005 Proposal – based on National Commission on Energy Policy (NCEP) –2.4% annual reduction of GHG emissions intensity from 2010 -2019. Translated into annual emissions caps. –91% -87% of allowances allocated to regulated sectors –Safety valve price of $7/ton CO2 in 2010 adjusted by 5% per year –DOE regulates program

7. February 2006 Climate Change Recent National Policy Developments Regional Greenhouse Gas Initiative (7 NE States) –2009 - 2014 CO2 Cap ~ 2004 emissions –2015 – 2019 CO2 Cap – 2.5% reduction per year through 2019 (10% below 2004 levels by 2019) –25% of allowances reserved for consumer benefit or strategic energy purposes –Unlimited banking of allowances and early reduction credits –Compliance demonstrated every three years

8. February 2006 2009-2019 BAU % Mix Coal PC53.1 IGCC0 Gas27.4 Nuclear16.9 Ren2.5 2009-2019 Production = 391,200 GWh 2009-2019 Fleet Intensity = 1359 lb/MWhr

9. February 2006 Potential GHG Emissions Reductions On-System –Environmental Dispatch* –Renewables* –Generation Efficiency –New Generation*/Fuel Switching –Biomass Co-Firing –Capture and disposal Off-System –Demand-side management –Market purchases* –Offsets (Terrestrial sequestration, clean projects) * Options considered in SRP study

10. February 2006 2009-2019 BAU % Mix 2009-2019 Bush % Mix Coal PC53.1 49.4 IGCC00 Gas27.4 Nuclear16.9 Ren2.5 6.3 Bush: By 2012, 18% reduction in 2002 intensity 2009-2019 Reductions Needed = 4.7 Million Tons 2009-2019 Fleet Intensity = 1335 lb/MWhr With target REN at 6.3%, goal exceeded

11. February 2006 2009-2019 BAU % Mix 2009-2019 McCain % Mix 1 2009-2019 McCain % Mix 2 Coal PC53.1 40.435.8 IGCC0 9.0 0 Gas27.4 41.0 Nuclear16.9 Ren2.5 6.3 McCain : Starting in 2010, absolute cap at 2000 levels, no price cap 2009-2019 Reductions Needed = 48.2 Million Tons 2009-2019 Fleet Intensity = 1113 lb/MWhr At $7/ton, $ Impact = $337 Million over 2009-2019

12. February 2006 2009-2019 BAU % Mix 2009-2019 Bingaman % Mix 1 2009-2019 Bingaman % Mix 2 Coal PC53.1 44.040.8 IGCC0 5.4 0 Gas27.4 36.0 Nuclear16.9 Ren2.5 6.3 Bingaman: Starting in 2010, reduce intensity by 2.4% per year, $7/ton price cap 2009-2019 Reductions Needed = 35 Million Tons 2009-2019 Fleet Intensity = 1181 lb/MWhr At $7/ton, $ Impact = $245 Million over 2009-2019

13. February 2006 2009- 2019 BAU % Mix 2009- 2019 RGGI % Mix 1 2009- 2019 RGGI % Mix 2 Coal PC 53.120.95.3 IGCC 028.50 Gas 27.4 71.5 Nuclear 16.9 Ren 2.5 6.3 RGGI: 75 % of current levels (2009-2014), 2.5% per year (2014-2018), No price cap 2009-2019 Reductions Needed = 119 Million Tons 2009-2019 Fleet Intensity = 752 lb/MWhr At $7/ton, $ Impact = $833 Million over 2009-2019

14. February 2006 Critical Elements of a Utility Carbon Risk Management Program Accurate inventories Estimate financial risks under future Climate Change policies Gain knowledge of cost-effective reduction methods Develop low emissions technologies for long- term generation needs Enhance business image by joining voluntary programs. Demonstrate voluntary reductions. Stay engaged in policy debates

15. February 2006 SRP Short-Term Actions Participation in Climate VISION/Power Partners Developing accurate GHG inventories for reporting under 1605(b) and potential voluntary registry programs Increase renewables in generation mix Participation in R&D –CoalFleetforTommorrow –Arizona geologic carbon sequestration (pilot study) Refine risk analysis –Firm up capital cost requirements –Perform sensitivity analysis using alternate carbon costs

16. February 2006 Key Elements of a National GHG Program Who is regulated? –Sector specific or economy-wide Where is the point of regulation? –Upstream (fuel extraction, fuel processing, fuel transportation) –Downstream (electric generators, large industrials) How should economics be addressed? –Intensity based targets vs hard cap, price caps, allocation of allowances, consumer protection What should be done to stimulate technology and R&D? How should program be integrated with other international efforts?

17. American Public Power Association Pre-Rally Workshop February 28, 2006 Washington, D.C. Climate Change: Making Community-Based Decisions in a Carbon Constrained World