Minnesota utilities say CO2 price estimates a somewhat futile exercise

Utilities that serve Minnesota have asked that the Minnesota Pollution Control Agency (MPCA) hold at the current level its estimates for the costs of CO2 emissions credit and said that even those estimates don’t have much application in the real world.

On March 9, Alliant Energy (NYSE:LNT), which does business in Minnesota through Interstate Power and Light (IPL), filed its arguments on that point with the Minnesota Public Utilities Commission and the MPCA. The arguments were in response to a notice issued by the MPCA about establishing 2012 estimates of the cost of carbon dioxide regulation.

Notable is that to the extent any Minnesota utility has to take into account CO2 price estimates in its resource planning, that will advantage renewables like solar and disadvantage fossil fuels like coal.

“IPL believes that providing a forecasted estimate of the likely range of costs of future carbon dioxide regulation on electricity generation is very difficult and inherently contains large uncertainty,” said IPL. “However, IPL also recognizes that Section 216H.06 of Minnesota’s Next Generation Energy Act requires such an estimate be made and updated annually.”

IPL has reviewed the 2011 cost estimate recommendation by the MPCA and the Minnesota Department of Commerce, Division of Energy Resources. This reflected a cost range for regulation of CO2 between $9 and $34 per ton of CO2 emitted in 2012 and beyond, which is being re-proposed for 2012.

IPL said that in the analysis, cost projections for the future costs related to the regulation of carbon emissions ranged from $0 to $191.50 per metric ton from all the sources used in the review. A final range was selected using a modified statistical averaging process. However, since the reviewed sources used a range of varied assumptions, the averaging process needed to factor in estimated adjustments so that the results would not be skewed by the modeling assumptions. These adjustments are fairly significant, reducing the confidence level of the final selected range, the utility added. Moreover, IPL said it believes that the lower limit may still be overstated.

IPL pointed out that it uses an independent consultant, Wood Mackenzie Ltd., to provide natural gas, coal and electric market price projections for use in IPL’s Integrated Resource Plan (IRP), which are updated on an approximate 6-month schedule. Wood Mackenzie also provides IPL with emission allowance price projections on SO2, NOx and CO2 for use in the IRP. In spring 2010, it was projected that CO2 regulation may begin in 2013. In each subsequent report, Wood Mackenzie has continued to project a delay in the implementation of a CO2 price, including the most recent projection in the fall of 2011. Currently it is projected that the start date of any CO2 pricing will not occur until 2022. “IPL has no current information to suggest this start date will not continue to be extended in the future,” the utility argued.

Wood Mackenzie has also reduced its projected CO2 price in any given year with each issuance of its projections. Furthermore, IPL is not aware of any program under consideration that would reflect implementation of a CO2 price within the next ten years, if at all. Four years ago, the possibility of a CO2 price in some form appeared to be more probable due to various greenhouse gas proposals in Congress. But there has been a severe continued downturn in the economy since the Minnesota Public Utilities Commission’s October 2009 order establishing the 2009 and 2010 estimate of future CO2 regulation costs.

“In addition, natural gas prices have declined significantly over the same time period,” IPL added. “Increased use of natural gas for electric power production inherently improves CO2 emission totals, and at this time, natural gas prices are projected to remain relatively low for the foreseeable future.”

There appears to be very little interest or movement in Congress to adopt CO2 legislation, IPL added. “This is supported by Wood Mackenzie as well as the general political movement including a lack of support by the President,” it said. “Additionally Republican presidential candidates have not expressed any interest in supporting national CO2 legislation.”

IPL said it can generally support the $9 to $34 per ton range as recommended by the MPCA and the department, but recommended an effective date of no earlier than 2022 as the year for which utilities should start to include these costs for planning purposes.

Otter Tail also sees little chance of congressional action

Otter Tail Power, a subsidiary of Otter Tail Corp. (NASDAQ Global Select Market:OTTR), offered similar comments on March 9. “Otter Tail believes the current state of the economy, the upcoming presidential and congressional elections, and escalated tensions in the Middle East have significantly slowed the political momentum of CO2 reduction policy from a legislative perspective,” the company said. “The probability of having such legislation passed and in-force during 2012 is extremely low.”

It is also possible that, in the absence of congressional action, U.S. Environmental Protection Agency regulation under the existing Clean Air Act may take the form of generation performance standards and generation efficiency improvements, rather than imposition of a cost per ton of CO2, Otter Tail added. While these regulations may have significant cost implications, they may be difficult to quantify on a per ton basis.

Otter Tail pointed out that in the most current Wood MacKenzie fuel price forecast, the assumption used is that the CO2 price will be $14 (real) per ton beginning in 2022 growing by 6% annually to reach $26.58 by 2033. Synapse Energy Economics, in its 2011 Carbon Dioxide Price Forecast, provided a high, mid, and low CO2 price forecast. Synapse’s mid CO2 price forecast starts at $15/ton in 2018 and climbs to $50/ton in 2030. In that same report, Synapse states that “Congress is unlikely to take up an economy wide cap and trade program in its new session; instead, legislators are likely to focus on policies that promote technological innovations.”

Cost estimates and timing for the future cost of CO2 regulation need to be realistic to deliver meaningful modeling results so appropriate generation resource decisions can be made for electric consumers in Minnesota, Otter Tail said. “Therefore, while Otter Tail supports maintaining the current range of $9 to $34 per ton, it recommends delaying the effective start date to at least 2020.”

Xcel’s consultants don’t even forecast near-term CO2 prices

Similar comments were also offered March 9 by Xcel Energy (NYSE:XEL). To develop a CO2 proxy price forecast, Xcel said it blended the baseline CO2 proxy price forecast from three different consulting firms: IHS Cambridge Energy Research Associates, PIRA and Wood MacKenzie. These three firms develop forecasts of energy demand, supply, and other factors, including an anticipated CO2 price.

The three firms started their forecast CO2 pricing between 2020 and 2022. Prior to 2021, only one firm offered a forecast for a CO2 price, which reduced the blended or averaged result in that year. Also, no forecasts extend beyond 2035.

The resulting “3-Source” CO2 proxy price forecast starts at $5.00 per ton in 2020, and climbs to $15.89 per ton in 2022 as all three consultant forecasts predict existence of a CO2 price in 2022. From 2022 onward, it escalates at about 9% per year in nominal terms. The higher escalation rate stems from the consultants’ view that reduction targets under future CO2 policy will get more stringent over time, as had been incorporated into previous federal CO2 legislative proposals.

The consultants Xcel surveyed foresee the potential for some degree of greenhouse gas regulation from the EPA based upon Clean Air Act rules, a process the EPA has already begun. This process may actually further delay the onset of a price on CO2, since the EPA regulation would not take the form of a CO2 price mechanism, but would likely employ a less flexible set of rules requiring emissions reductions from power plants, perhaps beginning in the 2014-2016 timeframe, Xcel noted.

It has been hypothesized that a future Congress might be interested in “reforming” the EPA regulations through a more efficient cap-and-trade or carbon tax. This might happen post-2015 and would likely allow a few years for the new legislated policy to begin, which pushes the beginning of carbon pricing into the 2020-2022 time frame, Xcel said.

“Finally, due to significant uncertainty associated with whether and when carbon policy may come into force and apply a price to CO2 emissions from Minnesota power plants, we also plan to submit planning scenarios with a $0 carbon assumption in our future planning efforts,” Xcel told regulators.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.