Will California's Carbon Caps Impact You?
Why should business pay attention to California’s AB 32, the climate change law mandating an economy-wide 25 percent reduction in carbon emissions by 2020?
How California goes, so goes the nation, particularly when it comes to the business of energy. State regulators are writing the rules for the nation’s first comprehensive program to limit carbon emissions. So far, the non-utility industries impacted include cars and trucks, refrigerators, landfills, docked ships, semiconductors, cement plants, fertilizers and auto tune-up and oil change shops.
And that’s just the beginning. The state Air Resources Board –in charge of drafting carbon reduction rules for the nation’s largest energy market – claims these early measures only get the state 1/10 of the way to the goal of cutting over 170 metric tons of carbon. To put that in perspective, that is the equivalent carbon spewing from 43 standard coal-fired power plants.
If you have manufacturing facilities in the South or Midwest, your power supply portfolio may now be a risk to your long-term profitability. Why? Once desirable because of cheap coal, these energy supply portfolios could soon represent liabilities requiring costly carbon “offset” mitigations.
If you are a utility -- or unregulated energy service provider -- why not learn from the world’s most adventurous energy innovators addressing AB 32, a law that offers corporations a heads-up on the mother of all business risks?
North versus South
“The threat of greenhouse gas emissions is real and the consequences severe. We start from that place,” acknowledged Ray Williams, Pacific Gas & Electric’s (PG&E) director of long-term energy policy, noting that his utility broke ranks with the rest of the business community and backed AB 32. Though state regulators only consider 12 percent of PG&E’s current supply portfolio as “renewable,” over half of its power plants are carbon-free. How is this possible? The utility derives an additional 24 percent from the Diablo Canyon nuclear power plant and roughly 20 percent from hydroelectric facilities that do not meet state criteria as “renewable” supply.
Unlike the rest of the country, where utilities rely on the most carbon intensive fuel -- coal -- to meet half of supply needs, California utilities derive, on average, only 20 percent of supply from coal imports. But PG&E buys far less than its neighbors: just 1 percent. These factors translate into surplus carbon offsets that could be sold to its southern California utility brethren as well as manufacturers up and down the state (see sidebar below).
Interestingly enough, Southern California Edison (SCE) and San Diego Gas & Electric (SDG&E) opposed AB 32. “We were concerned about the costs to our customers,” acknowledged Gary Stern, SCE’s director of strategy and resource planning. “We opposed AB 32 because climate change is a global issue it makes more sense to address it at the federal level,” said Mike Murray, Sempra Energy’s director of policy and legislative analysis. SDG&E, the state’s smallest private utility, is part of Sempra, which also owns Southern California Gas Company, the nation’s largest purveyor of natural gas.
Creating New Carbon Markets
Carbon offsets are a new commodity created when fossil fuel burning is displaced by non-carbon power sources, such as a wind project. The amount of carbon displaced by substituting wind for coal is calibrated, generating the offsets. If your portfolio is clean, offsets generate revenues. If your portfolio is dirty, offsets become a new line item in the budget. The costs of certified carbon reductions are currently running at over $50/ton.
Alex Rau, founder and principal with ClimateWedge, a two-year old firm working in corporate voluntary carbon markets, claims a critical issue yet to be decided in California is whether permits to emit carbon are given away for free (as was the case in Europe) or are auctioned off. If there is an auction, where those revenues go may determine whether carbon markets work at all. “I believe a revenue recycling approach is the best use of the proceeds from an auction, perhaps re-investing them into low-carbon technology R&D,” he said. If revenues are diverted to general fund government coffers, the whole system could flounder, he warned.
The good news is that “all of the viable permutations in Congress are integrating markets into their design to allow trading,” Rau said, whereas AB 32 is still mired in uncertainty. “California has to send the right signals to the private sector ASAP. What is the scope? What sectors will be covered? The law says economy-wide, but we don’t know what that means yet,” Rau said.
PG&E favors a carbon cap placed on the overall power supply portfolio, the so-called “load-based” approach. Since its portfolio has less carbon than its southern rivals, this broader bubble offers them great flexibility in selling offsets to utilities or companies looking to get under the carbon cap. SCE (as well as SDG&E) favors a system capped at point sources, also known in the industry as the “first seller” approach. This is the system in place in Europe and is the one being debated in Congress. Being in sync with the rest of the country will make it easier for SCE and SDG&E to (hopefully) purchase cheaper offsets as carbon markets expand beyond California’s borders.
Among US firms that have already gone carbon neutral through voluntary offset purchases include REI, Nike, Interface, Inc., Yahoo!, Inc., Working Assets, Dell, Mohawk and PG&E.
Moving Beyond California
“Our advice to other utilities across the country is to develop long-term procurement plans that consider what is happening in California. Carbon regulations are just a matter of time,” said Murray. At present, SDG&E only derives 7 percent of its total portfolio from renewable resources, so its carbon exposure is the highest among California’s private utilities. The utility is closest to California’s best remaining remote renewable resource basins, but cannot gain access to these premium non-carbon sources without new transmission lines.
Since the best large-scale wind and solar fuels are often remote, the transmission line business is a clear winner under AB 32 and copycat laws adopted at the federal or state level. Of the nation’s $600 billion in utility assets, only 10 percent currently represent transmission infrastructure. Over the past few decades, electricity consumption has jumped by more than 100 percent, while investments in transmission declined by over 50 percent, a gap that underscores a clear market opportunity. .
For its part, SCE can boast that it buys more renewable energy than any other utility in the country, obtaining roughly 16 percent of its power supply from sources deemed “renewable” by the state. Furthermore, the utility has recently slashed carbon emissions by a third, having recently abandoned its largest coal-fired source, the Mohave plant located across the state border.
One technology SCE is pursuing in response to AB 32 is a 500 MW hydrogen power plant that derives its fuel from coal gasification, storing residual carbon emissions in underground caverns created, ironically enough, by historic fossil fuel exploration. “We want to design a system that meets AB 32’s goals at the lowest cost. Since we have to go from among the cleanest to cleaner still, we have to dig a little deeper,” said Stern. Coal may not be completely abandoned under future carbon caps, but conventional plants that fail to account for or capture carbon are clearly suspect.
Electric Transit Best Utility Bet
No doubt, the most radical initiative launched by PG&E in response to AB 32 is support for plug-in electric-gas hybrid technology. The transportation sector generates over 40 percent of California’s carbon emissions, while electricity generation is 20 percent. Fuel switching from petroleum to electricity has state utility executives seeing more than one shade of green.
In April of this year, PG&E was the first utility in the country to publicly demonstrate vehicle-to-grid charging technology, partnering with Silicon Valley’s Google and Japan’s Toyota, whose gas-electric hybrids are the hottest cars on the market. Not only is the utility hoping to boost sales by having legions of motor vehicles plugging into its grid at night – when 40 percent of power plants are turned off – but PG&E’s long-term strategy is to turn our motor vehicles into mini-power plants, The utility is working on technology – dubbed V2G – that allows for the bi-directional flow between personal vehicles and the shared electric power grid.
“The future vision is that vehicles became distributed battery sources,” said Andrew Tang, PG&E’s smart energy web director. “Communication technologies are vital to making this vision real,” he added. All three utilities tout electricity as a substitute transportation fuel. “Electricity is cleaner than the internal combustion engine and most [vehicle] charges will occur during off-peak hours,” said Stern of SCE. He quickly added that plug-in hybrids don’t just represent “increased sales on the system,” a rare opportunity to boost revenues when most efforts to limit carbon focus on cutting consumption. From his vantage point, plug-in hybrids can also harmonize supply and demand between night and day, maximizing the value of existing infrastructure.
Whether designing market rules for new government-backed carbon markets, or pushing space-age cars that do double-duty as micro-power generators, California is showing there is business opportunity in places where you least expect it.