Friday, May 12, 2017

Hedging an Uncertain Future: Internal Carbon Prices in the Electric Power Sector

This report examines how internal carbon prices are used by companies and electricity regulators to manage regulatory risk, and identifies ways policymakers can offer guidance for companies to manage such risk in uncertain political climates.

Key Findings

  • Electric power companies have been at the forefront of using internal carbon prices to anticipate future policies, manage regulatory risks, prepare for new markets and services, and respond to customer interests.
  • In particular, electric utilities have used carbon prices in integrated resource plans (IRPs) to evaluate future resource portfolios and to examine business decisions such as the retirement of fossil fuel units.
  • A review of recent IRPs shows a diversity of carbon prices used based on a number of factors, including the potential for future constraints on carbon that go beyond current state and federal policies.
  • In a new political environment less supportive of climate policy, the estimation of internal carbon prices for planning and hedging regulatory risk has become more difficult but no less important.
  • State policymakers and electric power companies should consider renewed efforts to provide transparent assumptions about carbon prices in IRPs. In addition, there should be continued efforts to improve modeling and methodologies for carbon pricing.

Companies and analysts cite several benefits of using internal carbon prices (WBCSD 2015):
• anticipating future policies that may put a mandatory price on carbon or that require deployment of low- or zero-carbon technologies;
• managing regulatory risk associated with stranded assets or inefficiently allocated capital associated with fossil fuel facilities that could be costly to ratepayers and shareholders (CERES 2010; Morris 2015);
• preparing for new markets and customer services that will evolve as the electricity sector decarbonizes; and
• responding to customers’ or investors’ interests in reducing emissions (UN Global Compact 2015).

US companies in the electric power sector employ a wide variety of carbon prices in Integrated Resources Plans (IRPs)  Table 1 displays carbon price information from a sample of recent integrated resource plans (IRPs) from US investor-owned electric utilities. These IRPs are all dated after the announcement of the final Clean Power Plan regulations in August 2015 but before the November 8, 2016 presidential election.
Several differences in the carbon pricing used by electric power companies are worth noting. First, companies differ on whether they include a carbon price in their base case assumptions, in sensitivity analyses, or in both.  Barbose et al. (2009, 16) argue for including in the base case an estimated carbon price that reflects “the most likely carbon regulations over the planning period.” In addition, some IRPs present a range of carbon prices that reflect different future natural gas price assumptions, rather than alternative stringencies for future carbon policies.

Prices range from $0 to $122 per ton.

Also see which notes that A 2016 international survey of companies across all economic sectors found that carbon prices ranged from less than $8 to greater than $800 per metric ton CO2.

by Joseph A. Kruger
Resources For the Future (RFF)
April 25, 2017 

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