Charles Adkins, NewEnergy Associates, USA
Planning for emissions trading is a complex strategic task. Software tools can help utilities plan for compliance in the most cost-effective manner.
The 37 developed countries that are signatories of the Kyoto Protocol have committed themselves to a difficult and expensive effort to reduce greenhouse gas emissions. The European Union (EU) has committed to an overall CO2 emissions reduction of eight per cent below their 1990 levels. “This will be difficult to achieve,” states Eric J. Hughes, principal consultant, emissions strategy and resource planning with NewEnergy Associates, a Siemens company. “For example, under the EU allocations, Spain is allowed an increase over 1990 levels of no more than 15 per cent. However, in 2001 greenhouse gas emissions had grown by roughly 32 per cent from its 1990 levels. Ireland was permitted an increase of 13 per cent above 1990 levels, but was at a 31 per cent increase level in 2001.” Hughes goes on to state, “Significant reductions must take place between now and the start of restrictions next year. Even more stringent penalties are slated for 2008 and beyond.”
Figure 1. CO2 emissions from electric generation in Ireland
The current legislative and regulatory climate in the US is only slightly better than that found in Europe, Canada, and the rest of the world. While the regulations in the US governing SO2, NOx, and particulate emissions are well understood, there are significant costs looming as NOx limitations ratchet down from “ozone season” only to year round ones. Adding to these costs is the Maximum Available Control Technology (MACT) requirements for mercury reductions. Further complicating the situation are multiple technologies for controlling each effluent (such as scrubbers, SRCs, bag houses) and the array of clean technologies (solar, wind, biomass, and geothermal).
Figure 2. CO2 emissions with no changes to existing resources
Control technologies designed for one effluent generally do not achieve a complete solution for other effluents. As a result, selected combinations of technologies are required for a complete solution at any single plant. Any future restrictions on CO2 emissions in the US to mitigate SO2, NOx, and mercury only add to this problem and create a great deal of uncertainty for the planners and executive decision makers. Over the next several years European companies will face similar challenges planning to meet the CO2 reduction requirements of the Kyoto Protocol.
The inclusion of emissions compliance issues in the electric utility planning process adds a number of key questions to the already complicated decision process that utility executives must navigate:
- What is the baseline for compliance?
- What are the company’s compliance objectives?
- What are the strategic options for compliance?
- What is the plan for compliance?
All of these questions can be summed up as: can energy companies afford the required capital and operational expenditures and, conversely, can energy companies afford not to make those expenditures? “Based on politics and economics, energy companies expecting to succeed and grow in a rapidly changing industry cannot afford not to make these expenditures,” says Hughes. He goes on to say, “Even if the system in question is only slightly out of compliance and the penalties for non-compliance are not ruinous, the political and public relations fallout could damage a company critically over the longer term.”
The goal of emissions compliance planning is to develop a least-cost strategy that also satisfies mandated compliance levels. This focus on a least cost strategy generally concentrates on how to keep rates as low as possible. The capital and operational costs of emissions compliance are very significant and the rates charged to customers must cover these added costs. “It is clear that the public in general, our political leaders, and in some cases even industry insiders do not understand the full cost of environmental compliance and what that will mean to the cost of electricity,” says Hughes.
Figure 3. CO2 emissions with altered generator dispatch order
The tools and techniques associated with the traditional least cost planning, employing resource optimization techniques combined with system production cost modeling have never been more needed. These tools allow the utility planner to examine the effects of the critical planning elements that are under the control of the decision makers. There are five critical elements: whether to trade in emissions certificates, change the dispatch order of power plant resources to reduce emissions, purchase power from other energy market entities, make capital investment in emissions reduction technologies, or to switch resources to cleaner fuels.
Trading emissions certificates on an open energy market can result in significant cost savings for utilities. “Shared reductions are the most effective way to spread the overall compliance cost,” says Hughes. Changing unit operations to reduce emissions is another strategy and a shorter term solution. The benefit is in providing the company with sufficient time to implement more cost effective longer term strategies. Purchasing power from other companies can shift the compliance burden; however, the price will reflect compliance risk. Capital investment can take on two forms: retrofitting existing generation to reduce current emission levels, or building new and cleaner generation.
Making such capital investment allows the company to control its own destiny. The company is not relying on the liquidity of a market for certificates to achieve compliance or on the availability of low cost power. Mothballing and retiring the older dirtier generators must also be considered. This strategy allows room for the newer units in the generation mix, and achieves immediate reductions. Replacing coal and oil with natural gas or a renewable source fuel (biomass) are acceptable options in some cases, but the change in fuel and O&M (operations and maintenance) costs as well as any required capital expenses must be weighed against other reduction strategies. The benefits of fuel switching lie in generally lower capital costs and a shorter time to implement.
“A cost effective emissions compliance strategy will employ several, if not all, of these strategies,” states Hughes. The analysis tools used by the planners to support the decision makers must be able to examine multiple combinations of specific technologies and methods to reduce emissions and achieve compliance. Demand and supply side options must be modeled in the same system and their relative costs and benefits balanced against their effect on overall system costs of production, including direct environmental and indirect externality costs. Detailed emissions reporting and capital budgeting capabilities are also required. The optimization methodology must allow planners access to all plans meeting appropriate constraints for additional sensitivity and robustness analysis.
An Irish strategy
The following case study, provided by NewEnergy Associates, illustrates the development of a comprehensive emissions compliance plan through the use of its best practice strategy and planning tool ” Strategist. Established by Siemens Energy Business Solution, this has provided successful emissions compliance plans for a number of worldwide energy companies.
Ireland was previously cited as a country where significant CO2 reductions are needed to meet the commitments of the EU towards the Kyoto Protocol. The Irish electricity sector was chosen for this example case study primarily because there are a limited number of players in this market and it can thus be treated as if it were a single utility.
Under the EU allocation system Ireland must hold its total greenhouse gas emissions to no more than a 13 per cent increase above its historical 1990 level. In 1990 the Irish electricity sector produced 11.76 million t of CO2 equivalent. Ireland’s National Allocation Plan assigns 13.49 million t of certificates to the electricity sector. This represents an allowable increase of 14.1 per cent in CO2 production. If we assume that CO2 production holds constant at 2002 levels (18.08 million t, down slightly from 2001 levels) significant reductions are still needed to reach the 13.49 million t level.
If the Irish electricity sector simply maintains this level of CO2 production, penalties would be g183.5 million annually for the 2005 through 2007 time period (penalty of g40 per excess t). This situation becomes much worse in 2008 and beyond when the penalties rise to g100 per t. The total penalty would then rise to g458.8 million annually. In addition, from 2008 and beyond for any year in which a penalty is assessed an amount of certificates equal to the average must be surrendered the following year. This extra penalty is intended to compel compliance, but would result in potentially ruinous costs if the Irish electricity sector cannot reduce its CO2 emissions significantly.
In order to examine possible solutions to this problem, a simulation model of the Irish electricity sector was constructed in Strategist and run for the years 2004 through 2010. Figure 2 shows the baseline CO2 emissions resulting from this simulation. The model assumes only existing resources are available and that demand growth is in line with Economic and Social Research Institute statistics indicating an increase of 3.4 per cent until 2009, and 2.3 per cent thereafter. This simulation also assumed that up to 12 per cent additional CO2 equivalent certificates can be bought from other countries, or from other greenhouse gas producers within Ireland. This assumption is in line with proposed EU trading rules that will allow a company to buy no more than ten per cent of the certificates it needs across country borders. We believe that the situation in Ireland as a whole will limit the number of domestically available certificates, so a ceiling of 12 per cent was selected as a conservative lower limit for this case study. This results in an overall CO2 emissions target that is roughly 34 per cent above the 1990 CO2 levels for the electric generation sector. A detailed macro economic impact analysis would be required to refine these assumptions further. We believe that these assumptions, while rough, are realistic. Figure 2 shows that the Irish system will be out of compliance from 2005 on.
With only one year to bring CO2 emissions into line, there is little likelihood that construction of any retrofit reduction technology or new resource construction can be completed in time. To see if modifying the operations of the existing fleet of resources would help, the simulation was next allowed to change the dispatch order of the power generating units to find a solution that stays below the target limit. The results of this simulation are shown in Figure 3.
This strategy will keep the system below the target level for three additional years. This is not a long term strategy, but significantly increases the time for implementation of other compliance options, including retrofit CO2 reduction technology and/or new construction. In order to find a longer term solution a system resource expansion optimization was run that contained options to add new resources, replace existing resources with cleaner ones, and renewable resources. The resulting CO2 production levels from the optimization are shown in Figure 4.
Figure 4. CO2 emissions from optimized system expansion
Figure 5. Analysis showed that multiple emissions compliance methods will be required in Ireland.
This case study of the Irish electricity sector demonstrates that multiple emissions compliance methods will be required to meet the stringent CO2 mitigation targets set by the EU. A combination of certificate trading, modifications to unit operations, as well as new and cleaner generation resources were needed to bring the Irish electricity sector into full compliance. Retiring older units and fuel switching to achieve additional reductions are also possible, although they were not examined specifically in this case study. Models such as the one developed here using Strategist have been used to examine these factors in other studies.
While focussing on the strategic and planning aspects of emissions compliance, energy industry executives must also focus on execution-level aspects of emissions management. These related areas include actual emissions monitoring and reporting, integration with National Registries (if applicable), emissions risk management and trading, and fuels management. Best practices in each of these areas can help energy companies reduce costs and improve their competitiveness.
These proven methods and software tools make it possible to develop plans that achieve significant overall cost savings while meeting stringent emissions reduction goals in the most cost effective manner. It remains to be seen whether the public will accept the rate increases required to pay for the significant investment needed to meet these environmental goals. What is clear is that the public wants to know that utility companies are making any additional investments in the most cost effective way possible. That, at least, will make any additional rate increases easier to bear. With proven technology available today, such as Strategist, utility companies will be able to publicly defend their plans and strategies in front of price weary consumers.