CO2 Standards in Oregon

[Lisa Marina Brooks <lbrooks@essential.org>]

  FROM: 	 Kevin Bell (kevinbell@cvresearch.com)
  Subject: CO2 standards in Oregon
  
  Dear Energy Advocates:
  
  As a principle, I like this approach a lot. In practice, I have a big 
  problem. 
  
  Basically, this approach trades the principle of incorporating carbon 
  costs into resource siting for the irrevocable decision by the state of 
  Oregon to not meet even the low end of carbon cost levels established by 
  Oregon in 1992 until no earlier than the year 2012. If I were a 
  generation developer with an urge to build, I'd jump on a deal that 
  pushes environmental cost internalization out another generation.
  
  The "market" level of less than $0.60 per ton of CO2 is not based on 
  mitigation cost, or even a robust market test. Rather, it allegedly 
  hinges on an artificial market simulation and the completely untested, 
  and, in my opinion, completely unrealistic assumption that carbon 
  actually be can be mitigated at that price. To put that number in 
  perspective, keep in mind that Oregon (and numerous other researchers) 
  set the minumum and maximum environmental cost levels of CO2 at $10/ton - 
  $40 after intensive efforts to develop and accurately price actual carbon 
  mitigation strategies. More recent work by Trexler and others have found 
  a few low-cost strategies, but their impact is generally small and 
  speculative (other, of course, than renewable and energy effiency 
  investments, which are scalable in this regard). 
  
  One of the mitigation approaches that has been subject to the most 
  manipulation to suit a pre-set target cost is tree-planting. 
  Tree-planting is actually pretty expensive, unless you assume that highly 
  productive land is unvegetated, permanently unutilized unless trees are 
  planted explicitly to mitigate carbon emissions, and free, with minimal 
  installation and maintenance costs. More realistic assessments of 
  tree-planting costs easily get into the low end of the range of carbon 
  cost standards already in place in Oregon and elsewhere. Even with all of 
  those assumptions, you have simply temporarily transferred carbon from a 
  fossil fuel to temporary storage in the biosphere. Unless you plan to 
  bury the mature trees in the ground until they turn back into coal, you 
  have pushed the problem of new carbon in the atmosphere out 50 years or 
  so instead of actually mitigating the problem. Ultimately, I can't take 
  the tree-planitng portion of the Klamath mitigation proposal seriously.
  
  Similarly, the "best of breed" competition was hardly competitive. 
  Rather, it was a creative way to reconcile the desire of three developers 
  to build new gas projects with the political decision by the state to 
  permit one. The competition was limited to three developers with project 
  proposals already on the table, and no minimum threshold for what 
  constituted an acceptable starting offer. I believe that the winning 
  project at Klamath actually was the superior proposal of the three. But 
  there is no connection between what Klamath offered and actual carbon 
  mitigation costs, or what a truly competitive process might have yielded.
  
  So, where did $0.57/ton really come from? Based on my experience with 
  this issue in the Pacific Northwest, I think that we can trace the range 
  of proposals in the "best of breed" competition directly back to an 
  ill-fated decision by Bonneville Power Administration (BPA) to toy with 
  competitive generation resources at the beginning of the decade. 
  
  Faced with a potential need for power and a desire to be a player in the 
  rough-and-tumble exciting world of electric utilities, BPA decided it 
  wanted to build a CCCT. BPA doesn't have the statutory authority to own 
  generation. So, BPA opened a competitive bidding process for a long-term 
  purchase contract, eventually selecting Tenaska Power Partners to build a 
  249 MW plant in Western Washington (Washington siting rules only apply to 
  plants larger than 250 MW). 
  
  Under the terms of the Northwest Power Planning Act, BPA was required to 
  incorporate the environmental cost of the bids into the evaluation 
  process. BPA did so in a closed internal process that was essentially a 
  whitewash, and refused to respond to requests by the Northwest 
  Conservation Act Coalition for detailed information about how the winning 
  bid determination was made, or why Tenaska was selected.
  
  Since the 1991 Northwest Power Plan clearly showed that there was no need 
  for a new BPA combustion turbine in the early 1990's under any 
  load/resource scenario, BPA was also required under the Northwest Power 
  Planning Act to get explicit approval of this deviation from the Regional 
  Plan from the Northwest Power Planning Council. Unfortunately, the 
  Northwest Power Planning Council, already weakened by previous failures 
  to challenge repeated violations of the Northwest Power Planning Act and 
  Northwest Power Plan, barely noticed. BPA proceeded to sign a firm, fixed 
  rate, take-or-pay long-term contract with Tenaska. For those of you who 
  like to hear the end of the story, power prices and BPA's need for power 
  collapsed within months, BPA unilaterally abrogated the contract, and BPA 
  is currently being sued by Tenaska for close to a billion dollars. 
  Observers expect a settlement somewhere in the low hundreds of millions 
  of dollars.
  
  It gets worse. Responding to criticism about the proprietary selection 
  process and failure to adequately consider environmental costs, BPA 
  ignored some excellent work from its own staff (one of whom was a 
  principal author of the landmark Pace study on environmental cost), which 
  estimated carbon mitigation costs based on tree-planting in free Western 
  US forestlands at about $6/ton. Instead, BPA asked Tenaska to put $1 
  million into an escrow account to cover all risks of future carbon 
  mitigation costs. BPA accepted full responsibility and risk for any 
  mitigation costs above that amount, essentially relieving Tenaska of any 
  future environmental mitigation risk. 
  
  The net effect was to establish a regional CO2 mitigation cost precedent 
  of about $0.26/ton.
  
  When US Generation applied for its initial Hermiston project siting 
  permit (470 MW) in Oregon the following year, the BPA/Tenaska escrow 
  agreement was explicitly used as the basis for the HPP agreement with 
  public interest intervenors, establishing the precedent that the money 
  would actually go to try and mitigate something instead of sitting in a 
  bank. That settlement, in turn, was the starting point for the "best of 
  breed" competition (which included a second US Generation project at 
  Hermiston as one of the three proposals), which in turn is the basis of 
  the current proposal.
  
  What we are left with is a public policy that flows from a completely 
  arbitrary precedent set in a completely different context. Ironically, 
  the $0.57 level in this agreement is essentially what would have resulted 
  from Oregon implementing this same policy with the same rachet on the 
  arbitrary $0.26/ton level established by BPA with Tenaska in 1992.
  
  Combined with the limit of a *maximum* increase of 50% every two years in 
  the environmetal cost rachet (which in itself will require an unrelenting 
  political commitment by the state of Oregon to maximixe carbon mitigation 
  over a political journey spanning decades), generators have effectively 
  eliminated the threat of having to seriously consider carbon mitigation 
  in Oregon for many years to come. Furthermore, attempts by the state 
  siting council over the last five years to limit the massive regional 
  rush to gas generation are now moot. Look for multiple proposals in the 
  strategically located Hermiston area. For generation developers, this 
  deal is a tiny price to pay for the right to build at will with no risk 
  of new mitigation costs for decades, but only if they act now. Oregon has 
  no chance of meeting its state mandated goal of stabilizing carbon 
  emissions at 1990 levels.
  
  Establishing the principle of environmental cost incorporation into 
  resource decisions is fantastic. Applying actual mitigation cost or a 
  robust market test to setting the proper price point is wonderful. A 
  rachet that implements policies with far-reaching implications gradually 
  makes a lot of sense. This particular implementation sets a bad precedent.
  
  Assuming that it is far too late politically to fix this agreement, there 
  is one way that Oregon could pull this out, and still do some real good 
  within the next decade. If Oregon was willing to apply this environmental 
  cost and rachet uniformly to all power consumed in the state, the 
  incremental dispatch penalty of an existing coal plant such as Centralia 
  (one of the dirtiest plants in the west, based in Western Washington) 
  would be approaching a couple of mills/kwh by 2002 and rising fast, 
  enough for renewables to start showing up in dispatch order just as the 
  regional public benefit funds currently proposed for regional renewables 
  go away. If we could realistically use this initiative to accelerate 
  shutting down existing coal plants, that benefit would vastly exceed the 
  marginal value of this initiative in setting resource decisions for new 
  generation.
  
  
  
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