Last month, Xcel Energy subsidiary Public Service Company of Colorado (PSCo) filed a rate case at the Colorado Public Utilities Commission (Docket: 14AL-0660E). A lot of the case — the part that’s gotten most of the press — is about PSCo recovering the costs of retiring and retrofitting coal plants as agreed to under the Clean Air Clean Jobs Act (CACJA) of 2010. However, there’s a piece of the case that could have much wider implications. Way down deep in the last piece of direct testimony, PSCo witness Scott B. Brockett:
…provides support and recommendations regarding the initiation of a decoupling mechanism for residential and small commercial customers.
This recommendation has captivated all of us here at CEA because it could open the door to Xcel adopting a radically different business model, and becoming much more of an energy services utility (PDF), fit for the 21st century.
To explain why, we’re going to have to delve a ways into the weeds of the energy wonkosphere.
I recently wrote about how our risk tolerance/aversion powerfully affects our estimation of the social cost of carbon, but obviously that’s not the only place that risk shows up in our energy systems. Fossil fuel based electricity is also exposed to a much more prosaic kind of risk: the possibility that fuel prices will increase over time.
Building a new coal or gas plant is a wager that fuel will continue to be available at a reasonable price over the lifetime of the plant, a lifetime measured in decades. Unfortunately, nobody has a particularly good record with long term energy system predictions so this is a fairly risky bet, unless you can get somebody to sign a long term fuel contract with a known price. That doesn’t really get rid of the risk, it just shifts it onto your fuel supplier. They take on the risk that they won’t make as much money as they could have, if they’d been able to sell the fuel at (higher) market rates. If the consumer is worried about rising prices, and the producer is worried about falling prices, then sometimes this can be a mutually beneficial arrangement. This is called “hedging”.
With the release of the Environmental Protection Agency’s proposed rules limiting carbon pollution from the nation’s electricity sector, you’ve no doubt been hearing a lot of industry outrage about “Obama’s War on Coal.”
Don’t believe it.
Despite the passionate rhetoric from both sides of the climate divide, the proposed rules are very moderate — almost remedial. The rules grade the states on a curve, giving each a tailored emissions target meant to be attainable without undue hardship. For states that have already taken action to curb greenhouse gasses, and have more reductions in the works, they will be easy to meet. California, Oregon, Washington, and Colorado, are all several steps ahead of the proposed federal requirements — former Colorado Governor Bill Ritter told Colorado Public Radio that he expects the state to meet the proposed federal emissions target for 2030 in 2020, a decade ahead of schedule. This isn’t to say that Colorado has particularly clean power — our state has the 10th most carbon intensive electricity in the country, with about 63% of it coming from coal — but we’ve at least started the work of transitioning.
Furthermore, many heavily coal dependent states that have so far chosen to ignore the imperatives of climate change (e.g. Wyoming, West Virginia, Kentucky) must only attain single-digit percentage reductions, and would be permitted to remain largely coal dependent all the way up to 2030. Roger Pielke Jr. and others have pointed out that in isolation, the new rules would be expected to reduce the amount of coal we burn by only about 15%, relative to 2012 by 2020. By 2030, we might see an 18% reduction in coal use compared to 2012. Especially when you compare these numbers to the 25% reduction in coal use that took place between 2005 and 2012, and the far more aggressive climate goals that even Republicans were advocating for just two presidential elections ago, it becomes hard to paint the regulations as extreme. Instead, they look more like a binding codification of plans that already exist on the ground, and a gentle kick in the pants for regulatory laggards to get on board with at least a very basic level of emissions mitigation.
So, in isolation, there’s a limited amount to get either excited or angry about here. Thankfully, the EPA’s rules will not be operating in isolation!
Our society’s prevailing economic zeitgeist assumes that everything has a price, and that both costs and prices can be objectively calculated, or at least agreed upon by parties involved in the transaction. There are some big problems with this proposition.
Externalized costs are involuntary transactions — those on the receiving end of the externalities have not agreed to the deal. Putting a price on carbon can theoretically remedy this failure in the context of climate change. In practice it’s much more complicated, because our energy markets are not particularly efficient (as we pointed out in our Colorado carbon fee proposal, and as the ACEEE has documented well), and because there are many subsidies (some explicit, others structural) that confound the integration of externalized costs into our energy prices.
The global pricing of energy and climate externalities is obviously a huge challenge that we need to address, and despite our ongoing failure to reduce emissions, there’s been a pretty robust discussion about externalities. As our understanding of climate change and its potentially catastrophic economic consequences have matured, our estimates of these costs have been revised, usually upwards. We acknowledge the fact that these costs exist, even if we’re politically unwilling to do much about them.
Unfortunately — and surprisingly to most people — it turns out that understanding how the climate is going to change and what the economic impacts of those changes will be is not enough information to calculate the social cost of carbon. Continue reading
In my last post, I recounted some of the indications that have surfaced over the last decade that US coal reserves might not be as large as we think. The work done by the USGS assessing our reserves, and more recently comments from the coal industry themselves cast doubt on the common refrain that the US is “the Saudi Arabia of coal” and the idea that we have a couple of centuries worth of the fuel just laying around, waiting to be burned. As it turns out, the US isn’t alone in having potentially unreliable reserve numbers. Over the decades, many other major coal producing nations have also dramatically revised their reserve estimates.
Internationally the main reserve compilations are done by the UN’s World Energy Council (WEC) and to some degree also the German equivalent of the USGS, known as the BGR. Virtually all global (publicly viewable) statistics on fossil fuel reserves are traceable back to one of those two agencies. For instance, the coal reserve numbers in the International Energy Agency’s (IEA’s) 2011 World Energy Outlook came from the BGR; the numbers in BP’s most recent Statistical Review of Energy came from the WEC.
Of course, both the WEC and the BGR are largely dependent on numbers reported by national agencies (like the USGS, the EIA and the SEC in the case of the US), who compile data directly from state and regional geologic survey and mining agencies, fossil fuel consumers, producers, and the markets that they make up.
Looking back through the years at internationally reported coal reserve numbers, it’s surprisingly common to see big discontinuous revisions. Below are a few examples from the WEC Resource Surveys going back to 1950, including some of the world’s largest supposed coal reserve holders. In all cases, the magnitude of the large reserve revisions is much greater than annual coal production can explain.