Twenty-First Strategies

Twenty-First Strategies, LLC phone (703) 893-8333

6595 Terri Knoll Court fax (703) 893-8813

McLean, VA 22101 dklein@21st-strategies.com

May 29, 2002

Jean E. Vernet, Esq.

Office of Policy and International Affairs

Office of Electricity and Natural Gas Analysis

PI-23, [Attention: Voluntary Reporting Comments]{.underline}

U.S. Department of Energy

Forrestal Building

Room 7H-034

1000 Independence Avenue, S.W.

Washington, D.C. 20585

Re: [Voluntary Reporting of Greenhouse Gas Emissions, Reductions, and
Carbon]{.underline} [Sequestration]{.underline}, 67 *Fed. Reg.* 30370
(May 6, 2002)

Dear Ms. Vernet:

In response to the above-referenced notice of inquiry (NOI) and request
for comment from the Department of Energy (DOE), I wish to submit an
idea to simplify and rationalize the accounting treatment for direct vs.
indirect GHG emissions related to electricity generation and use. I
believe that this idea has the potential to make electricity GHG
accounting more comparable to that of other energy product sales, and at
the same time strengthen GHG accounting uniformity and credibility.

Please note that although I have long worked on climate issues for DOE
and others, I am offering this idea to DOE as my own. It does not
represent work performed on behalf of DOE or other clients.

### Summary

-   In EIA's §1605(b) Voluntary Reporting System, the distinction
    between direct and indirect GHG emissions is based upon ownership of
    the site where the greenhouse gases are released. This has been a
    major problem area for measuring and comparing GHG reductions among
    reporters, and potentially weakens credibility of the overall
    reporting system.

-   Electricity use by consumers is by far the main source of indirect
    GHG emissions. These emissions are considered indirect because they
    are produced at the electric power producer's site, rather than the
    end-user's property where the kWh are consumed. In contrast,
    petroleum refineries do not count the emissions from the gasoline
    they sell, as those emissions are created within the property of the
    end-user. Natural gas and coke receive similar accounting treatment;
    the Btu they shipped (and the associated GHG) are not counted until
    the consumer burns the fuel.

-   It may be possible to eliminate the distinction between direct and
    indirect emissions for most electricity use, together with much of
    the confusion it causes. **Rather than making the dividing line
    between direct and indirect emissions ownership of *where the
    greenhouse gases are released*, make the dividing line the ownership
    of *where the Btu are consumed*.** Electricity producers would then
    exclude from their total emissions an amount reflecting the energy
    content of the power sold. Consumers in turn would count as their
    direct emissions their share of Btu embedded in the kWh purchased.
    This would put electricity use on a footing nearly identical to that
    of household natural gas use and automobile gasoline use.

```{=html}
<!-- -->
```
-   Under this formulation, where the amount of *energy* consumed per
    kWh would be defined as the heat rate less 3,412 Btu/kWh, the CO~2~
    emissions for the generator would be calculated as:

> Generator lbs. CO~2~ = (MMBtu consumed~fuel\ *x*~ \* lb.
> CO~2~/MMBtu~fuel\ *x*~)\
> (kWh sold \* lb. CO~2~/kWh~national~)
>
> For electricity consumers, CO~2~ emissions would be assigned based
> upon the 3,412 Btu/kWh that they consume:
>
> Consumer's lbs. CO~2~ = kWh sold \* lb. CO~2~/kWh~national~

-   The lb. CO~2~/kWh national factor for the electricity sold would
    generally be based upon the latest annual *national* data. This
    reflects the fact that most electricity is a commodity product drawn
    from an interconnected grid, and is conceptually similar to GHG
    emission factors for gasoline and other fuel products. ("Green
    Power" products could be defined as a separate commodity product.)
    For the year 2000, the factor would be 438.4 lb. CO~2~/MWh,
    reflecting a national electric power sector average of 1,438 lb.
    CO~2~/MWh and electricity end-use comprising 30.49 percent of all
    Btu consumed by the electric power sector.

### Background

One of the more problematic areas in EIA's Voluntary Reporting of
Greenhouse Gases Program is in the accounting for changes in electricity
use. While reporters typically know very well how many kWh are saved by
a project, they must necessarily rely on conversion factors to express
these power savings in GHG terms. The "right" conversion factor is often
not obvious there are issues of average vs. marginal rates, historic vs.
future values, and geographic scope (national, regional, state, or
utility-specific). A review of projects reported under §1605(b)
indicates that many different approaches are being used among reporters;
this makes comparisons and reconciliation difficult, and can weaken
overall confidence in the reporting,

In EIA's Voluntary Reporting of Greenhouse Gases Program, reporters are
required to distinguish between direct and indirect emissions and
emission reductions on Form EIA-1605. As defined by EIA, "Direct
emissions are releases of greenhouse gases from sources owned (wholly or
in part) or leased by the reporting entity. Indirect emissions are
emissions from sources not owned or leased by the reporter that occur as
a result of the reporter's activities. The most important indirect
emissions are those associated with the consumption of electricity
purchased from an electricity generator. Because the distinction between
direct and indirect is unambiguous, direct emission reductions reported
to the Program should include no double reporting; however, the
application of the direct and indirect distinction is not
comprehensive."[^1]

In the Greenhouse Gas Protocol recently proposed by the World Business
Council for Sustainable Development and the World Resources Institute,
there is a somewhat similar split between direct and indirect
emissions.[^2] Direct emissions are included in Scope 1, and are those
that are owned or controlled by the reporting company. Scope 2 and Scope
3 emissions are both identified as indirect emissions. Scope 2 includes
those indirect emissions associated with imports and purchases of
electricity, heat, or steam. Scope 3 covers nearly everything else. The
Protocol calls for all participating companies to report on Scopes 1 and
2; Scope 3 is optional.

In both the EIA and WBCSD/WRI systems, electricity consumption is the
main element of indirect emissions. In both of these accounting systems,
the distinction between direct and indirect is made primarily on the
basis of who owns (or controls) the property where the GHG is emitted,
e.g., where the fossil fuel is *combusted*. While this is certainly a
workable and useful approach, it sometimes has odd implications. If I
adjust the thermostat on my house's gas furnace, I create direct
emissions. But if I adjust the thermostat on my electric A/C (in my
house, the same dial!), my emissions are considered indirect.

If this were simply a reclassifying of categories with equal weights, it
would probably be of no importance. But some may see normative values in
the terms "indirect" emissions may not seem to carry the same level of
responsibility as "direct" emissions.[^3] If so, a consumer switching
from gas to electricity lowers his direct emissions, but at the expense
of the electric power producer who burned the fuel. Similarly, a
combined gas and electric utility incurs direct emissions for the kWh it
sells, but not for the gas it delivers.

Note that in other areas of GHG reporting, the fuels supplier is not
charged with the emissions for the energy product that is sold. Some
examples include:

-   An oil refinery accounts for the emissions from the energy it
    consumes, but does not count the emissions associated with the
    gasoline and other products that are sold.

-   A natural gas pipeline company accounts for the emissions from the
    energy used to transport the gas and for gas losses in transit, but
    does not count the emissions from the natural gas that the consumer
    ultimately uses.

-   A coke oven accounts for the emissions from the fuels used, but the
    carbon that is converted into coke is considered sequestered until
    it is consumed in the blast furnace.

-   Petrochemical plants account for the emissions from the fuels they
    consume, but the hydrocarbons in their final products (e.g.,
    plastics, asphalt) are considered sequestered and not a source of
    emissions.

The main and possibly only reason that electricity is treated
differently is that the carbon is converted into CO~2~ within the
property boundaries of the generation facility. The electricity travels
instantly to the consumer, where it is considered GHG-free in the direct
sense. Yet the utility, with its obligation to serve, does not really
have control over *whether* the power is generated, only *how* it is
generated. In this sense, it is not too different from the natural gas
company that has control over *how* the gas is distributed, but not so
much *how much* should be.

### Possible Idea for Accounting for Electricity Use

This suggests an alternative treatment for electricity, one that may
eliminate the distinction between direct and indirect emissions for most
electricity use, as well as much of the confusion it causes. **Rather
than making the dividing line between direct and indirect emissions
ownership of *where the greenhouse gases are released*, make the
dividing line ownership of *where the Btu are consumed*.** A consumer
using one kilowatt-hour of electricity consumes 3,412 Btu; the electric
power producer may consume that many or more Btu in generating that
electricity product.

This accounting approach recognizes that electricity *is* energy being
shipped, just like gasoline and natural gas. In natural gas, when I turn
up the dial on my heater, I cause a near-instantaneous additional flow
of gas from the pipeline to my burner. Similarly, when I start up my
A/C, I am causing a near-instantaneous additional flow of current,
enabled in turn by the additional generation by the power generator. In
both cases the end-user is making it happen by consuming the energy; the
only real difference is the location of the fuel combustion and the
ownership of that location.

Take, for example, a coal-fired plant with a heat rate of 10,000
Btu/kWh. Using the refinery analogy, why not view the powerplant as
consuming 6,588 (= 10,000 - 3,412) Btu, and also transforming 3,412 Btu
into a kilowatt-hour to send to the consumer?

Under this formulation, where the amount of *energy* consumed per kWh
would be defined as the heat rate less 3,412 Btu/kWh, the CO~2~
emissions for the generator would be calculated as:

> Generator lbs. CO~2~ = (MMBtu consumed~fuel\ *x*~ \* lb.
> CO~2~/MMBtu~fuel\ *x*~)\
> (kWh sold \* lb. CO~2~/kWh~national~)

Note that in this formulation, the CO~2~ emission factors are
fuel-specific, just as is presently done. Accordingly, the first half of
the equation (dealing with the MMBtu consumed) properly estimates the
CO~2~ associated with all of the energy sources (coal, gas, renewables,
etc.) that passed through the generating facility. However, the second
half of the equation the CO~2~ adjustment for the electricity sold
reflects a *national* average for all power sources in the country.
Using a national factor assures equal treatment for all electricity
users; recognizes the difficulty of linking origins to destinations
across the grid, and ensures that the sum of carbon emissions for all
generators and all consumers equals national totals. Note also that the
adjustment for power is on the basis *sold*, not *generated*; this helps
bring T&D efficiency and losses into the equation and reflects the
actual amount of energy going to the end-user.

Similarly the CO~2~ emissions for the consumer's use of electricity
would relate just to the average emissions for the 3,412 Btu/kWh:

> Consumer's lbs. CO~2~ = kWh sold \* lb. CO~2~/kWh~national~

The lb. CO~2~/kWh national factor for the electricity sold would be
based upon the latest annual national data. Using national data (rather
than regional or utility-specific data) recognizes the fact that most
electricity is a commodity product drawn from an interconnected grid,
and is conceptually similar to GHG emission factors for gasoline and
other fuel products. The calculations I make here are based upon year
2000 data presented in EIA's *AER2000*[^4] and *GHG2000*[^5]*.*

1.  First, calculate the average lb. CO~2~/MWh for all electricity sold
    in the U.S. in 2000. Total utility emissions in 2000 were 641.6
    million metric tons of carbon. At 2204.6 lbs./metric ton and 44/12
    lbs. CO~2~/lb. carbon, this equals 5,186,395 million lbs. CO~2~.
    Dividing this by the 3,607 billion kWh sold in 2000 yields an
    average of 1,438 lb. CO~2~/MWh.

2.  Next, calculate the percent of the electric power sector's total Btu
    use that was sold to customers as electricity. In the year 2000,
    primary energy consumption in the electric power sector totaled
    40,368 trillion Btu (Table 2.1a). Also in 2000, electricity end-use
    totaled 3,607 billion kWh (Table 8.12). At 3,412 Btu/kWh, the
    electricity end-use totaled 12,307 trillion Btu, or 30.49 percent of
    all Btu consumed in the electric power sector.

3.  Finally, we say that 30.49 percent of the electric power sector's
    carbon emissions in 2000 (641.6 million metric tons carbon) was
    effectively embedded in the product (kWh) sold to end-users, and
    could properly be considered the direct emissions of the end-users.
    Hence, end-users would count the emissions from their electricity
    use at the rate of 30.49 percent of 1,438 lb. CO~2~/MWh, or 438.4
    lb. CO~2~/MWh. Generators would similarly deduct from their
    emissions at the same rate.

This factor would vary over time as the electric power sector's fuel mix
and generating efficiency changed. It would be necessary for EIA to
update this factor on an annual basis. EIA already does similar annual
updates of carbon emissions coefficients for various fossil fuels and
for electricity.[^6]

In treating electricity as a national commodity with a single GHG
emissions factor, I don't rule out the possibility that additional
electricity products could be defined in the future. In particular,
zero-emitting green power could be defined as a separate product.
Consumers purchasing and using green power products would have a zero
emissions factor applied to their kWh consumption. Similarly, the
electric power producer would use the same zero emissions factor for
those kWh sold. Here, too, the accounting treatment is very similar to
that of other fuel products, where for example, gasoline and diesel fuel
have different GHG coefficients.

### Some Implications

Table 1 represents an initial effort to identify how this accounting
change might affect the reporting for generators and for end-users for
certain types of reporting situations. This is a first attempt, and
could undoubtedly benefit from more discussion. However, it does appear
that in general, this accounting approach would tend to limit the
electricity end-user to gains and losses resulting from their own direct
activities to manage power use. Conversely, electricity generators would
gain or lose proportionately more from those activities within their
control.

Also from Table 1, it can be inferred that under some situations, a
generator could end up reporting overall *negative* GHG emissions.
Specifically, if in 2000 a generator had enough hydro/nuclear/renewables
to produce a system-wide carbon emissions rate below 438.4 lb.
CO~2~/MWh, then the deductions from the electricity sold would more than
offset the emissions from the Btu consumed. While this may seem somewhat
odd, it is not unique. Already, §1605(b) reporting entities could
conceivably achieve overall negative net emissions as a result of
landfill methane activities, biomass/wood waste burning, carbon
sequestration activities, and possibly others.

**\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\***

Thank you for this opportunity to participate in this important effort.

Sincerely,

Daniel E. Klein

President

Twenty-First Strategies, LLC

Table 1. Some Effects of Revising the Accounting to Where the Btu are
Consumed

  --------------------- -------------- -------------- --------------- --------------
  **Topic/Activity**    **Current      **New Effect   **Current       **New effect
                        effect on      on Generator** effect on\      on\
                        Generator**                   End-user**      End-user**

  **Improvement in      Generator      Same direct    Unlikely to     No effect on
  plant efficiency**    claims direct  reduction, but affect end-user end-user
                        reduction      magnified as   accounting      
                                       the base is    significantly   
                                       30% smaller                    

  **End-use             Generator may  Generator gets End-user may    End-user
  efficiency**          claim direct   70%, unless    claim indirect  claims 100%
                        reduction as   handled by     reduction for   direct on kWh
                        kWh drops      contract       all             reduction,
                                                                      unless handled
                                                                      by contract

  **T&D improvement**   Generator      Same direct    Unlikely to     No effect on
                        claims direct  reduction, but affect end-user end-user
                        reduction      magnified as   accounting      
                                       the base is    significantly   
                                       30% smaller                    

  **Building and using  Direct         Direct         Unlikely to     No effect on
  new renewables**      emissions do   emissions are  affect end-user end-user,
                        not change     reduced for    accounting      unless handled
                                       kWh sold       significantly   by contract

  **Adding              Generator      Generator      Direct          Direct
  electrotechnogies**   direct         direct         emissions fall, emissions from
                        emissions      emissions      indirect        electricity
                        increase       increase, but  emissions       replace direct
                                       only by about  increase        emissions from
                                       70% of kWh                     prior source
                                       sold                           

  **"Green Power"       Generator      Unless         End-user may    End-user
  marketing**           claims direct  addressed by   claim indirect  claims 100%
                        reduction from contract, same reduction for   direct on kWh
                        fossil         direct         all             reduction,
                        decrease       reduction, but                 unless handled
                                       magnified as                   by contract
                                       the base is                    
                                       30% smaller                    

  **Using existing      Direct         Direct         No effect on    No effect on
  renewables and        emissions do   emissions are  end-user        end-user
  nuclear capacity**    not change     reduced for                    
                                       kWh sold                       
  --------------------- -------------- -------------- --------------- --------------

[^1]: U.S. Department of Energy, Energy Information Administration.
    *Voluntary Reporting of Greenhouse Gases* 2000. DOE/EIA-0608(2000),
    February 2002. P. 6.
    <http://www.eia.doe.gov/oiaf/1605/vrrpt/pdf/0608(00).pdf>.

[^2]: World Business Council for Sustainable Development and World
    Resources Institute, *The Greenhouse Gas Protocol: a Corporate
    Accounting and Reporting Standard,*2001.
    [http://www.ghgprotocol.org](http://www.ghgprotocol.org/).

[^3]: This "responsibility" is suggested in EIA's instructions for Form
    EIA-1605, where in defining indirect emissions the example is given
    that "...consumption of electricity purchased from a utility causes
    a power plant owned by the utility (or some other entity) to emit
    greenhouse gas." See U.S. Department of Energy, Energy Information
    Administration. *Instructions for Form EIA-1605 for Data Through
    2000*, February 2001, p. 4.

[^4]: U.S. Department of Energy, Energy Information Administration.
    *Annual Energy Review 2000*. DOE/EIA-0384(2000), August 2001. Tables
    2.1a and 8.12. <http://www.eia.doe.gov/aer>.

[^5]: U.S. Department of Energy, Energy Information Administration.
    *Emissions of Greenhouse Gases in the United States 2000*.
    DOE/EIA-0573(2000), November 2001.

[^6]: See EIA *GHG2000,* Table B1, at
    <http://www.eia.doe.gov/oiaf/1605/ggrpt/pdf/appendixb.pdf>.