# Presentation: 528524

## The Role of Technology Development in Accelerating U.S. Mercury and Carbon Dioxide Emission Reductions

**Ned Helme**
**President, Center for Clean Air Policy**
**2005 EIA Midterm Energy Outlook and Modeling Conference Program**
**April 12, 2005**

## Center for Clean Air Policy

**Non-profit environmental think tank founded in 1985 by state governors to find a market-based solution to acid rain**
**Applying similar approaches to ozone, greenhouse gases, and air toxics at state, regional, national, international levels**
**Leader in OTAG process, EU GHG trading system design, and international climate change negotiations**
**Sponsor power sector and economy-wide modeling to support policy design**

## CCAP Air Quality Dialogue

**A stakeholder policy dialogue on alternative  designs of power sector three-pollutant (3P) and four-pollutant (4P) legislative programs **
**ICF conducted an IPM modeling analysis of 3P and 4P incentive and/or cap and trade programs**
**Stakeholders agreed on model assumptions and options for analysis **
**Goal was to understand possible middle-ground, second-best solutions**

## Some Caveats

- Not speaking for the environmental community
- Recommendations based on analysis conducted within multi-stakeholder Air Quality Dialogue
- Not commenting on the legality of EPA’s Mercury Rule
- Technology ideas expressed in this presentation were discussed in the context of a larger policy package and may not be supported independently by some groups

## Technology Key to Industry Acceptance of Emissions Caps

**Perceived availability of technologies with cost and performance certainty reduces resistance to new emissions caps**
**Less resistance to NO****x****, SO****2**** caps at “efficient” levels of control b/c high degree of certainty on control technology performance and cost**
**More experience w/advanced Hg and CO****2**** control technologies (or low-emitting generating technologies) is expected to build confidence in, reduce costs of technology, and lower resistance to new requirements**

## Development of wind technology 

- Development of wind technology

- Development of wind turbines

## CCAP Recommendation #1

- Legislative or regulatory approaches should include a ***technology incentive pool*** to spread the risks of technology development and help build confidence in the performance and cost of advanced mercury control technologies

## “Technology Incentive Pool” for Mercury

- Dialogue evaluated “Technology Incentive Pool” to encourage early experience with advanced Hg control technology
- Allocates 10% of the allowances from Phase I target to early adopters of advanced Hg technologies (ACI) pre-Phase I
- Modeling shows 31 GW of ACI in 2010 w/Technology Incentive Pool in contrast to 21 GW in 2010 without the incentive pool option*
- Increase in the system costs is minimal (1%, or $400 million over 2005-2030)

- * Comparison case assumes Hg is capped at 10 tons in 2015.

## “Technology Incentive Pool” Achieves Early Mercury Technology

- “Technology Incentive Pool” Achieves Early Mercury Technology

## Design and Implementation of a Mercury “Technology Incentive Pool”

- Tons could be awarded by:
- reverse auction – lowest bidders win
- First come, first served
- Pro rata sharing of 2.6 ton pool
- Portion of tons could be set aside for particular plant characteristics and coals (e.g. PC burning subbituminous coals) to insure demos on all configurations
- Incentive pool could be added to multi-pollutant bill
- Hg Early Action Reduction Credits were included in S.131, the Clear Skies Act of 2005

## Comparison of CCAP Tech Incentive Pool and Senate version

- Senate version did not set aside share of original allocation pool for techs – leakage from cap
- Allowances given to all reductions carried out early via tech – no limits, no process for selecting winners
- Senate incentive level may not have been high enough to cover cost differential – might only reward “free riders”
- Reverse auction method preferable

## Small Increases in 3P Compliance Costs Under Tougher Hg Caps

## Effects of Tighter Phase 2 Hg Cap Levels & Timing

**Costs of incrementally more stringent cap levels and timing about 5% of incremental 3P cost for each tightening evaluated**
**Cumulative Hg benefits increase 8-12% with each incremental change evaluated**
**Tightening the timing and size of cap has very limited impact on wholesale electricity prices (-1.5% to +2.1% depending on the scenario)**
**If measured against mercury only costs, the percentage increases would be considerably higher**

## Effect on Coal Markets of Tighter Hg Caps and Timing

**Tightening the mercury cap has marginal impacts on regional coal markets**
- Interior coal production rises slightly (1-3%)
- Appalachian and western coal production declines slightly (2-4% and within 1%, respectively)
**National coal production is higher than  2000 levels in all cases and varies only slightly between cases**

## Slide 15

## Hg/3P Conclusions

- Technology incentive pool before Phase I could encourage ACI early at low add’l cost, potentially reducing Phase 2 costs
- Significant portion of Tech pool probably needs to be targeted to subbituminous/lignite
- Costs of incrementally more stringent cap levels and timing about 5% of incremental 3P cost for each tightening

## Policy Implications of Hg/3P Modeling (CCAP View)

- Possible win-win areas on multi-pollutant design:
- Phase I cap w/ some portion allocated to “technology incentive pool” would encourage experience w/advanced technology, reducing current disagreements on ACI feasibility
- Trade off easy (e.g., 34 ton) Phase 1 cap for tougher and earlier Phase 2 cap – cost of moving to a 10 ton cap in 2015 is roughly equal to the savings from moving from 26 to 34 ton phase I target, going to 7.5 ton cap adds another 6%

## CCAP Recommendation #2

- Legislative approaches should include ***incentives for IGCC with carbon capture and sequestration***, whether with or without a cap.  Such incentives can help reduce carbon dioxide emissions while preserving coal-fired power generation.

## Need both Mid-Term and long-term solutions for climate

**Target**
**(60% reduction)**

**1990**

**2015**

**2040**

**2100**

- Reduction in carbon intensity
- (environmental incentives)

- Creation of material new energy sectors
- (economic growth incentives)

**Emissions**

**Long-term**
- Policy interventions to support technology breakthrough

## What is the scale of one 1Gtc wedge?

- Source: Rob Socolow, Princeton

## Chicken and Egg Problem

- Without technology solutions, hard to get strong reduction requirements; however, without strong reduction requirements, there is little incentive to develop technology solutions.
- Solution: Use incentives and a carbon cap together

## Key 4P Modeling Assumptions

- 3P Reference Case assumes:
- Phase 1 Hg control is 26 tons in 2010, Phase 2 Hg control is 10 tons in 2015
- EIA AEO 2003 assumptions on gas price and electricity demand
- Capital cost of IGCC = $1,248/kW
- Enhanced Oil Recovery (EOR) lowers sequestration costs by ~$10/ton CO2
- EOR is available in TX, CA, NM, LA & WY

## Selected 4P Scenarios Modeled

**IGCC w/CCS Incentive Package**
- Incentives for 17.5 GW IGCC+CCS, half w/credits for enhanced oil recovery, half without
- Modeled by forcing desired level of IGCC+CCS generation; incentive was output
**Cap at 2000 Levels in 2010 with IGCC Incentive Package**
- Offsets used to meet 15% of compliance
- 17.5 GW of IGCC+CCS, half with EOR credits
- EOR availability capped

## Effect of IGCC Incentive Package

- IGCC + CCS package reduces emissions by 2 to 3% below projected levels at an incremental cost of $8.2 billion and an annual cost in 2010 of $750 – 870 M*
- If incentive program were added to the 3P bill modeled here, cost would increase by 11%
- IGCC + CCS package maintains coal consumption at levels > or = to 3P Reference Case and lowers wholesale electricity prices
- Incentives needed to encourage IGCC+CCS are low ($1.20-$4.30/MWH) where EOR is available, higher ($15.30-$28.30/MWH) where it is not**

- *Costs reflect NPV from 2005 to 2030.  3P Reference Case = $71.3 billion. **For comparison, the federal tax credit for renewable energy is $17/MWh.

## Comparison of IGCC/CCS Incentives (Phase I) with Existing RE Incentives

|  | Cost per Year in 2010 ($millions) | Price per MWH | Capacity (GW) |
| --- | --- | --- | --- |
| RE | $328 | $17 | 2.75 |
| IGCC+CCS no EOR | $750-870 | $15-28 | 4.75 |

## Effect of CO2 Cap w/IGCC Incentives

- Results in an increase in emissions over current levels due to use of offsets but reduces emissions by 4 to 10% from what they would otherwise be in the absence of the cap.
- Costs $29.0 billion* and results in allowance costs of $3 to 5 per ton CO2
- Results in higher coal consumption than 2000 levels, but less than 3P Reference Case
- Raises wholesale electricity prices by 5 to 8% from 3P Reference Case

- * Costs reflect NPV from 2005 to 2030; 3P Reference Case = $71.3 billion.

## Effect of CO2 Cap w/IGCC Incentives, cont.

- IGCC incentives come to $0.9 to 1.3 billion per year as modeled (with 1⁄2 EOR) in 2010 and 2015
- This is less than 10% of CO2 allowance value under modeled power sector scenario at the revised McCain-Lieberman Cap levels
- This comes to more than double the proposed value of tax incentives and direct subsidies for coal in the Energy Bill
- S. 131 NOx/Sox allowance incentives for IGCC would total approximately $80 million per year

- * This is the cost of the incentive with a cap at 2000 levels in 2010.  The cost varies depending on the level of the carbon cap.

## Design of CO2 Control Measure:Including IGCC in a CO2 Cap

- Adding IGCC incentives to a cap program* results in:
- Slightly higher system costs (1-2%)
- Lower electricity prices
- Slightly more coal generation (4%)

***Note: These results are based on CO****2**** cap runs that were**
**not previously described.  Runs capped CO****2**** at 1990 levels**
**by 2016 but allowed unlimited penetration of EOR.**

## Conclusions (CCAP View)

- Affordable incentives can achieve real penetration of mercury and advanced coal technologies.
- Expected advantages include:
- Greater certainty on technology performance
- Lower costs for Hg control technologies and advanced coal generation technologies
- Enhanced fuel diversity
- New legislative authority is needed to advance these issues – ideas were in play with S. 131, albeit at lower incentive levels.

## Conclusions (cont)

- Growing consensus that need to have both IGCC demos and sequestration demos – can be separate
- State CO2 cap & trade programs could provide first tests of IGCC/sequestration techs – Cal cap on load-serving entitities
- Proposed Frontier Line from Wyoming to Cal could be 6,000 MW sequesteration-ready IGCC w/ 6,000 MW wind

## For More Information

- See “Design of a Multipollutant Control Program: Stakeholder Analysis of Potential Policy Options,” available at www.ccap.org/pdf/2004-May--multipollutant-report.pdf
- Contact Ned Helme, Center for Clean Air Policy, at 202-408-9260 or nhelme@ccap.org