A national laboratory of the U.S. Department of Energy

Office of Energy Efficiency & Renewable Energy

National Renewable Energy Laboratory 

Innovation for Our Energy Future 

Technical Assistance Project for 

the Minnesota Pollution Control 

Agency 

Laura Vimmerstedt 

Technical Report 

NREL/TP-620-40583 

December 2006 

NREL is operated by Midwest Research Institute ● Battelle Contract No. DE-AC36-99-GO10337 
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Operated for the U.S. Department of Energy 

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by Midwest Research Institute • Battelle 

Contract No. DE-AC36-99-GO10337

Technical Report 

NREL/TP-620-40583 

December 2006 

Technical Assistance Project for 

the Minnesota Pollution Control 

Agency 

Regarding design of Renewable Energy 

Reserve of NOx allowances under 

Minnesota’s rule in response to the 

Clean Air Interstate Rule 

Report to: Robert McCarron 

Minnesota Pollution Control Agency 

Prepared by: Laura Vimmerstedt 

National Renewable Energy Laboratory 

Prepared under Task No. 6210.2003 
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Technical Assistance Project for the Minnesota Pollution 

Control Agency 

Regarding design of Renewable Energy Reserve of NOx 

allowances under Minnesota’s rule in response to the Clean Air 

Interstate Rule 

Report to: Robert McCarron, Minnesota Pollution Control Agency 

Prepared by: Laura Vimmerstedt, National Renewable Energy Laboratory 

December 2006 
Introduction 

This report was prepared in response to a request for technical assistance from the Minnesota 

Pollution Control Agency (MPCA). The U.S. Department of Energy’s (DOE) Office of Energy 

Efficiency and Renewable Energy supported the National Renewable Energy Laboratory (NREL) 

in its response to this request through the Technical Assistance Project. 

Discussion with Robert McCarron identified the following as the highest-priority questions: 

1. What is the effect of (i) size of Renewable Energy Reserve (RER) and (ii) duration of 

allocation award on (a) NOx emissions in Minnesota and (b) retail electricity prices? 

2. What data is available on the response of wind energy development to financial 

incentives? 

This report addresses these two questions below. Appendix 1 provides sensitivity cases for 

question 1, above. Appendix 2 provides data on wind energy resources in Minnesota. Appendix 

3 provides the original Technical Assistance Project request. 

Effect of Size of Renewable Energy Reserve and Duration of 

Allocation Award 

We consider the following cases to explore the effect of size of RER and duration of allocation 

award: 

1. No reserve 

2. With reserves of the following size and duration: 

Size of Reserve →

Duration of Award ↓

1% 10% 15%

5 years A 

10 years C 

20 years B 

For simplicity, we will present here only the RER design combination marked “C” in the table 

above, because this represents the current version of the MPCA proposal. We provide sensitivity 

analysis including combinations A and B in Appendix 1. We will compare case C to a case 

without a reserve, for years after 2015. We focus on years after 2015 because the cap level 

decreases in that year. 

For each of these two cases, we will consider: 

1. How much value might be allocated, and how that value is distributed; 

2. Possible effect of that distribution on NOx emissions in Minnesota; 

3. Possible effect of that distribution on retail electricity price in Minnesota. 

1
How much value is allocated under the different cases, and how is 

that value distributed? 

The size of the RER is a question of distribution of NOx allowances, a tradable commodity that 

will have value in the market that the Clean Air Interstate Rule (CAIR) establishes. The duration 

of allocation award affects how this value will be considered from a project finance perspective – 

in other words, the risk associated with the value. Table 1 shows distribution of the value in 

terms of the annual value, the total over the allocation period, and the net present value over the 

allocation period. The net present value is calculated at two different discount rates and with and 

without prorating to reflect return on investment, regulatory risk, and prorating that is likely to 

occur if Minnesota meets its renewable energy goals. The prorating takes into account the fact 

that Minnesota’s renewable energy goals are higher than the size of the Renewable Energy 

Reserve. 

 

Table 1. Value of Alternative Allowance Allocations in Minnesota 

Allowance Price $1000/ ton-yr $2000/ton-yr 

 

No Reserve C. 15%, 

 10 years 

No Reserve C. 15%, 

 10 years 

Annual Value to Fossil 

Generators $26,203,000 $22,272,550 $52,406,000 $44,545,100 

Annual Value to Renewable 

Generators $0 $3,930,450 $0 $7,860,900 

Total Over Allocation Period 

to Renewable Generators $0 $39,304,500 $0 $78,609,000 

Net Present Value to 

Renewable Generators Over 

Allocation Period 

10% discount rate $0 $26,566,005 $0 $53,132,010 

30% discount rate $0 $15,796,484 $0 $31,592,968 

10% discount rate, 0.3 

prorate $0 $7,969,802 $0 $15,939,603 

30% discount rate, 0.3 

prorate $0 $4,738,945 $0 $9,477,890 

What is the effect of this distribution of allowance value on NOx 

emissions in Minnesota? 

With a cap-and-trade system, total emissions from regulated sources are expected to be equal to 

the cap, unless allowances are retired. This remains the case with an RER. The effect of a 

Minnesota RER on emissions that occur in Minnesota, a small part of the CAIR region, is 

difficult to predict because of uncertainty about allowance market performance. Allowance 

market performance is independent of the RER. We consider the expected effect of the RER 

under two scenarios: “competitive allowance market performance” and “constrained allowance 

market performance.” We do not speculate as to which of these scenarios may better predict 

market performance. 

2
Under a scenario of competitive allowance market performance, the RER would not affect fossil 

generators’ decisions about control equipment purchases or generation. Economic theory of 

competitive markets suggests that initial allocation of a good, in this case allowances, would not 

affect the price or allocation of the good once equilibrium is achieved through trade. In order for 

theory to hold true in actual markets, a market does not necessarily have to meet all of criteria for 

a “perfect” market in the economic sense, but deviations from perfect markets interject the 

possibility that actual market performance would not follow theoretical performance, as explored 

in the “constrained allowance market performance” scenario. 

Under a scenario of constrained allowance market performance, market imperfections would 

cause the fossil generators to assume a substantially lower cost of achieving emissions 

compliance by retiring allowances that were allocated directly to them, as compared to 

allowances that they could purchase in the market. Examples of such market imperfections 

include effects of regulations, monopolies, liquidity problems, or transaction costs. With 

sufficiently large market imperfections, fossil generators might avoid purchasing the incremental 

allowances that they would need because of the RER. They could avoid these purchases by 

installing more control equipment or by generating less electricity. 

Modeling has not been performed to evaluate a Minnesota RER, but some of the analysis of 

CAIR using computer modeling provides possible indicators of how Minnesota generators might 

respond to an RER under the scenario of constrained allowance market performance. This 

modeling was performed for the Environmental Protection Agency (EPA) using the IPMTM 

model, and the description of the model, modeling assumptions, and modeling results are 

available.1

 Some modeling results show how generators are likely to respond to slightly higher 

marginal cost of control, higher electricity demand, and higher natural gas prices (CAIR 2004 

EIA case vs. CAIR 2004 Analysis case). With a $100 (6%) increase in marginal cost of control 

from $1,600 to $1,700, emissions rates (lbs/Mbtu) of Minnesota generation do not change. This 

would suggest that Minnesota generators are unlikely to change how much control equipment 

they install in response to an RER, even with constrained allowance market performance. 

However, one coal-fired2

 unscrubbed plant appears to reduce its emissions by about 10%, from 

518 tons to 467 tons, because it generates less. These modeling runs suggest an overall 100 ton 

decrease in NOx emissions in Minnesota, (or 0.4% of the Minnesota allowances), due entirely to 

changes in generation in response to the higher marginal cost of control, higher electricity 

demand, and higher natural gas price. Therefore, these modeling runs suggest that increased 

marginal cost of control would have little effect on generator behavior; and, if anything, would 

cause them to generate slightly less under a scenario of constrained allowance market 

performance. 

It should be noted that these modeling runs cannot provide insight on the relative competitive 

position of Minnesota generators in comparison to those of other states, nor do they offer insight 

as to whether the scenario of constrained allowance market performance is likely. If Minnesota 

generators became less competitive relative to those in other states because of the RER, then NOx 

emissions in Minnesota would be expected to decrease due to lower generation. The unscrubbed 

 

1

 Multi-Pollutant Analyses and Technical Support Documents, Power Sector Modeling Supporting 

Materials, http://www.epa.gov/airmarkets/mp/index.html. 2

 These modeling runs do not offer a good comparison to assess gas-fueled generation behavior, because 

they do not isolate the effect of cost of control from the effect of higher natural gas prices. 

3
coal plant affected by a higher marginal cost of control in the CAIR modeling runs might reduce 

its generation even more. 

A Minnesota RER is not likely to cause an overall change in the NOx allowance price in the 

CAIR region. EPA published a marginal abatement cost curve3

 that shows the marginal 

abatement cost versus the amount of emissions reduction. Using the slope of this curve, one can 

estimate that even retirement of the entire 2,620 allowances in a 10% RER would increase the 

marginal cost of NOx emissions control by only $2/ton. Retirement of the entire RER is 

unlikely,4

 but represents a maximum scenario for its effect on the NOx emissions allowance 

market. 

What is the effect of this distribution of allowance value on retail 

electricity price in Minnesota? 

A simple estimate of the maximum5

 effect of the RER on retail electricity price in Minnesota 

may be made using the following assumptio 6 ns:

1. Annual fossil generation will not be affected by the RER. (This is likely to be a slight 

overestimate, because we would expect the RER to cause a slight increase in renewable 

generation, as discussed in the next section, “Response of Wind Energy Development to 

Financial Incentives.”) 

2. The market price of allowances will not be affected by the RER.7

 

3. All additional costs to fossil generators will be passed on to the consumer. (This would 

actually depend on the regulator.) 

Based on these assumptions, an estimate of the maximum effect of the RER on retail electricity 

prices is shown in Table 2. 

Table 2. Approximate Maximal Effect of RER on Retail Electricity Price in Minnesota 

Allowance Price $1,000/ ton-yr $2,000/ton-yr 

 

No Reserve C. 15%, 

 10 years 

No Reserve C. 15%, 

 10 years 

Annual Value to Fossil 

Generators $26,203,000 $22,272,550 $52,406,000 $44,545,100 

Incremental Cost Due to RER $0 $3,930,450 $0 $7,860,900 

Annual Generation (GWh) 54,000 54,000 54,000 54,000 

Incremental Cost (cents/kWh) 0.0000 0.0073 0.0000 0.0146 

 

3

 Federal Register, Volume 70, p. 25211. 4

 A RER does not retire allowances. However, allowances allocated to renewable generation might be 

retired under certain circumstances. Please see “Incorporating Wind Generation in Cap and Trade 

Programs,” p. 12. http://www.nrel.gov/docs/fy06osti/40006.pdf 5

 This is not a comprehensive assessment of all possible effects, ONLY a simple approach to estimating a 

maximum effect. 6

 Modeled effects of CAIR on retail electricity prices are shown in table D-8 of the Regulatory Impact 

Analysis for Final Clean Air Interstate Rule. This suggests a 2020 retail electricity price increase of 0.8% 

could be anticipated to result from implementation of CAIR. http://www.epa.gov/cair/technical.html 7

 This could be an overestimate if net fossil generation in the CAIR region decreased due to the RER 

(lowering demand for allowances), or an underestimate due to market imperfections or if retirement of 

RER allowances occurred. 

4
5

 

Response of Wind Energy Development to Financial Incentives 

Based on discussions with MPCA, we determined that it would be useful to provide data that 

shows that wind energy development increases in response to increased financial incentives, and 

that shows the possible magnitude of the response. A full analysis of the expected response of 

wind energy development in Minnesota to financial incentives is beyond the scope of this report. 

Instead, we recommend for MPCA consideration: 

1. Western Governors’ Association, Clean and Diversified Energy Initiative, Wind Task 

Force Report,

8

 shows that wind energy development has been highly sensitive to the 

federal production tax credit. This suggests that wind energy development responds to 

financial incentives, albeit one that is larger than the incentive likely to be provided by 

the RER. 

2. Wind Energy Cost Curves. A description of these cost curves is provided in the same 

report.9

 Similar data for Minnesota is available.10 

8

 Page 41, http://www.westgov.org/wga/initiatives/cdeac/Wind-full.pdf 9

 Page 17, http://www.westgov.org/wga/initiatives/cdeac/Wind-full.pdf 10 Please see spreadsheet included as Appendix 2 with this report. 
Appendix 1. Sensitivity Analysis 

Table 1. Additional Sensitivity Analysis, Value of Alternative Allowance Allocations in Minneso

Allowance Price $1,000/ ton-yr $2,000/ton-yr 

No Reserve 

A. 1%,  5 years 

B. 10%,  20 years 

C. 15%,  10 years 

No Reserve 

A. 1%,  5 years 

B. 10%,  20 years 

C. 15%,  10 years 

No Reserve 

Annual Value to Fossil Generators $26,203,000 $25,940,970 $23,582,700 $22,272,550 $52,406,000 $51,881,940 $47,165,400 $44,545,100 $78,609,000 Annual Value to Renewable Generators $0 $262,030 $2,620,300 $3,930,450 $0 $524,060 $5,240,600 $7,860,900 $0 Total Over Allocation Period to Renewable Generators $0 $1,310,150 $52,406,000 $39,304,500 $0 $2,620,300 $104,812,000 $78,609,000 $0 Net Present Value to Renewable Generators Over Allocation Period 

10% discount rate $0 $1,092,630 $24,538,900 $26,566,005 $0 $2,185,260 $49,077,800 $53,132,010 $0 30% discount rate $0 $829,650 $11,294,888 $15,796,484 $0 $1,659,300 $22,589,775 $31,592,968 $0 

10% discount rate, 0.3 

prorate $0 $327,789 $7,361,670 $7,969,802 $0 $655,578 $14,723,340 $15,939,603 $0 

30% discount rate, 0.3 

prorate $0 $248,895 $3,388,466 $4,738,945 $0 $497,790 $6,776,933 $9,477,890 $0 

6
7

Table 2. Additional Sensitivity Analysis, Approximate Maximal Effect of RER on Retail ElectricMinnesota 

Allowance Price $1,000/ ton-yr $2,000/ton-yr 

No Reserve 

A. 1%, 5 years 

B. 10%, 20 years 

C. 15%, 10 years 

No Reserve 

A. 1%, 5 years 

B. 10%, 20 years 

C. 15%, 10 years 

No Reserve 

Annual Value to Fossil Generators $26,203,000 $25,940,970 $23,582,700 $22,272,550 $52,406,000 $51,881,940 $47,165,400 $44,545,100 $78,609,000 Incremental Cost Due to RER $0 $262,030 $2,620,300 $3,930,450 $0 $524,060 $5,240,600 $7,860,900 $0 Annual Generation (GWh) 54,000 54,000 54,000 54,000 54,000 54,000 54,000 54,000 54,000 Incremental Cost (cents/kWh) 0.0000 0.0005 0.0049 0.0073 0.0000 0.0010 0.0097 0.0146 0.0000 
8

 

Appendix 2. Description of Wind Energy Data Workbook11

Please refer to the wind energy data workbook provided with this report. The following is a 

description of the data. 

The workbook contains the raw data for Minnesota that could be used to construct the supply 

curves similar to the ones that are displayed in the Western Governors’ Association, Clean and 

Diversified Energy Initiative, Wind Task Force Report.12 Please note: 

1. Each worksheet starts with land area grouped in bins by wind resource class (from class 7 

to class 3) and cost per MWh of producing electricity. Then, starting at row 250, you will 

see the corresponding MW capacity that could be constructed, also grouped by resource 

class and cost per MWh. You may find the MW capacity data more useful, so I have 

highlighted for MN. MN has usable class 4 and 5 wind. I did not see any class 3 or class 

7. 

2. Each worksheet represents a different assumption about transmission availability, ranging 

from 0 to 40% of current transmission capacity. The effect of transmission availability 

on amount of wind energy available in each resource/cost bin may be seen by comparing 

the different worksheets. This comparison will be most informative if supply curves are 

constructed from the data. 

3. The final worksheet provides details of land-exclusion assumptions and data sources. 

Note that this is based on older, lower-resolution, NREL-validated Minnesota wind data, 

not on the newer, higher-resolution data that has not been validated by NREL. 

4. Cost assumptions appear at the top of each spreadsheet. As you can see, there is one base 

production cost (levelized cost of energy - LCOE) for each wind resource class, and then 

one transmission cost per MWh-mile. The cost shown in $1 increment bins represents 

the cost of production (LCOE), plus the cost of constructing the transmission that would 

be needed to connect to the grid. It is the distance to transmission that causes the cost to 

be spread over a number of bins within each class. The value in each cell represents the 

amount (land area or MW) of wind resource (by class) available at that total cost 

($/MWh, production + transmission). 

5. The MN resource is in MN (within the capability of the Geographic Information System 

to determine), but it could be used in other states. It would require additional analysis to 

restrict it to the resource that could be used in MN. 

6. The load assigned to wind (20% of city peak demand) is the same in each of the 

worksheets. 

7. To construct a total supply curve from one of the worksheets, the total amount of MW 

available at each cost would be summed across all resources. The difference among 

supply curves from different worksheets will show the effect of different transmission 

availability assumptions. 

11 This appendix describes a data workbook that was e-mailed to Robert McCarron as part of the Technical 

Assistance Project. Wind resource data is available at http://www.nrel.gov/wind/resource_assessment.html, 12 Page 17, http://www.westgov.org/wga/initiatives/cdeac/Wind-full.pdf
9

Appendix 3. Original Request – Technical Assistance Project 

Checklist for Request 

The TAP program is designed to help states and cities in crosscutting areas not currently covered by an 

existing DOE program. The project has defined five areas as examples of appropriate requests: 

• System benefit charges or other rate-payer funded utility efficiency and renewable programs; 

• Renewable or efficiency portfolio standards; 

• Use of clean energy technologies to help states and localities address air emissions; 

• Use of renewable energy on public lands (state and local); or 

• Use of renewable and energy efficiency technologies for state and local disaster relief, mitigation and 

planning. 

The TAP team considers and approves other requests beyond these areas if they meet the intent of 

the project. 

 DATE REQUEST SUBMITTED TO REGIONAL OFFICE 

 

 February 22, 2006 

 CITY/STATE 

 Minnesota 

 ORGANIZATION(S) REQUESTING ASSISTANCE 

 Minnesota Pollution Control Agency (MPCA) 

 POINT OF CONTACT 

Who is the primary point of contact? 

(Name, phone number and email address) 

 Robert McCarron, (651) 296-7324, robert.mccarron@pca.state.mn.us 

Are there other contacts? 

(Name(s) phone number(s) and e-mail address(es) 

 Mary Jean Fenske, (651) 297-5472, maryjean.fenske@pca.state.mn.us 

 John Seltz, (651) 296-7801, john.seltz@state.mn.us 

Which agencies are involved? 

 Minnesota Pollution Control Agency 

Is the State Energy Office (SEO) involved? 

 We are consulting with Minnesota’s Department of Commerce. 

 
10

 TYPE OF ASSISTANCE & ESTIMATED LEVEL OF ASSISTANCE 

REQUESTED 

__X__ Consultation 

_____ Phone 

_____ Email 

_____ On-site visit 

__X__ Other (Specify) 

Written reports that describe findings and cite references. 

 _____ Presentation 

 _____ Testimony 

 _____ Review of legislation and/or documentation 

 _____ Uncertain what type of assistance is required. 

 _____ Other (Specify) 

 LAB & TECHNICAL PERSONNEL 

 Is there a request for a specific person and/or lab? No. 

 PROJECT ASSISTANCE SUMMARY 

As the MPCA plans to implement USEPA’s Clean Air Interstate Rule (CAIR), questions 

arise with respect to the operations of renewable energy reserves – sometimes known as “setasides.” These are measures that reserve a fixed number of NOx trading program allowances 

for distribution to generators that use renewable energy. NOx trading is new to Minnesota 

and we would like assistance in these areas (listed in order of priority): 

1. Size of Renewable Energy Reserve

We would like to know how renewable energy reserves of 1%, 3%, 5% and 10% affect: 

• NOx emissions in Minnesota

• administrative costs of the renewable energy reserve to grantees and to state agencies 

• retail electricity prices 

• costs incurred by emission source operators who “lose” allowances to renewable 

energy generators 

• financial benefit to grantees 

2. Duration of Allocation Award

We would like to know how the length of time an allowance is awarded (1, 5, 10 or 20 years) 

affects: 

• NOx emissions in Minnesota

• administrative costs of the renewable energy reserve to grantees and to state agencies 

• retail electricity prices 

• costs incurred by emission source operators who “lose” allowances to renewable 

energy generators 

• financial benefit to grantees 
11

3. Interaction with Renewable Energy Credits Programs

Questions have arisen on the interaction of renewable energy reserves with other energy 

programs. We need to further understand how or whether renewable energy reserves impact 

the value of Renewable Energy Credits. If NREL has or can compile information related to 

this issue, it would advance the decision process in Minnesota. 

4. Evaluation of Renewable Energy Reserve Programs in Other States

We would like to learn all that we can from other states’ experiences. We have yet to find 

program evaluations for renewable energy reserves in other states. If they exist, we would 

like to review them. 

 WHAT ARE THE LONG TERM GOALS OF THIS PROJECT? 

Stable and meaningful incentives that will encourage development of renewable energy 

resources. 

 ELIGIBILITY FOR TAP 

How does this request relate to one of the designated topics? Does it go beyond the scope of these 

projects? 

We expect that information developed by this project will help promote the “use of clean energy 

technologies to help states and localities address air emissions.” 

 TIMING 

What is the time schedule on this request? 

Information will be most helpful if it is received by the end of March. 
F1147-E(12/2004) 

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PLEASE DO NOT RETURN YOUR FORM TO THE ABOVE ORGANIZATION.

1. REPORT DATE (DD-MM-YYYY)

December 2006 

2. REPORT TYPE

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3. DATES COVERED (From - To)

 

5a. CONTRACT NUMBER

DE-AC36-99-GO10337 

5b. GRANT NUMBER

4. TITLE AND SUBTITLE

“Technical Assistance Project for the Minnesota Pollution Control 

Agency" 

5c. PROGRAM ELEMENT NUMBER

5d. PROJECT NUMBER

 NREL/TP-620-40583 

5e. TASK NUMBER

6210.2003 

6. AUTHOR(S)

Laura Vimmerstedt 

5f. WORK UNIT NUMBER

7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES)

National Renewable Energy Laboratory 

1617 Cole Blvd. 

Golden, CO 80401-3393 

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REPORT NUMBER

NREL/TP-620-40583 

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NREL 

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National Technical Information Service 

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13. SUPPLEMENTARY NOTES

14. ABSTRACT (Maximum 200 Words)

This report was prepared in response to a request for technical assistance from the Minnesota Pollution Control 

Agency (MPCA). The U.S. Department of Energy’s (DOE) Office of Energy Efficiency and Renewable Energy 

supported the National Renewable Energy Laboratory (NREL) in its response to this request through the Technical 

Assistance Project. Discussion with the MPCA identified the following as the highest-priority questions: What is the 

effect of (i) size of Renewable Energy Reserve (RER) and (ii) duration of allocation award on (a) NOx emissions in 

Minnesota and (b) retail electricity prices? What data is available on the response of wind energy development to 

financial incentives? This report addresses those questions. 

15. SUBJECT TERMS

Minnesota Pollution Control Agency; MPCA; Minnesota; renewable energy reserve; RER; duration of allocation award; 

financial incentives; technical assistance project; TAP; electricity; wind energy; NOx emissions; Clean Air Interstate Rule; 

CAIR; renewable energy; Laura Vimmerstedt 

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a. REPORT 

Unclassified 

b. ABSTRACT 

Unclassified

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