PowerFacts

Synapse Climate Report Misfires Wildly - Part Two: Report Actually Justifies Merchant Coal Allocations

Part Two: Report Actually Justifies Merchant Coal Allocations

EPSA's members represent the spectrum of fuel sources and technologies to generate electricity: coal, natural gas, nuclear, oil, and the range of renewables. As a sector, competitive suppliers have the lowest carbon emissions in the country. These suppliers are the leaders in deploying new, cleaner generation technologies and in vastly improving the operating performance of existing power plants. EPSA supports enactment of comprehensive federal legislation consistent with its climate principles. A key aspect of such legislation is fashioning a transition to a lower carbon future through emissions allowances based on recovery of net compliance costs that are fair to all market participants.

On July 15, 2009, several sponsors released a report prepared by Synapse Energy Economics, Inc. The sponsors have widely touted the report in opposition to carefully crafted provisions of the House-passed Waxman/Markey climate legislation to simply include competitive merchant coal plants in the bill's transitional allowance allocations to the rest of the electricity sector to help consumers and protect reliability. Given the report's many flaws, the several limitations admitted by the report's authors, and its outright omissions, this use of the report is unfounded.

In an egregious error, the report does not actually analyze the provisions of the House-passed Waxman/Markey legislation. As a result, any use of the report to draw conclusions about the legislation is misplaced. Specifically, two provisions not analyzed by the report are intended to prevent the results the report and its sponsors allege will occur (in addition to the bill's hard cap on merchant coal allocations of 3.5 percent of all allowances).

- The bill bases the limited transitional allocations for merchant coal plants on updated actual generation each year - and then for only one-half of the emissions from actual generation. (New Clean Air Act section 783(c)(4)) An independent analysis by Bernstein Research confirms that as a result, merchant coal plants would not act in practice in organized power markets as the Synapse report theorizes.

- The bill directs EPA and FERC to regularly review the merchant coal allocations during the transition period and adjust them if necessary to prevent what the Synapse report and its sponsors speculate might otherwise happen. (New Clean Air Act section 783(c)(5))

While the sponsors cite it to argue for zero merchant coal allowances, the report openly acknowledges that there are merchant coal plants that would be unable to recover their net carbon compliance costs in market prices (Synapse pages 7, 13), though the report fails to analyze the impact on reliability and wholesale power prices.

The report specifically acknowledges the validity of the very real world situation for which the Waxman/Markey bill provides a limited number of carbon allowances for a portion of merchant coal plant compliance costs during the transition period: when lower carbon natural gas sets the market-clearing price for coal-fired power and other sources of electricity in organized wholesale power markets. (Synapse report pages 13 and 3, and figure 1.)

In a fatal flaw, the report woefully understates the extent to which merchant coal plants are unable to recover carbon compliance costs when natural gas sets market prices. This is true based on current relative costs of various fuels to generate electricity, but even more so looking forward. Since the purpose of the legislation is to put a price on carbon that will increase the cost of higher-carbon fuels, the dispatch order of various fuels is highly likely to change in the future. The Synapse report does not take this dynamic effect into account at all.

In addition to inflating the revenues merchant coal plants will receive, the Synapse report also deflates expected merchant coal compliance costs by assuming that each coal plant will be able to abate 16 percent of its emissions for only $10 per ton. This counterfactual assumption ignores the fact that the only realistic alternative for coal plants to reduce their carbon emissions in the short run is to buy offsets, which will trade for the same price as allowances in a well-functioning market. By artificially assuming higher revenues and lower costs, the report understates the losses such plants face without reasonable transitional allocations, such as those in the Waxman-Markey bill. The sponsors conveniently omit that their coal plants will also receive transitional allowances.

The Synapse report is brazenly incomplete. Synapse does not appear to have done, or at least does not discuss, any analysis of other RTO markets where the situation facing merchant coal plants is even more difficult than in PJM. In addition, the report erroneously assumes that all merchant coal plants operate in organized wholesale power markets, when many are located outside of them. This has not stopped the report's sponsors from using it as a basis to deny merchant coal allocations in all situations, including those the report did not actually examine.

In a similarly fundamental omission that calls its usefulness to policymakers into serious question, the report simply ignores any impact on reliability and wholesale power prices, and thus on consumers, should merchant coal plants in various markets and non-market regions prematurely retire before lower-carbon power sources are readily available.

The report is internally inconsistent. While it acknowledges a negative impact on merchant coal plants that its sponsors ignore, Synapse attempts to paper this over by saying that plant owners can make it up from profits at other plants. (Page 7) Putting aside that this reflects a basic misunderstanding of how a prudent business manages assets, any such profits would likely come from the single clearing price mechanism that the report unfairly criticizes (see EPSA PowerFact Part One in response to the Synapse report). The Synapse report and its sponsors cannot have it both ways.

Synapse claims that limited merchant coal allocations hurt consumers in rate-regulated states because these allocations could otherwise be given to electricity local distribution companies in those states. First, this claim ignores the fact that merchant coal plants also operate in rate-regulated states. Second, the report's "logic" would justify eliminating any of the bill's allowances to any sector in the name of giving them to somebody else. In sum, instead of working together as a unified electricity sector to promote reliability and address cost impacts for all consumers, the report appears designed to seek benefits for a few at the expense of the rest of the electric sector.

CONTACT: JOHN SHELK
(202) 349-0154or 703-472-8660

EPSA is the national trade association representing competitive power suppliers, including generators and marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the United States, provide reliable and competitively priced electricity from environmentally responsible facilities serving global power markets. EPSA seeks to bring the benefits of competition to all power customers.