Parties stake out positions on how to allocate emissions allowances

By Jeffrey Tomich | 12/14/2015 07:48 AM EST

For state air regulators, the big question for 2016 is whether to choose rate- or mass-based compliance plans to satisfy U.S. EPA’s Clean Power Plan.

For state air regulators, the big question for 2016 is whether to choose rate- or mass-based compliance plans to satisfy U.S. EPA’s Clean Power Plan.

For the states that decide simpler mass-based plans to cap power plant CO2 emissions are the way to go, an even thornier issue awaits. It involves how to allocate emissions allowances.

Under a mass-based approach, states will issue allowances equal to the number of tons of CO2 allowed. Each fossil-fuel burning unit needs an allowance for each ton emitted. Allowances can be bought and sold and costs get factored into the expense of generating each megawatt-hour of electricity.


But before any transaction can occur, states face a lengthy menu of decisions regarding allocation: Are they handed out or auctioned? Are they awarded based on historical emissions or electrical output? How are proceeds used? Are they given to distribution utilities or generators? Are there set-asides?

In most states that don’t already participate in some type of carbon market such as the Regional Greenhouse Gas Initiative (RGGI) in the Northeast, these questions won’t be fully answered for at least a couple of years. But as states continue to dig deeper into their options, generators, advocacy groups and others engaged in talks around Clean Power Plan compliance are staking out positions.

Xcel Energy Inc., based in Minneapolis, operates across eight states from Michigan to Colorado — each of which may decide on different approaches to the Clean Power Plan.

But in those states that settle on mass-based plans, the company believes free allocation of allowances with oversight by state utility regulators is preferable to reduce the cost impact to consumers, said Jack Ihle, the company’s director of environmental policy.

"We are very concerned with the magnitude of the cost for our customers," Ihle said.

He cited Colorado as an example. If the state adopts a mass-based plan, it would need to cut annual power-sector CO2 output from 41 million tons annually to about 30 million tons. At a hypothetical cost of $20 per allowance, it would add up to $600 million in annual costs, he said.

"It’s a significant potential percentage increase in customers’ bills if you auction allowances or otherwise force the utilities to pay for them rather than freely allocate them and put it under the oversight of the PUC," he said.

Xcel, which announced plans to close two large coal-fired units at the Sherburne County Generating Station north of Minneapolis-St. Paul by the middle of the next decade, has also made clear that it wants to keep allowances for retired fossil units (ClimateWire, Dec. 11).

A case for historical emissions

Utilities have warned that redirecting emissions allowances from retired coal units could instead incentivize them to continue running aging, inefficient plants.

Houston-based Dynegy Inc., an independent power producer that operates in eight states, recommended that Pennsylvania adopt a mass-based plan. In comments to the Pennsylvania Department of Environmental Protection, the company said allowances should be allocated based on historical emissions or auctioned to generators and "a restricted pool of non-affected participants."

Dynegy said allocating allowances to electricity retailers would only "increase costs that are ultimately passed onto consumers." The company also cautioned against using set-asides and allocations as "a source of funding for incentives and subsidies."

Chicago-based Exelon Corp., which operates the nation’s largest nuclear fleet, also favors a mass-based approach, which would allow states "to auction or allocate allowances for maximum benefits," spokesman Paul Adams said in a statement.

Exelon, however, declined to specify how it believes allowances should be allocated.

In neighboring Missouri, St. Louis-based Ameren Corp. and other utilities have convinced state regulators that a mass-based approach is preferable (EnergyWire, Dec. 3). But the company declined to say how it thinks allowances ought to be allocated.

"There are still many details that must be considered as we move forward under a mass-based approach," Ajay Arora, Ameren Missouri’s vice president for environmental services and generation resource planning, said in a statement.

Steering clear of ‘default option’

Like other environmental groups, the Natural Resources Defense Council would prefer a RGGI-style auction with proceeds invested in energy efficiency, renewable energy and bill rebates, especially for low-income consumers, said Katharine McCormick, Midwest advocate for the NRDC.

Meanwhile, the group is cautioning against the "default option," in which states simply hand out allowances based on historical CO2 emissions.

"That basically just rewards the biggest polluters," McCormick said, adding that generators that cut carbon pollution can potentially profit by selling allowances rather than passing those benefits onto consumers.

But McCormick said there is also "middle ground" in states where an auction is unpalatable. Other options include allocating allowances based on electrical output, which would mean renewable energy and energy efficiency providers. In deregulated states, allowances could also be distributed to utilities, which could sell them to generators and use revenue to reduce costs for consumers or invest in clean energy.

Chris Kunkle, regional policy manager for Wind on the Wires, an advocacy group based in St. Paul, said how allowances are allocated in states choosing mass-based plans is among the key policy decisions that can help maximize the benefits of the enormous wind potential across the Upper Plains.

The group sees "tremendous opportunity" for states such as the Dakotas, Iowa and Minnesota, which benefit by exporting carbon-free energy to neighbors in search of ways to meet Clean Power Plan targets at the lowest possible cost.

"We think regulators and utilities are going to recognize the value there," he said.