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he Electricity and Natural Gas Sectors
Frequently Asked Questions
What is the role of the energy agencies in
shaping California's greenhouse gas
reduction efforts?
The California Public Utilities Commission and California En-
ergy Commission are tasked in California's 2006 Global Warm-
ing Solutions Act (Assembly Bill 32, or AB 32) with providing
information, analysis and recommendations to the California
Air Resources Board (ARB) on ways to reduce greenhouse gas
(GHG) emissions in the electricity and natural gas sectors.
Why are the electricity and natural gas sec-
tors being asked to reduce GHG emissions?
As a combined energy sector, electricity and natural gas are
second to the transportation sector in California's GHG emis-
sions. Electricity accounts for 25 percent of California's GHG
emissions, and natural gas, used at locations other than pow-
er plants, accounts for an additional 14 percent. California's
electricity sector can significantly contribute to reducing GHG
emissions by first pursuing all cost-effective energy efficiency
options and increasing renewable electricity generation.
Since the electricity sector currently relies mostly on natural
gas to produce electricity, it can reduce emissions by provid-
ing incentives for more efficient gas-fired technologies and
combined heat and power applications. The sector can also
reduce emissions by depending less on importing electricity
from coal-based facilities, which emits more carbon dioxide
per unit of electricity generated than natural gas.
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What has been comp feted so far in the joint
efforts of the Energy Commission and the
California Public Utilities Conn mission?
In November 2006, the two Commissions began a proceeding
on GHG regulation in the electricity and natural gas sectors.
Since that time, numerous workshops have been held on
regulatory design issues such as the appropriate point of reg-
ulation in the electricity sector, allowance allocation policies,
flexible compliance issues, and direct regulatory measures.
Approximately 65 stakeholder groups have participated in
the proceedings, with many more monitoring. Following pub-
lic comments on a draft Interim Opinion, the two Commis-
sions adopted their revised March 2008 Interim Opinion on
GHG reductions in the electricity and natural gas sectors.
Following the March Interim Opinion, the Commissions
released their September Proposed Final Opinion on Green-
house Gas Regulatory Strategies (Proposed Final Opinion) that
built on the March Interim Opinion and the ARB's Climate
Change Draft Scoping Plan (June 2008). This Proposed Final
Opinion is sponsored by Public Utilities Commission President
Peevey and Energy Commission AB 32 Implementation Com-
mittee members Chairman Pfannenstiel and Commissioner
Byron, and provides further recommendations and outlines a
variety of options for the ARB to consider in deciding how to
design a program to achieve the GHG emission reductions in
the electricity sector.
What are the key points in the March
Interim Opinion?
In the March Interim Opinion, the Commissions recommend-
ed to the ARB a mix of regulatory requirements and a cap-
and-trade system to achieve GHG reductions in the electricity
and natural gas sectors. Regulatory requirements include
mandates for energy efficiency and renewable energy, which
are the first two preferred resources to be used in meeting
the state's energy needs, as outlined in California's Energy
Action Plan. In addition, the Commissions recommended that
the first deliverer of electricity to the California grid be the
"point of regulation" and responsible for complying with AB
32 electricity sector regulations. For in-state electricity, the
deliverer is typically the power plant owner; for imported
electricity, the deliverer is typically the entity that imports the
electricity into the state.
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What are the key points in the September
Proposed Final Opinion ? -
In addition to reaffirming the Commissions' commitment to
maximize energy efficiency and expand renewable energy
development, the Proposed Final Opinion recommends an
approach for distributing GHG emission allocations and
auctioning in a multi-sector cap-and-trade program including
direct program approaches and greater detail on the supple-
mental elements of how such a system might work. The
Proposed Final Opinion also recognizes the value of energy
efficient combined heat and power (CHP) projects and recom-
mends that for large CHP projects, GHG emissions for either
electricity consumed on-site and/or delivered to the electricity
grid be included in a multi-sector cap-and-trade program.
What are the next steps in the joint
Commission proceeding?
Over the next several weeks, the Proposed Final Opinion is
available for public comment before being finalized and
adopted by the Commissions. The Energy Commission and
the California Public Utilities Commission currently plan to
adopt the Final Opinion on October 16, 2008 during their
public meetings. The Final Opinion will then be submitted
to the ARB for consideration in the scoping plan process.
How will the GHG emission reduction goals
be achieved?
Reductions in GHG emissions will be achieved through mea-
sures designed to increase energy efficiency and renewable
energy generation. These include required levels of perfor-
mance, such as statewide standards for buildings, appliances,
and delivery of renewable energy, and utility programs for
energy efficiency, such as rebates for purchase of efficient
appliances.
These programs and standards are the recommended means
to reach the reductions targeted for electricity and natural gas
in the ARB's Climate Change Proposed Scoping Plan. A cap-
and-trade program is recommended as an additional measure,
to ensure reductions from other sources, and produce addi-
tional reductions at lowest cost to consumers.
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Why do the two Commissions continue to
recommend program measures for energy
efficiency and renewable energy? What are
some opportunities for California to use
energy more efficiently?
California has already achieved great success in energy effi-
ciency, holding per capita electricity use constant since about
1973 while it has continued to increase nationally. These
electricity savings have been achieved through standards for
buildings and appliances, as well as utility programs promot-
ing energy efficiency. Energy efficiency is, as always, the
cheapest and most cost effective energy resource. Achieving
higher levels of energy efficiency means we need to maximize
use of efficient appliances and systems already available (for
example, low-energy lights such as compact fluorescents), as
well as make advances in how buildings are heated, cooled,
lit, and ventilated.
Renewable resources are essential for reducing GHG emis-
sions and reaching AB 32 goals. Over the last three decades,
California has built one of the largest and most diverse renew-
able portfolios in the world. A goal of 33 percent renewable
energy by 2020 is feasible, but only if the state commits to
significant investments in transmission on infrastructure and
implements programmatic changes.
What is "cap-and-trade"?
A cap-and-trade program is a system designed to achieve a
specific limit or cap on emissions. Entities within the jurisdic-
tion of the program would only be allowed to emit GHG
emissions if they hold emissions allowances or permits. Under
a cap-and-trade program these deliverers would be given
annual allowances to emit a certain amount of CO2 and other
GHG emissions based on certain criteria. Electricity deliver-
ers would have three options: 1) emit the amount of GHG
allowed by their permit or allowances, 2) reduce their own
GHG emissions and sell excess allowances to other emitters, or
3) emit more GHG emissions by purchasing unused permits or
allowances from another emitter. In this way, emitting entities
may interact through an emissions market, while an overall
cap on emissions is achieved. The emissions cap in early years
of the program will be a slight reduction from current emis-
sions, with the cap lowered in subsequent years and until the
required target is reached in 2020.
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How is a cap-and-trade program different
from a carbon fee?
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Before AB 32, any entity has been free to emit GHG emis-
sions, at no charge for the carbon emissions. In a cap-and-
trade system, a cap is set on the amount of allowed emissions,
but not the price of allowances to emit carbon. Allowances
can be traded as long as the emission cap is not exceeded. A
carbon fee system sets the costs for an allowance but has no
emissions limits so there is no need to trade emissions. Those
entities wanting to buy an allowance could purchase as many
as they could afford. While a carbon fee is likely to lead to
fewer emissions, it would not provide the same certainty as a
cap-and-trade program of reducing emissions to the specific
target set in AB 32.
Will a cap-and-trade program protect
consumers? -
AB 32 sets California on course to transform its economy into
a system that rewards actions to reduce GHG emissions. An
advantage of cap-and-trade is that the allowances component
of the program encourages reductions at the lowest cost.
For example, if power plant "A" can reduce emissions at a
cheaper cost than power plant "B", market principles suggest
that power plant "A" will sell allowances to power plant "B".
Consumers are protected by the flexibility offered by a cap-
and-trade system because it encourages electricity generators
to reduce emissions at the lowest cost, provided that actions
to reduce GHG emissions do not increase emissions of toxic air
pollutants and that all emissions continue to meet state and
federal standards for air quality.
Will cap-and-trade lead to market
manipulation?
The two Commissions are acutely aware of the possibil-
ity that markets can be manipulated to generate excessive
profits. The Proposed Final Opinion recommends easing into
cap-and-trade, with the bulk of initial emission reductions
achieved through regulatory mandates for efficiency and
renewable energy. One concern often expressed about a
cap-and-trade system is that entities may hoard allowances
to drive up prices for future allowances and then sell the
original allowances at a profit. The final program design by
ARB will include safeguards to prevent market manipulation.
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Will cap-and-trade lead to windfall
profits for power generators and .
financial marketers?
The European Union's (EU) cap-and-trade program provides
lessons that California is tracking. In the beginning of the EU's
program, allowances were allocated at no cost. The Proposed
Final Opinion recommends that some allowances be required
to be purchased from the program's outset—beginning with
20 percent of all allowances in 2012 and increasing to 100
percent starting from 2016. In addition, the cap-and-trade
program is being designed to return money to electricity
consumers. By 2016, the Proposed Final Opinion recommends
that power generators would pay for all of their rights to
emit GHG emissions with most of these revenues used for the
benefit of the electricity ratepayers.
Why is the "combined heat and power"
technology specifically discussed in the
September Proposed Final Opinion?
Many energy projects, most often developed by companies
that are not primarily in business to supply energy, simulta-
neously produce heat and electricity from a single fuel. This
practice is known as combined heat and power (CHP), or
cogeneration, and is common in the industrial sector. CHP
projects are usually more efficient because a single fuel is
used to produce both on-site heat and electricity, more total
energy is obtained per unit of fuel consumed and less GHG
emissions are released. Since CHP projects result in heat and
electricity output, the Commissions recognized the value of
higher efficiency provided by CHP projects and considered a
number of options on how to address CHP as a strategy for
reducing GHG's.
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What is the Western Climate initiative?
The Western Climate Initiative (WCI) was launched in Febru-
ary 2007 and currently includes Arizona, British Columbia,
California, Manitoba, Montana, New Mexico, Ontario,
Oregon, Quebec, Utah, and Washington. WCI's mission is to
develop a regional system to address climate change. WCI
partners are currently working on designing a market-based
mechanism to achieve greenhouse gas reductions by 2020.
The WCI target is 15 percent below 2005 levels, which in
California is equivalent to the 2020 goal of 1990 levels, as
required by AB 32.
What is the E3 model designed to do and
what can it show?
The Energy and Environmental Economics, Inc. (E3) model is
designed to provide information on supply of low-carbon re-
sources in California and show price impacts and magnitude
of GHG reductions that can be expected from different policy
initiatives (e.g., energy efficiency, renewable energy). In addi-
tion, it can show the impacts on utilities and their customers
of different allowance allocation policies in a cap-and-trade
program. The E3 model is a scenario tool that is dependent
on assumptions about the representation of the electricity
system and future conditions. While the accuracy of individ-
ual results taken in isolation may easily and legitimately be
questioned, the E3 model can accurately show the impacts of
one policy option relative to another, but its results are de-
pendent on input assumptions. More information on the E3
model is available at: www.ethree.ca/cpuc_ghg_model.html.
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