Reaching the Kyoto Targets, ACEEE Figure 5. Installed U.S. CHP Capacity and Avoided Carbon Emissions. Table 6. Estimated Impacts from the Accelerated Adoption of Combined Heat and Power Systems. Reaching the Kyoto Targets, ACEEE 10 Table 6 includes our estimates of the avoided SO, and NOx emissions from CHP adoption." While most of these reductions come from avoided utility electricity generation, some also come from reduced on-site emissions. CHP is an economic approach to reducing air pollutants because it increases thermal efficiency, which saves fuel and the resulting emissions. Traditional pollution control techniques, on the other hand, are less cost-effective and can reduce overall thermal efficiency. Because of the diversity of system configurations, permitting issues, system sizes, and repowering versus new construction, it is difficult to generalize about the incremental cost of adding CHP capacity. Larger systems (greater than 50 MW) tend to have lower costs per unit of capacity, often less than $500 per installed kW. The incremental installed cost for smaller systems can approach $1,000 per kW,, though in some cases the cost of permitting can approach a quarter of this cost. Based on discussions with experts (Carroll 1998; Davidson 1998; Hall 1998; Parks 1998), ACEEE has elected to use an installed cost of $650 per kW. This may represent an overly conservative assumption since we anticipate a majority of the new capacity installed by 2010 will be large systems in industrial facilities. The projected additional 50 GW, of CHP capacity installed by 2010 would require a cumulative investment of $ 32.5 billion and would yield net energy cost savings of $7.3 billion per year by 2010. This implies an average simple payback of 4.4 years. The net present value of the energy cost savings over the lifetime of additional CHP capacity installed during 1999-2010 equals $73.5 billion, 3.3 times the net present value of investments made during 1999-2010. These calculations do not include potential savings from avoiding on-site pollution control equipment, or the potential economic value of avoided SO2, NOx, and CO2 emissions. 10 This strategy may not result in overall reduction in SO, and NOx emissions in the aggregate since these emissions are or will be covered by emissions caps. This strategy (and others proposed in this report) will make it easier to meet the emissions caps. REDUCING POWER SECTOR CARBON EMISSIONS Opportunity Reaching the Kyoto Targets, ACEEE In 1996, U.S. electric generators (excluding cogenerators) emitted 517 MMT of carbon. The EIA's Reference Case Forecast projects electric generator emissions to grow to 663 MMT by 2010 (EIA 1997a). Opportunities to reduce power sector carbon emissions (apart from greater end-use efficiency and expanded use of CHP) are two-fold: (1) to improve the efficiency of electric generating plants, by using less fuel per kWh produced; and (2) to switch to less carbonintensive fuels (e.g., towards renewable energy and natural gas, and away from coal and oil). The heat rate of fossil fuel power plants (Btus of fuel consumed per kWh generated) has declined from 15,100 Btu per kWh in 1949 to 10,600 Btu per kWh in 1996 (ELA 1997b). Expressed differently, the average efficiency of fossil fuel plants has increased from about 23 percent to 32 percent." ELA projects that average efficiency will continue to rise as older power plants are retired and new combined-cycle and other higher-efficiency power plants are added. Specifically, ELA projects that the average efficiency will reach about 36 percent (9,600 Btu per kWh) in 2010 and 38 percent (9,100 Btu per kWh) in 2020 (including utility and non-utility power producers) (EIA 1997a). However, the most efficient combined-cycle plants now being sold commercially have efficiencies on the order of 52 percent and heat rates around 6,600 Btu per kWh (Linden 1997). Thus, on a technical potential basis, if all fossil fuel power plants were replaced with units with an average, efficiency of 52 percent, power sector emissions in 2010 would decline about 30 percent, cutting carbon emissions by about 190 MMT. Furthermore, if this generation all came from natural gas plants, carbon emissions would decline by a further 32 percent (an additional 215 MMT) relative to the EIA's Reference Case Forecast for 2010. Of course, replacing all existing fossil fuel power plants with state-of-the-art natural gas plants is prohibitively expensive, and relying overwhelmingly on natural gas raises serious questions about fuel availability and dependency on a single fuel. Still, additional heat rate improvements averaging 10 percent or so appear feasible, as would some additional shift away from carbon-intensive fuels. Coal alone accounted for 57 percent of electric utility generation in 1997 and the fraction of electricity produced by coal-fired power plants actually has risen slightly in recent years (EIA 1998). Barriers Barriers to carbon emissions reductions in the power sector are several-fold. First, the large sunk capital costs in carbon-intensive and relatively inefficient existing power plants limits the cost-effective carbon reduction potential. High-efficiency natural gas plants are generally cheaper "Efficiencies used throughout this section are based on the higher heating value of fossil fuel, which is the convention used in the United States. Reaching the Kyoto Targets, ACEEE per kWh than new coal plants. But new high-efficiency gas plants can compete with only a small fraction of existing coal plants. However, as discussed below, the substitution potential becomes much greater if a moderate cost penalty is accepted. Second, coal companies, coal miners, and owners of coal-fired power plants are strongly opposed to efforts to restrict emissions from coalfired plants. This makes it difficult to close existing power plants and shift fuels on political grounds, even where it is economically viable. Third, under existing Clean Air Act regulations, old, high-polluting plants are "grand fathered" and need to meet less stringent emissions standards than new plants, be they gas- or coal-fired. This encourages life extension of existing plants and discourages building new capacity. And fourth, competitive pressures and restructuring are leading to increases in availability and operation of existing low-cost (often coal) power plants in the short run. Some observers expect this trend will continue. For example, Paul Joskow wrote recently: However, competition may increase incentives to continue to maintain and Strategy Several strategies have been proposed to address these barriers and obtain power sector carbon reductions. Probably the simplest is to implement a "cap and trade" program for power sector (or multi-sector) carbon emissions, similar to the SO, cap and trading scheme established by the Clean Air Act Amendments of 1990. Such a scheme would limit carbon emissions to a pre-determined amount, such as at 1990 emissions levels. Under such a system, since emissions allowances are fully tradable, the market will determine the most economically efficient way to reach these levels through a combination of heat rate improvements, fuel switching, and improvements in end-use efficiency. The constraints on implementing a carbon cap and trade system are political-the utility and coal industries and their allies strongly oppose adopting carbon emissions caps. Alternatively, standards could be imposed on average heat rate, with allowable heat rates progressively reduced over time. As with carbon emissions caps, trading could be allowed, in that generators that are below the prevailing heat rate cap could earn credits that could be sold to less efficient generators, allowing the market to determine the most economically efficient way to meet the requirements. Such a proposal has been advanced by Bayless and Casten (1997), two energy industry CEO's. The advantage of such a system is that it is fuel neutral and thus is not likely to generate as severe opposition from the coal industry. Another advantage is that it Reaching the Kyoto Targets, ACEEE could stimulate implementation of combined heat and power systems (an important energy efficiency strategy discussed previously in this report), if credit is provided for any useful thermal energy ("waste heat”) obtained from power plants or cogeneration facilities. This policy could stimulate some fuel switching in that lower heat rates are more easily achieved with natural gas. Another complementary strategy is a renewable energy portfolio standard (RPS). Such a standard requires that a set percentage of each generator's output must come from renewable sources, but permits trading among generators so that generators with excess renewable energy allowances can sell them to generators without adequate allowances. An RPS has been adopted by a number of states and is included in a number of federal utility restructuring proposals. We do not consider the potential carbon emissions reductions from an RPS in our analysis of energy efficiency strategies. Analysis Estimating carbon emissions reductions from the different strategies is relatively easy. Estimating economic impacts is much harder. If a carbon cap and trade system were implemented capping power sector emissions at 1990 levels for 2010, then emissions would be no greater than 447 MMT in 2010, 186 MMT (28 percent) less than the ELA's Reference Case Forecast for 2010. A portion of this reduction could be provided through end-use efficiency improvements (e.g., stimulated by new efficiency standards and/or a PBF) and a portion through supply-side efficiency improvements and fuel switching. If a heat rate cap of 8,600 Btu per kWh were imposed (10 percent below the ELA's Reference Case Forecast for 2010), carbon savings would modestly exceed 10 percent (e.g., 66 MMT), due largely to the direct heat rate improvement and secondarily to the fact that coal plant heat rates are on average higher than gas, so a heat rate reduction requirement would likely stimulate some fuel switching. Reducing the heat-rate cap an additional 10 percent to 7,700 Btu per kWh in 2020 would cut emissions that year by at least 115 MMT (15 percent) relative to those in the EIA Reference Case Forecast. Likewise, EIA has estimated the carbon savings from an RPS, estimating that requiring 5 percent of 2020 generation to come from non-hydro renewables would reduce carbon emissions 15 MMT in 2010 and 27 MMT in 2020, while a 10 percent requirement in 2020 would cut emissions 32 MMT in 2010 and 63 MMT in 2020 (ELA 1997a). Economic impacts of these policies are much harder to estimate. The Clean Air Taskforce estimates that power sector carbon emissions can be reduced to 11 percent below the 1990 level (i.e., a carbon savings of 155 MMT) by retiring 30 percent of the existing stock of fossil plants (the dirtiest units) and replacing them with state-of-the-art gas-fired plants. Such a program would also substantially reduce emissions of NOx, hydrocarbons, and other pollutants. It would also help to correct the market distortion of grand fathering old plants from new source performance standards. According to their analysis, these environmental benefits could be obtained while increasing electric rates by an average of only 2-3 percent relative to a no-new |