The Climate Bill's effects upon electric rates explained and modeled

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FinPro's picture
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The Climate Bill's effects upon electric rates explained and modeled

Potential debate has been shelved until March, but it isn’t too early to evaluate what the current legislation will do. A dry analysis, free of political stumping, is what I am going to attempt. We know enough about the allowance schedule, likely CO2 permit pricing and data from EIA to tell us where we’re headed. It’s all there and not likely to become more expensive as buy-in is sought from fence-sitting Senators.

As a collegial effort, I invite both sides to critique the accuracy of this presentation. The numbers aren’t perfect, but should be sufficiently accurate to paint the picture. Some basics to start:

U.S. 2005 CO2 emissions: 5,975 million tons
Utility 2005 CO2 emissions: ~2,400 million tons
Utility 2006 MWH sold: 4,123 million (or 4.123 bb Megawatt hours, if you like)
2005 fuel mix: 49% coal, 18% natural gas, 33% non or negligible CO2
Carbon price per ton: $15, contingent upon Sen. A. Spector’s cap

The allowance formula:
Total allowances equal one for every ton of carbon emitted in 2005, or 5,975 billion
30% allocation to utilities is (.3)*(5,975)=1793bb
This 30% “giveaway” is broken into two parts:
15% according to pro-rata sales, or Utility MWH / National MWH sold
15% according to the pro-rata 2005 emissions rate, or Utility CO2 / National Utility CO2

Before flowing the numbers, its important to understand how watered down the bill has become and why it has lost support from Greenpeace, for instance. With the coal states heard, the $50 per ton prices included in previous bills, as well as the 60, or $80, figures modeled by utilities, are history. Arlen Spector (Sen-PA) has conservatively introduced a suggested cap of $15 per ton, which would go a long way to providing utilities the certainty of cost which is so important in this business. Some kind of cap will likely gain political support in the final bill and this maximum number forms the basis for costs in my model.

Using the above, we can apply the costs of emissions across various utilities. It follows intuitively that under Cap & Trade, if you don’t exceed your individual cap, you pay only for those allowances not already given to you. EIA data above suggest utilities emit 40% of carbon (2400/5975). Hence, 40%-30%, or 10% must be paid for under a status quo. Further application of the allowance formula makes the number to be purchased rise, or fall, based upon how carbon intensive the individual utility has become, or always was. Since coal and natural gas add up to roughly 70% of total electricity production, any utility that is ~50% coal and ~20% natural gas, will roughly break even with other utilities when it comes to the credits (permits, allowances). But what about Midwestern utilities that are 80% coal intensive? A few exceed this, but the common variation in the public sector falls over a range of about 40-80% coal (WV’s 98% notwithstanding).

Two points deserving focus are the point at which carbon intensiveness represents a cost and the specific intensiveness of any given utility, which tells us what that cost will be. It would be simple if it were only coal that was a formidable carbon source, but we have to include natural gas’ emissions rate which is half as much as coal. Adding half of the 20% US production that is gas to the 50% that is coal gives us a ~60% average carbon intensiveness across the country. Utilities exceeding this will pay and those beneath this, after having paid for the allowances not given away, will profit. That’s the simple reality behind the sales aspect of the formula which came under dispute in the Senate last week.

An example: At 80% carbon intensiveness (or coal) I arrived at Southern Minnesota Municipal Power Agency’s expected cost of $3.7mm to continue emitting carbon at its 2006 rate. How does this cost flow through its utility rates? Well, they sold 3.358mm megawatt hours in 2006. Not accounting for variations in sales, or fuel mix, since 2005, which is somewhat reasonable, this cost washes down to a 1.1 cent increase in per kwh rates across all commercial, residential and industrial accounts.

Here’s the kicker. To those of us on the East/West coasts, who pay ~20 cents per kwh, this is small in percentage terms. On the other hand, when you are a SMMPA customer paying 4.8 cents per kwh, it represents an almost 25% hike in your bill. Not a double, as some politicians would have us believe, and not a whole lot in absolute terms either. If a cap on carbon’s price isn’t established, it isn’t impossible to see a 4.8 cent per kwh rate doubling. But part of this whole illustration is to demonstrate that it's how you spin it.  To me, it's not so bad.

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Re: The Climate Bill's effects upon electric rates ...

 Great analysis. It shows how the effect of the legislation works it way through the system, but as we can see there is plenty of room for variation (upward undoubtedly) as it evolves.

FinPro opines:

To me, it's not so bad.

The camels nose under the tent isn't so bad, either. It's when the rest of the camel arrives that you find that you have a problem. By then it's too late. But of course, that's the plan.

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Re: The Climate Bill's effects upon electric rates ...

If you want to save energy and reduce the pollutants, why don't you try a carrot instead of a whip approach?  No one disagrees that energy use per individual should be reduced but that does not justify heavy international taxes that are traded as derivatives. 

If we are serious about wanting to reduce our dependence on finite fossil fuels and simultaneously protect the environment, then we better talk about how we might fund the needed changes on a major scale.  We have the power to fund a huge transformation whereby we may greatly reduce our nation's energy and water usage while adding sustainable energy sources.

 Why not use the 0% interest rates (offered to multi-national corporations, hedge funds, soveirgn wealth funds, etc.) directly to the people.  For example, we could reduce the energy usage of all homes and private buildings by 50% - and shrink their carbon footprint by 70% within 7 years. Almost all of the financial benefits would accrue directly to the people.

There would be no need to increase taxes or to add a penny to our national debt. This would be a powerful stimulus package in revving up our ingenuity and productivity while increasing employment.

Aany sovereign nation is free to issue it's own money. We issue bonds every day and equally, we are able to issue dollars. It's been done successfully before (greenbacks, Guernsey, Pennsylvania colonial script, pre-WW2 Germany, etc.) so this is not a novel idea or theory.

We seem to agree on the objective, look forward to your comments.

Larry

Some Extra Stuff - link to my original post

  1. According to the 2000 census there were 115.9 million housing units in the United States that account for around 21% of our total energy usage and 28% of our electrical usage. Housing units average around $2,200/year in annual energy costs.
  2. There are approximately 4.6 million commercial buildings in the U.S. that account for around 18% of our energy usage and approximately 32% of our electrical usage.

The average cost to upgrade our housing units would be $16,500 each with a range of $11,000 - $22,000. Over a seven year time span, costs would be approximately $1.9 trillion or $273 billion a year. The average commercial building upgrade would be around $410,000 for a total cost of $1.8 trillion or $269 billion a year.

The program could reduce our total national energy usage by 20% and our electrical usage by 30%. Similar programs could be applied to the transportation and industrial segments to further reduce energy usage while adding sustainable technology.

The hidden “home run” benefit of this program is the 30% electrical savings. Our national power grid (three main sectors) is an engineering marvel but it was not designed to handle the heavy load now imposed upon it. Our electrical power grid has become unreliable (especially in the summer) and the quality of electricity diminishes with load which shortens the life of computers, motors, appliances, etc.

Replacing or upgrading our power grid will come at an astronomical price. Superconductors, new generation equipment and upgraded switching devices would cost over $1 trillion dollars. By reducing our electrical usage we can get more service life out of the grid while working on sustainable alternatives and battery technology to enable us to begin pulling homes and buildings off the grid in earnest. The 6-8% transmission and distribution losses could be saved by on site and local electrical power generation.

What about inflation?  As long as goods and services are added commensurate to the newly issued money, there would be no inflation.

There is no reason to tax and punish the people in order to reduce our energy and water usage. Problems can sometimes be opportunities in disguise as long as we are smart about solutions.

Some energy facts:

  • Buildings and homes consume almost 40% of the total energy used in the United States and 60% of our electricity, more than cars/trucks or manufacturing plants - U.S. Department of Energy
  • Despite past efforts to conserve, CO2 emissions coming from fossil fuels used for power generation grew at a rate of over 12% for homes and commercial buildings from 1990-2003 - U.S. Department of Energy
  • Green buildings typically reduce energy usage by 30 - 70% - U.S. Green Building Council
  • Only 7.5 percent of total U.S. energy consumption came from renewable sources in 1998. Of that total, 94 percent was from hydropower and biomass (trash and wood incinerators) - U.S. Energy Information Administration
  • Though accounting for only 5 percent of the world's population, Americans consume 26 percent of the world's energy - American Almanac
  • Total U.S. residential energy consumption is projected to increase 17 percent from 1995 - 2015 - U.S. Energy Information Administration
  • Carbon emissions in North America reached 1,760 million metric tons in 1998, a 38 percent increase since 1970. They are expected to grow another 31 percent, to 2,314 million metric tons, by the year 2020 - U.S. Department of Energy
  • The United States is the world's largest single emitter of carbon dioxide, accounting for 23 percent of energy-related carbon emissions worldwide - U.S. Department of Energy
Tycer's picture
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Re: The Climate Bill's effects upon electric rates ...

So, who gets the money generated by the tax? Where does it go? Who is the steward?

Exactly how does it help the world population?

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Re: The Climate Bill's effects upon electric rates ...
DrKrbyLuv wrote:

Any sovereign nation is free to issue it's own money. We issue bonds every day and equally, we are able to issue dollars. It's been done successfully before (greenbacks, Guernsey, Pennsylvania colonial script, pre-WW2 Germany, etc.) so this is not a novel idea or theory.

So simple and effective!

Dr. Luv for Treasury Secretary!!! 

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DrKrbyLuv
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Re: The Climate Bill's effects upon electric rates ...

Tycer wrote:

Dr. Luv for Treasury Secretary!!!

Thank you Tycer, if asked I would serve Smile

Larry

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Re: The Climate Bill's effects upon electric rates ...

I’m not sure a 50% reduction in energy use wouldn’t take a “whip” and interest free money printing to subsidize solar on every roof top (not to mention a political wish list of other things) isn’t going to happen.

Quote:

“As long as goods and services are added commensurate to the newly issued money, there would be no inflation.”

Larry, what do you think would happen to the money supply if we just printed more whenever a good or service was created?  If a good goes obsolete, or a service has been completed, would that money self-destruct or would it still be circulating?  I think you might want to rethink the origins of inflation.

Some of your numbers are dated, but I like your presentation and hope renewables keep growing.  Part of the problem is the Federal Energy Regulatory Commission (or FERC), which is made up of former private utility executives who are dragging their feet on things like tidal energy.  In the long run, no matter the rate and potential for wind/solar/biomass, etc, it will be quite a while before the main stays of coal/gas/nuclear go away.

Quote:

There is no reason to tax and punish the people in order to reduce our energy and water usage. Problems can sometimes be opportunities in disguise as long as we are smart about solutions.

earthwise wrote:

Great analysis. It shows how the effect of the legislation works it way through the system, but as we can see there is plenty of room for variation (upward undoubtedly) as it evolves.  The camels nose ....

I feel "punished" for driving under the speed limit.  A lot of the whole debate is over how much buy-in there is over Anthropgenic CO2 and whether it is, itself, a camel's nose.  By its effect as an energy policy, the same could be said for doing nothing about oil.  The bill is very complicated and won't work if travesties like taxing carbon intensive goods from abroad, or some kind of offset system isn't in place for domestic agriculture.  Farming is energy intensive.  CO2 per capita is also highly disperse and apt to have a punitive effect on some of the poorest people in the county.  Some say the fix is a flat carbon tax.  I disagree when I try to envision all that would have to written into the tax code.

Perhaps the bigger buy-in issue is cynicism over the Congress and its ability to manage such a program.  All I did was look at the utility piece and the allowances as they are looking for utilities because that's what I do.  Yes, the revenues from permits that aren't traded (the 15% auctioned and any above the 2005 cap) will go to Uncle Sam.  I don't deny interpreting that as a tax, but there's no carrot to getting off coal when it costs 1.5-2.0 cents per kwh of capacity to build vs nuclear and wind's 6-8 cent installed kwh cost.  Solar is more.

At least energy and climate policy is not as partisan an issue as health care.

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DrKrbyLuv
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Re: The Climate Bill's effects upon electric rates ...

Hello FinPro,

We agree that there is an urgent need to save energy for many reasons.  Where we disagree is in how we might implement policies that bring the desired changes.

You support punitive measures while I suggest positive incentives. 

Energy and climate change are being used in a scam to loot the people. Matt Taibbi wrote a great article about this entitled "The Great American Bubble Machine" - BUBBLE #6 Global Warming:

...instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an "environmental plan," called cap-and-trade.

The new carboncredit market is a virtual repeat of the commodities-market casino that's been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won't even have to rig the game. It will be rigged in advance.

Here's how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy "allocations" or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

It's not always easy to accept the reality of what we now routinely allow these people to get away with; there's a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can't really register the fact that you're no longer a citizen of a thriving first-world democracy, that you're no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.

But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state, running on gangster economics, and even prices can't be trusted anymore; there are hidden taxes in every buck you pay.

FinPro wrote:

Larry, what do you think would happen to the money supply if we just printed more whenever a good or service was created?  If a good goes obsolete, or a service has been completed, would that money self-destruct or would it still be circulating?  I think you might want to rethink the origins of inflation.

The interest free money would be backed by the assets and labor used in energy upgrades.  One interesting part of this plan is that if savings of 50% can be reached, the savings in energy costs will offset most of the payments.  This is a win-win situation for all.  And no, I don't see how this can be inflationary as long as the new money is backed with performing assets.

Again, I think we agree much more than we disagree and I respect your responsible concern.  Hopefully we can find some common ground in solutions.

Larry

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FinPro
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Re: The Climate Bill's effects upon electric rates ...

Carbon credits aren't sophisticated like CDO's and credit derivatives.  They would be an undifferentiated commodity, like oil.  One solution to "$200" carbon credits, or research fanning that possibility for the gain of an investment bank, would be the ~$15 cap I mentioned Arlen Spector favors.

There is no costless incentive, absent diving costs of inaction, which drives wind and solar.  Its a "whip" just as Cap & Trade is.  Coal rules for cost.  When Lieberman wanted to tax carbon at 50-60$ a ton, that was a cost that would have precipitated conversions to alternatives solely on economic grounds.  $15 does not, but it does kick in motion greater conversion to natural gas and an understanding, and capitalization, of a limited carbon future.  The math is this: $15 per ton= about .6 MWH of coal generated electricity.  You see environmentalists throw around a 1:1 relationship for conveinience and the exageration of carbon output and you see denialists use it to amplify costs, but this is untrue using EIA data for national MWH's produced vs carbon emitted.  At .6 of $15, or about $9 per MWH, utility rates rise 9$/1000, or .9 cents (less than a penny) per kwh.

About Obama and this dated estimate:

Quote:

.. conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

This comes from the Obama budget and its dead on the vine because it assumed 100% auction and no $15 cap.  The Waxman / Markey bill has already pre-empted it with its 15% auction.  Obama wanted proceeds from 100% auction to go direct into his "make work pay" program which would have effectively rebated taxes back to the lower income brackets at ~65bb per year.  It was a further left solution and, like his administration's other solutions, is likely going to lead to a more moderate, if any, final solution in the Congress.  Many, like me, expected proceeds to go back into green tech.

The latest on all this stuff is that since Reid announced the shelving of C&T until March, Dick Lugar and Evan Bayh, both IN senators from each the rep/dem sides, came out in favor of “bottom up” approach to carbon regs, saying the one size fits all approach won’t scale to all manufacturers and that C&T is too big to administrate.  I'm not sure I agree, while I would guess most reading this would disagree with me.  The reason is that too many of these issues looked at in isolation (ie. Oil, nuclear, transportation, etc) are too partisan to expect 60 vote outcomes.  And we all know 60 votes is the new America...

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