Developing a Forward Looking Price Curve Approach, Model, and Corporate View

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The Materiality of Climate Policy for the PNW
Prepared For Northwest Power Conservation
Council

TrexlerCLIMATE ENERGY SERVICES,INC..climateser
vices.com
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Setting the Stage - Materiality

• Many Ways to Look at Climate Change Issue
• For Power Planning Purposes, Wed Like to Know
  What Will CO2 Cost in the Future?
• Without a Crystal Ball, No Clear Answer
• What We Can Assess Is Climate Policy Likely to
  be Material for PNW Stakeholders?
• If Material, Makes Sense For States to be
  Positioned For Those Impacts

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Presentation Overview

• Setting the Stage
• Current Policy Trends
• Should We Extrapolate?
• Assessing the Likelihood of Materiality
• Conclusions

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Climate change is the most pressing future issue
facing the business community.
-- World Economic Forum Davos, Switzerland January
2000
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Climate Change Policy Trends
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Policy - A Fast Moving Issue

• 88 IPCC Formed
• 92 Framework Convention Signed
• 94 Conventions Entered Into Force
• 95 IPCCs Human Fingerprint Report
• 96 Oregons CO2 Standard
• 97 Kyoto Protocol Signed
• 01 IPCCs Third Assessment Report
• 05 EU Emissions Trading System

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Policy The Several Levels

• International
• The Kyoto Protocol
• EU and other trading systems
• National
• Presidents 18 intensity target
• Voluntary industry programs
• Regional, State, and Local
• Oregon and other CO2 siting standards
• Californias technology forcing legislation
• Multiple regional initiatives

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Policy Trends International

• UN Framework Convention in Force
• Commits Parties to avoiding dangerous human
  interference
• Kyoto Protocol Signed in 1997
• Covers CO2, CH4, N2O, HFCs, PFCs, SF6
• OECD and EIT Countries 5.2 reduction from 1990
  levels
• Major focus on flexibility mechanisms
• Ratification Still Uncertain

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Policy Trends Canada

• New PM Martin Supports Kyoto
• Canada Grappling With 200 MMT Shortfall
• Large Emitters Facing 55 MMT commitment
• Industrys Liability Potentially Limited
• 15 intensity reduction, 15 liability cap
• Domestic Emissions Trading in 2008?
• Strong Public Support for Kyoto Protocol

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Policy Trends Japan

• Committed to Kyoto Protocol
• Trying to Find a Scenario That Works
• Nukes, renewables, emissions trading
• Exploring Range of Voluntary Measures
• Preparing Industry for Aggressive Measures
• Coal tax Y230 in 2003 to Y700 in 2007
• Japan Is In a Tough Situation
• Limited domestic options, economic stagnation

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Policy Trends Europe

• Strongly Supports Kyoto
• Now Strongly Supports Market Mechanisms
• Emissions Trading System Similar to SO2
• Cap and Trade System Will Launch Jan-2005
• Covering 12,000 installations, 50 emissions
• Expanding in coverage over time
• Estimates of Future Allowance Prices Vary
• From 5 Euros to 40 Euros

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Policy Trends United States

• At National Level, Policy is Stuck
• Continued Antagonism Toward the Science
• Skepticism Toward International Cooperation
• Exclusive Focus on Domestic Costs
• Can issue pass a zero cost test?
• Bottom Line Current 18 Intensity Reduction
  Target Not a Material Threat to Power Sector

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Policy Trends Regional to Local

• 50 of States Have or Developing Climate
  Strategies
• Several Have Specific GHG Rules and Regulations
• NH 4P Legislation CO2 to 1990 by 2010
• MA Largest 6 plants must reduce by 10
• CA Maximum feasible reductions in vehicle
  emissions
• OR and WA CO2 standards for new power plants
• New England Governors and Eastern Canadian
  Premiers - 1990 by 2010, 10 below by 2020.
• NE Governors Regional cap and trade by 2005?
• Alberta 50 mitigation requirement for new coal
  plant

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Extrapolating From Current Trends
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Whats Success?

• Avoiding Dangerous Human Interference
• At Some Point Requires Stabilization of
  Atmospheric Concentrations of CO2
• To Stabilize Today, Would Require a 70 Reduction
  in Global Emissions
• Kyoto actually doesnt even stop emissions growth
• Success Therefore a Huge Challenge
• Would revolutionize worlds energy system

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Trend Scenario 1 Policy Collapse

• A Fact That Serious Climate Change Policy Faces
  Huge Political and Economic Challenges
• Could These Challenges Lead to Collapse of
  International and Domestic Policy Momentum?
• Absent a scientific reversal, hard to see
• Broad public support for action on this issue
• The Odds Low
• Note Scenario Subject to Sudden Reversal!

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Trend Scenario 2 Stay the Course

• Climate Policy Unable to Overcome Challenges, and
  Will Likely Not Succeed.
• But Issue is Here to Stay
• Numerous policies and measures will be pursued
• Could Affect Power Sector in Material Ways
• Range of Cost Estimates 5-30/ton CO2
• The Odds High
• Note Scenario Subject to Sudden Reversal!

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Trend Scenario 3 Deal With It

• Combination of Factors Generates Political Will
  to Seriously Tackle Climate Change
• Through aggressive emissions reduction measures
• Through aggressive technology development
• Through aggressive reliance on GHG markets
• Would Affect Power Sector in Material Ways
• Stanford Modeling Forum 75-100/ton CO2
• The Odds Modest (But Better Than Collapse?)

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Potential Scenario Tippers

• Continued Scientific Findings
• International Cooperation Takes Hold Again
• U.S. historically at forefront of environmental
  cooperation
• Fear of Sudden Climate Change Takes Hold
• Recent Pentagon study a good case example, in
  which climate change assessed a major national
  security threat as early as 2020
• Weather, Hydro, Other Impacts Become Clear
• Public Sees Link, Wants Action Against Emitters
• Insurance, Financial Industries Revolt

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Conclusions The Likelihood of Materiality For
the PNW
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Assessing Materiality Scenario 1

• Under Policy Collapse Scenario, Policy Impacts
  Unlikely to be Material
• Fundamental scientific reversals?
• Political inability to grapple with the problem?
• Note Doesnt Mean Climate Change Itself Not
  Material to PNW!
• The Odds Low (simply not politically viable)
• Warning Subject to Disruptive Change

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Assessing Materiality Scenario 2

• Policy Could Easily be Material for PNW Energy
  Under a Stay the Course Scenario
• Facility siting rules
• Technology incentives
• Renewables standards
• Offset requirements on operating plants
• The Odds High (action, but not success)
• Warning Subject to Disruptive Change

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Assessing Materiality Scenario 3

• The Full Speed Ahead Scenario Very Material
• Restrictions on facility siting, operations
• Radical change in new plant economics vs.
  alternatives
• Rising gas prices create problems for gas base
• Intensive RD approach to energy sector
• Would Ultimately Revolutionize Energy Sector
• The Odds Modest (big political barriers)

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PNW Decision Making

• A Significant Issue Simply For Hydro Planning
• Material Impacts Over Time Very Likely
• Assessing specific PNW materiality requires
  analysis
• Policy Impacts Could Occur Disruptively
• Ratepayer Impacts Potentially Significant
• States Cant Stop Climate Change or Force
  International Cooperation, But Can Position
  Stakeholders