U.S. Climate Change Policy

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U.S. Climate Change Policy

• American Council of Engineering Companies (ACEC)
• Indiana
• Wednesday, October 21, 2009
• Indianapolis Downtown Sheraton
• David Bear- Duke Energy

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Topics for Discussion

• Duke Energys Position on Climate Change
  Legislation
• Climate Change Policy Attributes
• Potential Cost Impact to Duke Energy Customers if
  all Allowances Were Auctioned
• Waxman/Markey Bill
• Boxer/Kerry Proposal
• EPA Action to Regulate GHG Emissions

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Duke Energy Position on Climate Change Legislation

• Duke Energy supports federal legislation
  mandating economy-wide reductions in GHG
  emissions but not just any policy
• Policy needs to protect consumers
• Policy should incorporate the following
  attributes
• Economy-wide in scope
• Market-based (cap-and-trade)
• Slow, stop and then reduce emissions trajectory
• Effective cost containment measures
• A fair allocation of allowances
• Advances technology development, demonstration
  and deployment

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Climate Change Policy Attributes

• Economy-wide Cap-and-Trade
• Cap-and-trade most economically efficient
  approach
• Covers multiple sectors
• Slow, Stop and Reverse Emissions Cap Trajectory
• Reduce emissions gradually over time
• Recognize the current state of technology
  development
• Effective Cost Containment Measures
• Domestic and international offsets
• Unlimited banking
• Multi-year compliance periods
• Strategic offsets and allowance reserve pool

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Climate Change Policy Attributes continued

• Fair Allowance Allocation
• Program costs will fall disproportionately on
  consumers in the 25 states whose electricity
  comes primarily from coal
• Auctioning all allowances from the beginning of
  the program would unfairly penalize consumers in
  these states polluter pays is a myth
• The additional cost from an auction would
  contribute nothing to reducing emissions just a
  tax - and would result in a double hit to
  consumers
• Allowances should be granted to local
  distribution companies value will flow through
  to consumers no windfall profits
• Allocation level should be equal to recent
  emission levels associated with the electricity
  delivered
• An allocation avoids initial rate shock that
  would result from a 100 auction

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National average Coal share of total generation
50
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Climate Change Policy Attributes continued

• Promote Technology Development, Demonstration and
  Deployment
• Policy must promote new low-and zero-emitting
  base load generation technologies coal with CCS
  and nuclear
• Coal must play a large role in countrys energy
  future
• Currently no economically viable or proven
  technology for capturing and sequestering CO2
  from coal
• Funding is needed to support accelerated
  demonstration of several projects
• New nuclear generation a key to achieving large
  reductions in CO2 emissions from electric sector
• Remove regulatory and financial barriers to new
  nuclear
• Expand loan guarantee program Congress authorized
  in 2005
• Ban on spent fuel reprocessing should be
  revisited

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Smart Grid

• Installed 89,500 smart electric meters 62,000
  smart gas meters (Ohio)
• Installed distribution automation equipment
  (self-healing)
• Conducting residential pilot programs
• Duke Energy filed an application for stimulus
  funding under DOE FOA 58
• Requested maximum 200 million for projects on
  distribution systems requested and additional
  14 million for transmission and other
  demonstration projects.
• Timeline
• Application filed in August
• Awards anticipated in October
• Negotiations in Oct/Nov timeframe

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Coal Capture and Sequestration (Storage)

• Dukes Edwardsport project will be the largest
  and cleanest coal-fired power plant in the U.S.
  It will make IGCC technology a viable economic
  choice for Indiana electric customers.
• Duke Energy and regulators will work to study the
  plants long-term costs, impact and the
  effectiveness of CCS to help advance the
  development of clean coal technology.
• November 2007, IURC granted Duke authority to
  study the potential for partial CO2 capture and
  further study and potential implementation of CO2
  sequestration
• May 2009, Duke began working on a comprehensive
  engineering study for the design of a CO2 capture
  system
• August 2009, Duke applied for DOE for 50
  co-funding to offset cost of CCS

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Waxman/Markey Bill In the U.S. House of
Representatives

• Progress was made over the course of the House
  debate.
• In February, President Obama called for a 100
  percent government auction of allowances and had
  built 636 billion of receipts into his proposed
  budget. This would have had a devastating impact
  on electricity prices, especially in the coal
  states (see chart below)
• The final Waxman-Markey bill allocated 85 percent
  of the electricity sectors allowances to
  regulated local distribution companies and
  specified their value flow back to customers.
  Other measures were taken to mitigate costs to
  disproportionately-impacted companies, especially
  those who might be trade disadvantaged.

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Estimated Average Rate Increase-Duke Energy
IndianaFull Action vs. Waxman/Markey Formula

• Notes
• Cost estimates reflect emission projections in
  2012 and are allocated to each customer class
  based on their share of total projected 2012 MWh
  sales.
• Percentage increases were estimated using 2008
  rates applied to projected 2012 sales.
• Cost estimates do not include future capital
  spend, only cost to purchase allowances in 2012.
  (Assume program starts in 2012.)
• Actual allowance prices are highly uncertain due
  to the uncertain role of international offsets in
  the early years of a program . Prices could be
  higher than 20.

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Boxer/Kerry Proposal in the U.S. Senate

• Support efforts to increase the number of
  economy-wide allowances to the electric sector
  Waxman-Markey allocated 35 percent to the
  industry even though the industry is responsible
  for 40 percent of the emissions. A larger
  utility sector pot will reduce costs to
  customers.
• Work to address any inequities in the allocation
  formula that cause a disproportionate share of
  the costs to fall on any one region of the
  country.
• Work to extend the deadline for the total
  phase-out of the allocation. Waxman-Markey calls
  for a 5-year phase out of allowances starting in
  2020 with a full auction starting in 2025. The
  allocation phase-out should be tied to the
  introduction of new clean technology and
  additional time (at least 5 more years) will be
  needed before technologies such as carbon capture
  and storage will be ready for mass
  commercialization.

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Boxer/Kerry Proposal (continued)

• Offsets ---- continue to work hard to ensure a
  robust offset market is available Day One of the
  program (if not sooner). Available and
  accessible offsets can dramatically reduce the
  costs of compliance and reduce costs to the
  consumer
• Boxer/Kerry Proposal anticipated for Mark-up
  around Thanksgiving
• Move cap from 17 of 2005 emissions to 20 of
  2005 emissions
• Possible Price Collars to control (ceiling and
  floor price of allocations)
• Health Care, Financial Crisis, Climate Change

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EPA Action to Regulate GHG Emissions

• Supreme Court ruled in April 2007 that EPA has
  the authority to regulate GHG emissions under the
  Clean Air Act (CAA)
• EPA recently proposed a rule to regulate GHG
  emissions from new motor vehicles plans on
  finalizing by March 31, 2010
• Once finalized the door is open for EPA to
  regulate other sectors
• Final rule automatically triggers Prevention of
  Significant Deterioration permitting requirements
  for major stationary sources of GHG emissions
• President Obama has stated that his preference is
  the legislative approach, so why would his
  administration take this step?

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EPA Action to Regulate GHG Emissions (Continue)

• Duke Energy strongly opposes the regulation of
  GHG emissions using the CAA
• CAA too inflexible a regulatory instrument to
  allow for the efficient regulation of GHG
  emissions
• A program that can have such broad economic
  implications for the countrys economy should be
  the responsibility of an elected and accountable
  Congress

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U.S. Climate Change Policy

• QUESTIONS