The energy industry is bracing for a carbon-constrained world, but the ways
governments choose to control carbon around the globe may have vastly different
impacts on company bottom lines.
Some US Senate bills
propose that oil refiners be responsible not
only for their own emissions, but also for
auto tailpipe emissions.
Industry today generally accepts the
inevitability of mandatory carbon controls
and is now seeking to influence the final
form of these controls and negotiate the
future participation of developing nations in
a global carbon regime.
Credit consequences
may result as restrictions on greenhouse gas
(GHG) emissions cause significant increases
in capital costs and/or reductions in profitability.
Standard & Poor's sees carbon controls
impacting power sector credit quality
globally in four broad ways.
Sectoral Distribution
The distribution of emission reductions, and
hence costs, among various sectors of the
economy will vary substantially depending
upon the mechanisms chosen to implement
carbon legislation.
A cap-and-trade
approach, taken in isolation, may result in a
disproportionate allocation of emission
reductions to certain sectors while not
meaningfully affecting others at all.
The
power and automobile sectors provide a
prime example of this. Some US Senate bills
propose that oil refiners be responsible not
only for their own emissions, but also for
auto tailpipe emissions.
However, refiners
control neither the fuel efficiency of cars nor
the driving habits and model preferences of
drivers. At best, refiners can indirectly affect
such decisions by passing through to customers
the cost of carbon allowances in the
form of higher gasoline prices.
But this is
potentially a weak price signal. To take an
extreme example, at a price of $100 per ton
for CO2 credits, the price increase to consumers
would only be about $1 per gallon of
gasoline (burning 100 gallons of gasoline
produces one ton of CO2), a sum drivers have
absorbed in the recent past without switching
en-masse to less-polluting vehicles.
If an economy-wide emission cap is
adopted in the US, legislation that mandates
higher fuel economy for autos, or greater use
of ethanol, biofuels, etc. would be a key
determinant of how much reduction is
achieved from autos and how much is
demanded from other sectors.
Power generation
may end up with a disproportionate
share of emission reduction responsibility
(and the attendant credit risks) because,
even at $100 per ton for carbon credits, auto
emission reductions will depend on the
extent to which consumers and automakers
view higher gas prices as permanent and
change their behavior.
By contrast, with carbon
at $100/ton, the power sector could
become almost entirely emissions-free, as
most-if not all-estimates of the cost of
capturing and sequestering carbon are less
than $100 per ton.
Impact on existing power plants
The choice between auctioning and allocating
carbon credits in a cap-and-trade regime
has the greater impact on the value of existing
generating assets.
The free allocation of
CO2 emission allowances in Phase I of the
European Union's Emission Trading Scheme
(ETS) allowed gas and coal-fired generators
to be more profitable than in the absence of
the ETS.
This profitability will decline in
Phase II and beyond as more credits are auctioned
rather than assigned and the absolute
level of freely granted allowances to the
power sector is likely to decline.
Regional
initiatives in the US, such as the Regional
Greenhouse Gas Initiative (RGGI) in the
Northeast, are looking at auctioning a
majority of their credits.
We used a dispatch model licensed from
EPIS by Platts to identify aspects of the
power markets that drive compliance costs.
We've estimated the economic cost of compliance
as the change in EBITDA that a power
plant (or portfolio of plants) earns under a
base case with no carbon controls and under
two GHG scenarios, each modelled after one
piece of pending Senate legislation-the
Carper/Feinstein bill (GHG1), and the more
stringent Boxer/Sanders bill (GHG2).
We
ignore factors such as regulation and contractual
arrangements since these will only
influence how costs are allocated and not the
economic cost itself.
Created: Dec 4, 2007
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This article is taken from November 2007 edition of Platts 
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