As business gets serious about reducing greenhouse gases, its biggest hurdle is the uncertainty over which approach to cutting carbon emissions makes the best financial sense. Nowhere is that more evident than in the utility industry, where companies that produce electricity account for 37 percent of all carbon dioxide produced in the United States.
As they continue to build new, cleaner generation capacity to meet growing demand while working to clean up existing plants, power companies are placing long-term bets with billions of dollars of shareholders' and ratepayers' money. That’s why many in the industry are pushing the government to set mandatory caps on emissions with consistent rules for all players. Without them, these bets on cleaner power generation are turning into a bigger gamble than they would like.
“Business is moving at light speed compared to the federal government because they want market certainty,” said David Yarnold, executive vice president of the non-profit group Environmental Defense.
Until rules are established, no one can even begin to estimate the price tag to cut carbon emissions as much as 60 percent from current levels by the middle of the century. The Europe Union, whose combined economic output is roughly that of the United States, has set mandatory caps and is targeting cuts of greenhouse gas emissions 20 percent by 2020. Hitting that goal could cost between $1.1 trillion and $1.5 trillion, according to a recent report by McKinsey & Co.
“The way the companies are beginning to see it, and I think the way policymakers are very much seeing it is it’s a ‘pay now’ or ‘pay later’ situation across the board,” said Angela Anderson, vice president for climate programs at the National Environmental Trust. “We either do something now to get us on the path to reducing emissions or we’re going to have to do really dramatic changes in the 2020 time frame. And we're going to pay for the impacts we’re going to feel.”
There are also economic benefits on the other side of the ledger. Money spent to reduce greenhouse gases by power generators will give a major profit boost to the makers and suppliers of new technologies that can produce clean power more cheaply. Widespread adoption of these technologies is expected to further reduce the cost. But until the details of a U.S. carbon cap are settled, companies looking to provide solutions are unable to forecast demand accurately and improve the odds of getting a return on their investments.
Though the utility industry shares a common goal — making more power while producing less carbon dioxide — there is no single “magic bullet.” So the industry is pursuing a variety of strategies that collectively offer a solution to cutting greenhouse gases.
Among the key fronts they’re working on:
Renewables
Power generation from wind and the sun has been expanding rapidly as new advances in solar panels and photovoltaics make these zero-emission sources more cost-effective. Government incentives — to both power producers and consumers — have helped boost the role renewables are playing. But they’re still not competitive with fossil fuels, dollar for dollar, watt for watt.
And for a variety of reasons, renewables can’t provide anywhere near enough power to replace fossil fuels in time to reverse the environmental impact of greenhouse gases. For one thing, solar and wind generation are not available during all hours of the day and in all regions of the country.
Conservation
Consumers and companies are increasingly turning to a variety of conservation measures to cut costs — and help cut carbon emissions. In many cases, these technologies — from “green” construction methods to squiggly fluorescent light bulbs — more than pay for higher upfront costs.
“With a little bit of incentive, that can done immediately,” said David Crane, CEO of NRG Energy, which operates power plants in Texas and the Northeast.
Some $3.3 billion last year was spent on green office and retail construction; that number is expected to grow by up to 10 percent a year — to $20 billion by 2010, according to a study by McGraw-Hill. Green construction designs are also rapidly taking hold in new residential, government and educational buildings.
Existing power plants
Conservation and renewables won’t be able to cut greenhouse gases fast enough to make a difference in the ongoing impact on climate. That means finding ways to cut emissions from existing power plants — more than half of which burn coal. The solution is investment in technology to burn coal more cleanly and in capturing and storing carbon dioxide underground — a process known as carbon sequestration.
A few power companies could even make money — by selling CO2 to oil producers who inject it in the ground to force more oil to the surface. Most utilities, however, will have to find secure underground formations suitable for holding waste carbon dioxide in perpetuity. And it's not clear whether individual power generators are set up to handle the task by themselves.
"It’s sort of like garbage collection,” said Crane. "Someone has to own these underground reservoirs where the carbon will be stored. It would be very difficult for the private sector to even get the rights to that. These underground reservoirs are fairly large. Are you going to go house to house to ask people if you can buy the rights to store carbon 3,000 feet below them? It’s a classic public sector thing to do.”
New power plants
If they hope to keep up with growing demand for more electricity — and avoid future brownouts and blackouts — U.S. power companies can’t wait for new rules on carbon emissions to begin investing in new capacity. Demand for power is expected to grow 17 percent from current levels by 2020 and by nearly 30 percent by 2030, according to Department of Energy forecasts. To meet that demand for more “baseload” power, utilities have three basic choices: natural gas, coal or nuclear.
For most of the 1990s, natural gas was the fuel of choice for power generation. Gas-fired plants were relatively easy to build quickly, safely and cleanly, using proven technologies. But the popularity of natural gas brought a surge in demand for the fuel that has tightened U.S. supplies and driven up the price.
“(Natural gas) was the cleanest, cheapest, easiest to build,” said Michael Morris, chairman and CEO of American Electric Power, one of the largest power generators in the U.S. “And we took a 22-trillion-foot demand back to the wellheads and they said, ‘Jeez, all we can do is 18.’ So the price went from 2 bucks to 12 bucks. That took that whole game off the horizon.”
That’s one reason many U.S. utilities and power generators are now giving a second look to building new nuclear power plants, which emit no carbon dioxide. Though about 20 percent of U.S. electricity is produced by nuclear, construction of new nuclear power stations ground to a halt in the U.S. in the 1980s after construction cost overruns, public concerns about safety and problems financing new projects on Wall Street.
Now, thanks to tax credits and loan guarantees provided in the Energy Policy Act of 2005, a handful of power companies are pressing ahead with plans to build new nuclear plants — which they hope to bring online as early as 2014.
The hope is that by successfully licensing and building a handful of new nuclear plants, on time and on budget, these companies can demonstrate to that a new generation of nuclear plants and can be operated safely and economically, spurring additional construction.
But the industry faces several substantial hurdles in jump-starting nuclear — among them the thorny problem of storing the radioactive waste produced by spent nuclear fuel. A government plan to provide a central repository for spent fuel has been bogged down for over a decade.
Nuclear power also faces continued public opposition over safety concerns, including the fear that expanded reliance on nuclear fuel brings with it increased risk of the proliferation of nuclear weapons. Though some environmental groups have said nuclear should be considered, many continue to oppose it until these issues are resolved.
“People are open to thinking and looking and talking about it," said Anderson. “I just don’t think its one of the first options you turn to. There’s a lot of cheaper ... and more proven things you we can do.”
Cleaning up coal
That leaves coal — the source of over half the electricity generated in the United States. Despite tight supplies of natural gas and declining production of crude oil, the U.S. has estimated reserves of about 275 billion tons coal — about a 250-year supply at current demand, according to the American Coal Foundation.
But coal is also the dirtiest fuel — throwing off between 205 and 227 pounds of CO2 per million Btus of energy produced — depending on the type of coal. Of all fossil fuels, natural gas burns the cleanest — just 117 pounds per million Btus.
Still, technology is helping produce cleaner-burning coal plants, and new designs that are on the drawing boards could further reduce greenhouse gases. So-called “integrated gasification combined cycle” plants turn coal into gas and convert more of the heat from burning coal into power. Power companies are also looking at something called “ultra supercritical” combustion processes that get more energy out of each lump of coal by increasing the burning temperature and pressure.
But these new technologies — and the cost of retrofitting old plants to capture CO2 that is already being produced — cost money. Before utilities and power generators can decide which solution to pursue, they need to know which ones will give them the best return.
One proposal to encourage investment in clean technology — the mandatory "cap and trade" system in place in Europe — would penalize companies that don’t meet targets and reward those that meet or exceed them. Companies that invest in clean power would get credits that can be sold to companies that exceed pollution caps.
The proposal has won the backing of a wide list of corporate players — from power companies like Duke Energy, PG&E and FPL Group to industrial power users like Alcoa and environmental groups including Environmental Defense and the Natural Resources Defense Council.
Though the group has developed broad agreement that the federal government needs to move quickly to implement a cap and trade plan, there is less consensus on the specific rules of the same. Power generators with large nuclear fleets, for example, stand to make a big profit if they’re granted credits for investments they have long since recovered from rate payers. Companies that rely heavily on coal argue that incentives should be geared toward rewarding new investment that cuts carbon emissions.
“Those kind of intra-sector and intra-industry squabbles could bring this thing to a grinding halt if were not careful,” said Anderson.
It will fall to Congress to sort out who gets what under a variety of proposals making the rounds on Capital Hill. A recent Supreme Court decision — ruling that the Environmental Protection Agency has the right, and the duty, to limit carbon dioxide like other air pollutants — could leave some of the rulemaking to that agency.
Any U.S. carbon market would join an already rapidly expanding global cap-and-trade exchange. Under the Kyoto Protocol on global warming, companies are already trading credits to meet carbon caps. For the first nine months of 2006, that market was worth $22 billion — up from $11 billion for all of 2005, according to the World Bank.
But any global solution has to take into account the impact on all countries of the cost of reducing carbon emissions, according to Morris. That means that if China, India, or other developing countries don’t join a global plan and play be the same rules, they will enjoy an unfair manufacturing price advantage because their industries won’t have to bear the cost of controlling carbon.
“Our definition of reasonable would include either a tariff on their imported goods, or you do like the EU just did in their last meeting on this issue — which is to set a goal," Morris said. "And then if the world doesn’t join, you reduce the goal — or increase the goal if the world does join.”