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Pulling out the Stubby Pencil … and an ACES provision: UPDATED

May 19th, 2009 · 3 Comments

A 932 page bill … with manager’s amendments on top of it … with active committee debate … any single individual with an ability to actually understand the intricacies of the American Clean Energy and Security (ACES) Act has achieved near-super-human capacities. Reading through the bill, time after time, I pause to scratch my head, re-read, and try to figure out the implications of a section.

Lets take a brief example. Section 115, Commercial Deployment of Carbon Capture and Sequestration Technologies:

Amends Title VII of the Clean Air Act to direct the EPA Administrator to establish an incentive program to distribute allowances to support the commercial deployment of carbon capture and sequestration technologies in both electric power generation and industrial applications. Establishes eligibility requirements for facilities to receive allowances based on the number of tons of carbon dioxide sequestered. The allowance disbursement program is structured to provide greater incentives for facilities to deploy CCS technologies early in the program and for facilities to capture and sequester larger amounts of carbon dioxide.

That is just a summary, the actual text in the 932 Friday bill submission is much longer. Phase 1 includes a subsection to encourage, I believe, early adopters.

This subsection shall apply only to projects at the first 6 gigawatts of electric generating units, measured in cumulative generating 23 capacity of such units.

While I have sought to find it, I see no time limit associated with this special subsection. What does the subsection provide for? Bonus payments based on the percentage of CO2 emissions sequestered, starting with $50 per ton for sequestering at least 50 percent up to $90 for 85 percent or more. Again, only for that first 6 gigawatts and there are controls there, such as reducing payments for the monetary value of CO2 used in enhanced oil recovery.

Now, while I have (TREMENDOUS) problems with how much money is going into the uncertainty of Carbon Capture & Sequestration (CCS), with determination that this uncertain technology and high-cost approach is “the answer” (which I do not believe, with reason), the fiscal implications of this section are rather astounding.

Let us work through some numbers of a coal-fired plant.

  • Every Kilowatt Hour (kWh) generated by coal represents roughly 2 pounds of CO2. (Actually more, especially when considering systems-of-systems implications, but this is an easy enough number to work with.)
  • Thus, every Megawatt Hour (mWh) is 1 ton (1000 times 2 = …).
  • Every Gigawatt Hour (gWh) is thus 1000 tons.
  • And, thus, “six gigawatts of electric generation units” represents 6,000 tons of carbon every hour, or 144,000 tons per day, or 52.56 million tons per year assuming 24/7 operations.
  • With reasonable capacity calculation of the plants operating 80 percent of the time, this means 42 million tons of CO2 per year with these six gigawatts of generating capacity.

Let us assume that all of these eight gigawatts achieve the desired 85+% sequestration.  Based on my understanding of the legislative language, this would mean $90 of payment to each plant for each ton sequestered.  This would mean about $3.8 billion of payments every year. (To be fair, the direct calculation is $3.78432 billion / year.)

NOTE/UPDATE:  There is an interesting (and unusual?) calculation here.

‘(2) DISTRIBUTION.—The Administrator shall distribute emission allowances allocated under section 782(f) to the owner or operator of each eligible project at an electric generating unit in a quantity equal to the quotient obtained by dividing— ‘‘(A) the product obtained by multiplying— ‘(i) the number of metric tons of carbon dioxide emissions avoided through capture and sequestration of emissions by the project, as determined pursuant to such methodology as the Administrator shall prescribe by regulation; and ‘‘(ii) a bonus allowance value, pursuant to paragraph (3); by ‘‘(B) the average fair market value of an emission allowance during the preceding year.

This is confusing and an odd formula.

It provides a real roller coaster of a ride as to payments and total value:  If CO2 sequestration value is $1, then there would be $90 per ton payments for a total value of $91. If sequestration value is $45, then there would be a $2 payment for a total value of $47.  If $90/ton, then there would be $1 in payments, for a total value of $91. Thus, for these six plants, it seems that the operators would either want extremely low total CO2 sequestration values or extremely high ones, because those two paths return the highest income.

And, again, while it might be there, there doesn’t seem to be a time limit to this subsection. If that is truly the case, these six gigawatts of capacity could cost $3.8 billion per year indefinitely.  Over 25 years, we are talking just under $95 billion.

NOTE/UPDATE:  As per the comments, there is a 10-year time limit to these payments.  Thus, let’s assume that the average price of a sequestered ton is $10 through a 10 year period. That would be $9/ton in benefits which would total the value of these incentive premiums at $4 billion.  If …

And, yes, the legislation specifically states that these payments are to be adjusted for inflation. These are the “real” costs.

This is only one subsection for a demonstration effort of a currently unproven technology that seems quite possible to not be able to work at an affordable cost and for which there already seem to be quite serious alternatives.

Again, this is a complicated bill and this might be a misunderstanding — please correct.  But, if reading the bill correctly, this is a $3.8 billion potential bill … every year … year-in, year-out … indefinitely.  Is this the best use of our resources? Could we be spending that $100 billion, for example, on the deployment of 50 gigawatts of wind power or perhaps 20 gigawatts of nuclear power or …

NOTE / UPDATE:  This looks like a reasonable estimate would be that this might be a $4 billion or so bill over a ten year period, starting sometime in the next decade.  Still a concerning amount of incentive funding, but a far cry from $4 billion/year indefinitely.

NOTE / UPDATE TWO: The EPA has now modeled the changed bill, included in that.

Incentives for Carbon Capture and Storage

Changes to the incentive structure for carbon capture and storage (CCS) increase the deployment of that technology. Both the draft bill and the introduced H.R. 2454 provide incentives for carbon capture and storage. Based on guidance from Committee staff,
EPA analyzed the draft assuming that the first 3 GW of CCS will receive a subsidy of $90/ton captured for 10 years, that the next 3 GW of CCS will receive a subsidy of $70/ton captured for 10 years, and that a significant additional amount of CCS will receive a subsidy of $50/ton for 10 years. H.R. 2454 provides opportunities for greater subsidies. Up to 6 GW of CCS may receive a subsidy of $90/ton captured for 10 years.

Additional allowances are available through a reverse auction, allowing much of the additional, eligible CCS to receive subsides greater than $50/ton. The reverse auction ensures that CCS projects are neither over- nor under-subsidized, and that the bonus allowances will be distributed in a way that maximizes the amount of CCS deployed in response to the bonus allowances.

Those changes are likely to result in greater penetration of CCS in 2020 and 2025 than EPA saw in its analysis of the draft bill. That will likely result in somewhat higher use of coal in 2020 and 2025 than EPA saw in its analysis of the draft. Beyond 2025, the use of the reverse auction has the potential to extend the use of CCS bonus allowances to a greater number of projects than shown in EPA’s preliminary modeling of the draft.

PS: Thank you for comments below and email notes.

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Tags: analysis

3 responses so far ↓

  • 1 Jonathan Banks // May 19, 2009 at 7:49 am

    You are right that it is a big bill and it is complicated, but you missed some key pieces of the bill.

    Jonathan … I appreciate the step in and am looking to see how to modify the discussion. Within the discussion, itself, I raised that I simply had not seen any time limit, not that this was without time limit — just hadn’t found it. Perhaps problem is that, in part, I’m trying to save some CO2 by not printing out two reams of paper in a draft bill that seems to be shifting with each passing hour.

    There is a 10 year project window, i.e. you get payments/bonus allowances for the first 10 years of sequestration. The payments are also limited to what the funding is under the allowance allocation system, which is 2% of allowances in 2014-2017 and 5% after that. If you use EPA’s allowance values, that is an annual availability of 1.2 Billion in the early years, going up to 4.5 Billion in 2018. This is the total funding for both the Phase I section (786 c) and the Phase II section (786 d). The funding runs all the way through 2050, but is capped at 72 gigawatts. Below is Sec. 786(g) from the bill which is the limitation. Also notice that the Phase II section is constructed as a reverse auction, with an option for using a different bonus allowance program. The reverse auction would eliminate the chance for overpayment and windfall profits that can come with a fixed price payment (i.e. guess too high on the bonus payment and it becomes a windfall profit).

    LIMITATIONS.—Allowances may be distributed under this section only for tons of carbon dioxide emissions that have already been captured and sequestered. A qualifying project may receive annual emission allowances under this section only for the first 10 years of operation. No greater than 72 gigawatts of total cumulative generating capacity (including industrial applications, measured by such equivalent metric as the Administrator may designate) may receive emission allowances under this section. Upon reaching the limit described in the preceding sentence, any emission allowances that are allocated for carbon capture and sequestration deployment under section 782(f) and are not yet obligated under this section shall be treated as allowances not designated for distribution for purposes of section 782(r).

    The rollover to 782(r) is to the consumer refund.

  • 2 Arthur Smith // May 19, 2009 at 9:28 am

    Thanks for the analysis – interesting formula there!

    I was struck by the “measured in cumulative generating 23 capacity of such units” – what on earth does that mean? Sounds like it’s allowing for 23 x 6 GW? What is a “unit”, a single generator? But those would generally be more like a few hundred MW or maybe 1 GW…

    Arthur — Thank you for joining me in confused land of ‘after reading it three times I’m still not sure what I read …”

    If we are confused, if we don’t understand it, then what should we expect from the average citizen (let alone legislator)?

  • 3 paulina // May 19, 2009 at 3:51 pm

    Ummm, the ’23’ is just the line number…in the bill… that said…yes, I’m plenty confused, too…