Promoting Low-Carbon Electricity Production

Federal policy, such as the loan guarantees enacted in 2005 for the first few new coal gasification and nuclear plants, can significantly lower the capital cost. These policies are much less costly to the government than are direct subsidies because the government pays only when the borrower defaults.

Will companies invest on their own because they feel that low-carbon technologies are likely a good way to meet current pollution regulations? Dalia Patiño-Echeverri at Carnegie Mellon has used historic market data for SO2 and NOx allowances, along with estimates for CO2 and mercury allowances, to compute the value of such options. She found that in the absence of a carbon price, only if the owners have a planning horizon longer than 20 years would they replace a conventional coal-fired plant with a high-performance unit; otherwise, they would install SO2 and NOx controls on the existing plant. Without a carbon price, installing advanced technology would not be profitable.

Moreover, even in an era when CO2 allowances in a capand-trade system cost an average of $30 per ton of CO2, it is still unlikely that building an IGCC coal-fired plant will be profitable. At current prices for low-carbon technologies, an allowance price of roughly $35 to $50 per metric ton of CO2 would be required to trigger major commercial investment in low-carbon technologies.

Power plant operators are very conservative. Most of them do not count government-funded plants using advanced technology as effective demonstrations. They prefer to wait until a fellow company has operated a plant using new technology before ordering one themselves. Incentives to encourage companies to build and operate such plants can reduce the barriers to widespread adoption.

Conversely, if the government concentrates on supporting large and lengthy demonstration projects, this might delay commercial adoption of new technology by a decade or more. For example, the Department of Energy's (DOEs) Future-Gen project, which will construct an IGCC coal-fired plant with CO2 capture and sequestration, may be far less effective in inducing rapid adoption and technological progress than loan guarantees that encourage development of similar technology under private control. Like similar projects in the past, FutureGen's effectiveness is likely to be blunted because the project in all probability will incorporate too many new (government-driven) technologies that, in combination with a lack of a champion who has the financial commitment to push the project to success, will make CO2 capture look more risky and costly than it will be under commercial development.

Time to act

Who should act first in advancing the industry? State public utility commissions can approve reasonable and prudent investments in low-carbon plants that will be used and useful. State legislatures can enact carbon portfolio standards, or change renewables portfolio standards to CPS as the expenses of RPS mandates loom large. States can expand regional low-carbon initiatives. The DOE should implement the provisions of the Energy Policy Act of 2005 calling for federal loan guarantees for developing low-carbon generating capacities. These steps will greatly lessen the cost of implementing federal carbon standards.