By Amethyst Cavallaro
Online Editor, Power Engineering

If it isn't on the low-carbon diet, California won't be buying it.

Another history-changing bill for the state's energy future sits on Gov. Arnold Schwarzenegger's desk waiting to be signed. The legislation sets the ambitious goal of reducing greenhouse gas emissions (GHG) by approximately 25 percent by 2020. "In short, they want to turn the emissions clock back to 1990," said Stephen Hall, attorney for Stoel Rives LLP, specializing in energy law

"If we do this right, we will be a model for other states, the nation and other countries. So our vocabulary does not include failure," Linda Adams, secretary of the California Environmental Protection Agency, told the Sacramento Bee.

The Past Comes Back
In 1996, California became the first state to deregulate its $23 billion utility business. The rules from the phased deregulation resulted in the energy crisis of 2000-2001 and from a perfect storm of variables. "It is more than casually reminiscent of frantic efforts to draft a utility deregulation bill in the final days of the legislative session 10 years ago," Dan Walters wrote about the recent passage of the legislation. In an energy hungry state, this legislation is a big gamble for California's future (more)

Who's Making the Rules?
"It's too early to tell who will survive, but it will be those who get their hands around the rules," said Hall. The California Air Resources Board (CARB) will be the main regulatory body in charge of defining the rules regarding monitoring, reporting and enforcing AB 32. CARB will work with the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) in regulating electricity providers (more)

Electricity Imports
This legislation won't just restrict what California plants can emit. It will regulate the long-term contracts electric utilities make, and from this it will have far-reaching effects for power plants across the border. But is it legal? more

Winners and Losers
The biggest winners to emerge from the legislation are natural gas-fired combined cycle (NGCC) plants, energy attorney Marcus Wood said. California is setting itself apart by increasing its dependence on natural gas, in a time when U.S. electric companies are courting coal and nuclear as the solutions for future baseload generation needs and moving away from its relationship with natural gas (more)

Nuclear and Coal
But the pink elephants in this GHG room are nuclear and coal. Both are never mentioned directly in the legislation, but how they are addressed in the rule-making could have sweeping effects on California's future generation mix (more)

AB 32 & SB 1368 Details
Assembly Bill 32 (AB 32) and related senate bill 1368 (SB 1368) will be the most far-reaching legislation in the United States aimed at GHG emissions. The two bills, while related, deal with emissions reduction in very different ways (more)

California's Energy Mix
California Energy Commission's data show a diverse mix of generation fuels. But with 20 percent coming from coal and more than 20 percent coming from out-of-state imports, the state's energy mix may be very different in a decade (more)

The Past Comes Back (cont'd)
In 1996, California became the first state to deregulate its $23 billion utility business. The rules from the phased deregulation resulted in the energy crisis of 2000-2001 and from a perfect storm of variables.

Now another history-changing bill for the state sits on Gov. Arnold Schwarzenegger's desk waiting to be signed. The legislation sets the ambitious goal of reducing greenhouse gas emissions (GHG) by approximately 25 percent by 2020. "In short, they want to turn the emissions clock back to 1990," said Stephen Hall, attorney for Stoel Rives LLP, specializing in energy law.

This legislation is a big gamble for California's future. "It is more than casually reminiscent of frantic efforts to draft a utility deregulation bill in the final days of the legislative session 10 years ago," Dan Walters wrote in his Sacramento Bee column. Walters worries that political posturing will lead to the same disasters that befell utilities during the 2000-2001 energy crisis.

California needs more energy; it's population is growing, it's economy is booming and conservation programs can dam up electricity demand for only so long. To complicate matters, California desperately needs new generation facilities to replace older plants and to provide for an increase in future demand. Wood observed that uncertainty from these factors and the lack of clear guidelines could freeze up electric generation projects, exacerbating the situation.

The Golden State has gone it alone before. It was the first to mandate catalytic converters and has been at the forefront for environmental controls. AB 32 acknowledges that national and international support is essential to addressing fully the threat of global warming. But California legislators believe that AB 32 will have far-reaching effects and encourage other states, and the federal government, to act. In fact, Arizona Gov. Janet Napolitano recently issued an executive order aimed at drastically cutting the state's GHG emissions. Oregon's governor is considering similar legislation.

"No western state wants to be a carbon sink," Hall said. But he does not see federal GHG legislation happening any time soon.

Not only do the legislators take pride in putting California again at the forefront of national environmental law, they believe that the state's economy will actually benefit from the technology and innovation this bill will initiate.

Ashley Brown, executive director of the Harvard Electricity Policy Group, said California's actions from an economic point of view were not prudent for the state's immediate competitive advantage. However, he does agree with California's legislators that regulations push technology. "Doing nothing guarantees no technological advance because there's no reason to do it," he said. "As long as the standards are reasonable, then technology will follow." On the subject of whether he thought California's legislation was reasonable, Brown said, "We need clear rules. Ambiguity won't help anyone."

Who's Making the Rules? (cont'd)
The need for a clear set of rules has led all of the stakeholders in supplying California's energy needs to the question, "What exactly are the standards, and who will be deciding how to slice up the CO2 pie?" No one wants to be stuck with the biggest piece.

The law firm of Stoel Rives LLP will be hosting an interactive Web conference on all the issues that directly impact the electric industry. "It's too early to tell who will survive, but it will be those who get their hands around the rules," said Stephen Hall, who will be presenting, along with his colleague Marcus Wood at the Web conference.

AB 32's language allows a market-based cap-and-trade system, but does not mandate it. Wood said the system could resemble the successful federal Acid Rain Program or it could be influenced from international systems resulting from the Kyoto Protocol. Gov.

Schwarzenegger strongly backed the inclusion of a market-based outlet for industry in AB 32. Some California Democrats and advocates for poorer neighborhoods opposed it, warning of "hot spots" that could result from a trading program. If older power plants can comply by buying credits, the fear is they won't reduce emissions in poorer neighborhoods, Hall explained. CO2 is not a localized pollutant, but emitters of CO2 often emit other potentially harmful pollutants, like mercury or particulate matter, he added.

The California Air Resources Board (CARB) will be the main regulatory body in charge of defining the rules regarding monitoring, reporting and enforcing AB 32. CARB will work with the California Public Utilities Commission (CPUC) and the California Energy Commission (CEC) in regulating electricity providers. CARB will decide what were the 1990 GHG emission levels and make the rules regarding who has to reduce how much and what allowances they will have, i.e., whether they will have to reduce GHG at the source and issue a "cap" on emissions or whether they can use a market-based trading program that will give them the ability to buy, sell or trade emission credits or a combination of both.

Electricity Imports (cont'd)
This legislation won't just restrict what California plants can emit. It will regulate the long-term contracts electric utilities make, and from this it will have far-reaching effects for power plants across the border. If it isn't on the low-carbon diet, California won't be buying it.

The Four Corners facility, located on Navajo land in New Mexico, is one of the largest coal-fired plants in the United States, producing 2,040 MW. Because it exports electricity to California, it also now falls into this new category of regulated GHG emitters. Southern California Edison (SCE) owns 48 percent of units 4 and 5 and will now have to make some big decisions on how to proceed with its stake in the plant from now on.

Four Corners is an example of how SB 1368 will make it harder to supply baseload to California's energy intensive economy. But does one state have the right to regulate how another state does business?

"I'm expecting someone to challenge this," said Marcus Wood, attorney for Stoel Rives LLP who specializes in regulated and unregulated power providers. He pointed out that because California controls the state's distribution system, it can control what kind of electricity flows on it. But he said that others could find legal ground on how SB 1368 hinders interstate commerce and fight it in court for years.

Some have already decided to play nice. Sacramento Municipal Utility District (SMUD) pre-empted SB 1368 by initiating a plan in July to cut its GHG emissions — allowing it to claim the title of first public utility to support legislation to cap emissions that cause global warming. Then in August it publicized a request for renewable energy providers and announced its new energy mix goals: 12 percent renewable energy by 2006 and 23 percent by 2011. The utility issued a public statement of support for AB 32, albeit tainted by its strong assertion that electric utilities aren't the real culprits in the CO2 problem. The statement is a hint of the debate to come over how to slice up the CO2 pie and who's going to get stuck with the biggest piece.

Pacific Gas & Electric Corp. (PG&E) also issued a positive statement on the bills. "We're supporting this legislation because we are convinced that climate change is an urgent problem and action is needed now," Peter Darbee, Chairman, CEO and President of PG&E said. PG&E is emerging from bankruptcy and has a generating mix of gas, nuclear, coal and renewable energy.

Winners and Losers (cont'd)
"Those who hope this will all blow over and go away will be the biggest losers," said energy lawyer Stephen Hall. "This is a worldwide trend. It's not going away."

The biggest winners, according to electricity regulation law expert Marcus Wood, to emerge from the legislation are natural gas-fired combined cycle (NGCC) plants. The legislation sets them as the baseline for emissions and automatically deems them in compliance with the new standards.

California is setting itself apart by increasing its dependence on natural gas, in a time when U.S. electric companies are courting coal and nuclear as the solutions for future baseload generation needs and moving away from its relationship with natural gas.

Wood deemed NGCC plants the overall winners because SB 1368 compares all plant emissions to natural gas-fired combined cycle (NGCC) plants and automatically puts these plants in the carbon-approved category. Hall expressed concern about the pressure this new direction would put on LNG supplies and its price in the face of world demand, an observation that recalls some of the problems faced during the energy crisis of 2000 and 2001.

Renewable projects will be in higher demand, but their profitability will depend on how emissions credits will be handled in any market-trading mechanism, Hall said. And that uncertainty could scare off investors until the rules governing any new market-based program are defined.

One alternative energy sure winner is bio-energy, electricity that is generated from biomass, syngas or landfill gas. SB 1368 officially acknowledges that the process of turning biomass into energy creates a near net-zero emissions cycle. The biomass (forests, grass, crops, etc.) that is grown to burn or turn into syngas absorbs CO2 in the fields; therefore, CO2 emitted during combustion is returned to the source, creating a closed CO2 loop. Wood and Hall saw a definite possibility of more biomass investment because of this positive definition.

Municipal utilities could be potential losers under the new legislation. SMUD and Los Angeles Department of Water and Power (LADWP) are formerly unregulated entities that will now answer to the California Energy Commission (CEC) for GHG emissions. Wood said these types of publicly-owned utilities may be in trouble because the legislation directly hits some of the utilities' baseload supply (imports of coal-fired power) and forces them to either buy from somewhere else or pay for emissions credits in a potential market-based program.

Those holding permits for new power plant construction could be losers too, Wood said. He predicted that it will be difficult for permit holders to secure financing for projects until the rules are clear on allowances, a market-trading scheme and any technological changes the plant will need to make. This could put more pressure on adopting rules for the interim period.

Nuclear and Coal (cont'd)
But the pink elephants in this GHG room are nuclear and coal. Both are never mentioned directly in the legislation, but how they are addressed in the rule-making could have sweeping effects on California's future generation mix.

One big question for utilities is whether zero emissions nuclear plants will get emission credits for their operation. That could place the only two operational nuclear plants in the state, Diablo Canyon (PG&E) and San Onofre (SCE and San Diego Gas & Electric Co.), into a considerably advantageous position. It could also spur debate on whether to build new plants or reactivate older ones like SMUD's Rancho Seco nuclear plant.

For now, California law prohibits the construction of any new nuclear power plants within its borders until the CEC finds that there exists a demonstrated technology for the permanent disposal of spent fuel from nuclear facilities. However, investors could see a source of income from nuclear plants outside of the state that export to California. But would these plants get emissions credits? Hall said that these unanswered questions put nuclear in the winners' category for the time being until more details are known.

The only allusion to coal in the legislation is in a short paragraph in SB 1368 on carbon dioxide sequestration. The bill says that when this method is used, emissions pumped into the ground will not be counted.

"There may be some opportunity for in-ground sequestration in the future and the legislation has left the door open for it," Wood said.

He interpreted this also as a way to encourage integrated gasification combined cycle (IGCC) technology with or without carbon sequestration. IGCC plants produce much less GHG than pulverized coal generation, even without sequestration, he added. But the technology has not yet been proven in western states using western coal.

Coal-fired stakeholders include PG&E, SCE and LADWP, and their coal-fired power supplies 20 percent of California's electricity, according to 2005 CEC data; it is a cheap source of energy for the state that will soon become much more expensive. By how much and whether it can be offset by emission credits is to be determined by the CPUC.

"I think this is a crucial time for people to get involved in the upcoming rulemakings. Billions of dollars will change hands because of this legislation," said Wood.

AB 32 & SB 1368 Details (cont'd)
Assembly Bill 32 (AB 32) and related senate bill 1368 (SB 1368) will be the most far-reaching legislation in the United States aimed at GHG emissions. The two bills, while related, deal with emissions reduction in very different ways.

AB 32, also called the California Global Warming Solutions Act of 2006, was enacted August 31 and is awaiting the governor's promised signature. It will restrict GHG emissions for all industries and addresses the problem of leakage, which it defines as an increase in GHG emissions outside of the state from emitters who have either left or opted to buy supplies from non-Californian companies.

SB 1368 expands on AB 32; it was passed September 9 and also awaits the governor's signature. It deals specifically with electric utilities and any "load-serving entity," including local publicly owned utilities that were previously exempt from state regulations. It also specifically addresses leakage for electric service providers and limits the type of long-term contracts they can make in and outside of the state.

The California Environmental Protection Agency attributes 20 percent of all state emissions to electricity production. AB 32 will also greatly affect cement factories and oil and gas refineries. The air emissions that will be regulated are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride.

But nothing is going to change overnight. CARB's regulations go into official operational effect January 1, 2012.

What does this mean for baseload and peaking units? Long-term contracts of five years or more to supply baseload generation will be regulated under SB 1368. Peaking plants will be subject to AB 32, but not SB 1368. However, a baseload plant cannot operate under a peak-load output; SB 1368 looks at each plant and its reason for being in deciding whether it will be under SB 1368 or not. Hall cautioned against utilities depending on short-term contracts because of their vulnerability to price changes, a lesson learned during the energy crisis of 2000 and 2001.

California's Energy Mix (cont'd)
California Energy Commission's data show a diverse mix of generation fuels. But with 20 percent coming from coal and more than 20 percent coming from imports, the state's energy mix may be very different in a decade.

State's Fuel Mix

Source: CEC 2005 data