“Under my plan of a cap and trade system, electricity prices would necessarily skyrocket. . . . Because I’m capping greenhouse gases, coal power plants, natural gas—you name it—whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money. They will pass that money [cost] on to consumers.” – Barack Obama, January, 2008[1]

As I write this, the Senate Environment Committee is debating HR 2454, the Waxman Markey Bill.  Their first hearing was held July 7^th . There were the usual speeches from the usual suspects staking out their political positions and pandering to their constituencies.

Committee Chair Barbara Boxer, D-CA lobbed the first stink bomb in her opening remarks accusing Republicans of opposing any change to the status quo calling it a of “a pattern of ‘NO!’  Ranking Republican Sen. James Inhofe, R-OK responded that Republicans are opposed to higher energy costs and subsidies predicting that the current Waxman-Markey cap-and-trade bill would be defeated in the Senate.

U.S. EPA Administrator Lisa Jackson said the climate crisis policy debate was like the space race of the 1960s and the US is behind and must get moving forward to catch up. She said federal studies have shown the Waxman-Markey Bill would impose only a ‘modest daily cost increase’ for Americans.

Outside of the hearing,  analysts were trying to decipher the large, complex bill and understand the implications of that ‘modest daily cost increase’ especially in light of the dueling reports from Administration, Congressional and other sources at odds about the real impacts of the bill.  One of the most pointed assessments came from Hugh Wynne, an analyst from Sanford C. Bernstein & Co. LLC, a widely recognized Wall Street sell-side research firm, which released a detailed assessment of the bill’s impacts on specific utilities across the country in its assessment of winners and losers.

He said the analysis showed that utilities with a large nuclear portfolios were likely to be clear winners from passage of Waxman-Markey but utilities with large positions in coal would be hit hard by the cap and trade allowances provisions of the bill.  That was hardly new news, but it was striking to see Wynne’s rate impact and EBITDA estimates.  Here is a summary table of impacts for the biggest losers and biggest winners from Wynne’s presentation:

Biggest Losers

Remember, $10 per tonne of CO2 is a low ball allowance price designed to ease the parties into the carbon cap and trade regime.  Even $27/tonne is not sufficient to really change behaviors in ways that will come close to reducing emissions to the target levels.

The California Public Utilities Commission and the California Energy Commission working on the implementation strategy for AB32, the Golden State’s plan to reduce greenhouse emissions says that it will require CO2 allowance costs of $100/tonne to meet the emissions reduction targets.  What these state agencies did not say is that you get there by tanking the economy to reduce demand and along the way you raise A LOT of tax revenue.

Meanwhile back on Capitol Hill, Wynne says coal positioned players on the unregulated side also take a hit on EBITDA as a result of the growing cost of allowances under the bill.  He offered three examples:

Biggest Winners

While nuclear power is not considered “renewable” energy, its low carbon footprint has the unintended consequence of being a virtue under Waxman-Markey.  Contrast the biggest loser impacts above with Wynne’s assessment of the impact on utilities with a large nuclear portfolio such as Exelon (EXC) or Constellation Energy (CEG) which are expected to have 0% impact on rates under Waxman-Markey in 2012 and a 1% and 2% rate impact respectively in 2030 at the same CO2 allowance prices.

At the same time, the implications of higher energy prices are generally good for merchant energy players with a strong portfolio in nuclear and cleaner energy sources.  Those players can expect improvements in EBITDA as HR2454 pushes up energy prices.  Some examples of earnings growth winners from Wynne’s analysis are:

Wynne said the path of losers and winners will diverge the closer they get to 2030 with unregulated nuclear and renewable generators with improving earnings while the growing cost of allowances drags down earnings for the coal based and other players who must buys allowances.  These impacts hit the Midwest and Southeast where coal is a big part of the power generation portfolio particularly hard.

I could not resist the temptation to combine Exelon and NRG estimates to see what you get when you put the two of them together—but that is another discussion all together.

Double Whammy: The Federal RPS Pancaking

Hugh Wynne also analyzed the proposed Federal renewable standard of Waxman-Markey finding the bill’s current provisions would require that utilities add an additional 98 million MWh of generation at an estimated cost of $86 billion by 2020  beyond the 385 million MWh at a cost of $296 billion that state renewable portfolio standards are already require.  As currently written the bill would increase the MWH of renewable energy required by 25% beyond the current state PRS levels (98/385 MWH) and increase the costs for renewable energy compliance by 29% ($86B/$296B) which would disproportionately impact the states depending upon their RPS requirements since the bill creates a Federal floor for RPS.

As a Californian I admit I am conflicted on this provision since if the bill passes that means California could back off the 33% RPS goal our politicians are espousing and still be ahead of the Federal targets.  I know that is ‘California dreamin’ but it would save ratepayers a very large amount of money and these days, we don’t have the gold to save the world.

Wynne estimates that retail rates would have to increase $41 billion, or 9% of U.S. retail electric sales in 2008 phased in over a decade to achieve the Federal minimum RPS standard.  The consequence of this additional renewable energy requirement is that it would displace often lower cost natural gas-fired generation and that in times of higher natural gas prices some gas units might be stranded.  It has the biggest impacts in states with voluntary or relatively low renewable energy standards.

No one mentioned that so dramatically increasing the portfolio share of renewable energy would also require billions in new transmission construction to bring wind, solar and geothermal resources in remote locations to markets.  California estimated that it would take about $15 billion in new transmission construction in the WECC to realize its 33% PRS goal—and the Federal Government would have to preempt the states and environmental rules to accomplish it.  Good luck with that!

Elections do have consequences, as we are about to learn.  But so do skyrocketing prices.