The U.S. Electric Power Sector and Climate Change Mitigation

Electricity Cover

U.S. Electric Power Sector and Climate Change Mitigation

Prepared for the Pew Center on Global Climate Change
June 2005

By:
Granger Morgan, Carnegie Mellon University
Jay Apt, Carnegie Mellon University
Lester Lave, Carnegie Mellon University

Press Release

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Foreword

Eileen Claussen, President, Pew Center on Global Climate Change

The electricity sector in the United States enables almost every aspect of our economy—from agriculture, to manufacturing, to e-commerce. As witnessed during the California Energy Crisis and the 2003 blackout in the northeast and midwest, interruptions in the supply of electricity can be highly disruptive. It is hard to imagine a sector that is more important to our economy than electricity. But electricity also accounts for one third of our nation’s greenhouse gas emissions. In order to effectively address the climate challenge, we must significantly reduce greenhouse gas emissions associated with electricity production and use. In this report, authors Granger Morgan, Jay Apt, and Lester Lave identify numerous opportunities to decarbonize the U.S. electricity sector over the next 50 years.

This Pew Center report is part of our effort to examine key sectors, technologies, and policy options to construct the “10-50 Solution” to climate change. The idea is that we need to tackle climate change over the next fifty years, one decade at a time. Looking at options available now and in the future, this report yields the following insights for reducing GHG emissions from the electricity sector.

  • There are likely multiple pathways to a low-carbon future for the electricity sector, and most involve some portfolio of technological solutions. The continued use of coal with carbon capture and sequestration; increased efficiency in the generation, transmission and end use of electricity; renewable and nuclear power generation; and other technologies can all contribute to a lower-carbon electric sector. Yet, all of these technologies face challenges: Cost, reliability, safety, siting, insufficient public and private funds for investment, and market and public acceptance are just some of the issues that will need to be resolved.
  • A major effort is needed to develop and deploy commercially available low-carbon technologies for the electric sector over time. The lower-carbon efficiency and generation technologies available and competitive in the market today are probably insufficient to decarbonize the electricity sector over the next few decades. Given the magnitude of the challenges the industry faces in coming decades, it is critical that the United States—both the public and private sectors—develops and maintains dramatically expanded R&D. Near-term and long-term R&D investments will help ensure that we have technologies to enable a low-carbon electricity sector.
  • It is critical that we start now to embark on the path to a lower-carbon electric sector. A decarbonization of the electricity sector could be achieved in the next 50 years through increased efficiency and fuel-switching in the near term, and a gradual deployment of lower-carbon technologies over the next several decades. Over the long term, GHG reductions will be achieved at lower cost if climate considerations are incorporated into the industry’s investment decisions today. Voluntary efforts to reduce GHG emissions will not be enough, especially given the current uncertainty in the industry. A clear timetable for regulation of GHG emissions is essential—a timetable that begins in the near future.

The authors and the Pew Center would like to thank Severin Borenstein of the University of California Energy Institute, Ralph Cavanagh of the Natural Resources Defense Council, and Tom Wilson of EPRI for their review of and advice on a previous draft of this report.

Executive Summary

Measured by environmental impact and economic importance, the electricity industry is one of the most important sectors of the American economy. The generation of electricity is responsible for 38 percent of all U.S. carbon dioxide (CO2) emissions and one third of all U.S. greenhouse gas (GHG) emissions. This sector is the largest single source of these emissions. It is also the largest source of sulfur dioxide (SO2), oxides of nitrogen (NOX), small particles, and other air pollutants.

At the same time, electricity is critical to the U.S. economy. Recent annual national expenditures on electricity totaled $250 billion—making the electricity sector’s share of overall GDP larger than that of the automobile manufacturing industry and roughly equal in magnitude to that of the telecommunications industry. Expenditures alone, however, understate the importance of electricity to the U.S. economy. Nearly every aspect of productive activity and daily life in a modern economy depends on electricity for which there is, in many cases, no close substitute. As the most desirable form of energy for many uses, electricity use has grown faster than GDP. The Internet and computers would not operate without very reliable, high-quality electricity. Electricity also plays a major role in delivering modern comforts and easing household tasks, from running heating and cooling systems to washing clothes and dishes. It plays an even more important role in the commercial, manufacturing, and agricultural sectors, where it provides lighting and powers a variety of machines. In short, it is hard to imagine a modern economy functioning without large amounts of reliable, high-quality electricity.

The economic and environmental importance of the electric power industry is, moreover, likely to grow in coming decades. Electricity demand has increased steadily over the last three decades and is projected to continue rising in the future, despite ongoing improvements in end-use efficiency. The industry, meanwhile, has undergone dramatic structural changes over the last 10 years, moving from a system of monopolies subject to state price regulation to a mixed system that now includes some elements of market competition in many states. After declining for 75 years, electricity prices have risen since 1970, making expenditures for carbon control a difficult proposition in the absence of mandatory GHG policy. The uncertain state of electricity market restructuring efforts around the country, particularly since the California crisis of 2001-2002, has increased perceptions of investor risk and sharply raised the cost of borrowing for capital investments by investor-owned utilities.

In this context, reconciling growing demand for affordable and reliable electricity supplies with the need for substantial reductions in GHG and criteria pollutant emissions presents a significant challenge for policy-makers and for the electricity industry itself. Indeed, even if worldwide growth in demand for electric power ceased today, the industry’s current level of emissions is not sustainable. Stabilizing atmospheric carbon dioxide concentrations at twice the level of pre-industrial times is likely to require emissions reductions of 65-85 percent below current levels by 2100. Clearly, reductions of this magnitude can be achieved only by taking action globally and across all sectors of the economy.1 But the electricity sector will undoubtedly need to assume a major share of the burden—in the United States and worldwide—given its centralized structure and contribution to overall emissions.

This report explores the electric power industry’s options for reducing its GHG emissions over the next half century. Those options include new technologies that are still being developed—such as coal gasification with carbon capture and sequestration—as well as strategies that rely on existing technologies at different stages of commercial and technical readiness (such as nuclear and renewable generation), lower-carbon fuels (like natural gas), and efficiency improvements (both at the point of electricity production and end use). Many of these options, in addition to reducing CO2 emissions, also reduce conventional air pollutants.

Although a power generating plant has a lifetime of 30-50 years, low-carbon technologies could claim a substantial fraction of the generation mix by mid-century—in time to help stabilize atmospheric GHG concentrations within the next century or two. Some of these technologies, such as coal-based integrated gasification and combined cycle (IGCC) generation, still need to overcome basic cost, reliability, and market-acceptance hurdles; others, such as carbon capture and sequestration, have yet to be demonstrated on a large scale. Still others, such as wind, nuclear, or even (given recent fuel price increases) natural gas combined cycle power, are relatively well developed but face constraints in terms of siting, public acceptability, cost, or other factors.

Nevertheless, the analysis presented in this report suggests that substantial GHG reductions could be achieved by the power sector—without major impacts on the economy or on consumer lifestyles—through the gradual deployment of lower-carbon options over the next several decades. At the same time, more immediate emissions reductions can be achieved through lowering demand by increasing the efficiency with which electricity is used; substituting natural gas for coal; improving efficiency at existing plants including highly efficient combined heat and power systems at suitable sites; expanding deployment of renewable generation technologies, including biomass co-firing of coal plants; and through the use of carbon offsets such as forestry projects and methane capture and collection. These immediate measures can reasonably be expected to reduce electricity growth and expand low-carbon electricity production in the United States from its 28 percent share in 2003, while also reducing emissions from higher-carbon generators.

While initial steps to limit electricity sector CO2 emissions will have only a modest impact on total U.S. emissions, steady and deliberate efforts to promote long-term technological change in this sector eventually could produce significant climate benefits, given the industry’s share of current emissions. The dollar cost of achieving GHG reductions will depend to a significant extent on which of several possible technology pathways emerge as both feasible and cost-effective in the decades ahead. Increasing the efficiency with which electricity is used is important to any energy future. In one scenario, the successful commercialization of carbon capture and sequestration technology would allow for continued use of fossil fuels in combination with somewhat increased reliance on similarly priced wind resources. In another scenario, a new generation of nuclear technology proves acceptable and plays an expanded role in meeting future electricity needs. Future emissions reductions might need to be achieved chiefly through increased reliance on relatively more expensive natural gas and renewable energy. Some forms of renewable energy can certainly play a role, but just how large a role depends on a range of uncertain issues in terms of cost, technical performance, and power system architecture. A major scale-up of renewable energy would likely require a greatly enhanced transmission network and expensive energy storage technologies to compensate for the remoteness and intermittency of much of the wind and solar resource base. These issues will be resolved only through further research and expanded field experience.

In all cases, however, long-term reductions will be achieved at lower cost if climate considerations are incorporated into the industry’s investment decisions sooner rather than later. Building another round of conventional pulverized coal plants that comply with new pollution control requirements for SO2, NOX, particulate matter, mercury, and other toxic emissions, but that later need to be scrapped, or retrofitted with costly and inefficient CO2 scrubbers, would likely be the most costly path.

To ensure that climate considerations figure in the industry’s planning decisions and to provide effective market incentives for investment in low-carbon technologies, a clear timetable for the regulation of GHG emissions is essential. Many industry experts and utility executives see such regulations as inevitable over the next 10-20 years, but cannot—without some certainty about future regulation—justify added expenditures for low-carbon technologies today, either to their shareholders or to state regulators concerned about the local economic impacts of higher-priced power. Voluntary efforts to reduce CO2 emissions simply will not be sufficient in an increasingly cost-competitive and risk-averse market. If, however, GHG emission limits are implemented in concert with other pollution control requirements, long-term air quality and climate objectives will be achieved more quickly and at lower total cost than under a piecemeal approach.

Four major policy recommendations emerge from the findings in this report concerning prospects for a long-term transition to a low-carbon electricity power sector:

  • Establish a firm regulatory timetable for reducing CO2 emissions from the electricity industry that parallels the timetable for reducing discharges of conventional pollutants. To assure that emissions targets are met at minimum cost, they should be set well in advance and should be implemented using market-based mechanisms such as a cap-and-trade system or a carbon tax. Avoiding high costs later requires accounting for CO2 in current investment decisions and technology choices.
  • Address the most serious institutional and regulatory barriers to the development of low-carbon and carbon-free energy technologies by implementing policies aimed at: (1) developing an adaptive regulatory framework for managing geologic carbon sequestration, in order to provide an alternative (coal gasification with carbon capture) to building new conventional coal plants; (2) determining if it is feasible to mitigate the safety, proliferation, and waste-management concerns that currently inhibit the expansion of nuclear power; (3) facilitating the adoption of cost-effective low- or no-carbon renewable technologies such as wind and biomass and promoting distributed resources and micro-grids—that is, clusters of small, modular generators interconnected through a low-voltage distribution system that can function either in concert with, or independent of, the larger grid; and (4) creating financial arrangements that decrease the risk penalty assigned by investors to new capital in the restructured era that have tended to discourage major electricity industry investments and that present further hurdles to the deployment of new technologies.
  • Promote greater end-use efficiency through policies that encourage power companies to invest in cost-effective, demand-side energy savings. Impose stricter federal efficiency standards for appliances and buildings (as detailed in the Pew Center report, Towards a Climate Friendly Built Environment) and promote the deployment of efficient combined heat and power systems. California has succeeded in slowing per capita electricity demand growth significantly through a variety of efficiency initiatives; these and other programs should be examined to estimate their potential to reduce demand more broadly and to identify “best practices” that can be documented and implemented elsewhere.
  • Create a federal requirement that all parties in the electricity industry invest at least one percent of their value added in R&D in order to explore how promising new technologies can solve the difficult reliability, efficiency, security, environmental, cost, and other problems facing the industry. Firms should have the choice to make the investments themselves or contribute to a fund managed by the U.S. Department of Energy. In parallel with this industry mandate, the Department of Energy needs to develop a more effective program of needs-based research into power generation and storage, electricity transmission and distribution, conservation, demand management, and other electric power technologies and systems.

Conclusions

The path to a low-carbon future for the electricity sector poses a range of challenges. As France has demonstrated, nuclear power is a known technology that could produce such a future, but nuclear power faces a number of major problems including high cost, low public acceptance, and risks of proliferation. Large-scale fuel switching to natural gas could lead to substantial reductions in CO2 emissions, though not their complete elimination, but it would be expensive and probably adversely impact the nation’s energy independence. Carbon capture and sequestration holds the promise that it could allow continued use of America’s enormous coal reserves. While likely affordable and technically feasible, it has yet to be demonstrated on a large scale and faces open questions of cost and reliability. Some forms of renewable energy can certainly play a role, but just how large that role can be depends on a range of uncertain issues in terms of cost, technical performance, and power system architecture. These issues will be resolved only through further research and expanded field experience. Conservation and load management hold great potential, but to date regulators and political decision makers have not advanced these solutions with the vigor that is needed. Clearly there are multiple paths to success, most involving some portfolio of these solutions. Today our best option is to work hard to advance the most promising, in the hopes that several ultimately prove to be technically, economically, and politically feasible.

The electricity industry’s investment decisions are unlikely to favor low-carbon options unless and until a clear regulatory timetable for limiting CO2 emissions is established. Absent such a timetable, aging pulverized coal units will likely be retrofitted with add-on controls for SO2, NOX, and mercury and could continue operating for decades with no provision for CO2 abatement. This could lead to a situation where more drastic CO2 reductions must be achieved over a shorter timeframe in the future, potentially at far higher cost.

Environmental issues generally, and global warming concerns in particular, have focused attention on a number of major challenges to the current U.S. electricity system. Industry restructuring, underinvestment in transmission infrastructure and other system assets, under-utilization of currently available low-carbon electricity generation sources, reliability and security issues, and insufficient R&D funding interact to cloud the future of this vital sector of the U.S. economy. Under any future scenario, this complex set of issues must be addressed in a manner that accounts for the hybrid—half restructured and half traditionally-regulated—nature of the industry. The elements that matter most now are:

  • An end to regulatory uncertainty regarding future CO2 control. Establishing clear and consistent policy goals sooner rather than later and implementing these goals through mechanisms such as a cap-and-trade system with scheduled cap reductions will avoid very significant costs.
  • Development efforts focusing on promising technologies that do not require fundamental breakthroughs, such as IGCC with carbon capture and sequestration for coal as well as natural gas.
  • Adoption of best practices for promoting energy conservation and improved efficiency.
  • A federal requirement that electricity industry companies spend at least one percent of their value added on research to develop critical enabling technologies and to address core questions that are likely to be crucial in determining which of several possible technology paths the industry should follow in the future. Examples include making carbon capture and sequestration feasible and determining whether cost-effective electricity storage options can be developed for intermittent resources like wind and solar.

Properly managed, it should be possible to accomplish the transition to a low-carbon electricity future at manageable cost and with little disruption to the U.S. economy. But the United States must initiate that transition now.

About the Authors

M. Granger Morgan
Carnegie Mellon University

M. Granger Morgan is Professor and Head of the Department of Engineering and Public Policy at Carnegie Mellon University where he is also University and Lord Chair Professor in Engineering. He is also a Professor in the Department of Electrical and Computer Engineering and in The H. John Heinz III School of Public Policy and Management.

Morgan's research addresses problem in science, technology and public policy. Much of it has involved the development and demonstration of methods to characterize and treat uncertainty in quantitative policy analysis. He works on risk analysis, management and communication; on problems in the integrated assessment of global change; on improving health, safety, and environmental regulation; on energy systems, focused particularly on electric power; and on several other topics in technology and public policy. His books, published by Cambridge University Press, on Uncertainty: A guide to dealing with uncertainty in quantitative risk and policy analysis (1990 with Max Henrion) and Risk Communication: A mental models approach (2002 with Baruch Fischhoff, Ann Bostrom, and Cynthia J. Atman) are widely cited as providing the definitive treatment of these topics.

At Carnegie Mellon, Morgan directs the new NSF Center on Climate Decision Making and co-directs, with Lester Lave, the Carnegie Mellon Electricity Industry Center.

Morgan serves as Chair of the EPA Science Advisory Board, Chair of the EPRI Advisory Council, and Chair of the Scientific and Technical Council for the International Risk Governance Council (based in Geneva, Switzerland). He is a Fellow of the AAAS, the IEEE, and the Society for Risk Analysis.

He holds a BA from Harvard College (1963) where he concentrated in Physics, an MS in Astronomy and Space Science from Cornell (1965) and a Ph.D. from the Department of Applied Physics and Information Sciences at the University of California at San Diego (1969).

Jay Apt
Carnegie Mellon University

Jay Apt is Executive Director of the Carnegie Mellon Electricity Industry Center at Carnegie Mellon University's Tepper School of Business and the CMU Department of Engineering and Public Policy, where he is a Distinguished Service Professor.

He received an A.B. from Harvard College in 1971 and a Ph.D. in experimental atomic physics from the Massachusetts Institute of Technology in 1976. His research interests are in economics, engineering, and public policy aspects of the electricity industry, economics of technical innovation, management of technical enterprises, risk management in policy and technical decision framing, and engineering systems design.

He received the Metcalf Lifetime Achievement Award for significant contributions to engineering in 2002 and the National Aeronautics and Space Administration's Distinguished Service Medal in 1997.

Lester B. Lave
Carnegie Mellon University

Lester B. Lave is University Professor and Higgins Professor of Economics at Carnegie Mellon University, with appointments in the Business School, Engineering School, and the Public Policy School. He has a BA from Reed College and a Ph.D. from Harvard University.

He was elected to the Institute of Medicine of the National Academy of Sciences and is a past president of the Society for Risk Analysis. He has acted as a consultant to many government agencies and companies. He has received research support from a wide range of federal and state agencies, as well as foundations, nongovernmental organizations, and companies.

Lave is the director of the CMU university-wide Green Design Institute and is co-director of the CMU Electricity Industry Center. His research is focused on applying economics to public policy issues, particularly those related to energy in general and electricity in particular.