Reducing carbon emissions could send state power prices soaring

June 16, 2008

Cheap coal made for cheap electricity and for decades made Indiana a magnet for the energy-hungry manufacturing industry.

But that advantage might soon fall into the scrap bin, as a report from Purdue University suggests industrial customers in Indiana could see disproportional rate increases in the years ahead as the state's coal-intensive electric utilities are forced to reduce carbon dioxide emissions.

Purdue's "Projected Impacts of Carbon Dioxide Emissions Reduction Legislation on Electricity Prices in Indiana" was prepared earlier this year in response to the Lieberman-Warner Climate Security Act, which was defeated June 6 in the U.S. Senate.

It would have capped carbon emissions, though regulated utilities would've been able to trade credits with other utilities to emit more. Lieberman-Warner was particularly controversial, however, in part because not everyone agrees man-made carbon dioxide has a significant effect on global temperature variations that have been cyclical since before the industrial revolution.

Though the legislation fell 12 votes short in the U.S. Senate, ratepayer groups say a reincarnation is likely to follow after this fall's elections. Both presidential candidates, Sens. Barack Obama and John McCain, have signaled support for caps on carbon emissions.

If Lieberman-Warner is any indication, Indiana industrial electric customers could see rates climb 38 percent by 2020--perhaps 50 percent by 2025, based on Purdue estimates.

"Those are certainly higher than what would have been anticipated," said Jack Wickes, an attorney in the utilities practice at Lewis & Kappes in Indianapolis and executive director of Indiana Industrial Energy Consumers Inc. Members include Eli Lilly and Co., General Motors, Honda Motor, Rolls-Royce Corp., Subaru of Indiana Automotive and Toyota Motor Manufacturing.

Indiana would be hammered

A bill the likes of Lieberman-Warner will hit Indiana especially hard because the state ranked fifth in the United States in carbon dioxide emitted annually, according to a 2006 ranking by the Energy Information Administration. The Purdue report said similar studies "have shown projected national electricity price increases of 15 to 25 percent in 2025."

Industrials wouldn't be the only electric customers squeezed by carbon legislation: by 2025, rates of residential and commercial customers could have risen about 40 percent under Lieberman-Warner, according to the report.

The Purdue report was issued earlier this year by three Purdue entities: the State Utility Forecasting Group, the Energy Center and the Climate Change Research Center. It's heavy on caveats--noting uncertainty about long-range forecasts and the degree to which conservation measures and alternative generation will be deployed. The study also didn't account for technological advances that could occur.

High-cost and longer-term alternatives to coal generation, such as nuclear power, were dismissed. But the retirement of older coal-generating plants and the availability of alternatives such as wind and natural gas were considered in the calculations, said Douglas Gotham, director of the State Utility Forecasting Group.

The report also contemplates that electric utilities would buy a certain number of carbon offsets to forestall actual investment in clean energy.

Also, the report didn't include the potential cost of limiting five other greenhouse gases contemplated by the bill: methane, nitrous oxide, sulfur hexafluoride, perfluorocarbons and hydrocarbons.

So although the report's findings are open to debate, "I think what it does is sound the alarm we could be causing substantial harm to our manufacturing electric rates," Wickes said.

'Least-cost' mandate needed

Of added concern, Wickes said, is that there is no regulatory framework in Indiana to compel utilities to use a "least-cost" option to comply with eventual carbon regulations.

Jerry Polk, an Indianapolis attorney representing Citizens Action Coalition in utility cases, said there were some statutes enacted following the passage of the federal Clean Air Act that required use of least-cost options for specific pollutants. Beyond that, the Indiana Utility Regulatory Commission generally does not see itself as being required to compel utilities to choose the least-cost option insofar as carbon is concerned, Polk added.

Without such state legislation enacted, investor-owned utilities are prone to spend billions on costly and risky compliance options, then seek IURC approval to recover the costs from ratepayers--all to protect the interests of their shareholders, said CAC Executive Director Grant Smith.

One of the most infamous examples the group points to was Senate Bill 224, which failed in the most recent session of the state Legislature. It would have allowed utilities to pass on to ratepayers the cost of research and development of carbon controls for coal-fired power plants.

"Meanwhile, off-the-shelf technologies that can produce billions in savings for ratepayers languish because the utility industry controls the Senate Utilities & Regulatory Affairs Committee," said the CAC in a response to the failed bill.

A preferred way to blunt costs of carbon regulation is for utilities to aggressively deploy other options now, such as increased use of wind and other renewable-energy resources, as well as energy-efficiency programs, Smith said.

Electric utilities such as Duke Energy and Indianapolis Power and Light have bought or will soon buy power from newly erected wind turbines in Indiana. Duke also has proposed an energy-efficiency program that currently is being evaluated by the IURC.

Now or later

Ratepayer group CAC is particularly troubled, however, by a $2 billion coal gasification plant Duke is building in Edwardsport and the carbon liability it's likely to incur.

Duke has proposed injecting and storing carbon dioxide into deep underground formations. This so-called "carbon sequestration" technology is still being developed and is likely to be costly. Duke has not included those costs in the construction of the plant.

"What is 'least cost' needs to be looked at today," said Polk, "and not be pushed off into the future."

One advantage of dealing with coming carbon issues now is that it would pump more money into the renewable-energy sector today--cultivating new companies and creating new jobs in the state, Smith said.

Industrial ratepayer advocate Wickes acknowledged there "is significant interest in the economic viability of Indiana coal," but he said policymakers in Indiana should remember the state's manufacturing sector as a whole is much more important.

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