Duke Energy CEO defends the need for free permit allocations
One of the most interesting political dynamics emerging around climate policy is the clash between coal utilities and utilities that rely more on natural gas and nuclear. (Most of the former are regulated, while most of the latter are, to one extent or another, deregulated or restructured.)
Gas and nuke utilities stand to benefit from a cap-and-trade program that prices carbon steeply and quickly, since their fleets are already (relatively) low-carbon. Coal utilities, on the other hand, are CO2-intensive and are pushing for measures to ease the transition to low-carbon technology. The main such measure is allocating — that is, giving away — pollution permits under a cap-and-trade system, at least for the first few decades. This would allow them to avoid steep, immediate rate hikes for their customers.
Or so they say. The principle argument against permit allocation is that electricity prices will go up anyway while coal companies pocket the profits and delay action. If permits are auctioned, the revenue would to to government, which could use it to cushion the blow to low-income ratepayers.
The most articulate public defender of the interests of coal utilities is Jim Rogers, CEO of Duke Energy. Duke was one of the original members of the U.S. Climate Action Partnership, and Rogers is known as one of the corporate world’s earliest and most influential advocates for cap-and-trade (see Grist’s 2007 interview with Rogers).
I caught up with Rogers at the ECO:nomics conference after his panel on “whose ox would be gored” under cap-and-trade. In person he is warm, genial, and unfailingly courteous. Unlike some of the other folks I talked to at the conference, Rogers genuinely seems to care about the policy details — he’s charmingly eager to persuade everyone he talks to, even manifestly clueless Fox News anchors (ahem). Whatever you think of his arguments (and many environmentalists oppose them strenuously), he seems sincerely committed to both abating climate change and protecting his ratepayers.
DR: You say categorically that allocated [GHG] permits will be passed along straight to the consumer to lower electricity bills. I hear other people — several of whom testified to Congress on the matter — say the opposite, that coal utilities will pocket the permits and raise electricity prices anyway. Somebody’s wrong, or confused.
JR: First of all, you have to start with the idea that there’s a hybrid [electricity] market in the United States. Some states are vertically integrated and regulated; others are competitive, restructured. Four out of five states that we operate in are regulated; the fifth is basically regulatory-light. So there is no question in my situation that [with] these allowances, the consumer benefits. I’ll sign that in blood: they get every one of them.
Prices are going up, but they’re going up for other reasons. Coal prices are up, gas prices, uranium prices, copper, steel, infrastructure cost. You’ve got this huge push, after — this is an important point — a decade and a half of the real price of electricity falling. Now we’re seeing the real price rise. You add to that by forcing us to buy allowances in auctions, when the price will get pumped up artificially by commodity speculators.
What’s more complicated, to answer the complete question, is what happens in the restructured states.
DR: That was my next question.
JR: They need to allocate them to the local regulating company to offset when they purchase coal in the market.
[Ed. note: I followed up with Rogers’ people about this. The idea is that in restructured markets, dozens of entities are buying power from wholesalers and either selling it to consumers or trading it. Rogers’ notion is to grant allocations to those entities based on the carbon level of the power they’re buying. As there are many of them, this would be a highly complex endeavor. However, Duke does not have an official position on this question, so there is, they acknowledge, a bit of hand-waving at this juncture.]
That’s not a perfect answer. There’s an easy answer for the regulated business; there’s a harder-to-figure-out answer for the competitive markets.
But in 25 states, more than 50 percent of the electricity comes from coal; of those 25 states, 21 of them are regulated. There’s a reason they never went to deregulation — because they had low prices.
DR: So you would have allocation work differently for regulated utilities than for deregulated utilities.
JR: I think you have to.
DR: Regulated utilities make their money from return on capital and so are biased toward deploying the biggest, most capital-intensive solutions — that means coal-gasification and sequestration. You don’t have any structural incentive to push for more efficient generation (through cogen or other means), smaller plants closer to load, or other efficiencies. Is that affecting your approach to cap-and-trade?
JR: That’s a good observation, and historically, that’s true. That’s true generally in our industry — but not true of me. [laughs] As I’ve said, I’m looking at 500,000 rooftops to put solar on. With our Save-A-Watt program, I’m looking at making investments beyond the meter. We’ve got the most innovative program in the country to reduce demand.
DR: Obviously we can’t create national carbon policy based on your personal environmental enlightenment, though; we have to do something structurally. Do you think deregulating utilities and removing that perverse incentive should be a piece of the carbon puzzle?
JR: We tried deregulation, and it failed in most places. Actually, costs are going up faster in deregulated markets today than in regulated [ones]. But I do think we ought to change. Historically, we made money the more we invested; the faster the load grew, the more power plants we built. That was a commodity model. What if you change the model, where we get paid for creating value by demonstrating productivity gains in the use of electricity?
Yes, we should change the regulatory model, but we shouldn’t necessarily deregulate it in the way we’ve talked about that historically.
DR: When I hear you and Jeff Immelt talk, your mentions of renewable power are somewhat desultory. It sounds — reading between the lines — like neither of you guys think renewables are a serious, substantial part of the solution. You seem to be placing your bets on nuclear and carbon sequestration. Is that accurate?
JR: You have to look at it with two eyes. Today, China uses 2 billion tons of coal a year — twice what we use in the U.S. They’re going to build 800,000 new megawatts in the next eight years, which is roughly two and a half times the coal generation we have installed in the U.S. today. If you’re really going to address the carbon problem in a big way, you’ve got to do carbon capture and sequestration, if for no other reason than to help with the 75 percent of all incremental carbon that’s going to come from developing countries.
DR: Why wouldn’t driving down the cost of renewables convince China to go a different route?
JR: Here’s a statistic for you: the cumulative amount of photovoltaic solar in the U.S. is 10 gigawatts through ’08. Starting in ’10, they’re projecting we’ll add 10 gigawatts a year every year in the U.S. If guys like me bring economies of scale and the law of large numbers to solar, you’ll see that price curve come down pretty fast. The other reason I want to do it is that 50 percent of the cost of solar is in the implementation, the installing. If I can take my workforce and train them with our trucks, our infrastructure, our logistics, we could really drive that price down, and if we could put an order in for 500,000 of these, we could ride that curve down.
DR: If that’s true, why do people talk about this number of new coal plants in China as though it is inevitable? If solar becomes cheap, why wouldn’t China switch?
JR: They will. But this is just what’s going to happen in the next eight years. It will take 5 to 10 years even on the most aggressive plan to get the price of solar down to the same level.
DR: Won’t it also take 5 to 10 years to develop CCS technology?
JR: Your question makes my point. We’ve got to be going all-out with all of this. It’s not either-or; it’s both. We’ve got to avoid the tyranny of one or the other. We need solar, we need wind, we need nuclear, we need carbon capture and sequestration — we need all of it. That’s the message. And we need a huge investment in energy efficiency. I have two aspirations: to de-carbonize our supply and make our communities the most energy-efficient in the world.
Let me give you one last stat. Think about where we are on a macro basis: There are six and a half billion people in the world. By 2050, there’ll be nine [billion]. Even if it wasn’t a climate issue, the battle over scarce resources is going to be huge in 2050. If you have the most energy-efficient economy, you’re going to be in a much better position — you’re not going to be held hostage to these scarce resources. So even if there wasn’t a carbon issue, I’d make the argument we ought to be doing this.
DR: If you could speculate, completely blue-sky, what do you think Duke’s generation portfolio is going to look like in 2050?
JR: Ooh, that’s a tough question. [pauses] About 25 percent of our generation comes from nuclear today. I think it’ll be more like 35 to 45. I think solar, which is zero today, will be 5, 10 percent. I think we’ll have a mix of gas and coal gasification with sequestration.
DR: Still about 50 percent?
JR: No, I think it’ll probably be more like 40 percent. Today [coal] is 70. We did a 2050 scenario, and by then we’ll have retired every plant except two.
DR: Thanks for taking the time.