Re-evaluating the implied cost of CO2 avoided by clean energy investments

The authors present a graphical framework to evaluate the implied CO2 abatement costs that can be used by policymakers and resource planners to provide clarity on cost-effective policy design, and on the implications of planning decisions for meeting future de-carbonization goals. The framework would allow for comparison of alternative investments, while distinguishing the extent, type and timing of resources they would displace since those factors are system-specific and can substantially impact abatement costs. 1. Implied cost of CO2 abatement In this article, we describe the implied cost of CO2 abatement as the cost premium incurred for clean energy over traditional or marketbased resource alternatives. Planners and customers would be willing to pay this cost if they believe the traditional or market-based mechanisms do not appropriately internalize the societal costs of emissions. In that sense, the implied cost metric can be alternatively viewed as some form of an implied “CO2 externality value,” reflecting a willingness-to-pay for the CO2 reductions, expressed as dollars per ton. We apply a straightforward formula to calculate the implied cost, as shown below: ($/MWh cost of clean resource − $/MWh cost of displaced resource) ÷ tons/MWh emissions displaced = $/ton implied cost of CO2 abatement Although it is mechanically simple to calculate implied CO2 abatement costs, it can be particularly involved to identify which resources would be displaced by the clean energy resource. As discussed later in this article, the cost and emissions characteristics of the displaced resources are as important as the characteristics of the clean energy resource itself, and they can vary over time and across areas. 2. Drivers of CO2 abatement cost In the past several years, a number of market and policy changes have shown that the cost of CO2 abatement continues to be a moving and often confusing target. Abatement costs can vary quite a lot depending on a specific area’s technology costs and performance characteristics. Installed costs of wind and solar resources have declined and their performance has improved materially, creating lower-cost CO2 abatement opportunities than before. At the same time, however, natural gas prices have remained low (albeit with increased volatility in some regions), keeping the costs of renewables still relatively high compared to natural-gas-fired generation in most parts of the country. Abatement costs depend quite a bit on the alternative resources displaced and their cost and performance characteristics, which can change dramatically over time due to market conditions and public http://dx.doi.org/10.1016/j.tej.2017.08.006 ☆ The views and opinions expressed in this publication are strictly those of the authors, and do not necessarily represent the views or opinions of The Brattle Group, any of its other employees, or its clients. ⁎ Corresponding author. E-mail address: [email protected] (M.G. Aydin). 1 This is a simplification since policies to build renewables, such as renewables portfolio standards, can have multiple objectives and benefits beyond emissions abatement. For more discussion please see G. Barbose et al., “Costs and Benefits of Renewables Portfolio Standards in the United States,” Ernest Orlando Lawrence Berkeley National Laboratory, LBNL-187516, July 2015, Available at https://emp.lbl.gov/sites/all/files/lbnl-187516.pdf. See also Ryan Wiser et al., “A Retrospective Analysis of the Benefits and Impacts of U.S. Renewable Portfolio Standards,” Lawrence Berkeley National Laboratory and National Renewable Energy Laboratory, TP-6A20-65005, January 2016, available at https://emp.lbl.gov/sites/all/files/lbnl1003961.pdf. 2 Please see our 2012 article for additional discussion: Philip Q Hanser and Mariko Geronimo, “What Price, GHGs? Calculating the implied value of CO2 abatement in green energy policies,” Public Utilities Fortnightly 150(10) (October 2012): 12. The Electricity Journal 30 (2017) 17–22 Available online 04 October 2017 1040-6190/ © 2017 Elsevier Inc. All rights reserved. MARK