US: Power import labelling rules could distort CO2 permit market in 2014, companies warn

26 March 2014 19:11 Source:ICIS

Rules labelling the CO2 intensity of power imports into California could distort the market for carbon permits, several companies have warned, by causing a mismatch between actual emissions and those covered by companies in 2014.

Under Californian emission trading system (ETS) rules, power imports bought directly from a generator are labeled as specified power, or from a specific generation source.

But when power is bought on the InterContinental Exchange (ICE) or through a broker, imports are classified as default power. This fixes its carbon intensity at 0.428 tonnes of CO2 equivalent per MW, or the level of an efficient natural gas-fired plant.

Market participants said the rules could impact both coal and renewable power, potentially causing coal-generated power to be labeled as cleaner while green imports are given a higher emissions rate.

Putting a price on clean power

The issue also occurs when importers buy power from so-called asset-controlling suppliers (ACS). In this event, power is given a specific carbon rate that is based on emissions from the ACS’ generating facilities.

Bonneville Power Administration (BPA), one of the two ACS entities, together with Powerex, operates mostly on hydroelectric power from a federally-owned power plant. It has an ACS-rate of 0.0249 tonne of CO2 equivalent (tCO2e) per MW for 2014 - only 6% of the carbon footprint associated with default power.

BPA sells ACS power, and surplus power bought on the secondary market, to the wholesale market. However, ARB rules do not allow BPA to distinguish between generation sources trading via brokers or on the ICE.

As a result, BPA trading manager Alex Spain told ICIS that cleaner ACS or specified power could be sold on the secondary market as dirtier default power. BPA also loses seller control and the ability to get a premium price for cleaner power.

CCA price impact

If ACS or specified power is claimed as default power, emissions could artificially rise in the ETS, driving up demand for California carbon allowances (CCAs). This would have a knock-on effect on prices.

The rules were intended to keep a level playing field for anonymous power sold through ICE or brokers, regulator Air Resource Board said, by ensuring that compliance entities matched up with coal-fired power on ICE are not penalised and forced to buy more CCAs.

The ARB will apply the rules for the first time this year, after it decided against applying them retroactively in 2013.

Last year, the Los Angeles Department of Water and Power, a major utility in California, warned that using the rules (retroactively) would result in raised emissions, inaccurate reporting emissions and an altered CCA market.

The carbon footprint associated with power imports is key, as it significantly impacts overall emissions in the ETS. Between 2009 to 2012, the share of renewable power imported into California almost doubled from 5.8 GW to 12.5 GW. This was equivalent to roughly 4% of total generation in the state, according to statistics provided on behalf of the California Energy Commission.

Coal imports have stayed in the 20,000 GWs range over the past four years. Dan X. McGraw

By Dan X. McGraw