Electricity Prices and Costs

The Clear Skies and Carper bills are projected to lead to higher electricity prices. Relatively speaking, the changes expected in the 2-P and 3-P cases are small, while those in the Carper 4-P cases are larger, particularly if offsets are limited. In the Clear Skies cases, electricity prices in 2010 are projected to be between 3.4 percent and 4.0 percent higher than in the Reference case (Figure 40). In terms of the Nation’s total electricity bill, these changes amount to an increase of between $7 billion and $9 billion (2.7 percent to 3.3 percent). In 2025, the projected changes in electricity prices are similar, ranging from 2.9 percent and 4.0 percent higher than in the Reference case, while the Nation’s total electricity bill is between $7 billion and $10 billion higher than in the Reference case (2.1 percent to 2.8 percent).

In the Carper 2-P and 3-P cases, electricity prices in 2010 are projected to be between 3.3 percent and 3.7 percent higher than in the Reference case (Figure 41). Relative to those in the comparable Clear Skies cases, the smaller percentage changes in the Carper 2-P and 3-P cases are due to the effects of the GPS approach used to allocate allowances. In terms of the Nation’s total electricity bill, these changes amount to an increase of between $7 billion and $8 billion in 2010. In 2025, the projected changes in electricity prices range from 1.2 percent to 2.1 percent higher than in the Reference case, while the Nation’s total electricity bill is between $2 billion and $5 billion higher than in the Reference case.

The potential electricity price and bill changes are projected to be larger in the Carper 4-P cases, but they are very sensitive to assumptions about offset availability and costs. Electricity prices in 2010 are proje cted to be between 3.7 percent and 5.3 percent higher in the Carper 4-P cases than in the Reference case. In terms of the Nation’s total electricity bill, these changes also amount to an increase of between $8 billion and $11 billion. In 2025 the projected change in electricity prices in the Carper 4-P cases range from 4.2 percent to 9.5 percent higher than in the Reference case, while the Nation’s electricity bill is between $11 billion and $24 billion higher than in the Reference case.

Relative to the Reference case, power companies are expected to incur greater costs to comply with the provisions of Clear Skies. These costs, often referred to as resource costs, include fuel, operations and maintenance, and capital expenditures. In addition, when the mercury safety valve is exercised under Clear Skies, power companies w ill be paying the government for additional allowances. Relative to the Reference case, resource costs and mercury safety valve payments over the 2005 to 2025 time period are projected to be $20.8 billion higher in the Clear Skies 2-P case and $24.4 billion hig her in the Clear Skies 3-P case (Figure 42).¹⁶ These increases are less than 2 percent of the Reference case resource costs. Adding the mercury cap to the NOx and SO2 caps increases costs in 2010 by slightly less than $700 million. The changes in costs are dampened somewhat by consumers’ responses to the higher electricity prices projecte d in the Clear Skies cases.¹⁷ If consumer electricity consumption did not fall in response to the higher electricity prices, the power industry could incur greater costs to comply. In a case without consumer demand response (labeled Clear Skies 3-P No Demand Feedback in Figure 42), the increase in discounted resource costs and mercury safety valve payments over the 2005 to 2025 time period is projected to be $46.4 billion.

In the Carper 2-P and 3-P cases, the change in discounted resource costs over the 2005 to 2025 time period is projected to range from $33.4 to $51.7 billion (Figure 43). The higher costs relative to the comparable Clear Skies cases result from the more stringent emissions caps, the lack of a mercury safety valve, the minimum mercury removal requirement, and the GPS emission allowance allocation approach used that reduces output substitution (i.e., there is a smaller electricity price impact so consumers do not lower their demands as much as they otherwise would). In the Carper 4-P cases, power companies will not only face higher electricity production costs, they also will be paying for offsets. The combination of higher discounted resource and offset costs over the 2005 to 2025 time period ranges between $64.5 billion and $156.1 billion in the Carper 4-P cases.