Risky Business

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WHAT POWER SUPPLIERS CAN DO TO REDUCE ENVIRONMENTAL REGULATORY RISKS

A principal finding of this report is that depending on coal for power generation is financially risky, not just environmentally dubious. Substituting efficient natural gas technology yields a substantial improvement; better still is some combination of energy efficiency and renewable generating technology. Many of America's power-plant owners have started down that path, by making voluntary commitments to stabilize or reduce their carbon dioxide emissions. NRDC intends to use these rankings to help assess progress in meeting and expanding those commitments.

Fortunately for America's pocketbooks and environment, there is no scarcity of economical alternatives to coal. The list begins with a host of untapped energy efficiency opportunities. Literally hundreds of electric utilities have proved since 1980 that they can invest productively in ways to save electricity more cheaply than it can be produced.^[22] In their evaluations of utility performance from 1990-1994 alone, California and New York regulators found $3.6 billion in net life-cycle benefits to their electricity customers. By 1994, the average cost of saved kilowatt-hours to California utilities had dropped below two cents per kilowatt-hour, and Southern California Edison was announcing an energy-efficiency portfolio that would have been cost-effective even if credited solely with the value of unburned fuel. Annual savings equivalent to one percent of utility systems' total electricity consumption were being achieved by companies that in no sense had tested the limits of their capacity.^[23]

Renewable generating technologies other than hydropower also have established a substantial market position over the past decade, thanks to significant cost reductions in wind, geothermal, solar and biomass generation. Recognizing the environmental and economic benefits of continued progress on all these fronts, legislatures in California and Rhode Island recently mandated significant additional utility-sector investments in energy efficiency and renewable energy resources, and federal regulators opened the way for other states to follow.^[24] And utility customers are eager for more options in these categories; "a striking 90 percent of utility customers say they believe it is 'very important' or 'somewhat important' that their utility provide electricity generated by renewable fuels," and substantial majorities would pay more to achieve that result.^[25]

Will nuclear power and large-scale hydropower enjoy a renaissance in a new era of cleaner power? We strongly doubt it; too many competitors offer similar or greater environmental advantages with shorter lead-times and lower costs. Every U.S. nuclear power plant ordered since 1973 has been canceled, and even Quebec has been reevaluating plans for giant hydropower development. It is less costly and risky to use electricity more efficiently or generate it with more forgiving renewable and natural-gas-fueled technologies.

Good illustrations of all these points emerge from carbon dioxide reduction strategies adopted recently by some of the utilities that currently report relatively high emissions per dollar of revenue. For example, American Electric Power, Cinergy and Pacificorp all are undertaking to reduce their risk exposure through strategies that include energy efficiency investment, upgrades to existing generation and transmission systems, new renewable energy facilities, and generation using methane recovered from landfills.^[26] Expanded efforts along these lines could significantly improve the standing of these and other companies that now are ranked at the high-risk end of our spectrum.

Robust generation and energy-services industries stand ready to replace our oldest and dirtiest power plants with far cleaner and more efficient equipment. There is no technical or economic reason why electrical generation should continue to dominate either air pollution statistics or global climate concerns. Accordingly, we very much look forward to the day when indices like the one we initiate here will no longer be needed.

Yet some continue to promote a very different future, in which coal-based generation expands substantially to meet growing power demand. Today's coal-fired plants already account for more than one-half of U.S. electricity generation and are physically capable of expanding production by more than 30 percent.^[27] More coal-fueled units have been proposed for construction. The most important audience for this report is those who will be asked to underwrite these huge refurbished and new pollution sources. We doubt that checkbooks will be opened until the investors know who will be taking responsibility for future clean-up costs, and the pat answers of the past century will no longer work. Increasingly, prospective investors throughout the economy will focus on opportunities to avoid or minimize the financial risks outlined in this report -- and the results should mean good news for both power markets and the communities they serve.

Notes

22. For a national overview, see U.S. Department of Energy, Report to the President and Congress of the United States on the Current Status and Likely Impacts of Integrated Resource Planning (March 1995).

23. For extensive documentation of utilities' recent progress in energy conservation, see Ralph Cavanagh, Restructuring for Sustainability: Toward New Electric Service Industries, The Electricity Journal (July 1996), pp. 71-72 and accompanying footnotes.

24. In August 1996, California's Assembly and Senate unanimously passed AB 1890, which creates a statewide fund of not less than $600 million annually for investments in energy efficiency, renewable energy, low-income electricity services and long-term electricity-related research and development. Almost simultaneously, Rhode Island mandated comparable levels of investment (in terms of rate impact) in its Rhode Island Restructuring Act of 1996 (96-H8124). See also the Federal Energy Regulatory Commission's Order No. 888, 18 C.F.R. Parts 35 and 36, at pp. 436-37 (April 24, 1996) (encouraging states to assess nonbypassable charges on electric distribution services to recover costs of investments in energy efficiency).

25. See Kari Smith, Customer Driven Green Markets, Clean Power Journal, pg. 6, (Center for Energy Efficiency and Renewable Technologies, Summer 1996).

26. Cinergy and AEP are the parent companies of PSI Energy and Ohio Power, respectively.

27. Federal Energy Regulatory Commission, Final Environmental Impact Statement - Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities (RM95-8-000) and Recovery of Stranded Costs by Public Utilities and Transmitting Utilities (RM94-7-001). FERC/EIS-0096, April 1996, Tales 5-1 and 5-4 (indicating that coal-fired generation could increase by 31 percent between 1993 and 2010, from 1,639 to 2,152 billion kWh, even assuming no change in total power-plant capacity).