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The proposed Regional Greenhouse Gas Initiative (RGGI) in seven northeast states is expected to lead to an increase in the price of electricity in the region and beyond. How will this program affect the value of existing generating assets in the region and how does it affect the market value of firms? In a new discussion paper, CO2 Allowance Allocation in the Regional Greenhouse Gas Initiative and the Effect on Electricity Investors, RFF researchers Dallas Burtraw, Danny Kahn, and Karen Palmer investigate the effect of the policy on electricity investors using a detailed simulation model of the electricity industry.
This research focuses on a regional CO2 cap-and-trade program for electricity generators in the seven northeastern states participating in RGGI. The scenarios that RFF researchers analyze are more stringent than the most recent RGGI proposal but retain its key features. The analysis uses a discounted cash flow methodology to assess the changes in the value of individual generating assets. Individual assets are aggregated by ownership to calculate the change in the value of the portfolio of assets owned by a firm and for the entire industry.
The researchers find that the effect on the value of electricity-generating assets in the RGGI region may be positive or negative and can be quite large. In addition, they find that the way in which emissions allowances are distributed initially can make a big difference. |
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Typically, CO2-emitting facilities such as coal-fired plants do well when emissions allowances are allocated based on historic emissions or historic electricity generation. Low and non-emitting facilities do relatively well when allowances are auctioned. However, every firm does well under free allocation based on historic measures, sometimes gaining hundreds of millions of dollars in value.
One of the concerns in designing the regional program is the issue of leakage. Leakage refers to the expectation that facilities outside the region will increase their electricity generation in order to supply power to the Northeast and thereby avoid the emissions cap. The RFF researchers model this effect and find that there is a modest increase in emissions outside the region. Moreover, they find where there is leakage, there is also profit. A number of firms operating inside the RGGI region also own generation facilities in neighboring regions, and these facilities can be expected to increase generation in order to supply power back into RGGI. And they gain value doing so. When this increase in value at facilities outside the region is accounted for and added to the effect at facilities that operate inside the region, the researchers find that half the firms actually make money under an auction in which they have to pay for emissions allowances. Accounting for all firms, the change in the market value of the industry under an auction is positive.
The researchers find that facilities outside the RGGI region gain value not only due to sales back into RGGI, but also as a result of increased electricity prices outside RGGI. Electricity prices rise outside RGGI because of an increase in the demand for power imports to the RGGI region. As a consequence, customers outside RGGI have to pay more for electricity, even though they are not participating in the program, and this contributes substantially to the increase in the value of generating facilities in the states that border the RGGI region. In a sense, electricity customers outside the RGGI region are paying a cost for the program, even though they are not participating in it. |
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