E C S

ECONOMIC CONSULTING STRATEGIES, INC.

Which Way Forward? Alternative Paths for Generating Electricity in Americas Heartland
How will Missouri, Oklahoma, Nebraska and Kansas cope with the challenges and opportunities that lie ahead?

By Stephanie Kelton, James I. Sturgeon and Brandon Richman

October 2009

Stephanie Kelton
Dr. Stephanie Kelton is an Associate Professor of Economics at the University of Missouri-Kansas City and the founder and Managing Director of Safeguard Energy, LLC. She is also the Director of Student Research at the Center for Full Employment and Price Stability and a Research Scholar at the Levy Economics Institute at Bard College. She has been studying issues related to energy economics for a number of years and has published dozens of peer-reviewed articles in leading academic journals including: Cambridge Journal of Economics, Journal of Economic Issues, International Journal of Political Economy, Review of Social Economy, and many others. She is a macroeconomist with technical expertise in forecasting and economic modeling.

James Sturgeon
Dr. James I. Sturgeon is professor of economics and department chair at the University of MissouriKansas City and an Honorary Fellow at Bremen University, Germany. He teaches Institutional Economics and Industrial Organization. He has served as president of the Association for Evolutionary Economics and the Association for Institutional Thought; being Co-founder of the latter. His research and publishing interest is industrial organization and public policy and institutional economic theory. He is the author of several studies on the electric utility industry, and has published in the Journal of Economic Issues, the International Journal of Social Economics, and the Review of Institutional Thought among others. He has authored or co-authored three books, and been an expert witness in electric utility rate cases.

Brandon Richman
Mr. Richman is a Ph.D. student at the University of Missouri-Kansas City and an economic consultant at Black and Veatch. Prior to joining Black & Veatch, he was a researcher at the Institute for Institutional and Innovational Economics at the University of Bremen in Bremen Germany.

Copyright Economic Consulting Solutions, Inc. This Report is published by Economic Consulting Solutions, Inc. All rights reserved. Reproduction or redistribution of this Report in any form for any purpose is expressly prohibited without the prior consent of Economic Consulting Solutions, Inc. The views expressed in this Report are those of the authors only. Economic Consulting Solutions, Inc. accepts no liability for the accuracy or completeness of the information, recommendations or forecasts contained in this report nor for any actions taken in reliance thereon. While all content is believed to be correct at the time of publication, no responsibility can be accepted by Economic Solutions, Inc. for its completeness or accuracy.

Table of Contents
Which Way Forward? Alternative Paths for Generating Electricity in Americas Heartland

1. Executive Summary and Overview 1.1 1.2 1.3 1.4 1.5 Introduction and Background Existing Research Goal and Scope Method Areas for Further Research

6 6 6 7 8 9 10 10 10 19 21 21 21 23 28 30 34 40 42 45 50 50 51 52 60

2. The Challenge(s) Ahead 2.1 Introduction 2.2 The Path Were On 2.3 Path Dependence vs. Path Creation 3. The Cost of Power: An Overview 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 Introduction Estimating the Cost of Different Generation Technologies A Survey of Studies Cost and Economies of Scale Capital Costs: An Overview of Recent Trends and Studies Efficiency and Cost Regulation, Social and External Costs Nuclear Coal, Natural Gas & Petroleum Wind

4. Simulating the Effect of Different Generation Portfolios on Electric Rates in MONK 4.1 Introduction 4.2 Method 4.3 Simulating the Models 5. Which Way Forward? 5.1 5.2 5.3 5.4 Introduction Method Alternative Paths for Generating Electricity in the MONK Region Fuel costs

60 61

6. Conclusion 2

69

List of Figures
Page Figure 1: Figure 2: Figure 3: Figure 4: The U.S. Generation Portfolio, 2009: Net Generation by Energy Source, Total (All Sectors) Total Generation by Source, U.S. as a Whole (Percentile), 1995, 2008 Kansass Net Electricity Generation, in MWh, by Fuel Type, 1999-2008 Kansass Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008 Figure 5: Oklahomas Net Electricity Generation in MWh, by Fuel Type, 1999-2008 Figure 6: Oklahomas Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008 Figure 7: Nebraskas Net Electricity Generation in MWh, by Fuel Type, 1999-2008 Figure 8: Nebraskas Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008 Figure 9: Missouris Net Electricity Generation in MWh, by Fuel Type, 1999-2008 Figure 10: Missouris Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008 Figure 11: The Relationship between Average Retail Electric Rates and Coal Use, 2007 Figure 12: Lazard Estimated Levilized Cost of Electricity by Technology Type, in $/MWh, 2008 Figure 13: DOE/Black & Veatch, Estimated Levilized Cost of Electricity by Technology Type, In $/MWh, 2008 Figure 14: California All-in-Levilized Busbar Cost, Selected Technologies, ($/MWh) Figure 15: Maryland PRIG Cost, Cents/kWh Figure 16: Total Overnight Fixed Cost in 2008, ($2007/kW) Figure 17: PCCI Index with and without Nuclear Figure 18: California Study, Capital Cost per kW Figure 19: Lazard Capital Cost for Electric Generating Plants, Selected Technologies, 2008 Figure 20: Black & Veatch, Capital Cost Per KW, 2010 Estimate Figure 21: U.S. Peak Demand Forecast by Scenario Figure 22: Central Air-Conditioning Saturation, Residential Sector (%) Figure 23: Estimated Nuclear Generation Capital Costs in KWs, Selected Studies, 2007-2009 Figure 24: Historical Average Weekly Coal Commodity Spot Prices ($ per Short Ton), Week Ended October 2, 2009 Figure 25: Installed Wind Generating Capacity, Selected Countries, Cumulative and 2008 Figure 26: U.S. Wind Resource Map Figure 27: Kansass Wind Potential Figure 28: Oklahomas Wind Potential Figure 29: Nebraskas Wind Potential Figure 30: Missouris Wind Potential Figure 31: Kansass Simulated Cost per MWh with Wind Power and Carbon Cost Variation Figure 32: Kansass Simulated Cost per MWh with Wind Power, Efficiency and Carbon Variation Figure 33: Oklahomas Simulated Cost per MWh with Wind Power and Carbon Variation Figure 34: Oklahomas Simulated Cost per MWh with Wind Power, Efficiency and Carbon Variation Figure 35: Nebraskas Simulated Cost per MWh with Wind Power and Carbon Cost Variation Figure 36: Nebraskas Simulated Cost per MWh with Wind Power, Efficiency and Carbon Cost Variation Figure 37: Missouris Simulated Cost per MWh with Wind Power and Carbon Cost Variation Figure 38: Missouris Simulated Cost per MWh with Wind Power, Efficiency and Carbon Cost Variation Figure 39: Kansas Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Carbon Costs Figure 40: Kansas Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency vs. No Efficiency, $0 Carbon Cost 11 11 12 13 14 15 16 16 17 18 19 24 25 26 27 30 32 32 33 33 36 37 43 45 46 47 48 49 49 50 53 54 55 56 57 58 59 60 62 63

Page Figure 41: Oklahomas Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Cost of Carbon Figure 42: Oklahomas Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency vs. No Efficiency, $0 Carbon Cost Figure 43: Missouris Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Carbon Costs Figure 44: Missouris Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency vs. No Efficiency, $0 Carbon Cost Figure 45: Nebraskas Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Carbon Costs Figure 46: Nebraskas Electric Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency vs. No Efficiency, $0 Carbon Cost 64 65 66 67 68 69

List of Tables
Page
Table 1: Cents/kWh Estimate by Power Source, Various Studies Table 2: Cost and Performance Characteristics of New Central Station Electricity Generating Technologies, 2008 Table 3: Potential Peak Demand Reduction by State and Scenario Table 4: Estimated Cost of Nuclear Generated Electricity, 2018 Table 5: Generation Costs per KWh by Power Source for Simulations Table 6: Results of Kansas Simulation, Wind/Coal Substitution with Carbon Emission Costs Table 7: Kansass Simulated Cost per MWh with Wind Power, Efficiency and Carbon Cost Variation Table 8: Results of Oklahoma Simulation, Wind/Coal Substitution with Carbon Emission Costs Table 9: Oklahomas Simulated Cost per MWh with Wind Power, Efficiency and Carbon Cost Variation Table 10: Results of Nebraska Simulation, Wind/Coal Substitution with Carbon Emission Costs Table 11: Nebraskas Simulated Cost per MWh with Wind Power, Efficiency and Carbon Cost Variation Table 12: Results of Missouri Simulation, Wind/Coal Substitution with Carbon Emission Costs Table 13: Missouris Simulated Cost per MWh with Wind Power, Efficiency and Carbon Cost Variation 22 29 38 43 51 53 54 55 56 57 58 59 60

1. Executive Summary and Overview 1.1 Introduction and Background Apart from addressing the global economic and financial meltdown, there is currently no greater concern among world leaders than the imperative for a long-range solution to meet our global energy needs. Part environmental, part economic, the world is rethinking its energy portfolio and looking for safer, cheaper and cleaner ways to satisfy the growing demand for energy worldwide. 1 For Americans, these concerns intensified in 2006, when rising oil prices and concerns over national security led President George W. Bush to advocate for greater energy efficiency and a more diversified energy portfolio. 2 This led to a burgeoning of research touting the cost-effectiveness (or environmentalfriendliness) of one generation source against all others. Unfortunately, almost all of these studies contain empirical and/or methodological flaws, many of them serious enough to render them all but useless as a guide for action. This report was prepared by a team of economists from the University of Missouri-Kansas City, who set out to analyze the various options for satisfying the need for electricity in what we call the MONK region of the United States: Missouri, Oklahoma, Nebraska and Kansas. We recognize the challenges that are inherent in long-range forecasting, however we believe it is critical to undertake a full-cost analysis that extends the time horizon to include the entire life of the plant or generation source in order to reach a fair comparison of the costs and benefits of different generation technologies. Studies that fail to consider broader concepts of costs and longer time horizons will almost certainly favor a generation mix that fails to protect consumers and taxpayers from the price shocks and geopolitical and environmental risks that will likely intensify in a carbon-constrained, post peak-oil world. 1.2 Existing Research When it comes to estimating the cost of generation from alternative fuel sources, there is often significant variation in the literature. Historically, studies of electricity cost and supply have focused exclusively on central station generation options coal, natural gas and nuclear and, because of the complexities and uncertainties involved, a full-cost analysis over the life of the project has rarely been attempted. For example, a number of studies have examined the cost of nuclear power from new generation, producing estimates that have ranged from a low of 8.4 cents per kWh to a high of 30 cents per kWh. Similar discrepancies have plagued the findings for coal and natural gas, and the lack of uniformity (or even remotely approximate agreement) has presented something of a challenge to decision makers, who frequently rely on a key studys findings when making long-term planning decisions. Thus, forecasting is a double-edged sword. It is, on the one hand, important to grapple with the complexities and uncertainties involved in analyzing the full range of costs associated with different
The U.S. Energy Information Administration (EIA) estimates that U.S. energy demand will increase by 63% and global demand will triple by the end of 2050. 2 The clean-energy rhetoric actually began in 2000, during George W. Bushs presidential campaign, when he pledged to enact a four-pollutant bill to force Americas coal-fired power plants to begin cutting their carbon emissions. However, within weeks of taking office, that plan was abandoned, and the U.S. made no substantive progress on this front during his eight-year tenure as President.
1

generation technologies, but one must be mindful of the devil that often lurks within the details often in the underlying assumptions or tucked safely away in a footnote. For example, after studying the Climate Stewardship and Innovation Act of 2007 (S. 280), the Environmental Protection Agency (EPA) concluded that many of the benefits being touted under this legislation were premised on variety of flawed assumptions including: the future price and demand for natural gas in business-as-usual scenario, no federal bio-fuels program, nuclear build-out of heroic proportions and a nearly unrestricted availability of offsets from other countries. More recently, Cooper (2009) raised serious concerns about the assumptions that underlie many studies on nuclear power generation, arguing that the cost estimates used in many studies are based on assumptions that do not comport with reality (p. 66). Even the veracity of the projections that come out of the Department of Energys own Energy Information Administration (EIA) is a frequent target of criticism. The EIA, which forecasts everything from market trends in economic activity to future energy consumption (by fuel type), has been criticized for underestimating the likely growth in power sector demand for natural gas, and overestimating the demand for coal-fired generation. 3 Another problem that has plagued many studies of electricity cost centers on the treatment of externalities. Historically, many researchers have ignored these costs, but this has begun to change. For example, Moodys now includes estimates of the environmental impacts associated with carbon, precursors to acid rain, and uranium waste, and even the utility industry is beginning to factor carbon into their cost calculations. A final problem is that it is still fairly common for researchers to overlook the role of efficiency (on the demand side) as a potential source of supply. Cooper (2009) is a notable exception. His study compares the cost of building new nuclear reactors against a much wider range of options including efficiency, cogeneration, biomass, geothermal, wind and solar over the entire life of the reactor. Despite all of these differences, however, some fairly clear patterns are emerging in the literature. For example, almost all of the studies published in the past three to four years have concluded that the costs of generating electricity from renewable sources will continue to decline and that renewables will account for a larger percentage of supply in the next 20 years. 1.3 Goal and Scope Many studies ask, How much electricity should be generated from coal, natural gas, nuclear power or renewables? This is not our goal. Instead, we ask, Which generation portfolio will best protect consumers from large, unanticipated price swings in a carbon-constrained environment? Thus, our central research question centers on identifying the optimal, long-run path for power generation in a mix of Region 7 (EPA) and major SPP states that include: Missouri, Oklahoma, Nebraska and Kansas (MONK). Many of the most widely-cited studies of power generation focus on the traditional central station options (i.e. coal and natural gas) as alternatives to nuclear reactors. However, the actual range of options is much wider. Studies that are produced (or funded) by utilities tend to promote a narrow range of options because large, base-load power is their bread and butter (i.e. they profit by increasing the rate base). But a broad range of generation options must be considered if the interests of consumers (as ratepayers) and society (as taxpayers) are to be protected.
3

The EIA estimates that 64% of incremental generation will be satisfied by coal-fired generation from 2007-2030.

Moreover, since the goal is to help decision makers identify the generation portfolios that will protect consumers in the MONK region from undue hardships, external costs (especially those that will have to be internalized to comply with environmental law) must be part of the analysis. Midwestern states will have to address the same challenges the rest of the nation faces i.e. how to meet a growing need for power while responding to intensifying pressure to address the problem of climate change. And, while public utility commissions often take the position that external costs should not be recognized in the decision-making process, Cooper (2009) has pointed out that, to the extent that ratepayers bear those costs as taxpayers (where they are monetized outside of rates) and as inhabitants of the area affected (where they are not monetized), the public utility commission does bear responsibility (p. 55). As economists, we realize the importance of diversification in mitigating risks. We therefore adopt a portfolio approach. Thus, rather than searching for a single low-cost solution to meet the projected growth in electricity demand, we ask: How do we produce our power today? How will we produce power in the future? Will future generation portfolios in the MONK region look much different 5-, 10- or 20-years from now? What kinds of pressures economic, political and social will drive future changes in the choice of generation technologies? Will states be proactive (path-creating) or reactive (pathdependent) when it comes to deciding how to meet our future energy needs? What impact will a complacent (or path-dependent) approach have on ratepayers? How significantly does the picture change under a path-creation scenario, where decision makers consider the full range of costs over a longer planning horizon? Thus, our goal is to provide an empirically and theoretically sound economic analysis that offers a complete cost picture that can be used to help decision-makers choose an optimal energy strategy for each state within the MONK region. The overriding aim of the study is to examine a set of possible paths that might be taken and to illustrate the impact that different path choices will have on retail electric rates and, subsequently, ratepayers over the medium- and longer-run.

1.4 Method The greatest challenge for any analyst who attempts to answer the question, What will it cost to generate electricity from X, Y or Z at some future date? is in the identification of the underlying forces that that will ultimately drive generation costs. In order to be useful, the study must isolate and account for all of the various elements (economic and non-economic) that compose and affect the total cost of generation. Studies that fail to grapple with these complexities (e.g. those that do not provide a full-cost analysis over the entire life of the capital project) are inherently biased and should not serve as the basis for making large-scale investment decisions that will impact consumers (ratepayers) as well as society (taxpayers). An important source of both information and data is the US Department of Energys EIA. It publishes monthly data on many energy types and issues annual reports as well as special reports. We rely especially on their data and the 2008 EIA annual report and the 2009 monthly reports. Other data are from the Federal Energy Regulatory Commission (FERC), A National Assessment of Demand Response Potential, Staff report, June 2009, and from a series of recent studies, noted above, that have addressed issues similar to those we examine. Most recent studies rely heavily on the same data sources we rely on in this study.

Seeking to project future conditions of technology, fuel sources and costs, and construction costs is well known to be problematic. In this study we are most concerned with the present relative conditions and comparative conditions. Changing technological conditions may have significant impacts on cost and market conditions. For our purposes in simulating the hierarchy of supply technologies, we assume that the relative cost of present generation we remain as it today. This assumption tends to favor older technologies. This is because costs tend to move more slowly, up or down, as production techniques age and more is known about how to extract optimal efficiency from them. Thus, our assumptions tend to favor hydro, coal, natural gas and nuclear technologies to the disadvantage of solar, efficiency, wind and biomass. Even so, we find these technologies are now cheaper, competitive with, or nearing competitive status with older forms of generation. An important point is to understand that in choosing sources of supply it is relative cost that is crucial, not absolute cost. If our assumptions about the forces shaping relative costs hold, the level of absolute cost of these alternatives does not affect the hierarchy of supply choice in our simulations. In simulating the supply alternatives we incorporate several variables. Chief among these are direct busbar costs, assimilation of efficiency as an alternative to increased generationwhat is now named negawats, external costs, and the presence of different classes of wind in the MONK region. We assume the monetary values of the cost of CO2 emissions reasonably account for external costs. This is a conservative assumption in that there are other external costs, but in many cases there are no monetary measures of these. Additionally, we assume a linear growth in demand based on the last ten years in each state. We adjust for this by assuming increases in efficiency that partly offset this linearity. The more specific procedures and methods for the simulations are detailed in the sections, 3.1 and 4.3 below. 1.5 Areas for Further Research As with much research, unanswered questions emerge in the process of seeking to understand the questions at hand. This is the case here as well. In particular, we find four areas ripe for further inquiry. First, we have used national averages to estimate the impact of efficiency in the MONK region. Additional, detailed, state specific, research would better establish the opportunities, costs, implementation and public policies necessary to exploit this alternative. Some of this work has been started and we recommend its vigorous pursuit. Second, we find the MONK region to be ripe for acceleration in the development of wind energy. As such, two important aspects of this are its cost and the further development of the technology. Presently, nearly all production is outside the US. We recommend further study of the feasibility of developing manufacturing facilities in the MONK region. Such development would address two significant sources of cost transportation and the exchange rate between the importing and exporting country. Associated with this is a third area for study the rate of installation of wind generation and the transmission cost of this source. The next year or two will provide much more information on this rate, especially in the MONK region, where the rate has begun to accelerate in the last few years. A fourth area is the issue of external costs of all sources of electricity generation. It is likely, for example, that these are underestimated for fossil fuels and nuclear power but also for newer forms of generation for which the experience is shorter and some external costs may not have yet emerged. Related to this is a public policy change such as cap-and-trade, which may occur in the not too distant future.

2. The Challenge(s) Ahead 2.1 Introduction The worlds demand for energy is expected to triple by 2050. On a global scale, most of this increase will be driven by the so-called developing world (especially India and China), but the U.S. will also require some 63% more energy by 2050. As a result, experts predict that the U.S. will need to add roughly $20 trillion worth of new infrastructure to its capital stock by 2030. 4 The question is, what will this infrastructure look like? How much of the $20 trillion will be spent on wind, coal, nuclear, solar, biomass, etc.? What kinds of forces legislative, economic, cultural, etc. will guide those decisions, and will the decisions we make in the near term serve to benefit consumers over the longer time horizon? Before we attempt to answer any of these questions, let us take a moment to examine the choices that have brought us to where we are today. 2.2 The Path Were On This section provides an overview of the generation choices we have made, both nationally and within the MONK region, over the recent past. The profiles include background on the production of electricity during the past decade or so, as well as a discussion of the patterns of that production. Figure 1 provides a snapshot of our nations existing generation portfolio. Currently, we rely on coalfired power plants to supply approximately 45.4 percent of our electric power. Nuclear power satisfies 21.0 percent of our current needs, and almost as much, 20.8 percent, comes from natural gas-fired plants. Conventional hydroelectric power provided 7.5 percent of the total, and other forms of renewables including: biomass, geothermal, solar, and wind and other miscellaneous energy sources generated the remaining 4.2 percent of electric power. A trivial amount, 1.2 percent, is generated by petroleum-fired plants.

See Andrew D. Weissman, Climate Change & Energy Security Tackling a Daunting Challenge Head-on, Energy Business Watch (2008), www.energybuinesswatch.com.

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Figure 1: The U.S. Generation Portfolio, 2009: Net Generation by Energy Source, Total (All Sectors)
Hydroelectric Other Sources Convetional 4.2%
7.5%

Nuclear 21%

Coal 45.4%

Natural Gas 20.8% 1.2% Petroleum Source: Authors calculations using data available from http://www.eia.doe.gov

Figure 2 shows how we arrived at the current portfolio. Over the past decade or so, the biggest changes to our national portfolio have been driven by the substitution of natural gas for coal. Figure 2: Total Generation by Source, U.S. as a Whole (Percentile), 1995-2008
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 coal petroleum natural gas nuclear hydroelectric conventional other sources

Source: Authors calculations using data from http://www.eia.doe.gov

We now turn to an examination of the generation portfolios in the MONK region. We begin with Kansas. 11

Kansass Electricity Generation Profile Electric power generation capacity in Kansas is from three main sources: coal, natural gas and uranium. Wind, which has only become a part of the profile in the past few years, still contributes only minimally to Kansass electric supply. Kansas generates a small amount of power from hydro sources but none from renewables such as biomass or solar. 5 In analyzing this, we look at generating capacity and net generation. The distribution of capacity and net generation (by fuel source) are shown in Figures 3 and 4. In the past ten years, generating capacity has increased by a bit more than 2,100 MW. This is almost entirely due to an increase in natural gas and wind fueled plants. No new capacity for coal, nuclear or hydro has been added. Wind capacity has increased from zero in 1999 to 665 MW. Generation capacity from natural gas has increased by about 1,400 MW over this period, all from electric utilities. 6 In 1999, about 53 percent of generating capacity was from coal, with 30 from natural gas, 12 from nuclear, followed by 5 percent petroleum (diesel), and trivial amounts from other sources. By 2008, about 43 percent of capacity was from coal, 37 from natural gas, 10 from nuclear, 5 from wind, and 5 from petroleum. Hydro remained insignificant. Figure 3: Kansass Net Electricity Generation, in MWh, by Fuel Type, 1999-2008

40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 Coal Natural Gas Nuclear Wind1 Petroleum Hydroelectric

MWh Generated

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Figure 4 contrasts Kansass net generation of electricity with its generation capacity. During 2008, about 73 percent of net generation was from coal, 5 percent from natural gas, 18 percent from nuclear, 4 percent from wind, and trivial amounts came from other sources. Wind generation increased from zero
5 6

We include only commercial power in these profiles. Based on data from the US Department of Energy, Energy Information Administration, State Electricity Profiles, Annual and Monthly Reports, 2008 and 2009. 12

MW in 1999 to 1,767,505 MW in 2008. An interesting outcome in this profile is that even though coal represented 43 percent of capacity, it accounted for 73 percent of net generation in 2008. This reveals the base load nature of coal and indicates that there is excess capacity in the other types of generation (except nuclear), especially natural gas. It probably also suggests that gas is a more expensive source of power at the dispatch level, not including external costs. Figure 4: Kansass Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008

Wind 5% Nuclear 10%

Petroleum 5%

Nuclear 18%

Wind 4%

Natural Gas 5%

Coal 43%
Coal 73%

Natural Gas 37%

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Oklahomas Electricity Generation Profile Electric power generation capacity in Oklahoma comes from two main sources: coal and natural gas. Hydro and, to a lesser extent, diesel and wind also contribute a small amount of capacity. Wind has only become a part of the profile in the past few years. In the past ten years, generating capacity has increased by about 6700 MW. This is almost entirely due to an increase in natural gas, though hydro and wind have also contributed about 500 MW each. No new capacity for coal or nuclear has been added. 7 In 1999, about 57 percent of generating capacity was from natural gas, with 39 percent from coal and 4 percent from hydro. During 2008, about 65 percent of generating capacity was from natural gas, 26 percent coal, 6 percent hydro 3 percent from wind. Net generation of electricity, like in Kansas, has a somewhat different profile than capacity. Unlike Kansas, generation from natural gas is the most Based on data from the US Department of Energy, Energy Information Administration, State Electricity Profiles, Annual and Monthly Reports, 2008 and 2009. 13
7

important fuel source. In 1999, about 61 percent of net generation was from coal, with 33 from natural gas and the remainder coming from hydro (6 percent), petroleum (diesel), and trivial amounts from other sources. During 2008, about 46 percent of net generation was from coal, 46 percent from natural gas, 5 percent from hydro, 3 percent from wind, and trivial amounts from other sources. Figures 5 and 6 illustrate the capacity and net generation by fuel type. Figure 5: Oklahomas Net Electricity Generation in MWh, by Fuel Type, 1999-2008
40,000,000 35,000,000 30,000,000

MWh Generated

25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Coal Natural Gas Wind Petroleum Hydroelectric

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

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Figure 6: Oklahomas Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008

Wind 3%

Hydro 6% Coal 26%

Wind 3% Hydro 5%

Natural Gas 65%

Coal Natural Gas 46% 46%

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Nebraskas Electricity Generation Profile Electric power generation capacity in Nebraska is from two main sources: coal and uranium. Natural gas, petroleum and hydro contribute small amounts to capacity. Wind has only become a part of the profile in the past few years. There is about 1300 MW of diesel fuel power capacity, but it is used little. The amounts from hydro are actually small, and there is very little or no generation capacity from other sources, such as biomass. In the past ten years, generating capacity has increased by a bit more than 1,600 MW. This is almost entirely due to an increase in natural gas fueled plants. No new capacity for coal, nuclear or hydro has been added. Wind capacity has increased from zero in 1999 to 45 MW. 8 In 1999, about 49 percent of generating capacity was from coal, 19 percent from nuclear, 18 percent from petroleum (diesel), 11 percent from natural gas and trivial amounts from other sources. In 2008, about 44 percent was from coal, 29 percent from natural gas, 18 percent from nuclear, 5 percent from petroleum and 4 percent from hydro. Wind has increased from 0 to 1 percent over this period. In 2008, coal and nuclear accounted for 95 percent of net generation, 66 percent from coal and 29 from nuclear, with hydro, petroleum and wind each contributing a trivial percentage. Like the other states in these profiles, even though coal represented 44 percent of capacity, it produced 66percent of net generation. Figures 7 and 8 illustrate capacity and net generation by fuel type.

Based on data from the US Department of Energy, Energy Information Administration, State Electricity Profiles, Annual and Monthly Reports, 2008 and 2009. 15

Figure 7: Nebraskas Net Electricity Generation in MWh, by fuel type, 1999-2008

25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0

MWh Generated

Coal Natural Gas Nuclear Wind Petroleum Hydroelectric

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Biomass

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Figure 8: Nebraskas Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008

Petroleum Wind 5% 0% Nuclear 18%

Hydroelectric 4%

Wind Hydro 1% 2% Nuclear 29% Coal Natural Gas 66% 2%

Coal 44%

Natural Gas 29% Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Missouris Electricity Generation Profile Electric power generation capacity in Missouri is from three main sources: coal, natural gas, and uranium. Smaller amounts of capacity are generated from hydro and petroleum. Wind has only 16

become a part of the profile in the past few years and is still 1 percent or less. In the past ten years, generating capacity has increased by a bit less than 3,700 MW. This is almost entirely due to an increase in natural gas with much lesser increases in coal and wind and hydro. No new capacity from nuclear or hydro has been added. Generation capacity from natural gas has increased by about 3,200 MW in this period. 9 In 1999, about 67 percent of generating capacity was from coal, with 16 percent from natural gas, 7 percent from nuclear, 5 percent from petroleum (diesel), and trivial amounts from other sources. During 2008, about 43 percent was from coal, 37 percent from natural gas, 10 percent from nuclear, 7 percent from petroleum, and the remainder from hydro and other sources. Net generation of electricity has a somewhat different profile than capacity. Wind generation increased from zero MW in 1999 to 1,767,505 in 2008. Generation capacity from natural gas has increased by about 1,400 MW in this period. During 2008, about 55 percent of capacity was from coal, 28 percent from natural gas, 6 percent from nuclear, 7 percent from petroleum, 3 percent from hydro and 1 percent from wind. Net generation in 2008 was 81 percent coal, 10 percent nuclear, 6 percent natural gas and 3percent hydro. Figures 9 and 10 illustrate capacity and net generation by fuel type. Figure 9: Missouri Net Electricity Generation in MWh, by Fuel Type, 1999-2008
90,000,000 80,000,000

MWh Generated

70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0

Coal Natural Gas1 Nuclear Wind Petroleum Hydroelectric Biomass Tire Derived

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Based on data from the US Department of Energy, Energy Information Administration, State Electricity Profiles, Annual and Monthly Reports, 2008 and 2009.

17

Figure 10: Missouris Electric Generating Capacity and Net Generation of Electricity, by Percent Fuel Type, 2008

Hydroelectric Petroleum 3% Wind 7% 1% Nuclear 6%

Nuclear 10% Hydroelectric 3% Natural Gas 6%

Natural Gas 28%

Coal 81%

Coal 55%

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Perhaps the most obvious thing about the generation profiles described above is that they bear little resemblance to the national profile shown in Figure 1. That is, while coal is the dominant source of generation in all four states as it is at the national level it is disproportionately dominant throughout most of the region (Oklahoma being the exception). It is also interesting to note that, whereas the nation as a whole relies equally on natural gas and nuclear power, states within the MONK region tend to depend almost exclusively on one or the other, making their portfolios less well-diversified than the national one. Nebraska, for example, uses almost no natural gas, and Oklahoma generates none of its electricity from nuclear energy. A final interesting point relates to the relationship between the composition of the generation portfolio and the average retail price of the electricity generated. 10 As Figure 11 reveals, the retail price of electricity in the U.S. has averaged roughly $0.09 per kWh, but there is great disparity across the nation. 11 For example, Hawaiians paid approximately 21.3 per kWh while residents of West Virginia paid only about 5.3 per kWh. So what accounts for these disparities?
Generally speaking, the prices paid by a utilitys customers reflect the cost of producing or purchasing power, plus associated transmission fees, support services, and other costs, as well as a state-approved rate-of-return on the assets owned by the utility. 11 We note here that, since 2007, electric rates have risen sharply across the entire nation. As of this writing (July 2009), the U.S. average residential rate is 11.96 cents/kWh, and aver residential rates in Missouri, Oklahoma, Nebraska and Kansas are 9.66 cents/kWh, 8.79 cents/kWh, 9.9 cents/kWh and 10.09 cents/kWh, respectively. (http://tonto.eia.doe.gov/state).
10

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A significant part of the inter-state variation in retail prices is related to the cost and availability of the fuels used to generate electrical power. Thus, many have pointed out that states with the lowest average electric rates also tend to be the states with the largest share of coal in their generation portfolios (see Hunsacker, 2009). Figure 11 tends to confirm this argument, showing that, with the exception of a few states in the northwest, where hydro is the dominant source of electric power generation, the lowest electricity rates tend to be found in states that are the most reliant on coal. 12 Figure 11: The Relationship between Average Retail Electric Rates and Coal Use, 2007

Source: www.coalcandothat.com

Thus, one might argue that the lack of diversification has served consumers well because electric rates within the MONK states are well below the national average. The problem, however, is that the past may not be a good predictor of the future. Indeed, allowing ourselves to become locked into a particular generation model, especially one that is highly carbon sensitive, may exact a significant toll on ratepayers in the years ahead. The reason is simple: in a changing world, path-dependence can carry a big price tag.

2.3 Path Dependence, Path Creation and Flexibility of Choice Alternatives are at the heart of economic analysis. This includes the application of alternative theories to proposals for the use of resources. In the last few years, a theory of path dependence and path creation has developed. Choosing among alternatives sometimes means choosing long term paths, and, in the case of electric power, these paths are subject to decisions by public policy makers, regulators, public and privately owned utilities and consumers. Path creation is made under conditions of uncertainty so that choosing a path with a high probability of lock-in is especially problematic. When the cost of switching are low, the costs associated with path lock-in also decline. This depends on
12

It should be noted that the data in Figure 1 reflect 2007 figures and that many states have experienced sharp increases in average retail prices since then. However, the basic point remains valid: average retail prices per kWh tend to be lowest in states where reliance on coal is highest.

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whether, by selecting a specific mix of production technologies the path is locked-in or pathdependent. If they are, then tying to switch to a different technology at some point in the future will be more costly because the lock-in costs have to be overcome. This is exactly why rotary dial phones persisted long after the invention of touch tone phones. The past 100 years have involved a relatively slow rate of electricity generation innovation/installation with respect to fuel type. But that is no longer the case, as new technologies are present and becoming more economically viable, rapidly in some cases. Thus, it is importance to consider the lock-in costs of alternative technologies. Among the most important determinants of path lock-in is technological specificity. This occurs particularly when a technology has a high start-up cost with large economies of scale and an interdependent relationship with the interests of specific producers (or other parties) who may stand to benefit by the reduction of alternatives. This is known as path creation. It involves making a conscious decision to create a path that has a high probability of being locked and therefore a deterrent to replacement by competitive or better alternatives. A simple example will serve to illustrate. The installation of a coal or nuclear fueled plant presently requires several years to build and creates a high output unit. Once built, the cost of switching to another plant (fuel) type entails abandoning existing plants. The same is true of demand side lock-in. The higher the capital cost of an end use appliance the longer the potential period of lock-in. It is cheaper to change to an energy efficient light bulb than a more efficient cook stove, and cheaper for a cook stove than an air conditioner. The rate of turnover is not only important it is subject to fallacies of composition. From societys economic calculation it is worthwhile to upgrade the efficiency of the housing stock. From an individual calculation it is the turnover of the house that is important to the calculation. Thus the more rapid the turnover of the housing stock the less is the incentive to build or retrofit for efficiency. This is why it is economically rational to subsidize economically efficient, long life appliances, houses, building and other end use stock. A like analysis is applicable to producers. From the Investor Owned Utilitys (IOUs) point of view low direct cost yields greater probability for profit. 13 Consequently, incentives to find the lowest private cost of production may exist, but not necessarily to find the most efficient lowest social cost. Or, the IOU may have little incentive to participate in conservation programs which reduce use at the expense of profit. It is therefore a matter of public policy to provide an incentive structure, including subsidies, disincentives, and so on to enhance the probability of creating a socially efficient supply and demand for electricity. There are complex reasons, both technical and economic for this, but the point is that path theory helps elucidate and anticipate these issues and allows policy makers to consider the consequences of lock-in as well as the immediate consequences of a policy. As a final example, consider the implication ns of carbon legislation. With growing concern over the environmental effects of burning coal (especially the emission of CO2), policymakers at the state, federal and international level are calling for restrictions on the burning fossil fuels. And, since coal-fired power plants are the single biggest emitter of greenhouse gases (GHGs), the road ahead may be particularly difficult in the MONK region, due to its heavy reliance on coal-fired generation. In fact, as our

13

This is true even under rate of return regulation, since the IOU is not guaranteed the rate set by the regulatory body, i.e., it is allowed to earn less, just not more than the set rate.

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simulations will demonstrate, if we fail to appreciate the costs of path-dependence, residents in our region may end up paying some of the highest electric rates in the nation. In what follows, we undertake a full-cost analysis of a range of generation technologies available in the MONK region. We then develop a model and use it to run a series of simulations to determine the effect that changing portfolio generation technologies may have on the future cost of electricity in each of the MONK states. 3. The Cost of Power: An Overview 3.1 Introduction In this section, we analyze the cost of generating electricity and relate it to the situation in the MONK region. We first consider the national situation, beginning with a survey of some recent studies of generation costs, in order to develop some background for our analysis. We then examine the cost of alternative technologies, including efficiency and demand management. Finally, we construct a cost profile for each of our four states, based on existing generation and future paths for meeting electricity demand. Varying costs are associated with different generation technologies. The costs of producing electricity from conventional sources include: capital, operation and maintenance (fixed and variable), fuel, water and a variety of other costs. The latter include finance and regulatory compliance. The costs that drive the rates have, until very recently, been on a sharp upward trend. Capital, fuel and increased regulation to capture indirect (external) costs have been both rising and volatile. The economic downturn has tempered some of these costs (construction) and raised others (finance). Legislation may further increase costs of some types of generation, but subsidies may bring down the costs of financing for others. Most renewable sources face capital, operation and maintenance, and other costs depending on the technology, but in most renewable alternatives fuel cost is not important. Sources of electricity carry uncertainty about future operating characteristics, fuel costs, and regulatory policy. In what follows, we consider some of the sensitivities involved in these options. We do not (indeed cannot) consider all of the options, however. For example, refurbishment of existing nuclear units for base load supply may be economically viable, but there is little if any reliable data on this. Also, this report does not consider some generating alternatives either because they are not well suited to the MONK region or because they are economically only useful as peaking plants. The cost characteristics of the alternatives examined here are based on a review of several publicly available studies as well as data available from the Energy Information Agency (EIA) of the US Department of Energy (DOE). Thus, in what follows, we focus specifically on capital, operation and maintenance (including fuel) and regulation. 3.2 Estimating the Cost of Different Generation Technologies Estimating cost can become sufficiently complex that we lose sight of some straightforward conditions that allow us to better understand the problem. For example, among conventional sources, nuclear and coal-fired units are characterized by high capital costs and comparatively lower direct operating costs. They are desirable for base load operation only, although some older coal-fired plants are frequently used as an intermediate source. Gas-fired generation is characterized by lower capital costs and higher operating costs and thus may be suitable for operation as peaking and/or base load generation.

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In the past decade, electricity production has faced at least three important cost issues: (1) fuel price volatility; (2) regulatory uncertainties related to greenhouse gas emissions, and: (3) changes in production and consumption technologies. Together, these uncertainties compound the decisionmaking complexities that are related to power generation. This has led to an increased level of research analyzing the cost-effectiveness or environmental friendliness of one generation source or another. Some, perhaps most, of these studies have flaws at the empirical or methodological level, while others are based on assumptions that tend to favor one source over others. Despite some of these flaws, a better picture of the comparative costs is emerging. In the last few years, changes and improvements in technology have begun to show up in the results of cost studies of alternative and conventional sources of electricity. These studies reveal the emergence of a fairly clear pattern of rank order of the cost of electricity. This is shown in Table 1 below. While the data in this table are not strictly comparable, the average is useful for the limited purpose of indicating the nature of the cost rank ordering, given the studies from which they are derived. In looking at the studies as a whole, we see that the issue of cost of alternatives is an open question yet to be resolved. In what follows we seek to bring more clarity to the cost picture in our four-state region. In so doing, we concentrate on the resources available to each state and the potential impact that different resource mixes can have on cost. In particular we take the existing generation in each state and simulate the substitution of different classes of wind generation, efficiency and carbon emission costs. This yields a series of estimates for different mixes of the above variables which are summarized in the last part of this section. Table 1: Cents/kWh Estimate by Power Source, Various Studies California Energy Commission/ Public Utility Commission Efficiency Wind1 Geothermal Biomass Coal supercritical Gas CC Coal IGCC Nuclear Solar Thermal Coal IGCCw/ CCS
1

Lazard Low

Lazard High

US DOE / Black& Veatch

Common wealth Edison

Maryland PIRG

Average

8.9 10.2 8.5 10.5 9.4 11.5 15.3 12.6 17.3

0 4.4 4.2 5.0 7.4 7.3 10.4 9.8 9.0

5.0 9.1 6.9 9.4 10.0 12.6 14.5 13.5

2.5 7.1

2.0 4.0

6.8 7.4 9.1 8.9 12.0

3.2 3.8 6.8 7.1 7.6 8.2 8.4 10.3 11.6 12.0 14.3

For Wind we use Class 5 area costs from the US DOE/Black & Veatch study, the only one that estimates wind costs by wind area.

Source: Calculated by authors from data selected from the studies reviewed below.

The above are estimates of direct cost or, in some cases (the high estimates), emissions costs. We examine external cost later in this section. This is important in understanding the true economic costs associated with the production of electricity from different power sources.

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3.3 Survey of Studies There have been a number of important studies of electricity cost and supply in the past few years. And while these studies do not provide a consensus in their various estimates of cost (in large part due to differing assumptions, variables and time period analyzed), they do indicate that a fairly clear pattern is emerging. Below, we briefly survey some of these recent studies of the electric power industry. These reasonably cover the issues surrounding the industry, tend to be relied on and cited in other studies, and provide a starting point to analyze the situation in the four-state region. Almost all studies in the past three or four years have concluded that renewable sources of energy are becoming more important and are predicted to account for a larger percentage of supply in the next 20 years. While we rely on these studies, we do not find any one of them wholly suitable for an analysis of this region. In 2008 Lazard, an investment bank, conducted a study comparing the cost of several generation technologies. They found that alternative technologies are complementary to conventional generation technologies and concluded that their use will be increasingly prevalent for a variety of reasons, including government subsidies, RPS requirements, and continuously improving economics as underlying technologies improve and production volumes increase. In this study, Lazards approach was to determine the $MWh levelized cost of energy that would provide an after-tax return to equity holders equal to an assumed cost of equity capital. Certain assumptions were identical for all technologies, in order to isolate the effects of key differentiated inputs such as investment costs, capacity factors, operating costs, relevant fuel costs and U.S. federal tax incentives. Sensitivities included fuel costs and illustrative carbon emission costs. But Lazard did not consider other potentially significant factors such as scale benefits or detriments for renewables, the value of Renewable Energy Credits or carbon emissions, the impact of transmission costs, and the economic life of the various assets. Figure 12 indicates the sensitivity to capital cost, carbon capture and fuel of various ways to meet power needs. Lazard results show significant sensitivity to all three variables. As we would expect, gas and coal show the most sensitivity to fuel and carbon cost, and nuclear to capital cost. Wind is primarily influenced by capital cost. In the low-cost estimate, Fuel Cells are the highest cost followed by IGCC coal and nuclear. Using the low-cost estimate, Lazard finds wind the cheapest source with efficiency running a close second.

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Figure 12: Lazard Estimated Levelized Cost of Electricity by Technology Type, in $/MWh, 2008
180 160 140 120 $ Per MWh 100 80 60 40 20 0

Low Estimate Base Case With 90% Cabon Capture High Estimate Base Case With 90% Cabon Capture Estimate Base Case With 90% Cabon Capture Fuel Cost Low Source: Based on Selected data from Lazard, Ltd., 2008

Several recent studies by various groups have focused on the potential and cost of wind as a source of electricity. For example, the DOE has issued several reports on wind in the last few years. In 2008, it published a report based on the work of Black &Veatch analyzing the feasibility of wind power and comparing it to other sources. The study covers the technology, availability, cost and other significant issues in adding to wind generation. We rely on this study especially for comparative cost and supply potential. Black & Veatch has also conducted several cost analyses over the last few years. In a recent study of a 20 percent wind scenario, they compared the cost of wind against a host of conventional sources. Figure 13 summarizes the results of the DOE and Black & Veatch studies.

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Figure 13: DOE/Black & Veatch, Estimated Levelized Cost of Electricity by Technology Type, in $/MWh, 2008
250 200 150 Cost / MWh 100 50 0
Coal SC Wind Class 5 Gas CC Wind Class Wind Class Nuclear 4 3 Coal CSCC Gas CT

Source: Selected data from Black & Veatch, 2 0 Percent Wind Energy Penetration in the United States, A Technical Analysis Of The Energy Resource. Black & Veatch Project: 144864, Prepared For American Wind Energy Association Final Report, October 2007

In May 2008, the California Energy Commission and the California Public Utilities Commission (CPUC) released a comparison of the costs of new generating capacity from various sources, 14 taking into account a comprehensive set of variables, in which they reported bus-bar cost in cents per kilowatt-hour in 2008 dollars. 15 The study is the most comprehensive of those seeking to estimate the cost of electricity. It includes many cost variables not accounted for in other studies. 16 This study is useful because it provides a method and calculation algorithms that may be applied to cost estimates. However, the study is geared only to the regions of California and as such is weighted to reflect the generation mix of that state. On the other hand, the study does serve as a guide for analysis and provides a basis for understanding relative costs by source. Figure 14 shows the estimates of cost for selected generation technologies as reported in the California study.

The analysis for the comparison was prepared for the California Energy Commission and the California Public Utilities Commission Energy and by Environmental Economics, Inc., a consulting firm that prepares studies for utilities, governmental regulators, law firms, and non-profit agencies. 15 Bus-bar means the price of the power leaving the plant. All capital, fuel, and operating costs are taken into account in bus-bar costs. 16 See California Energy Commission and the California Public Utilities Commission prepared by Energy Environmental Economics, Inc., May 2008. 25

14

Figure 14: California All-in Levelized Busbar Cost, Selected Technolgies, ($/MWh)
200 180 160 140 120 100 80 60 40 20 0 Wind Biogas Gas CCCT Coal ST Coal IGCC Solar Nuclear Coal IGCC Thermal with CCS

In March 2009, Maryland PIRG released a study 17 that analyzed the cost of nuclear power as a future source of electricity. The study compared nuclear to other options including solar, biomass, wind and efficiency-demand management. Citing other studies and data from U.S. Department of Energy, Energy Information Administration, Annual Energy Outlook with Projections to 2030, and U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, Wind Powering America: Clean Energy for the 21st Century, the report provides cost estimates for various energy sources, shown below in Figure 4. The report concluded that, America should speed the introduction of clean energy technologies by enacting a national energy efficiency resource standard 18 to require, at minimum, that all new demand for electricity be met with energy efficiency measures. Energy efficiency programs across the country have proven effective in saving substantial amounts of electricity and natural gas, saving consumers money, reducing energy prices, eliminating the need to build expensive new power plants. . .

Travis Madsen et al., The High Cost of Nuclear Power Why America Should Choose a Clean Energy Future over New Nuclear Reactors, Maryland PIRG Foundation, March 2009 18 Emphasis in original. 26

17

Cost / MWh

Source: California Energy Commission and the California Public Utilities Commission prepared by Energy Environmental Economics, Inc., May 2008

Figure 15: Maryland PRIG Cost, Cents/kWh

18 16 14 Cost / KWh 12 10 8 6 4 2 0 Wind Biogas Solar Thermal Technology Type Cost/KWh Low Estimate Cost/KWh High Estimate Nuclear Coal IGCC with CCS

Source: Travis Madsen et al., The High Cost of Nuclear Power Why America Should Choose a Clean Energy Future over New Nuclear Reactors, Maryland PIRG Foundation, March 2009

Cooper has conducted one of the most important and comprehensive studies of nuclear power. His study was critical of the position that there is a feasible economic cost case to be made for nuclear power. In it, Cooper provides a summary of various studies as well as estimates of the cost of nuclear power compared to other generation sources. The main finding is that nuclear is not cost competitive due in substantial part to the capital cost and uncertainty of the length of construction time. 19 Hunsaker released a comparative study that relied on a simple ordinary least squares (OLS) regression to examine the relationship between states average electric retail price and the percent of power from different sources. He concluded that coal and hydro were least cost alternatives, but there are major problems with his study. First, it does not separate renewables by type, but rather aggregates them as one variable. Further, it does not account for either efficiency or external costs. Thus, as Hunsaker confesses, It should be reiterated that all of the coefficients are not statistically significant in the model as presented. As such, extrapolations using this model must either be considered in that context or allowed a large margin of error. Estimates from this model may provide an order-of-magnitude prediction, but more sophisticated modeling would be necessary for a high degree of certainty. 20 The DOE has published recent reports on the cost of various types of technology for generating electricity. There are several alternative technologies and fuel sources The following are included in the latest Energy Information Administrations study of generation costs: 1) Scrubbed New Coal; 2) Integrated Coal-Gasification Combined Cycle (IGCC); 3) IGCC with Carbon Sequestration; 4) Conventional Gas/Oil Comb Cycle; 5) Advanced Gas/Oil Comb Cycle; 6) Advanced Combined Cycle Coal with Carbon Sequestration; 7) Conventional Gas Combustion Turbine; 8) Fuel Cells; 9) Nuclear; 10) Biomass; 11) Mark Cooper The Economics Of Nuclear Reactors: Renaissance Or Relapse? Institute For Energy And The Environment, Vermont Law School, June 2009 20 Matthew Hunsaker, Estimating the Effect of Electric Generation Technology Mix on Retail Electric Rates, draft manuscript. 27
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Landfill Gas; 12) Geothermal; 13) Hydropower; 14) Wind; 15) Wind Offshore; 16) Solar Thermal; and 17) Photovoltaic. Each of these has a place and a use. Historically, generation has been divided into Base, Intermediate, and Peaking (BIP). In this structure, base plants have been large, capital intensive output facilities fueled by coal, water, uranium and (more recently) natural gas. The economic logic of this has been that the high capital cost is overcome by lower energy costs and economies of scale. While these plants are for base load, smaller or older gas and coal plants are used to meet intermediate load, and low capital cost, high energy cost diesel or gas plants are used to meet peak load. That economic logic is being challenged by technological innovations leading to micro scale plants. There is now a shifting toward decentralized, low- or no-carbon resources, mostly gas-fired, and renewables. Private investment in micro scale power was over $100 billion in 2007, about one-eighth of total global energy investment. Multiple small units are faster to deploy for a given total effect than a few big, slow-tobuild units. Chief among these for purposes in MONK is wind and to a lesser extent biogas and small scale hydro. As Table 2 shows, small scale does not necessarily mean low capital cost. It does however usually mean low or no energy cost and low or no external costs. Table 2 gives an overall cost comparison of alternative technologies. It also reports the EIA estimate of lead time to build each of the units. These are not necessarily the most applicable data, indeed other studies have very different estimates, but they do provide an introductory guide to understanding relative costs and lead times. Figure 16 is derived from the data in Table 2, and it illustrates the total fixed cost (which includes capital cost) and variable cost of selected technologies used in MONK. 3.4 Cost and Economies of Scale It is a well established economic principle that average cost of production declines as scale increases for a plant. However, at some point, average cost levels off and may then either stay relatively flat or turn up. For conventional generating technologies, economies of scale have been reached and are reasonably well known. But the same cannot be said about wind, solar, biomass or other alternatives, where it is clear, for example, that the cost of wind has been decreasing as scale has increased. Indeed, scale has been the single most important factor in reducing the cost of energy from wind generators. The average size of wind turbines has increased from the 10s of kilowatts in the 1980s to over 2 megawatts today. 21 It is important to keep in mind that scale applies to a specific plant. This means, for example, that the minimum optimal scale for a coal plant may be around 400 MW. Smaller size plants than this would generate electricity at a higher unit cost. On the other hand, the minimum optimal scale for wind may be 2 MW per unit with a minimum of 10 units. It depends heavily on location variables. There are also technological economies of scale. These occur as we learn more about how to produce a particular product with a specific technology. It is clear that wind has been enjoying both types of unit cost reducing effects. Of course only time will tell the extent to which they may be enhanced.

Black & Veatch, 20 Percent Wind Energy Penetration in the United States, A Technical Analysis of the Energy Resource. Black & Veatch Project: 144864, Prepared For American Wind Energy Association Final Report, October 2007. 28

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Table 2 Cost and Performance Characteristics of New Central Station Electricity Generating Technologies, 2008 Total Overnight Cost2 In 2008 ($2007/kW) 670 948 962 1,890 1,923 2,058 2,242 2,378 3,318 3,496 3,766 5,021 5,360 6,038 Variable O&M In 2008 ($2007 mills/kW) 3.57 2.00 2.07 2.94 0.00 4.59 2.43 2.92 0.49 4.44 6.71 0.00 47.92 0.00 Base Total Fixed Cost in 2008 ($2007/KW) 650 889 929 1,703 1,827 1,951 2,052 2,262 2,963 3,218 3,403 4,750 4,646 5,762 Total Overnight Fixed Cost in 2008 ($2007/KW) 682 960 974 1,910 1,953 2,086 2,256 2,417 3,408 3,542 3,830 5,078 5,366 6,050

Technology Conv. Combustion Turbine Adv Gas/Oil Comb Cycle (CC) Conv. Gas/Oil Comb Cycle ADV CC with Carbon Sequestration Wind Scrubbed Coal New Conventional Hydropower Integrated Coal-Gasification Combined Cycle (IGCC) Advanced Nuclear IGCC with Carbon Sequestration Biomass Solar Thermal Fuel Cells Photovoltaic
1

Size (MW) 160 400 250 400 50 600 500 550 1350 380 80 100 10 5

Lead time (Years) 2 3 3 3 3 4 4 4 6 4 4 3 3 2

Base Overnight Cost1 In 2008 ($2007/KW) 638 877 917 1,683 1,797 1,923 2,038 2,223 2,873 3,172 3,339 4,693 4,640 5,750

Fixed O&M ($2007/kW) 12.11 11.70 12.48 19.90 30.30 27.53 13.63 38.67 90.02 46.12 64.45 56.78 5.65 11.68

Overnight capital cost including contingency factors, excluding regional multipliers and learning effects. Interest charges are also excluded. These represent cost of new projects initiated in 2008. Capital costs are shown before investment tax credits are applied. 2 A contingency allowance is defined by the American Association of Cost Engineers as the "specific provision for unforeseeable elements if costs within a defined project scope; particular import where previous experience has shown that unforeseeable events which will increase costs are likely to occur.

Source: Based on selected data from a 2009 study by the Energy Information Administration The values shown in this table are developed by the Energy Information Administration, Office of Integrated Analysis and Forecasting, from analysis of reports and discussions with various sources from industry, government, and the Department of Energy Fuel Offices and National Laboratories. They are not based on any specific technology model, but rather, are meant to represent the cost and performance of typical plants under normal operating conditions for each plant type.

29

Figure 16: Total Overnight Fixed Cost in 2008 ($2007/kW)

7000 6000 Cos t / KW 5000 4000 3000 2000 1000 0

Source: Derived from data in Table 2of this report.

When it comes to wind, there has been a significant increase in scale in the last 30 years. That appears to have stabilized, at least for now, with a single turbines currently averaging 1.5 to 2 MW. 22 Thus, 200 wind turbines provide 300 to 400 MW of capacity. This shows up in the cost per MWh. The resulting decline in costs has been dramatic from $450 per MWh to $70 per MWh in the last 30 years. Further, as the scale has increased so too has the wind rating of the resource. At 50 meters, capacity factors range between 30 and 35 percent, but at 100 meters capacity factors increase to 40 or 50 percent, and the available resource area ratings increase by at least one level. For example, at 50 meters, Kansas has ratings of fair (3), good (4) and excellent (5), depending upon location. But with turbines standing 100 meters in height, these ratings increase to good, excellent and outstanding (6). Seven is the highest rating, though most of the seven areas are offshore. Texas has been a leader in developing wind energy and has ratings of fair and good mostly in the panhandle. Thus, as scale increases, it is clear that the wind resource in the Wind Belt will increase in both quantity and quality, further driving down the cost of wind. This is a main assumption in most of the studies, and it appears to have been verified by experience. 3.5 Capital Costs: An Overview of Recent Trends and Studies Prior to the economic and financial crisis that began in the fall of 2007, the cost of constructing new power plants was rising sharply. These costs, which are measured by the Power Capital Costs Index (PCCI) shown in Figure 17, indicate that the cost of constructing a new power plant in North America rose 76 percent over a three-year period beginning in 2005. Researchers have attributed this surge in prices to continued high activity levels globally, especially for nuclear plants, with continued tightness

Black and Veatch find that this may be slowing, for example, GEs primary turbine, at 1.5 MW, was first installed over 10 years ago. 30

22

in the equipment and engineering markets, as well as historically high levels for raw materials. 23 As Figure 17 shows, the global contraction has served as a drag on construction costs. The capital costs shown in Figures 17- 19 are not directly comparable, but they do help illustrate how cost estimates vary depending on time and assumptions. Cost estimates are fraught with comparability problems. Estimates may use different assumptions. Further, studies adopt different methodologies for measuring cost. For example, capital cost estimates may be overnight or all-in. They may or may not include finance cost, and they may rely on different construction times. The California study estimates the capital cost of a new IGCC coal plant without carbon capture and storage (CCS) at $3,087 per kilowatt. Adding 90% CCS raises this to $5,127 per kilowatt, both in 2008 dollars. 24 According to the Lazard study, the cost of a new IGCC coal plant without CCS is $3,750 per KW, with 90% CCS it is $5,050 per KW. The same study estimates the cost of a new supercritical coal plant without CCS at $2,550 per kW, with 90% CCS is $5,350 per KW. In June 2008, staff at the Federal Energy Regulatory commission estimated that building a new 1,000 megawatt (MW) reactor could cost up to $7.5 billion At that cost, analysts at Moodys calculated that reactor owners would have to sell power in the market at 15 cents per KWh (without transmission and distribution costs) in order to achieve profitability. As we have shown, wind generating capital costs have trended down over the past 30 years, and capacity factors have increased. Black & Veatch estimates that it is possible that real costs will decline roughly 10 percent over the next 25 years to $1,485/kW. 25 There are, of course, many examples to illustrate what happens when a new technology is introduced and evolves to widespread use. In the early 1980s a micro computer (PC or MAC) had 5 to 10 MB of storage, a RAM of 1 MB or less and cost, $2,000 - $4,000 or more. By 2000 the storage capacity was routinely 80 GB, with a ram of 2-4 GB and a cost of about $800- $1,200.

This is according to Candida Scott, lead research for the Capital Costs Analysis Forum for Power. The study is available through from HESpress@ihs.com. 24 California Energy Commission and the California Public Utilities Commission, May 13, 2008. 25 Black & Veatch, 2 0 Percent Wind Energy Penetration in the United States, A Technical Analysis of the Energy Resource. Black & Veatch Project: 144864, Prepared For American Wind Energy Association Final Report, October 2007. 31

23

Figure 17: PCCI Index with and without Nuclear

Figure 18: California Study, Capital Cost Per KW

6000 5000 4000 Cost / KW 3000 2000 1000 0 Gas CCCT Wind Biogas Coal ST Solar Coal IGCC Coal IGCC Nuclear Thermal with CCS

Source: California Energy Commission and the California Public Utilities Commission prepared by Energy Environmental Economics, Inc., May 2008

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Figure 19: Lazard Capital Cost for Electric Generating Plants, Selected Technologies, 2008

$8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $Biomass Wind Biomass Fuel Cell Solar PV IGCC Cofiring Direct Low Capital Cost Estimate $/KW Coal Solar Nuclear Thermal

$ Per KW

High Capital Cost Estimate $/KW

Source: Based on Selected data from Lazard, Ltd., 2008

Figure 20: Black & Veatch, Capital Cost Per KW, 2010 Estimate
3500 3000 2500 Cost / KW 2000 1500 1000 500 0 Gas CT Gas CC Wind Coal SC Coal CSCC Nuclear

Source: Black & Veatch, 2 0 Percent Wind Energy Penetration in the United States, A Technical Analysis of the Energy Resource. Black & Veatch Project: 144864, Prepared For American Wind Energy Association Final Report, October 2007

The preceding serves to illustrate the unpredictability of capacity and cost. Further, in the case of a technological cost increase or failure to meet expectations, or obsolescence, the micro nature of wind reduces significantly the cost of decommissioning. There is no waste to dispose of and the land can be put to alternative use with little (if any) decontamination. Recently, capital costs, which had fallen as the technology and production costs fell, began to rise. The most important reasons for this are exchange rate fluctuations, commodity prices and greater demand for windmills. These three sources of cost increase may also be seen as an opportunity within MONK. The impact of exchange rate fluctuations is due to a decline in the dollar against the Euro. Over the past nine years, the price of one Euro has risen from approximately $1 to $1.46, making products imported from the Eurozone more 33

expensive to American buyers. This is important, because nearly all of the wind generating capacity in the US is imported from Europe, including that produced by US domiciled companies such as General Electric. Since the MONK region has significant potential for wind generated electricity, it would further improve the economic case for wind if the supply chain could be enhanced by locating supply facilities within the region. For example, a plant in a major MONK city (e.g. Wichita) could draw on the existing underutilized resources to build wind generators. 26 3.6 Efficiency and Cost The twentieth century was marked by the expansion of the use of electricity in the US and around the world. In fact, the presence of electricity is considered a significant marker of economic development; the greater the consumption of electricity per capita, the greater the degree of economic development. So great was the interest in expanding its use that little attention was given to the efficiency with which it was adopted. People were so pleased to have power that the meter reader was viewed as a good thing, an all-electric home was sold as a model of modernity and appliances were sold by utilities at a discount to home owners. We now look at the possibility that less consumption of electricity is a marker of economic development. Frequently, what does not happen is a good thing; an injury is avoided because a car has air bags, a house is not burned down because of fire alarms fire departments, a job is not lost because new work is demanded. Similarly, energy consumers benefit when an air conditioner pulls less power because it has a high efficiency rating or the home or building has a higher insulation rating. In the 1980s after the passage of the PUPRA, a number of demonstration projects were launched. A notable one was in Seattle. Faced with building new generation capacity, Seattle City Light offered customers a no-interest loan of up to a $5,000 to insulate, weatherize and otherwise improve home electric efficiency. The loan was repaid over a 10 year period with no payments for the first 5 years. The program was deemed a success because the installed cost of new power would have exceeded the loss of interest on the loan. Today, we find a renewed interest in the improvement and expansion of efficiency. The American Council for an Energy-Efficient Economy, which includes leading experts on energy efficiency, estimates that the United States could cost-effectively reduce its overall energy consumption by 25 to 30 percent or more over the next 20 to 25 years. In addition to the standard energy efficiency (EE) programs, there are a number of other ways to reduce energy consumption by targeting end-use consumers. The most important is known as demand response (DR). 27 The Federal Energy Regulatory Commission (FERC) recently released the first-ever nationwide study of demand response potential based on a state-by-state analysis. The FERC study estimates the potential energy savings that could be realized under different program intensities, and it is intended to help decision-makers understand the various pathways for pursuing increased levels of demand response (FERC, 2009, p. xi). Below, we highlight some of the studys most important findings, especially as they relate to the demand response potential in MONK.

A feasibility study for such an opportunity is beyond the scope of this study, but it is recommended. The Department of Energy uses the term demand response to refer to changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardized.
27

26

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The study compares the outcomes that might be achieved under four different demand response scenarios, with a baseline scenario where there is no demand response effort. The four demand response scenarios and their underlying assumptions are described below, and the aggregated results are summarized in Figure 21. 1. Business-as-Usual -- This scenario projects energy demand over the next ten years, assuming that only current (and currently planned) demand response programs are in place. 28 Under this scenario, peak demand is projected to decline by 38 GW (a 4 percent reduction), compared to its estimated value in 2019 under the no DR scenario. 2. Expanded Business-as-Usual -- Under this scenario, the business-as-usual scenario is enhanced by the following demand response programs: 1) all states adopt the current mix of demand response programs; 2) partial deployment of advanced metering infrastructure; and 3) dynamic pricing is made available and 5 percent of customers participate. The reduction in peak demand is calculated at 82 GW (or 9 percent lower) compared to the baseline (no DR) scenario. 3. Achievable Participation -- This scenario estimates the demand response potential assuming: 1) a full-scale deployment of advanced metering infrastructure by 2019; 2) a dynamic pricing tariff is the only default; and 3) those that opt out of dynamic pricing can choose other demand response programs, such as direct load control. The results a 138 GW reduction in peak demand (a 14 percent reduction) assume that 60 to 75 percent of customers stay on dynamic pricing rates, that many of those that opt out choose other demand response programs, and that 60 percent of customers use some form of enabling technology (e.g. programmable communicating thermostats). 4. Full Participation -- This scenario assumes the most aggressive deployment of advanced metering and dynamic pricing. It assumes that 100 percent of customers remain on dynamic pricing and that enabling technologies are used whenever they are cost-effective. The reduction in peak demand is estimated at 188 GW (a 20 percent reduction) by 2019.

28

Programs such as interruptible rates and curtailable loads for medium and large commercial and industrial customers, as well as direct load control of large electrical appliances and equipment, such as central air conditioning, of residential and small commercial and industrial consumers.

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FIGURE 21: U.S. Peak Demand Forecast by Scenario

Source: FERC (2009), A National Assessment of Demand Response Potential

As Figure 21 shows, the amount of demand response potential that can be achieved varies with the number of customers participating in each customer class, the availability of dynamic pricing and advanced metering infrastructure (AMI), and the deployment of enabling technologies. The study estimates that, with no DR efforts in place (baseline scenario), peak demand will grow at 1.7 percent per year, reaching a total of 950 GW by 2019. However, under varying degrees of intensity, DR programs can produce sharp reductions in peak demand, even fending off any appreciable increase over the next decade. Figure XX also shows that the largest relative increases occur when we move from the Businessas-Usual to the Expanded Business-as-Usual case (i.e. the reduction in peak demand more than doubles). As the study explains, this is because of the incremental potential for aggressively pursuing traditional programs in states that have little or no existing participation. 29 But regional differences are also important when we consider the demand response potential that occurs when we move from the Expanded Business-as-Usual scenario to the Achievable and Full Participation scenarios. Here, the study concludes that the demand response potential is highest in the hottest parts of the nation, where central air-conditioning is more common. Figure 22 shows the penetration of central air-conditioning in all 50 states.

At this time, Nebraska and Missouri do not have any regulatory mechanisms in place to promote demand-side management (DSM) at electric utilities. In contrast, both Kansas and Oklahoma provide shareholder incentives to provide utilities with a financial incentive to pursue demand-side programs.

29

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Figure 22: Central Air-Conditioning Saturation, Residential Sector (%)

100 90 80 70 60 50 40 30 20 10 0
Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisana Maine Maryland Massachusetts Michigan Minnesota Missippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

Source: A National Assessment of Demand Response Potential, FERC, 2009

Under the Achievable Participation and Full Participation scenarios (where most or all customers are participating in dynamic pricing and direct load control), the FERC study predicts that a cost-effective demand management program will tend to yield significant reductions in peak demand in states like Florida, Missouri, Nevada and Arizona (where the saturation of central air-conditioning is highest) and more modest reductions in places like Alaska, New Hampshire and Vermont. But this does not imply that Missouri should necessarily adopt an aggressive demand response program while Vermont should be satisfied with the status quo. This is because demand response is only one part of the menu of options that should be taken into account when developing a state-wide energy plan. Indeed, we believe it is unlikely that there is a single demand response model that will optimize every states energy portfolio. Thus, we agree that each utility, together with state policy makers, must decide whether and how best to move forward with adoption of demand response, given their particular resources and needs (FERC, 2009, p. xv). If, after careful deliberation, an expanded demand response is considered desirable, regulators and other state policymakers must determine how best to encourage collaboration with the utilities and how to generate support from consumers. Above all, it must be recognized that without a sufficient buy-in on the part of utilities and end-users, any push by regulators or other state policy makers to expand existing demand response programs will result in wasted resources and disappointing outcomes. Indeed, when it comes to the successful implementation of demand response, it is impossible to overemphasize the significance of the public-private buy-in. The FERC report identifies more than two-dozen such barriers. To conserve space, we reproduce a summary of the most important barriers identified in the study. They include: Regulatory Barriers Lack of a direct connection between wholesale and retail prices Measurement and verification challenges Lack of real time information sharing Ineffective demand response program design Disagreement on cost-effectiveness analysis of demand response

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Technological Barriers Lack of advanced metering infrastructure High cost of some enabling technologies Lack of interoperability and open standards Other Barriers Lack of customer awareness and education Concern over environmental impacts Thus, in order to be successful, the relevant parties must find ways to overcome many of the barriers that may inhibit a successful expansion of demand response efforts. A major resistance to consumption efficiency is that most Investor Owned Utilities (IOUs) are on an incentive structure which encourages a larger rate base because the rate base is the source of investor return. The largest items in a rate base are generation plants. Efficiency is not a source of return for IOUs under the present institution of rate base regulation. It is likely that an adjustment in this institution would significantly help promote consumption efficiency. This is not to say deregulation, but rather a way to incentivize efficiency for consumers and producers. As an example, Kansas City Power and Light, in the Kansas City area, has recently announced a program to extend its air conditioner cycling program in order to reduce summer peak load. The program offers customers a bill reduction in exchange for agreeing to have their air conditioners controlled (turned off) for 15 minutes per hour at peak times. 30 Now let us look more closely at the demand response potential in MONK. Our goal is to provide a realistic picture of the energy savings that might be achieved under the different demand response scenarios. Table 3 shows the estimated demand response potential in MONK over 5- and 10-year time horizons. Table 3: Potential Peak Demand Reduction by State and Scenario
Business-as-Usual 2014 3% 1% 10% 0% 2019 2% 1% 9% 0% Expanded BAU 2014 7% 9% 14% 9% 2019 7% 9% 13% 9% Achievable Participation 2014 2019 8% 13% 11% 14% 14% 19% 10% 14% Full Participation 2014 9% 13% 15% 10% 2019 17% 19% 24% 19%

Kansas Missouri Nebraska Oklahoma

Source: A National Assessment of Demand Response Potential, FERC, 2009

Beginning with Kansas, we see that the demand response potential more than triples saving an additional 464 MW when we move from the Business-as-Usual scenario to the Expanded Business-asUsual scenario over the next decade. Thereafter, a near-doubling occurs cutting peak demand by an additional 592 MW with the transition from Expanded Business-as-Usual to Achievable Participation. Finally, under the most aggressive demand response program (i.e. Full Participation) the FERC study estimates that Kansas could reduce its peak demand by another 498 MW by 2019. This is due to a number of factors, including the fact that Kansas has: a small amount of existing demand response, a higher-than-average saturation of central air-conditioning (83.7%) and a significant share of peak demand in the Residential and Large Commercial and Industrial (C&I) classes.
30

Kansas City Power & Light mailing to customers, October, 2009. 38

As in Kansas, Missouris greatest potential comes with the transition to the Expanded Business-as-Usual scenario. But the gains are significantly greater in Missouri, where peak demand could be fall by more than 500% (saving an additional 1,617 MW) with a modest expansion from the Business-as-Usual scenario. This is mainly due to the fact that Missouri has a very high percentage of homes with central air-conditioning, an above-average residential load 31 and only a moderate amount of existing demand response. Peak demand continues to decline though at a slower pace as the state moves to Achievable Participation (an added savings of 1,083 MW) and then to Full Participation (saving another 1,070 MW). Nebraska, meanwhile, already has one of the nations most aggressive demand response programs. Its current DR program relies on interruptible tariffs for Large C&I customers and direct load control (DLC) for Small and Medium C&I customers. If the state were to step up its DR efforts even further, it could shave an additional 4-5% off peak demand with each transition from Business-as-Usual through Full Participation. Under the most aggressive demand response scenario, peak demand in 2019 could be held to a level that is not much different from where it is today. Finally, we turn to Oklahoma, where the demand response potential is truly seismic. The reason the potential is so high is because the base of existing programs is so low. Indeed, at its current level of commitment (i.e. Business-as-Usual), the states demand response efforts are not expected to have any discernable impact on peak demand over the next ten years. However, if Oklahoma were to move to the Expanded Business-as-Usual scenario, peak demand could by a whopping 9% in as little as five years. And here it is interesting to note that there isnt much to be gained, at least in the first five years, by pursuing a more aggressive DR strategy, since peak demand would fall by only one additional percentage point under the Achievable Participation and Full Participation scenarios. Together, programs aimed at improving energy efficiency i.e. demand management, smart grid, time of use pricing, and load management can be an important way to meet the challenges ahead. There is growing agreement among federal and state policymakers, business leaders, and other key stakeholders, around the idea that a Smart Grid is not only needed but well within reach. According to a recent assessment by the DOE, If the grid were just 5% more efficient, the energy savings would equate to permanently eliminating the fuel and greenhouse gas emissions from 53 million cars. Consider this, too: If every American household replaced just one incandescent bulb (Edisons pride and joy) with a compact fluorescent bulb, the country would conserve enough energy to light 3 million homes and save more than $600 million annually. Clearly, there are terrific opportunities for improvement.32 Indeed, there is a growing body of evidence that the lowest cost alternative in the power supply curve is efficiency. We see this in the Lazard study as well as others. For example, Lazard estimates the cost of Energy Efficiency at a levelized bus-bar cost of somewhere between zero and 5.0 cents per KWh and states that improving the energy efficiency of our economy is the cheapest and fastest way to address Americas energy problems. Indeed, saving energy through efficiency measures is much cheaper than generating and delivering electricity. In some states, energy efficiency supplies most new electricity needs cutting projected consumption by 1 to 2 percent each year at a cost of less than 3 cents per kWh. In comparison, a typical American family pays more than 10 cents per kWh for electricity. Analyses of future energy efficiency potential typically find
31

The Smart Grid: An Introduction, US Department of Energy, prepared by Litos Strategic Communications, Washington, D.C., undated. 39

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More than half (51%) of peak demand stems from residential demand.

vast available resources with average levelized costs of around 4 cents per kWh in the residential sector and 2 cents per kWh or less in the commercial and industrial sectors. For example, recent studies of Energy Efficiency potential in Maryland and Florida found that these states could reduce electricity consumption by as much as 30 percent below forecast levels by 2025, at average costs around 3 cents per kWh. And this is not an anomaly 128 studies by the electric power industry concur. For example, Commonwealth Edison calculated that an aggressive efficiency program in Illinois could save more than 1,000 GWh of electricity per year at a cost of only 2.5 cents per KWh. More recently, the Chair of the Federal Energy Regulatory Commission said: [It] turns out that demand response, local storage, and distributed generation are among the best "dance partners" to ensure we can reliably integrate renewable energy resources into the grid. Indeed, it has been demonstrated that these distributed resources are more efficient than central station fast response natural gas fired generators at matching load variations and providing ancillary services needed to ensure reliability. They are even faster, generally cheaper, and have a lower carbon footprint than the traditional power plant provided ancillary service. 33 3.7 Regulation, Private Social/Direct CostsExternal Costs All generation sources impose costs on society. Some of these are paid as part of the price of electricity directly by ratepayers and some are not. Costs that are usually not included in comparisons include the costs of air, water, and land pollution from generation as well as fuel extraction and transport; nuclear waste disposal; oil spill prevention and cleanup; exposure to physical or economic disruption of supply lines; and military intervention to ensure supply. 34 Clearly, when no attempt is made to capture external costs such as green house gases, and CO 2 in particular, electricity prices are lowest. But, just as clearly all costs are social because some members of society pay them. A significant issue is whether private costs include all social cost. Stated differently, an issue is whether those who use the good pay the full social cost of producing it, i.e., whether private cost equals social cost. An economically inclusive analysis of cost includes an assessment of alternatives and includes all costs. One way to think about this is the example of labor. From the individuals point of view the cost of working is the next-best alternative activity that one must forego in order to work. That is the cost of helping to build a power plant may be the value one puts on fishing, playing golf, or taking a nap. But if one is involuntarily not working (would prefer to work in order to have more consumptions choices) the cost of going to work is considerably reduced. From societys point of view the cost of putting idle labor to work is very close to zero. The question then is not the cost of labor but what for purpose to use the labor. Unless the macro economy is at full employment and full production, the labor cost associated with building a power plant is the foregone chance to use that labor for something else, not the money wage paid to the laborers. Including external costs in electricity rates can be complex, which is why, in this study, we consider only the cost of carbon emissions in our analysis. Some argue that since ratepayers will not pay these costs in the price of electricity, they should not be included. It may be argued that a money cost for external costs is difficult and arbitrary. 35 Yet, someone, including ratepayers, pays these costs indirectly as Jon Wellinghoff, Chairman of the Federal Energy Regulatory Commission, CAISO Stakeholder Symposium October 7, 2009 34 Annual Energy Outlook 2009 with Projections to 2030, DOE/EIA-0383(2009), March 2009. 35 A strong and persuasive argument has been associated with the intrinsic costs of putting windmills in certain locations. The Flint Hills of Kansas are seen as having an intrinsic value that will be marred by 40
33

residents of the area affected. Recently, nuclear reactor and renewable power cost analyses especially have included a money cost in the way of a per ton cost of carbon price added to the bus-bar cost. There is evidence in other studies, e.g., California, Lazard, and EIA, that external costs are important and should be included. Consider the statement in the latest EIA report as it pertains to greenhouse gases: The overall amounts of new capacity added in the reference case and the no GHG concern case are similar, but there are differences in the mix of plant types built. New coal builds without CCS are higher in the no GHG concern case than in the reference case, as the concern that new regulations might be coming dampens investment in new coal-fired plants in the reference case. On the other hand, new natural-gas-fired plants, which are not as GHG-intensive, are more attractive economically in the reference case. In an environment of uncertainty about future regulation of CO2 emissions, natural gas becomes the primary choice for new capacity additions; without such uncertainty, coal remains the primary choice. 36 The report continues with the following conclusion regarding changes in generation portfolios: . . . the explicit GHG emission cap reduces the total amount of electricity generated from all coal-fired plants by 33 percent and the amount from 8 percent in 2030, as older coal plants are retired and the marginal costs of units still operating, which must hold allowances, are higher. Despite their high initial capital costs, new coal-fired units with CCS are less expensive to operate than traditional coal-fired plants without CCS, given a tight constraint on CO2 emissions. 37 Carbon capture and compression technologies are in an emerging stage. While the federal government appears to be focused on the role that renewable energy can play in reducing carbon emissions, the utilities are also beginning to focus on renewable energy as a strategy to mitigate both fuel price volatility and the internalization of external costs. As we move to reduce carbon emissions, the impact of more renewable energy on ratepayers is an issue. A GHG reduction policy would affect decisions about the types of plants to build, the fuels used to generate electricity, and the prices for GHG emissions from electric power plants. While the levelized cost of energy for alternative energy generation technologies is becoming increasingly competitive with conventional generation technologies, direct comparisons will likely take

windmills. We agree. Just as the mountains of West Virginia are marred by strip mining coal, and Montana and Wyoming suffer from the scars and environmental devastation of mining, the cost of locating windmills in certain areas is of concern. There is perhaps nothing more restoring of our inner contentment and awe of nature than to gaze at the landscape of the Flint Hills, uninterrupted by the marks of human existence. Absent even fences the hills stretch green, under a blue sky or in the fall or winter auburn with shadows falling over the mesas. Still, a continuation of present productions technologies brings costs that are likely to create much greater damage to the intrinsic value of landscapes, streams and lifestyles. 36 Annual Energy Outlook 2009 With Projections to 2030, DOE/EIA-0383(2009), March 2009. 37 Annual Energy Outlook 2009 With Projections to 2030, DOE/EIA-0383(2009), March 2009. 41

into account intermittent issues such as location (e.g., central station vs. customer-located), dispatch characteristics (e.g., base load and/or dispatchable intermediate load vs. peaking or other uses). Very recently, a decline in carbon dioxide levels due to the recession and use of cleaner fuels led the Energy Information Administration to forecast a 5.9 percent drop in energy-related carbon dioxide emissions for 2009. Based on EPA, Black & Veatch, and EIA data and forecasts we assume the cost of emissions regulation will result in a money price per ton of carbon emitted in the range of $10 to $50. Whether this cost is added to the cost of generating electricity and added to the price charged to customers or not we assume it to be a real cost. It may be argued that allowing offsets in a cap and trade rgime will defeat the purpose of the policy goal because the cap becomes as sieve that does not capture carbon. This may well be true, but even if the cap is a sieve, the costs are still paid and should not be excluded from consideration because they are not included in the direct cost paid by consumers. In other words, the true social cost is paid either directly by those that use the electricity or indirectly by all those affected by the health and irritation of emissions. The same may be said for water pollution and the supply of water. If the cost of water and the potential for shortage is not considered a part of the cost of electricity, it is still a cost and it will be paid by someone. It may show up as an increase in the price of food brought on by the increase in the price of water or brought on by decreased supplies of irrigation dependent foods. Further, the uncertainly associated with the risks yet to be known is a reason to expect future costs of certain technologies to have a higher present price. If no known or foreseeable risks are associated with a technology, e.g., no carbon emissions from wind are now foreseeable; nothing is added to the estimated cost. It is of course a policy decisions how this is to be paid, but all costs of production are paid one way or another. This is a tradeoff, a matter for policy, but an informed policy is one that brings all reasonable arguments and points of view to the table. In a reasonable or deliberative choice multiple hypotheses may be considered in dealing with a problematic situation. No choice is to be given precedence over others; meaning that one is just as diligent in looking for knowledge that may question a plan of action as knowledge that questions other plans. We criticize our hypotheses or ends by inquiring into what results from the use of the means designed to realize them. When action is intelligent and responsible, the means are part of the end. And a continuity of means and ends increases the probability that present choices will result in consequences that do not lock in an undesirable or unreasonable path. 3.8 Nuclear The on-going drama surrounding nuclear power is reminiscent of Lucy persuading Charlie Brown to kick the football she is holding, only to pull it away just as his foot passes by, leaving him flat on his back for the nth time. The promise of nuclear power began as a source of electricity that was initially billed as too cheap to meter, then cheaper than coal, and now more carbon friendly than burning cheap coal. In terms of capital costs, a nuclear plant is the highest and requires the longest construction time. The long construction time reduces the economic advantage, if any, that it would otherwise enjoy. The longer the construction time, the more important become issues of finance, risk, and the incidence of the cost and risk burden. Once they are incurred, capital costs are, by their very nature, sunk nothing can be done to alter this fact. Thus, the higher the sunk costs the more inflexible the alternative. And the more likely to lock in a path which may not be the best alternative. They raise the future cost of switching at a later date. Further, long lead-times allow consumer costs to escalate and give alternatives more time to develop, thus improving their competitiveness. Figure 23 below gives an indication of the range and variability of the estimated capital cost of a nuclear generating station.

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Figure 23: Estimated Nuclear Generation Capital Costs in KWs, Selected Studies, 2007-2009
$12,000 $10,000 Cost / KWE $8,000 $6,000 $4,000 $2,000 $-

Source: Based on data from Cooper

Some studies, especially those produced (or funded by) the nuclear industry, use coal and natural gas plants and the principal alternative generating sources. This is mainly due to the assumption that increasing carbon costs will tilt in favor of nuclear power. However, market indicators point to this position as becoming, or having already become, technologically obsolete and financially unacceptable. Without loan guarantees, we will not build nuclear plants. 38 Cooper and others have argued that Lazard underestimates nuclear costs significantly. Still, Lazards estimates are between 9.8 and 12.6 cents per KWh and thus indicate that nuclear generation is not the least cost option when capital cost and construction time are taken into account. An analysis by Severance paints an even more costly picture of nuclear power. According to this study, the total generation nominal 2018 dollar cost/KWh, in what is described as the Most Likely Scenario, for a new nuclear plant is as shown in Table 4. Table 4: Estimated Cost of Nuclear Generated Electricity, 2018 Cost Source $/KWh Capital Cost Operation & Maintenance w/o Fuel Property Taxes Decommissioning & Waste Cost Fuel Cycle Costs Total $ / KWh $ Cost / KWh .22 .01 .02 .02 .03 .30

Source: Severance, Craig A. 2009, Business Risks and Costs of New Nuclear Power, January 2, 2009.

Michael J. Wallace, Executive Vice President of Constellation Energy, quoted in the New York Times on July 31, 2007 43

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In the Severance study, the lower cost case carries a capital cost 17 cents per KWh for a total cost of 25 cents per KWh. 39 These widely varying and escalating cost projections are a concern, especially in light of the fact that no nuclear plant has ever come in at (much less under) estimated cost. 40 3.9 Coal, Natural Gas & Petroleum In the last few years, price volatility for fossil fuels has increased, creating fuel price uncertainty and increased difficultly managing and predicting near and medium term operating costs. And this feeds into the uncertainty of estimating capital costs. Fuel costs account for about 70% of the cost of producing natural gas-fired electricity. The cost of natural gas-fired electricity increases about one cent per KWh for each dollar per MMBtu of increase in natural gas. The California Public Utilities Commission used a range of costs for natural gas: $5.50 - $6.50 per MMBtu. Today's price is around $4.00 per MMBtu, but it has been as high as $12/MMBtu in the last year. The Lazard study below uses a cost estimate of $8.00/MMBtu. Falling gas prices could have significant impact on the future configuration of generation. Coal prices used to track oil prices and to a certain extent they still do. However, Powder River Basin coal has dropped significantly and has also been much less volatile. Figure 24 below illustrates the variation in coal prices from different regions of the US. While coal may be relatively abundant and cost competitive with natural gases, it has a higher carbon cost. According to Jon Wellinghoff, Chairman of the Federal Energy Regulatory Commission, "We've got more natural gas in this country than we know what to do with. It may make a lot of sense to start shutting down coal plants and using gas for base load." 41

Severance, Craig A. 2009, Business Risks and Costs of New Nuclear Power, January 2, 2009. Dr. Paul Joskow, Massachusetts Institute of Technology, May 19, 2006 41 Reuters, Jon Wellinghoff, chairman of the Federal Energy Regulatory Commission, CAISO Stakeholder Symposium, Interview, October 7, 2009
40

39

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Figure 24: Historical Average Weekly Coal Commodity Spot Prices ($ per Short Ton), Week Ended October 2, 2009

The direct capital cost of coal-fired generation in the US is relatively more certain than nuclear and wind. What is not as well known is the impact of regulatory policies that require the internalization of costs, which are now, in whole or in part, external i.e. not included in the price paid by consumers. In the past few decades there has been increasing, though not steady, pressure to internalize these costs. In this analysis we conduct a sensitivity analysis of these costs. Lazard finds that a new IGCC plant will produce electricity for 10.4 to 13.4 cents per KWh depending on the level of carbon emission. An advanced supercritical coal plants cost range from 7.4 to 13.5 cents with the highest cost having a 90% carbon capture and storage capability. Petroleum based power faces significant uncertainty regarding cost volatility. Many analysts argue that peak production of oil is on the near horizon and output will begin to turn down leading to shortages and rising prices. More likely though is not a decline in the amount of oil available, but the amount of oil available at historical price levels. In either case the conclusion results in a prediction of increasing volatility and level of petroleum prices. We conclude, as have many electricity producers, that petroleum based generation is an unattractive alternative, even without considering external costs such as carbon emissions. It is suitable only for peak power and even then may be phased out as forces, such as efficiency and alternative power sources, come into play. 3.10 Wind Wind is the most rapidly growing power source in the world. With an increase of over 8,000 MW in 2008 the US has now taken the lead in wind generation. Prior to 2008 Germany, a country about the size of Montana, was the world leader. Figure 25 shows the cumulative installed capacity and 2008 additions for selected countries. The U.S. added more wind power capacity in 2007 than coal-fired capacity in the past five years combined. There has been an increase in installation in wind power in 45

what may aptly be named the US Wind Belt. This Belt lies in the center of the country from North Dakota south to Texas and includes all or parts of Minnesota, Iowa, South Dakota, Nebraska, Kansas, Oklahoma, and Texas. A significant portion of class 5 wind power is located in the western half of Kansas and Oklahoma and is scattered in various areas in Nebraska. A national goal of 20% wind requires areas with greater wind resources to produce more than 20% since some areas are unsuitable for wind production. The comparative advantage by a region should be considered in the portfolio of generating capacity. Figure 25: Installed Wind Generating Capacity, Selected Countries, Cumulative and 2008
30000 25000 MW Capacity 20000 15000 10000 5000 0 US Germany Spain China India Italy Cumulative 2008 (MW) 2008 Additions (MW)

Source: World Wind Energy Report, 2008, World Wind Energy Association, http://www.wwindea.org/home/index Comparing direct costs of larger wind farms in windier areas is now considered economically competitive with "conventional" fossil fuel power plants in many locations. However, wind is not a uniformly priced resource. Its costs vary depending on project scale, wind speed and variability, distance to consumption area, and density of windmills. The best wind sites appear to be competitive with market electricity prices in most U.S. regions. Moreover, when indirect costs and savings are added, wind power becomes even cheaper relative to other sources of power especially in Kansas, Oklahoma and Nebraska and to a lesser extent in Missouri. These indirect costs and savings include the price added to conventional sources for pollution, water use, and decommission cost. For example, Black & Veatch estimate that there would be a savings of 4 trillion gallons of water through 2030 if 20 percent of electricity were generated by wind, a 17 percent reduction in the sector. 42 This water would then be available for other uses including crop irrigation and livestock consumption. We do not include this savings in our analysis. We do, however, deal with carbon emission cost elsewhere in this study. The advantages of wind over conventional sources of electricity generation include that it is much less affected by fuel prices, can offer long-term fixed-price contracts, costs are relatively stable once initial capital costs paid, and, because of the comparatively small size of an individual wind farm, the outage of a single wind turbine will require less of a reserve requirement than larger power plants, and it is subject to less regulation cost due to pollution. According to the U.S. DOE's Energy Information Administration, both natural gas and petroleum are subject to price and supply fluctuations, changes in demand and the political conditions. The cost of wind energy remains stable over time because the majority of costs are Black & Veatch, 2 0 Percent Wind Energy Penetration in the United States, A Technical Analysis Of The Energy Resource. Black & Veatch Project: 144864, Prepared For American Wind Energy Association Final Report, October 2007. 46
42

fixed up-front. Present disadvantages are that wind generation production profiles differ based on when the wind blows hardest and transmission line availability. Since wind speed is variable, wind imposes some costs on the regional electric system. As to transmission costs, DOE studies found that wind integration costs are approximately $5/MWh or less, for a wind capacity penetration of up to about 15% of the regional peak load into which the wind power is delivered. 43 And, when it comes to getting wind power onto the grid, Karl Pfirrmann, Interim President and CEO of PJM Interconnection (PJM), insists that his firm has a legal responsibility is to make sure that the grid is reliable and the wholesale electric market is competitive. 44 He said: Wind is not as variable as people may think. Our experience shows that if a wind generator is operating at a certain level at present, there is an 80 percent probability that it will be operating within 10 percent of that level one hour from now. And, there is a 60 percent probability that it will be operating within 10 percent of that level five hours from now. Were also encouraged that better forecasting will enable us to better predict the output from the wind generators on our system. 45 As a renewable resource, wind is classified according to wind power classes, which are based on typical wind speeds. These classes range from Class 1 (the lowest) to Class 7 (the highest). In general, at 50 meters, wind power Class 4 or higher can be useful for generating wind power with large turbines. Class 4 and above are considered good resources. Particular locations in the Class 3 areas could have higher wind power class values at 80 meters than shown on the 50 meter map because of possible high wind shear. Given the advances in technology, a number of locations in the Class 3 areas may suitable for utility-scale wind development. Particular locations in the Class 3 areas could have higher wind power class values at 80-meters than shown on the 50-meter map because of possible high wind shear. Figure 26 shows the wind potential across the US, and Figures 27-30 provide a visual illustration of the wind potential for each state in the MONK region. Figure 26: US Wind Resource Map

= Fair (3) = Good (4) = Excellent (5) = Outstanding (6)

43 44

US Department of Energy Annual Report on U.S. Wind Power Installation, Cost and Performance Trends: 2006. PJM is the organization that operates the grid for nearly all of Pennsylvania and much of 14 other states. 45 Karl Pfirrmann, PennFuture, Vol. 9, No. 5 December 5, 2007

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Figure 27 indicates that Kansas has wind resources consistent with utility-scale production. Major areas of good wind resource are found throughout much of western Kansas with scattered areas in the eastern part of the state. Significant areas of excellent wind resource are located in southwestern Kansas and extend to north-central Kansas. Population centers located close to excellent resource areas include Dodge City, Garden City, and Great Bend. Despite its potential, wind power contributes only minimally to Kansas electricity supply. Figure 27: Kansass Wind Potential

F Figure 28 indicates that Oklahoma also has wind resources that are consistent with utility-scale production. Major areas of good wind resource are found throughout much of western Oklahoma with a few areas of good-to-excellent wind located on the ridge crests in the eastern part of the state. Significant areas of excellent wind resource are located in the extreme northern part of the Oklahoma Panhandle and in the region from Guymon east to Woodward. Other excellent resource areas are found near Elk City and on the hills northwest of Lawton. The best wind resource areas are typically located on elevated terrain features, whereas the lowest wind resource are generally located in valleys and basins with relatively low elevations. When it comes to renewable energy, wind farms in the west, hydroelctric dams and a small amount of wood and wood-waste generation combine to contribute small amounts of electricity to the Oklahoma power grid.

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Figure 28: Oklahomas Wind Potential

Figure 29 indicates that Nebraska has wind resources consistent with utility-scale production. Major areas of good wind resource are found throughout much of Nebraska except the extreme eastern fringe (such as Lincoln eastward to the Missouri River). Transmission lines either traverse or are located in close proximity to many of these good wind resource areas. Significant areas of excellent wind resource are imbedded within some of the good wind resource areas, such as the excellent areas located southwest of Norfolk, west of Valentine, west of Chadron, and south of Scottsbluff. Like Kansas and Oklahoma, Nebraska has only scratched the surface when it comes to wind power, generating most of its (small amount of) renewable energy from hydroelectric power. Figure 29: Nebraskas Wind Potential

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Figure 30 shows the highest wind resources in Missouri are found in the extreme northwestern part of the state. Class 3 areas are concentrated from St. Joseph north to the Iowa border. Missouri generates less than 2 percent of its electricity from renewable sources more than four-fifths from coal and most of the renewable energy is produced from conventional hydroelectricity generation. Non-hydro renewables account for just 0.3% of total net electricity generation. Figure 30: Missouris Wind Potential

4. Simulating the Effect of Different Power Generation Portfolios on Electric Rates in MONK 4.1 Introduction: In general, electricity prices depend upon the cost of generating assets producing the electricity. Utilities that use more expensive technologies must charge higher rates in order to cover the higher generation. Electric rates are related to the cost of the power plants so we simulate how changes in the mix of power plant technologies might affect electric rates. For reasons discussed below this study compares plants fueled by Coal, Natural Gas, Uranium, Wind and Hydro as appropriate to the states resource availability. Another alternative way to meet the demand for electricity is to manage that demand by the use of incentives to improve end use efficiency. In fact this alternative is the least costly in terms of direct cost and the reduction of indirect costs. This is treated below in separate simulations for each state. 50

4.2 Method: To run the simulation we use the cost per MWh as derived from the studies discussed above. This is our composite case. Cost data is based on our analysis of the degree to which it reflects current conditions in technology, cost, regulation uncertainty, the outlook in the four state region, and the current generation mix in the four state region. We select those data which best reflect the circumstances faced in MONK and rely on data and studies from the US Energy Information Agency. For example, it is clear that Missouri is at a disadvantage in wind generation compared to the other three states, and Oklahomas present portfolio is much more based on natural gas than the other three states. Since natural gas produces less CO2 emissions than coal, it is less sensitive to increases in wind production. Whereas the opposite is true for the other three states, which have larger proportions of nuclear in their generation profiles. We use Black & Veatch wind costs for Levels 4 and 5 for Kansas, Oklahoma, and Nebraska and Level 3 for Missouri. Natural gas cost is from the Lazard Study, but is the same in Black &Veatch and the lowest in the studies reviewed here. Supercritical Coal costs are from Lazards Low estimate which is the same and Black & Veatch while Coal- Integrated Gasification Combined Cycle (IGCC) is from the California study. This latter is in between Lazard and Black & Veatch estimates and does not include carbon reduction costs. We eliminate petroleum from the portfolio and reduce generation totals by the amount it generates. Petroleum is used primarily for peaking plants and is a very small part of the portfolio in MONK. We use the bus-bar cost estimates in Table 5 below to generate the simulation. Here, we substitute wind for coal and assume all coal is supercritical. To the extent that the coal plants are IGCC, our simulation is on the low side. The more the actual IGCC coal is in the portfolio the lower would be our simulated cost. We do not substitute wind for nuclear because it is not economically or technologically logical to cycle nuclear plants up and down. Coal plants can do this without significant loss of efficiency. Thus the substitution hierarchy is wind for coal and when applicable for natural gas. This simulates substitution of a lower cost/carbon emission source for a higher cost one. We also simulate for carbon prices a $0, $10 and $30. We use the Black & Veatch emission rates for C02 to conduct a cost sensitivity analysis based on the composite case cost data. To the extent that carbon increases the cost of a fuel private and social costs will be closer to equality. Table 5: Generation Costs per KWh by Power Source for Simulations
/KWh $0/Ton CO2 Wind 5 Wind 4 Wind 3 Natural Gas Coal SC Nuclear 7.1 7.7 8.6 7.3 7.4 8.9 /KWh $10/Ton CO2 7.1 7.7 8.6 7.7 8.41 8.9 /KWh $30/Ton CO2 7.1 7.7 8.6 8.5 10.43 8.9

Source: Estimated by authors based on studies surveyed in this report based on our composite case.

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The simulation is based on variables defined as follows: Cost / MWh: the weighted average cost of bus-bar electricity plus CO2 for each state. Coal: the percentage of electric generation within a given state that is derived from coalfired plants. Natural gas: the fixed percentage of electric generation within the state that is derived from natural-gas-fired plants. Nuclear: the fixed percentage of electric generation within the state that is derived from nuclear plants. Wind: the percentage of electric generation within the state that is derived from wind. CO2: the cost added per MWh for each ton of CO2 emitted for each fuel type. Efficiency: the cost in KWh of implementing more efficient appliance stocks, rate structures, and other demand management techniques. In Kansas, Oklahoma, and Nebraska we assume that level 5 areas will be the first to be installed, followed by 4 and 3, respectively. In Missouri level 3 is the only one considered. This affects the cost analysis slightly in that level 5 is slightly cheaper than 4, and 4 slightly cheaper than 3. This may result in an over estimate of the cost since by the time the lower levels are used the cost may be reduced if innovation in wind occurs or if the geography of windmill manufacturing shifts toward these regions. We simulate using 10, 20 and 30 percent wind generation in Kansas, Oklahoma and Nebraska, and 10 and 15 percent in Missouri. We consider these to be somewhat conservative estimates of the wind capacity in these regions, especially if newer, taller windmills are used. These estimates are based on 50 meter technology which is very conservative. But it does illustrate the relative difference it makes when the generation portfolio is realigned to incorporate a new technology. 4.3 Simulating the Models We first simulate a model for each state by substituting 10, 20 and 30 percent wind generation to the existing base load mix of plants with a carbon emission cost of $0, $10 and $30 per ton. We then perform the same simulation, adding efficiency at 5, 10 and 20 percent of existing 2008 net generation. We assume in the simulations for Kansas, Oklahoma and Nebraska that up to 15 percent of capacity can be that generated in Class 5 and 15 percent in Class 4 wind areas. For Missouri we assume that all wind in generated in Class 3 areas. The results are presented in the Figures and Tables below. Running the simulation for Kansas, shown below in Figure 31 and Table 6, substituting wind for coal reduces MWh costs for 10 and 20 percent wind at $0 price for carbon, though not significantly. At 20 percent wind and $10 cost for carbon a consumer of 1,000 KWh per month would save $2. This is important because until recently it was assumed that wind substitution would increase consumer costs. As the price of carbon emissions rises to $30 per ton, perhaps the closest to its external cost, consumers savings increase to about $8 per month. At 20 percent wind capacity, 15 percent of which is assumed to be in Class 5 areas, and 5 percent in Class 4 areas cost goes up slightly due to the higher cost of area 4 wind. At 30 percent wind and $0 cost carbon emissions the cost increases by less than 1 KWh. Wind is a lower cost alternative to coal at all points in the simulation except 30 percent wind and $0 carbon price.

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Figure 31: Kansass Simulated Cost per MWh with Wind Power and Carbon Cost Variation
120 Bus bar Cost / MWh 100 80 60 40 20 0 2008 Net Generation 2008 Net 2008 Net 2008 Net Generation/ 10% Generation/ 20% Generation/ 30% Wind Wind Wind Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009 and from Table 5

Table 6: Results of Kansas Simulation Wind/Coal Substitution with Carbon Emission Costs
2008 Net Generation/ 10% Wind 76.4 83.3 97.1 2008 Net Generation/ 20% Wind 76.4 82.3 90.7 2008 Net Generation/ 30% Wind 76.7 81.6 91.4

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 76.6 84.1 99.2

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009 and from Table 5

When efficiency is added to the above simulated portfolios, see Figure 32 and Table 7, the cost is reduced by $3 per MWh at 10 percent efficiency and about $7 per MWh at 20 percent efficiency. The most cost effective portfolio in these simulations for Kansas is 20 percent efficiency and 20 percent wind. It would more at 30 percent wind, but this combination reduces coal generation to negative and then the substation goes to the next highest alternative, nuclear, but as discussed above, until these plants are decommissioned this substitution does not lower cost. 46 The 20/20 portfolio (20 percent wind, 20 percent efficiency) reduces cost per MWh by over $20 compared to no increase in wind or efficiency and a $30 carbon price. This almost completely offsets the cost of carbon emissions at $30 per ton. In other words by implementing efficiency and wind power the state of Kansas can absorb a $30 per ton carbon cost with almost no increase in electricity rates; about 1.2 per KWh or 40 per day for a consumer of 1,000 KWh per month. On the other hand without wind and efficiency, but with a $30 carbon cost, consumers would pay about $21 more per month (or about 70 per day).

46

This holds for Oklahoma and Nebraska as well.

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Figure 32: Kansass Simulated Cost per MWh with Wind Power, Efficiency and Carbon Variation
120.0 100.0 Bus bar Cost / MWh 80.0 60.0 40.0 20.0 0.0 2008 Net Generation 2008 Net 2008 Net 2008 Net Generation/ 10%Generation/ 20%Generation/ 30% Wind/ 10% Wind/ 20% Wind/ 20% Efficiency Efficiency Efficiency Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009 and from Table 5

Table 7: Kansass Simulated Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation
2008 Net Generation/ 10% Wind/ 10% Efficiency 73.0 78.9 90.7 2008 Net Generation/ 20% Wind/ 20% Efficiency 69.6 73.5 77.8

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 76.6 84.1 99.2

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009.

Running the simulation for Oklahoma, shown below in Figure 33 and Table 8, substituting wind for coal reduces MWh costs for 10 and 20 percent wind at $0 price for carbon, though not significantly. At 20 percent wind and $10 cost for carbon a consumer of 1,000 KWh per month would save $1.90. As in Kansas, this is important because until recently it was assumed that wind substitution would increase consumer costs. As the price of carbon emissions rises to $30 per ton, consumers savings increase to about $8 per month. At 20 percent wind capacity, 15 percent of which is assumed to be in Class 5 areas and 5 percent in Class 4 areas, cost goes up slightly due to the higher cost of area 4 wind. At 30 percent wind and $0 cost carbon emissions the cost increases by about 1 KWh. Wind is a lower cost alternative to coal at all points in the simulation except 30 percent wind and $0 carbon price. And, at those levels, 54

the cost is almost the same. However, Oklahoma does not appear to have as much Class 5 wind as Kansas, so it may not be able to achieve 15 percent in that class. If this is the case, either the cost of wind will go up slightly ,as they rely more on Class 4, or taller (e.g. 80 meter) windmills may be used. The latter will increase Wind Class 5 area, but may also increase capital cost. Figure 33: Oklahomas Simulated Cost per MWh with Wind Power and Carbon Variation
100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2008 Net Generation 2008 Net 2008 Net 2008 Net Generation/ 10% Generation/ 20% Generation/ 30% Wind Wind Wind

Bus bar Cost / MWh

Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009 and from Table 5

Table 8: Results of Oklahoma Simulation Wind/Coal Substitution with Carbon Emission Costs

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10

2008 Net Generation 72.3 78.8

2008 Net Generation/ 10% Wind 72.1 77.9

2008 Net Generation/ 20% Wind 72.1 76.9

2008 Net Generation/ 30% Wind 72.4 76.2

Busbar Cost / MWh \CO2@$30 91.8 89.5 86.5 83.8 Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009 and from Table 5

When efficiency is added to the above simulated portfolios, see Figure 34 and Table 9, the cost is reduced by $2.60 per MWh at 10 percent efficiency and $7 per MWh at 20 percent efficiency. The most cost effective portfolio in these simulations for Oklahoma is 20 percent efficiency and 20 percent wind. As in Kansas, this almost completely offsets the cost of carbon emissions at $30 per ton. Implementing efficiency and wind power in Oklahoma makes it possible to absorb a $30 per ton carbon cost with an increase in electricity rates of about 1.4 per KWh or 46 per day for a consumer of 1,000 KWh per month. Conversely, without wind and efficiency, but with a $30 carbon cost consumers would pay about $18 more per month, 60 per day.

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Figure 34: Oklahomas Simulatd Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation
100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2008 Net Generation 2008 Net Generation/ 10% Wind/ 10% Efficiency 2008 Net Generation/ 20% Wind/ 20% Efficiency

Bus bar Cost / MWh

Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009 and from Table 5

Table 9: Oklahomas Simulated Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 72.3 78.8 91.8

2008 Net Generation/ 10% Wind/ 10% Efficiency 68.7 73.5 83.1

2008 Net Generation/ 20% Wind/ 20% Efficiency 65.3 68.1 73.7

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

The simulation for Nebraska, shown below in Figure 35 and Table 10, which substitutes wind for coal, reduces MWh costs for 10 and 20 percent wind at $0 price for carbon, though not significantly. At 20 percent wind and $10 cost for carbon a consumer of 1,000 KWh per month would save $2.20. As the price of carbon emissions rises to $30 per ton consumers savings increase to about $8 per month. At 20 percent wind capacity, 15 percent of which is assumed to be in Class 5 areas, and 5 percent in Class 4 areas cost goes up slightly due to the higher cost of area 4 wind. At 30 percent wind and $0 cost carbon emissions the cost increases by less than 1 KWh. Wind is a lower cost alternative to coal at all points in the simulation except 30 percent wind and $0 carbon price. Nebraska is in a similar position to Oklahoma and does not appear to have as much Class 5wind resource as Kansas. Nebraska may not be able to achieve 15 percent in that class.

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Figure 35: Nebraskas Simulated Cost Per MWh with Wind Power and Carbon Cost Variation
120.0 100.0 80.0 Bus bar Cost / MWh 60.0 40.0 20.0 0.0 2008 Net Generation 2008 Net Generation/ 10% Wind 2008 Net Generation/ 20% Wind 2008 Net Generation/ 30% Wind Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Table 10: Results of Nebraska Simulation Wind/Coal Substitution with Carbon Emission Costs

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 78.0 84.8 98.4

2008 Net Generation/ 10% Wind 77.7 83.6 95.3

2008 Net Generation/ 20% Wind 77.7 82.6 92.3

2008 Net Generation/ 30% Wind 78.0 81.9 89.5

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

When efficiency is added to the above simulated portfolios, see Figure 36 and Table 11, the cost is reduced by $3.80 per MWh at 10 percent efficiency and about $10.60 per MWh at 20 percent efficiency. The most cost effective portfolio in these simulations for Nebraska is 20 percent efficiency and 20 percent wind. Implementing efficiency and wind power makes it possible to absorb a $30 per ton carbon cost and decrease electricity rates by about 5 per KWh. This is a savings to consumers of or 1.70 per day for a consumer of 1,000 KWh per month. Conversely, without wind and efficiency, but with a $30 carbon cost, consumers would pay about $25 more per month, 85 per day.

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Figure 36: Nebraskas Simulated Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation
120.0 100.0 Bus bar Cost / MWh 80.0 60.0 40.0 20.0 0.0 2008 Net Generation 2008 Net Generation/ 2008 Net Generation/ 10% Wind/ 10% 20% Wind/ 20% Efficiency Efficiency Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Table 11: Nebraskas Simulated Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 78.0 84.8 98.4

2008 Net Generation/ 10% Wind/ 10% Efficiency 74.2 79.0 88.7

2008 Net Generation/ 20% Wind/ 20% Efficiency 67.4 69.2 72.8

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Running the simulation for Missouri, shown below in Figure 37 and Table 12, substituting wind for coal raises MWh costs for 10, 20 and 30 percent wind at $0 price for carbon from 1 to 3. At 20 percent wind and $10 cost for carbon a consumer of 1,000 KWh per month would pay about $4. Since the wind Class for Missouri is 3 or less wind substitution would increase consumer costs at a carbon cost of $0 or $10. This is because Class 3 wind at 50 meters is more expensive per KWh than coal or natural gas with no carbon costs. As the price of carbon emissions rises to $30 per ton consumers savings increase to about $8 per month. At 30 percent wind and $0 cost carbon emissions the cost increases by less than 3.5 KWh. Wind becomes a lower cost alternative to coal when the carbon price is $30.

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Figure 37: Missouris Simulated Cost Per MWh with Wind Power and Carbon Cost Variation

$120.00 Bus Bar Cost / MWh $100.00 $80.00 $60.00 $40.00 $20.00 $2008 Net Generation 2008 Net Generation/ 10% Wind 2008 Net Generation/ 20% Wind 2008 Net Generation/ 30% Wind Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Table 12: Results of Missouri Simulation Wind/Coal Substitution with Carbon Emission Costs
2008 Net Generation/ 10% Wind 75.9 83.4 98.3 2008 Net Generation/ 20% Wind 77.2 83.6 96.4 2008 Net Generation/ 30% Wind 78.3 83.8 94.6

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 74.8 83.2 100.0

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

When efficiency is added to the above simulated portfolios, see Figure 38 and Table 13, the cost is reduced by $1.20 per MWh at 10 percent efficiency and about $3.60 per MWh at 20 percent efficiency. The most cost effective portfolio in these simulations for Missouri is 20 percent efficiency and 20 percent wind. This does not entirely offset the cost of cost of carbon emissions at $30 per ton. It does however reduce the impact of that cost. Without efficiency and wind, consumers in the state of Missouri would pay $21.70 more per MWh for electricity. This is about 72 per day for a consumer of 1,000 KWh per month. For Missouri, the gains from wind are not a high as they are in the other three states, making the pursuit of efficiency an even more important policy objective.

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Figure 38: Missouris Simulated Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation
120.0 100.0 80.0 Bus Bar Cost / MWh 60.0 40.0 20.0 0.0 2008 Net Generation 2008 Net 2008 Net 2008 Net Generation/ 10% Generation/ 20% Generation/ 30% Wind/ 10% Wind/ 20% Wind/ 20% Efficiency Efficiency Efficiency Cost / MWh \CO2@$0 Cost / MWh \CO2@$10 Cost / MWh \CO2@$30

Source: Calculated from data in US Department of Energy, Energy Information Administration, state electricity profiles, 2008 and 2009

Table 13: Missouris Simulated Cost Per MWh with Wind Power, Efficiency and Carbon Cost Variation

Carbon Cost Busbar Cost / MWh \CO2@$0 Busbar Cost / MWh \CO2@$10 Busbar Cost / MWh \CO2@$30

2008 Net Generation 74.8 83.2 100.0

2008 Net Generation/ 10% Wind/ 10% Efficiency 73.6 80.0 92.8

2008 Net Generation/ 20% Wind/ 20% Efficiency 72.4 76.8 85.6

2008 Net Generation/ 30% Wind/ 20% Efficiency 71.2 73.6 78.3

Source: Calculated from data in US Department of Energy, Energy Information Administration,

5. Which Way Forward? 5.1 Introduction This paper set out to answer the following question: Which generation portfolio will best protect consumers from large, unanticipated price swings in a carbon-constrained environment? In choosing alternative supply portfolios i.e., choosing among alternative sources of supply it is important to recognize that it is relative costs (not absolute costs) that are relevant. Thus, what is most important are the conditions that bring about the relative costs of the alternatives and whether these are correctly ordered.

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5.2 Method To get a perspective on the relationship of the impact of future demand and alternative ways to meet that demand, we construct simulations of supply based on projected demand for 2030 in each of the four states. Each of the four states is projected to have an increase in MWh demand at the average rate for the last ten years until 2030. We take the 2008 sources of supply as a starting point and construct supply schedules for 2030. For each state, we start with a yearly increase in efficiency of 1 percent each year after 2010. This means that by 2030 each state will meet 20 percent of its supply with efficiency if it stays on this path. What this means is that rather than actually growing at the projected rate, demand is reduced by the amount of efficiency achieved in the system. However, infusing efficiency has a cost, assumed to be 4 cents per KWh for all four states. For Kansas and Oklahoma we assume an increase in wind generation up to 25 percent of supply; 15 percent from Wind 5 and 10 percent from Wind 4. Nebraska is assumed to reach 23 percent wind; 15 percent from Wind 5. For Missouri we assume an increase in wind supply up to 15 percent from Wind 3. We also develop separate supply schedules using $0 and $30 carbon cost. Supply sources and costs are projected with combinations of efficiency and carbon costs. Efficiency and wind are substituted for the most expensive alternative to generate the forecasts. 5.3 Alternative Paths for Generating Electricity in the MONK Region The final set of Figures compares alternative paths for supplying electricity and relates them to their likely impact on consumers. For each state in the MONK region, the area between the two schedules (cost in dollars per MWh multiplied by the number of MWhs) is the cost to consumers of choosing to stay on the present path, i.e., choosing not to use efficiency. While significant, it is important to note that these costs would be even greater if lower cost wind is not substituted for coal. This is exacerbated when carbon cost is added to coal and natural gas. We assume the states with nuclear plants will continue to use them at the same rate as in the past, but they will not build new ones. Another result of the simulations is that all four states can meet the entire estimated increase in demand exclusively through a combination of efficiency and wind at a lower cost than other alternatives. Missouri for example, can meet its projected demand with 15 percent efficiency and 12 percent wind without adding any other sources. The remaining MONK states are in an even better position than Missouri, since they have higher wind quality and more potential supply. It is also clear from examining the supply curves below that when carbon costs are account for, coal and natural gas are pushed farther back on the supply chain. In fact, for all four states the simulations show that instead of being the first choice for the supply chain, coal should be the last choice, at least until the nuclear plants now producing are decommissioned. At that decision point, the relative costs of coal and nuclear would bear analysis based on the cost conditions at the time.

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Kansas Figure 39: Kansas Electricity Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Carbon Costs

12 10 8 Bus Bar Cost per KWh 6 4 2 0 0 10000 20000 30000 MWh (000) Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors. 40000

Efficiency/ $30 Carbon Cost Efficiency/$0 Carbon Cost 50000 60000

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Figure 40: Kansas Electricity Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency vs. No Efficiency, $0 Carbon Cost

10 9 8 Bus bar Cost per KWh 7 6 5 4 3 2 1 0 0 10000 20000 30000 MWh (000) 40000 50000 60000 Efficiency/$0 Carbon Cost No Efficiency/$0 Carbon Cost

Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors.

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Oklahoma Figure 41: Oklahomas Electricity Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Cost of Carbon
12

10

Bus bar Cost per KWh

2 Efficiency/ $30 Carbon Cost Efficiency/ $0 Carbon Cost 0 0 20000 40000 60000 80000 100000 120000 140000 MWh (000)

Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors.

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Figure 42: Oklahomas Electricity Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency vs. No Efficiency, $0 Carbon Cost

9 8 7 Bus bar Cost per KWh 6 5 4 3 2 1 0 0 20000 40000 60000 MWh (000) Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors. 80000 Efficiency/ $0 Carbon Cost No Efficiency/ $0 Carbon Cost 100000 120000 140000

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Missouri Figure 43: Missouris Electricity Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Carbon Costs

12 11 10 9 Bus bar Cost per KWh 8 7 6 5 4 3 2 1 20,000 40,000 Efficiency/ $30 Carbon Cost Efficiency/ $0 Carbon Cost

60,000 80,000 100,000 120,000 140,000 MWh (000) Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors.

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Figure 44: Missouris Supply Schedule, by Generating Source, Estimated 2030 Demand, Efficiency vs. No Efficiency, $0 Carbon Cost
12 11 10 9 8 7 Bus Bar Cost Per KWh 6 5 4 3 2 1 0 0 20000 40000 60000 80000 100000 120000 140000 MWh (000) No Efficiency/ $0 Carbon Cost Efficiency/ $0 Carbon Cost

Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors.

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Nebraska Figure 45: Nebraskas Electricity Supply Schedule, by Generating Source, Estimated 2030 Demand, 20% Efficiency, Differing Carbon Costs
12 11 10 9 8 7 Bus bar Cost per MWH 6 5 4 3 2 1 0 0 10000 20000 MWH (000) Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors. 30000 40000 50000 Efficiency $30 Carbon Cost Efficiency $0 Carbon Cost

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Figure 46: Nebraskas Supply Schedule, by Generating Source, Estimated 2030 Demand, Efficiency vs. No Efficiency, $0 Carbon Cost
12 11 10 9 8 7

Bus bar Cost Per KWh

6 5 4 3 2 1 0 0 5000 10000 15000 20000 25000 MWh(000) 30000 35000 40000 45000 50000 No Efficiency $0 Carbon Cost 0.00 Efficiency $0 Carbon Cost

Source: Calculated from data in US Department of Energy, Energy Information Administration, as projected in supply simulation model developed by authors.

6. Conclusion The results of this study challenge the widely-held belief that alternative sources of energy especially wind power are not cost-competitive when compared to traditional sources like natural gas and coalfired generation. This is because, as a resource, wind is somewhat like a diamond. It is heterogeneous (i.e. of differing quality), which makes some types of wind (e.g. Class 5) far more valuable than others (Class 2 or 3). Unlike diamonds, however, wind gets cheaper as the quality of the resource increases. This is because the capacity factor increases sharply with wind class. Indeed, we show that the MONK region has access to enough high-quality wind to cost-effectively begin shifting its generation mix away from coal to Class 5 wind. And, when coupled with investments in energy efficiency, producers in these states can create an energy path that helps them avoid the much larger price increases that would be passed on to consumers under a path-dependent scenario. Importantly, this is true regardless of whether the U.S. adopts a cap-and-permit system (with tradable or non-tradable permits). Of course, if the U.S. does adopt such legislation, the penalty for remaining on 69

the current path (i.e. choosing path dependency) will be even higher because a sizable volume of avoidable costs (i.e. the carbon costs that could have been avoided by shifting some generation from coal to wind) will be passed on to ratepayers.

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