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California power sector faces 2014 carbon compliance obligations nearing 80 million tons

August 17, 2015 by Rahul Rana

CaliforniaCarbon.info, August 17, 2015: For their carbon emissions in 2014, California’s power sector will face obligations totaling some 79.9 million tons. These will have to be met in November 2015 by compliance instruments recognized under the state’s cap-and-trade program. This estimate is based on data released by the California Energy Commission (CEC) earlier this month, which revealed that California’s total electricity system power fell by 1.1% in 2014 to 293,268 GWh.

Renewables help overcome large hydro shortfall

Electricity generation from large hydro declined drastically from 20,754 GWh in 2013 to 14,052 GWh in 2014, due to the ongoing drought in California. This decline was largely compensated for by a 14% increase in in-state renewable energy generation (39,236 GWh in 2013 to 44,839 GWh in 2014). The contributions of coal, natural gas and nuclear remain close to their 2013 levels. Total in-state fossil fuel based electricity generation increased by only 0.87% in 2014, reaching 122,990 GWh. Capped emissions from fossil fuel power generation is estimated to stand at 44.7 MMtCO2e, based on CaliforniaCarbon.info’s emissions forecast model which utilizes an emissions elasticity factor of 0.61 for in-state fossil fuel power generation.

California imports less non-renewable power

The contribution of electricity imports to California’s total system power reduced fractionally from 32.6% in 2013 to 32.2% in 2014. In absolute terms, electricity imports declined 2.6%, from 96,845 GWh in 2013 to 94,360 GWh in 2014.

The volume of imported coal-derived power declined by 19.4%, while imported natural gas and renewables stayed close to their 2013 levels. A reduction in non-REC specified claims by California utilities resulted in a modest increase in the unspecified source category, to 43.3% of total imported power in 2014 (from 38.3% in 2013).

California imported 79,444 GWh of electricity from non-renewable sources of energy in 2014, as compared to 80,402 GWh in 2013. The emissions elasticity coefficient of 1.19 (between emissions from electricity importers and total electricity imported from non-renewable sources), suggests that this decline may produce a 1.5% decline in emissions from the electricity imports category. Expected 2014 capped emissions from this sector are 35.2 MMtCO2e.

2014 compliance surrender

All capped entities for the first compliance period (2013-2014) of cap and trade will be required to surrender the remaining 70% of their 2013 obligations, and the entirety of their 2014 obligations, in November this year. This is not expected to dramatically influence a secondary market which has been significantly oversupplied, to the tune of 21.331MMtCO2e across the Western Climate Initiative (WCI) for the 2013 compliance year alone. Our 2020 WCI price forecast suggests that 2014 will see the cumulative surplus increase. V2013s and V2014s are currently trading at a fractional premium over the V2015, likely reflecting the option value that the earlier vintages possess. However, liquidity on the 2013/V2014 is considerably lower, with most entities likely to already have their compliance fully managed. While a V2014 contract volume of 1,220,000 is expected to deliver before the November deadline, there is no open interest on the V2013 during the same period.

Our most recent forecast for the WCI carbon market, which projects through 2030, finds that cumulative shortage should kick in sometime in the mid-2020s, causing sharper year-on-year price increases. Until then, we expect the market to remain oversupplied and prices to remain close to the floor.

Chandan Kumar: chandan.kumar@climate-connect.com

Rahul Rana: rahul@californiacarbon.info

Steven Neoh: steven.neoh@climate-connect.com

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