Report

Hedging an Uncertain Future: Internal Carbon Prices in the Electric Power Sector

Apr 25, 2017 | Joseph A. Kruger

Summary

This report examines how internal carbon prices are used by companies and electricity regulators to manage regulatory risk, and identifies ways policymakers can offer guidance for companies to manage such risk in uncertain political climates.

Key Findings

  • Electric power companies have been at the forefront of using internal carbon prices to anticipate future policies, manage regulatory risks, prepare for new markets and services, and respond to customer interests.
  • In particular, electric utilities have used carbon prices in integrated resource plans (IRPs) to evaluate future resource portfolios and to examine business decisions such as the retirement of fossil fuel units.
  • A review of recent IRPs shows a diversity of carbon prices used based on a number of factors, including the potential for future constraints on carbon that go beyond current state and federal policies.
  • In a new political environment less supportive of climate policy, the estimation of internal carbon prices for planning and hedging regulatory risk has become more difficult but no less important.
  • State policymakers and electric power companies should consider renewed efforts to provide transparent assumptions about carbon prices in IRPs. In addition, there should be continued efforts to improve modeling and methodologies for carbon pricing.