I was struck by Duke CEO Jim Rogers’ recent comments on the need for carbon price signals – in the form of a federal cap & trade program– as a necessary ingredient for meeting the Obama administration’s goal for an 80 percent reduction in CO2 emissions by 2050.

Rogers has long been known for his proactive stances on environmental stewardship. But he is also the CEO of the third-largest emitter of CO2 emissions in the U.S., and he’s calling for a program that would substantially increase production costs associated with Duke’s coal-dominated fleet of generation assets. This view is consistent with what many power generation executives have told me over the eleven years of NeuCo’s existence, which could be summarized with the statement: “the only thing worse than regulation is regulatory uncertainty.”

Natural gas is not a cure-all
I particularly appreciated Rogers’ reference to natural gas as the “crack cocaine” in a carbon-constrained world.  Many environmentalists simplistically view closing coal-fired plants and replacing them with gas-fired combined cycle plants as an easy solution to the power industry’s CO2 problem.  But two important facts are ignored in this prescription.  The first is that even with state-of-the-art highly efficient combined cycle plants, gas-fired generation still emits almost half the CO2 per MWh as a coal-fired plant. The second is that reliance on natural gas makes electricity production – the largest input to our Nation’s economy – dependent on a dwindling domestic resource with highly volatile prices, and a fuel supply that can only be augmented by importing liquefied natural gas (LNG). Reliance on LNG involves high transportation costs, makes a ready target for terrorists, and increases our dependence on countries where democracy, stability, and human rights are in short supply.

Innovation is critical
I also appreciate Rogers’ premise that technological innovation is critical to achieving climate change-related objectives, and that the only way to spur this innovation is price signals that reflect the potential global costs of ignoring this problem.  As part of the solution, Rogers believes that the U.S. government should “reward energy companies with rebates equal to about 90 percent of the cost saved through conservation efforts.”

While energy efficiency and demand-side management (DSM) will necessarily play a large role in our collective efforts to meet climate change challenges, I believe new technologies also need to be harnessed to get the largest possible CO2 reduction from existing generation assets.  And for regulated utilities, which still comprise the majority of US generation, incentives provided by state regulators can play a powerful role.  

Larry Kellerman works for Goldman Sachs and runs its power generation subsidiary, Cogentrix Energy.  He is also one of the nation's top utilities experts. Kellerman, was quoted in Thomas Friedman’s latest book (“Hot, Flat, and Crowded”) and uses the metaphor of “motivating the rat by showing it the cheese.” 

In stating that regulators should more creatively drive efficiency in older technologies, Kellerman suggests they tell the utilities they regulate: “You have all kinds of power plants – coal, natural gas, nuclear, wind. Here is the CO2 emissions target for your whole fleet.  If you continue to perform on emissions at your existing level, we will give you your standard rate of return.  If you achieve a big reduction – by burning your coal more efficiently and losing less energy as you push it through your boilers and turbines – we will give you an extra rate of return."

Having been a regulator during the late 1980s when “incentive-based regulation” was being experimented with, I have seen how strongly such regulation can affect utility behavior.  And I couldn’t agree more with Kellerman that incentive regulation should apply not only to the consumer demand side of the equation, but the generation supply side as well.