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EPA's New Regulation: Bold, Modest, or Both?

On March 27, 2012, EPA proposed first-ever national performance standards for greenhouse gas emissions from future power plants.   The proposal is both a bold move and a modest policy with little practical impact.  The rule is neither expected to reduce huge amounts of carbon emissions, nor will it kill a swath of power plants.  In fact, the proposed regulation will have very little, if any, impact on actual power plants, jobs, electricity rates, or pollution.  Still, it represents an historic step in the debate over actions to curb climate change and in the long term future of coal-fired electricity generation.

EPA’s proposed standard requires new plants to limit carbon dioxide (CO2) to one thousand pounds per megawatt hour (1000 lbs CO2/MWh), on an annual or 30 year average basis.  This emission standard will not change plans to build natural gas-fired combined cycle plants (which fall within the allowed emission rate), natural gas-fired simple cycle peaking turbines (which are exempt), or wind, solar, geothermal, or hydro-electric renewable energy (which do not emit greenhouse gases).  

Furthermore, the proposed rule will not impact any unit in the current electric generating fleet, including the more than 300 gigawatts of existing coal-fired generating units (which are not covered by the rule, even if they undergo major modifications).

What the new regulation does impact is the ability to build a brand new coal- or petroleum coke-fired electric generating unit without limiting its carbon emissions a decade from now (the 30 year average allows an efficient coal plant to operate for ten years before adding carbon capture and storage (CCS) technology).  In some sense, the EPA regulation articulates what many investors and power companies have been unwilling to overlook – the inherent risk of carbon emissions over the thirty year or greater expected life span and the need to consider the expense of future CCS technology in the financing of a new coal-fired power plant. 

But perhaps most importantly, with an expected period of prolonged low natural gas prices due to the shale gas revolution, companies have already been walking away from any plans to build new coal-fired power plants.  

Further, as natural gas prices have fallen, so has the wholesale price of electricity, threatening the economics of operating marginal coal plants in the existing fleet.  Although announced retirements of coal-fired generators are mounting, the near flat electric demand growth and under-utilized gas-fired capacity in the current fleet suggest adequate capacity to meet electricity reserve margins and there is little need for new baseload generating capacity in the next decade.  Where new capacity is warranted, companies are investing in lower cost, lower emitting, and quicker-to-build natural gas-fired plants, as well as renewable energy. 

The few exceptions include Summit Power’s planned 400 MW Integrated Gasification Combined Cycle (IGCC) poly-generation plant, known as the Texas Clean Energy Project.  A potential window into the future, this project is poised to build a coal gasification plant that will produce electricity and fertilizer (urea), as well as capture ninety percent of the CO2 to sell for enhanced oil recovery (EOR).  The carbon capture will allow the new coal plant to emit less than a natural gas-fired plant, as well as earn revenues for selling the contained CO2 to nearby oil fields, where it can be injected for permanent storage while increasing the amount of recoverable oil and gas.  Even though the Texas Clean Energy Project could easily meet the new EPA standard, the rule allows for any permitted coal plants that have yet to begin construction, such as the Texas plant and 14 others, to avoid the standard as long as they break ground in the next twelve months. 
This planned coal plant is expected to receive $450 million in funding from the Department of Energy and to take advantage of tax credits for EOR.  The irony is that the value of the CO2, as well as the innovative merging of electricity generation with chemical manufacturing, could help make this coal-fired plant economic even with today’s market fundamentals driven by low natural gas prices.

According to EPA’s own Regulatory Impact Analysis, their proposed regulation has no costs and no benefits. If this is the case, then why do the rule? EPA is under a settlement agreement to issue the new source performance standards under the Clean Air Act. This settlement agreement followed a 2007 Supreme Court decision finding: “under the Act’s clear terms, EPA can avoid promulgating regulations only if it determines that greenhouse gases do not contribute to climate change or if it provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether they do.” In the EPA’s endangerment finding, now under review by the courts, EPA found that a basket of greenhouse gases endanger public health and welfare. EPA has subsequently initiated Clean Air Act processes to regulate CO2, first from cars and now from power plants.

A final rule could be issued as soon as later this year. But that won’t be the last word. Opponents of the regulations will undoubtedly initiate lawsuits. Advocates will demand limits on carbon emissions from the current fleet, arguing that it is required by the Clean Air Act. Meanwhile, the on-going debate over the best approaches for reducing greenhouse gas emissions will continue as the United States has yet to produce a national consensus on a plan of action to address climate change.

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Read more blog posts from BPC’s Energy Project here.

2012-03-30 00:00:00
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