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Electric Reliability under New EPA Power Plant Regulations: A Field Guide

Keeping track of reports on the potential impacts of EPA regulations is becoming a full time job. Dr. Susan Tierney, Managing Principal at the Analysis Group and WRI Director, provides a “field guide” to these studies, and explains what they might mean for the power supply landscape in the next few years.

The Environmental Protection Agency (“EPA”) is proposing new regulations designed to reduce the emissions of harmful and toxic pollutants released to the air by electric power plants, as required by the Clean Air Act. Other EPA regulations under existing laws would affect water and waste systems of certain power plants. While power plants would be brought into compliance gradually over the next decade, questions have been raised about the reliability of the electric power system as the industry responds to the new regulations. Several new studies have weighed in on the debate. This article provides a "field guide" to these reports and their conclusions.

My own conclusion, based on their findings, and my own study for the Analysis Group/MJ Bradley Associates, is that EPA regulations are manageable and will render the resulting fleet of power generators more efficient and with lower emissions. We do not need to trade off cost-effective benefits in the form of public health for lower electric reliability; both of these are essential “givens” for Americans. This investment in cleaning up and modernizing the nation’s power supply system is important and ultimately do-able.

State of Play

Keeping track of every new report on the potential impacts of planned federal environmental regulations is becoming a full time job. In the past few months alone, several new studies have outlined their authors’ views of the different implications for power plant retirements that could result from EPA’s proposed air and water regulation affecting existing generating units. (See list below.)

Some observers have suggested that many, if not all, of these regulations need to be delayed in order to ensure that upcoming retirements of coal-fired power plants do not lead to adverse impacts on the reliability of the electric grid, while others have pointed out the various ways that the industry and its regulators are well-equipped to take the actions needed to ensure that public health is protected while keeping the lights on everywhere as uneconomical plants proceed to retirement.1

While there are some common themes, it can be hard to pinpoint the reasons why reports on this subject sometimes come to different conclusions about potential retirement implications of the new regulations. Some of the studies look at the impacts of air regulations alone, but not water regulations. Others study the impacts of EPA actions relating to new greenhouse gas (GHG) emission regulations, while others do not. Some studies are clear about their assumptions regarding important factors such as natural gas prices; others are not. These differences make it difficult for the most experienced analysts to make sense of why the studies come to different conclusions.

EPA regulations are manageable and will render the resulting fleet of power generators more efficient and with lower emissions.

Given the abundance of studies - and the significance of the issues - it's important to understand what’s what. This blog post aims to provide a “field guide” to these reports – to explain what they might mean for the power supply landscape in the next few years. This “field guide” focuses on the air regulations that primarily affect existing fossil fuel power plants and that are not related to GHG emissions, since these are the regulations with the earliest compliance dates for power companies.

Results of studies on EPA proposed regulations

In sum, the many reports suggest that the impacts of air regulations (i.e., those affecting sulfur dioxide (“SO2”), nitrogen oxides (“NOx”) and mercury)) are relatively modest in the near term – the period during which the industry will need to respond to regulatory signals. Assuming a compliance period starting in 2015 for such air regulations, the estimates range from 6 gigawatts (“GW”) to 65 GW, with most of the studies falling into a range of approximately 25 GW to 50 GW, compared to a total coal-fired resource base of approximately 310-340 GW.2 The amounts compare to an estimated 1,045 GW base of generating capacity in the U.S. in the year 2015.3 The results of the studies are shown in the figure below and do not include those that look at impacts including either GHG emission regulations and/or water regulations.4

The parts of the country with potential exposure to relatively high retirements in response to the air regulations are, not surprisingly, the portions of the country with a high percentage of coal plants (especially older and less efficient plants) and with lower existing reserve levels at present. These regions are shown in the figure below.

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As I and others have written about elsewhere, there are various tools that different players in the industry have at their disposal to ensure that these resource additions are undertaken in a timely way so that regions have sufficient power plant and other capacity (such as demand-reduction capability, transmission reconfigurations) to ensure that reliability requirements are met.5 Undoubtedly, there is work that still needs to be done to make sure that appropriate parties – power plant owners, state and federal regulators, regional transmission organizations, demand-side service providers, investors, and others – take action expeditiously to make prudent decisions. Nevertheless, the actions necessitated by the proposed EPA regulations are manageable and will render the resulting fleet of power generators more efficient and with lower emissions.

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Background: The Regulations

Several EPA regulations will affect portions of the nation’s existing power plants. Prior WRI blogs (and other observers) have outlined the major air and water rules, so I won’t repeat them here.

All in all, each regulation affects different groups of generating units over different time frames and in different parts of the country:

  • The Clean Air Transport Rule (“CATR”) principally affects fossil plants in the Eastern half of the U.S., and focuses on reducing SO2 and NOx emissions that are affecting both in-state and downwind air quality. The CATR follows upon the Clean Air Interstate Rule (“CAIR”), which court orders have required the EPA to revise.

  • The regulations affecting various hazardous air pollutants (“HAPs”), including mercury (“Hg”) among others, and introducing a requirement for Maximum Achievable Control Technologies (“MACT”) for power plants; the utility MACT rule mainly affects coal-fired power plants.

  • The regulations affecting the disposal of coal combustion residuals (or the so-called “coal ash”) rule, also affecting certain coal-fired power plants.

  • The Clean Water Act regulations (the so-called “316(b)” regulations) that will affect the water intakes and discharges of cooling systems of certain thermal power plants that use “once-through” cooling systems (and which may include many other power plants besides coal-fired power stations).

  • New regulations that would regulate GHGs from new and existing power plants. The regulations affecting new power plants went into effect on January 1, 2011, and regulations affecting emissions from existing power plants have yet to be proposed.

In light of statutory requirements and court orders, EPA has different amounts of flexibility in modifying current versions of these regulations, where such already exist. A WRI timetable for drafting and finalizing regulations, as well as the periods during which the affected power plants would need to be in compliance, is summarized in the chart below by WRI Senior Associate John Larsen.

[img_assist|nid=11878|title=Regulatory Compliance Obligations for the Utility Industry|desc=|link=node|align=center|width=600|height=439]

The Studies: Key Differences and Omissions

The many studies published (and in some cases, released) during the last year come from various authors or sponsors, including consultants, investor analysts, industry trade associations, and reliability organizations. They differ tremendously in terms of how they treat – and how transparently they report6 – their assumptions. Some of the more important assumptions clearly shape the results of their studies. These include such critical factors as: the role of natural gas supply and prices in adversely affecting the fundamental economics of coal plants (especially the older and less efficient ones); the as-yet-to-be-revealed response of the markets in providing new capacity to replace power plant capacity that is derated or retired; the time frames needed for the market to respond in one form or another; or the extent to which investment choices and resource options differ in light of whether a plant is in a regulated utility’s rate base or in a merchant power market.

Important differences among the studies include:

  • Varying assumptions about regulatory impact: A few of the studies (notably the one prepared by the North American Electric Reliability Corporation (NERC report, 10/2010)), studied not only the impact of EPA regulations affecting traditional air pollutants (SO2, NOx, mercury) but also the impacts of the 316(b) and GHG regulations coal-ash regulations. NERC identified the 316(b) regulations as having the biggest impact on retirements of coal plants with concerns raised for reliability, especially if EPA’s 316(b) regulations are “strict”.7 (I note that EPA Administrator Lisa Jackson wrote on December 16, 2010, that “EPA last month sought and received consent [from the court] to delay the deadline for a proposed rule by four months, to March 14, 2011” and with final action by July 2012. She said further that the “proposal that EPA issues next March will reflect a common-sense approach that reasonably accommodates site-specific circumstances while keeping faith with the need to minimize adverse environmental impact.”) The Brattle Study did not distinguish between impacts of the air rules only and the impacts of all of EPA’s upcoming regulations. The ICF-Fine Study includes the impact of GHG regulations. And the ICF-EEI looked at scenarios including 316(b) and GHG regulatory impacts.

  • Varying assumptions about market responses: Many of these reports make it clear that action needs to be taken soon by a variety of parties to assure that the estimated amounts of retirements do not adversely impact reliability. NERC makes this clear, as does the MJBA-AGI Study, the CRA Study, and several of the studies done by investment analyst firms (DB Study, CS Study, and Bernstein Study). The studies do not, however, make assumptions about how the market will respond as retirements are announced or anticipated. Conditions will change over time as electric supply and demand markets evolve. Most of the studies, therefore, serve as a call to action: as they overstate the resource adequacy gaps that will occur by 2015, they signal to various market participants – owners of retiring power plants, other power plant developers, buyers of power to replace that retiring capacity with other resources (e.g., newly built power plants, underutilized power plants, transmission reconfigurations, demand-side resources) – the need for new actions to meet upcoming electricity customer requirements. Lead times for many options fit well within the time frame identified by the studies.

  • Varying assumptions about fundamental power plant economics: Many of the studies (CRA, Bernstein, DB, Brattle, ICF-Fine, ICF-EEI, NERC) use different technical assumptions about key parameters that affect a power plant owner’s decision about whether it is more economical to add new pollution-control equipment on an existing coal plant or to retire the unit instead. Relevant key assumptions include the cost of replacement power, the cost of back-end control equipment, the types of equipment that are suitable for compliance with EPA rules, the amount of time that an existing plant will continue to operate in the future, the amount of time that the new plant will be dispatched to produce power in future electricity markets, the regulatory and tax treatments afforded to different types of plants, and the level of demand for electricity in the first place. As every technical analyst of electric systems knows, these assumptions shape the output, as do the features of the financial and dispatch models used in these studies.

  • Distinguishing the underlying impacts of low gas prices from the impacts of the EPA regulations: Importantly, rarely do the studies make it clear that low gas prices have fundamentally worsened the economics of coal plants, even in the absence of the EPA regulations. The relative attractiveness of producing power from natural gas compared to coal results from significant shifts in the prices of these two fuels over the past few years. Although gas plants on average tend to produce power relatively efficiently (i.e., with a lower “heat rate” (Btu per kWh produced)), coal plants (with higher average heat rates) have had a power production advantage due to relatively cheap fuel prices. This advantage has significantly eroded, as shown in the figure below, as gas and coal prices have changed over time (2005-2011). Coal plants with high heat rates (e.g., the ones that are older and smaller) are especially vulnerable to this change.

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This is an important part of the story about expected power plant retirements. If gas/coal market fundamentals were not where they are today – with relatively low gas prices as a result of newly opened and economically accessible natural gas fields, and rising coal prices (especially relative to natural gas) – then we would not expect to see as many coal-plant retirements in the face of the EPA regulations. The studies themselves are based primarily on gas price forecasts created in 2010 (including those used in last year’s Annual Energy Outlook prepared by the U.S. Energy Information Administration). It is clear that more recent estimates show that gas price forecasts and futures are lower than they were last year. With lower gas prices, one would expect more retirements of coal plants than with higher gas prices, something that various studies (e.g., the May 2010 ICF study prepared for EEI that was released to a congressional committee) have recognized. This is a market-driven outcome, rather than one resulting fundamentally from EPA air regulations.

  • Singular focus on “resource adequacy”: The studies that look at “system reliability” mainly focus on resource adequacy (i.e., are there enough resources available to provide power when needed, under reasonable outlooks for demand?) rather than operational security (i.e., can the system keep the lights on in all places and at any time of day in ways consistent with reliability standards?). As NERC stated in its study, “The impacts of potential EPA regulations may also have second tier effects on reliability, beyond resource adequacy. Resource deliverability, outage scheduling/construction constraints, local pockets of retirements, and transmission needs may also affect bulk power system reliability. While these issues were not studied in this assessment, the industry will need to resolve these concerns.”8 Clearly, more analysis is needed and the tools are available to do so.

  • Focusing on regional costs without looking at regional benefits: Finally, virtually none of the studies I’ve identified above (except perhaps the one I participated in) attempt to connect the dots between the places where air quality will improve (i.e., the geographic location of benefits) as a result of EPA’s regulations, and the regions where the power plant fleet will undergo modernization (i.e., the geographic locations of areas with potential cost increases). The cost increases will result from a variety of factors: plant owners adding new pollution control equipment; the need to replace capacity and energy from retiring plants; and so forth. Many of the benefits will occur in regions with cost impacts. In this sense, the people who will be experiencing the long-run health benefits and lower medical costs are the same people who may pay somewhat higher electricity bills.

Conclusion

After analyzing the range of reports produced on the proposed EPA regulations and their timelines for compliance, I am not persuaded to alter the view I expressed with my co-authors in our August 2010 report, Ensuring a Clean, Modern Electric Generating Fleet while Maintaining Electric System Reliability. “We conclude that, without threatening electric reliability, the industry is well-positioned to respond to EPA’s proposed road map to ‘help millions of Americans breathe easier, live healthier,’ provided that EPA, the industry and other agencies take practical steps to plan for the implementation of these regulations and adopt appropriate regulatory approaches.” We can do this, and we must.

Dr. Susan Tierney is Managing Principal of the Analysis Group, and serves on the World Resources Institute Board of Directors. Dr. Tierney is an expert on energy policy and economics, specializing in the electric and gas industries. She has consulted to companies, governments, non-profits, and other organizations on energy markets, economic and environmental regulation and strategy, energy and renewables policy, and energy facility projects.


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