How the Power Industry Is Making Sense of an Environmental Quandary

Decision-making isn’t paralyzed, even in the face of many unknowns concerning U.S. environmental rules, said a diverse set of industry experts at ELECTRIC POWER.

This year’s much-awaited Environmental Mega Session at the 18th annual ELECTRIC POWER Conference & Exhibition in New Orleans, La., on April 19 was titled “Navigating Clean Power Plan Compliance” (Figure 1). But as moderator Tony Licata of Licata Energy & Environmental Consultants noted, the industry is faced with a quandary concerning the future of the Environmental Protection Agency’s (EPA’s) October 2015–finalized Clean Power Plan (CPP).

PWR_060116_EPMega_Fig1

1. Panelists for the 2016 ELECTRIC POWER Environmental Mega Session. At the podium: Chuck Barlow, vice president of environmental strategy and policy for Entergy Corp. Seated, from left to right: John King, a partner at law firm Breazeale, Sachse & Wilson; moderator Tony Licata of Licata Energy & Environmental Consultants; Block Andrews, associate environmental engineer for Burns & McDonnell; J.T. Smith, director of policy studies, Midcontinent Independent System Operator; and Maria Race, director of NRG Energy’s federal environmental programs. Source: POWER

Much of the incertitude stems from the U.S. Supreme Court’s February 9–issued stay of the rule, blocking EPA action on it until the U.S. Court of Appeals for the District of Columbia decides on the rule and requests for appeal or writ are decided. But questions also abound concerning how the electoral cycle will affect the rule. Additionally, nobody knows how the Supreme Court will change after the recent death of Justice Antonin Scalia—the most animated of the high court’s nine judges and the one who, in his last major environmental opinion for the court, compared the EPA’s rulemaking of the Mercury and Air Toxics Standards (MATS) to buying a Ferrari without looking at the price tag. Congressional Republicans have, to date, denied President Obama’s Supreme Court nominee, D.C. Circuit Chief Judge Merrick Garland, the courtesy of a confirmation hearing, leaving the court split with four liberal-leaning justices and four conservative-leaning ones.

Meanwhile, many states haven’t started developing state implementation plans (SIPs), which are needed to comply with the EPA’s rule. Others haven’t definitively decided to do nothing—which would leave them relying on a federal implementation plan if the plan is not overturned. Another deferred decision for many is that between using a mass-based and a rate-based approach. At the same time, Licata said, the future prices of gas and coal are uncertain as the U.S. power sector makes a fuel-based transition away from the latter and toward the former, and as economics ravage merchant nuclear fleets.

Sooner or Later, We’ll Have an Answer

But nothing resolves a quandary like a legal decision from the Supreme Court or the D.C. Circuit, and “sooner or later we’ll have an answer,” John King, a partner with Louisiana-based law firm Breazeale, Sachse & Wilson, said optimistically.

King, who gave attendees a “high level” overview of legal arguments for and against the rule, explained that the rule’s key objective is to reduce carbon dioxide (CO2) emissions by 30% from 2005 levels by 2030. “The EPA, in its opponent brief, indicated that there’ll be only a 16% reduction in CO2 emissions as a result of the CPP from 2020 to 2030, and it equated that from the rate of decrease that had occurred from 2002 to 2013 without any federal guidelines,” he said.

Essentially, King explained, the plan requires three “building blocks”: The first requires creating more efficiency onsite at power plants, and the other two require “generation shifting,” or what people call “beyond the fence” measures. “These aren’t required onsite; they’re achieved by substituting [coal plants] with lower-emitting, cleaner-burning gas plants or no-emitting renewables such as wind or solar,” he added, noting that those Building Blocks 2 and 3 are “at the center of the controversy of what has gone up to the Supreme Court.”

The rule requires initial SIPs by September 2016 and final plans by September 2018. Implementation must begin no later than 2020 to achieve the required reductions by 2030. Legal challenges have been “fast and furious,” he noted. Even before the rule was finalized and published in the Federal Register, a request for an emergency stay was filed but denied by the D.C. Circuit; and after the rule’s publication, another request for stay was filed in January in the D.C. Circuit, leading the Supreme Court to take the “unprecedented action of granting a stay, even before the D.C. Circuit has heard the merits.” The D.C. Circuit is now considering the merits of the rule.

The EPA’s response was filed on March 28, 2016, and oral arguments are set for June 2, 2016. “It’s anyone’s best guess when the decision will be made by the D.C. Circuit, and whether that is when the Supreme Court will hear it,” King said.

A Legal Chokehold

“All the arguments are centered around a few sentences,” in Section 111 of the Clean Air Act (CAA), King said. (For more on the use of the CAA, see this issue’s Commentary: “Learning from the Clean Air Act’s Tragic Flaw.”) The EPA has taken a definition tucked away in the CAA’s Section 111(a)(1) and applied it to Section 111(d)(1) to bolster its authority to promulgate standards of performance. “It has generated more paper and felled more trees than anything that I’ve seen to date—something like 3.4 million comments on the rule, numerous applications to the courts,” he said.

Industry’s basic arguments assert that Congress, in passing Section 111, did not authorize the EPA to restructure the power sector, and neither does it permit the EPA’s generation-shifting (or “beyond the fence”) approach. Industry also argues that standards of performance must be set for or apply to individual sources, not “owners or operators,” as the EPA asserts, citing 45 years of prior EPA interpretations of Section 111. “Essentially what the opponents argue is that EPA is asking or mandating those sources—which EPA equates to owners and operators for the first time. Instead of making changes at their source, or facility, they have to go outside of that and find ways to reduce carbon via cap and trade and other methodologies to reduce carbon emissions even if they can’t achieve it at their site,” said King.

The EPA, however, contends that “generation shifting” clearly falls within the definition of “standard of performance,” because it’s the best system of emission reduction. “System” is extremely expansive and can include a broad scope of pollution-curbing measures, he said. The EPA is also essentially saying that the power sector is already trying to find carbon reductions. “They’re saying: ‘We’re not doing anything that the power sector isn’t already doing now.’ ”

The legal challenges also pinpoint a seemingly tiny difference concerning the definition of “standard of performance” between the so-called “House version”—which was passed and put into U.S. Code— and a “Senate version,” which is “floating around,” King explained. The Senate version’s definition of “standards of performance” (Section 302 [a]) specifies a particular clause of the CAA (Section 112[b]), which the House version does not. Industry argues that the EPA is prohibited by this so-called “Section 112 exclusion,” because the exclusion—which is not ambiguous, as the EPA has claimed—is to avoid duplicative regulation under Section 111 and Section 112. The EPA says it interpreted the House and Senate amendments the same way, he said.

Other Factors

Aside from the legal battle over the CPP, a number of other factors are affecting the power sector, and that has big implications for coal generators, specifically, who are trying to decide how much money to spend to maintain optionality, noted Block Andrews, an associate environmental engineer with Burns & McDonnell.

Topping his list of considerations that are prompting shifts in power markets was low natural gas prices, followed by “plenty of renewable subsidies,” renewable portfolio standards, “too many obstacles for new coal,” and “multiple environmental rules for existing fossil fuel sources impacting competitiveness.” Building a new coal plant under MATS, for example, would require reducing mercury levels for a non-lignite plant by 98.5%, he said. “Clearly, these limits are crazy low, and trying to get a guarantee for anybody for beating those limits is basically impossible.”

Power generators that are evaluating what to do with existing coal plants in the face of these considerations should assess whether or not they can handle additional capital and operational and maintenance costs. The first thing to consider is the marketplace. “Locational marginal pricing reflects the value of the energy at the specific location and time it is delivered,” Andrews said. “Clearly, where you are in the continuum makes a difference in what your future looks like.”

Decisions may also be driven by several other environmental rules, including the EPA’s ozone and cooling water rules, and especially by the effluent limitation guidelines (ELG) and the coal combustion residuals (CCR) rule. For the ELG and CCR rules, for example, generators may have two options. The first would be to close the facility in 2022, which would avoid ELG compliance and dry ash conversion required by the CCR rule; however, costs would still be required for pond/landfill closures. Overall, this option could cost about $1.5 million in 2020 (and about $50,000 after 2024). Option 2 would entail keeping the plant operational beyond 2022, Andrews said, but that would require converting the bottom ash system to a dry system, closing the ash pond, and expanding the existing landfill. This option would cost about $450,000 in 2016, $20 million in 2020, and about $300,000 after 2024. Ultimately, each facility has unique characteristics that require evaluation of compliance-specific costs and resource planning, he said. (For more on CCR compliance, see “Coal Combustion Residuals Rule Compliance Strategies” in this issue.)

A Regional Transmission Organization’s Perspective

J.T. Smith, director of policy studies at the Midcontinent Independent System Operator (MISO), echoed concerns about the timeline uncertainty prompted by the Supreme Court’s stay, primarily because his organization has a role in maintaining electric reliability. “To do so, we need anywhere from a five- to 15-year lead time,” he said.

MISO, which manages a regional grid spanning 15 U.S. states and the Canadian province of Manitoba, has considered six capacity expansion scenarios that take into account generation, transmission, and environmental constraints. The grid operator is already seeing decarbonization owing to low natural gas prices and state renewables incentives, Smith said.

And that trend will likely continue. Its business-as-usual scenario, for example, takes into account that about 12.6 GW of coal capacity will retire as a result of MATS. Among MISO’s findings is that more coal retirements are certain depending on the level of carbon reductions required under the CPP or some other plan. Under a 17% emission reduction by 2030 from 2005 levels, MISO could see about 8 GW of retirements, but under a 34% emissions reduction—what the regional transmission organization calls the “final CPP model”—the industry could see 24 GW of retirements.

Meanwhile, when exploring whether states in its region are likely to pick a rate-based or mass-based compliance approach to the CPP, MISO found a preference for the mass-based approach. “Depending on what the fleet looked like, most of the time mass was the preference of most of our states, even where we saw high energy efficiency, renewable penetration,” he said. “But what’s important to know… is that even for those states that were showing a propensity to rate at the beginning, when they found they didn’t have anybody to sell their emission rate credits to, they started to shift their preference back to the mass component.”

Under a rate-based compliance approach, continued investment in non-CO2-emitting resources will be necessary to mitigate CO2 price increases, while system dispatch faces relatively less change under a mass-based approach, MISO predicts. What that boils down to, according to Smith, is “[t]hat the mass-trading regime allows more flexibility for your existing fleet to exist going forward.”

Banking on a Low-Carbon Future Beyond the CPP

The panel also included two representatives from power companies: Maria Race, who leads NRG Energy’s federal environmental programs, and Chuck Barlow, a vice president of environmental policy and strategy at Entergy Corp. Both pointed to efforts that their companies are taking in preparation for carbon reductions, regardless of how CPP legal challenges are resolved.

Predicting that state commitments to clean energy will endure, Race said that NRG Energy, owner of several coal-fired facilities across the nation, is looking to reduce its carbon emissions by 50% by 2030 and by 90% by 2050 below a 2014 baseline. That will mean “driving competitive solutions, deploying innovative, low-carbon energy technologies,” she said. “I believe this will largely be market-driven, as costs for coal plant management increase inevitably, as they have been, and costs for renewable installations decrease while more transmission is built for wind and solar.”

Federal environmental rules other than the CPP are also putting pressure on coal generation. Compliance with the Cross-State Air Pollution update rule starting in 2017 will require companies to retrofit units “in ways that they never conceived before.” And some states, like Illinois, are also developing their own CCR rules, she noted.

Meanwhile, the EPA has said it will continue assisting states that are pushing for a low-carbon future modeled by the CPP and that the EPA does “not consider it inconsistent with the stay” by the Supreme Court, said Race. “Now, the next step in the EPA’s rulemaking is to finalize the federal plan and model trading rules, which there is every indication that EPA will promulgate soon in spite of the stay.”

Any company’s position on the CPP will depend on its vision, she said, and NRG is a proponent of state measures that offer compelling means to achieve low-cost CO2 reductions. That said, NRG is urging states in which it operates to adopt a state-measures approach with a mass-based trading backstop. “We believe it will allow lower costs and an abundance of CO2 reductions earlier than the other options. It also gives a better chance to adapt to the particular situations of the state—the ability to incorporate energy efficiency and renewables in state plans, and secure certain commitments from less-efficient power plants.” It also offers compliance without the risk of high compliance prices and trading-ready regimes and the premature shutdown of efficient coal plants, which would become stranded assets, Race said.

More Obvious and Less-Acknowledged Uncertainties

Entergy’s Barlow, a lawyer who formerly acted as general counsel for the Mississippi Department of Environmental Quality, pointed out that CAA compliance plans are usually the responsibility of the governor or state environmental quality agencies. However, owing to the rule’s large impact on electricity markets, “utility regulators are expected to play an important role in CPP planning.” It will force many of these different state representatives, some appointed and some elected, to meet each other for the first time—with unpredictable consequences.

Barlow was more optimistic about the short term. While the rule’s ultimate compliance deadlines aren’t clear, the D.C. Circuit can be expected to issue a decision on the CPP in the third or fourth quarter of 2016, and the Supreme Court will almost surely agree to review the decision, “whatever happens in the D.C. Circuit,” he said. “The stay will be in place until the Supreme Court rules on the case, likely in late 2017 or 2018—so no filings with EPA are required in September 2016 or likely in 2017.”

The Supreme Court may vacate the rule or remand it to the EPA, or a combination of the two. Even if the rule is upheld in whole or in part, the EPA may not change some compliance deadlines, Barlow warned. That could mean state plans will be due in 2018. “States must decide whether and how to continue compliance planning in the interim.”

Several regional transmission organizations, like MISO, are continuing planning efforts, but the states “are in different places,” which can be cumbersome for a company like Louisiana-based Entergy that also has subsidiaries in Arkansas, Mississippi, and Texas. Arkansas is among a number of states that oppose the rule but have done a tremendous amount of study, Barlow said. “They have staff members who are very well-versed in the rule, [who] probably can pick up a pencil again and start writing the state plan pretty quickly,” he said, adding that the state’s environmental agency and utility regulators are actively coordinating on the rule. “Entergy thinks that’s a great approach,” Barlow said. “But other states have done very little, quite frankly, and perhaps have not provided time or funding for staff members,” he said. “Some states may think that they need to do more, and we’re happy to cooperate with those states,” he said.

That includes Louisiana, which had conducted a CPP “listening session” at the end of March. Mississippi has suspended stakeholder meetings on the rule, and Texas isn’t planning to conduct any further analysis or meetings, he noted. ■

Sonal Patel is a POWER associate editor.