Coal, Generation, Natural Gas

EPA’s Clean Power Plan: A Fight to the Finish

Issue 2 and Volume 93.

“Litigation is a pursuit of practical ends, not a game of chess.”- Judge Felix Frankfurter

The window for comments on the Environmental Protection Agency’s (EPA’s) Clean Power Plan is coming to a close, and opponents have been lining themselves up for a fight. To date, 13 states have filed a lawsuit against the Clean Power Plan. In contrast, the governors of nearly the same number of states penned a letter supporting the president’s action on carbon emissions and asked for stronger regulations. Most appear to be waiting for the final regulation due this summer. Litigation promises to be lengthy and intense with the following economic arguments likely to show up in court.

A Carbon Tax in Disguise?

Critics say that the Clean Power Plan is nothing more than the failed legislative carbon tax. It appears that a carbon tax may be the only approach for states to realize the EPA’s carbon reductions in the timeframe proposed. Of the four carbon-reducing vehicles identified by the EPA, only the carbon tax directly displaces carbon-intensive coal plants instead of lower-emitting gas-fired units, effectuating the conversion from high-carbon emissions resources to lower-emitting resources. This approach is the most effective way of reducing carbon quickly and in accordance with market mechanisms; however, the carbon tax price must be set at the right level and adjusted regularly to account for changing market conditions.

Zeroing in on Emissions

Implementation of other zero-emitting resources (e.g., renewables and nuclear) generally will displace natural gas-fired units, resulting in a less effective approach to meet carbon targets. For example, solar energy production generally occurs during peak periods when natural gas-fired combustion turbines are on the margin; wind generally occurs at night when natural gas-fired combined cycles may be on the margin. In addition, renewables require compensatory flexibility on the system to ensure reliability-flexibility that likely is to be met with natural gas-fired units. Although nuclear is a technically effective solution, it is politically difficult in a post-Fukushima world and will require substantially more time than to be permitted, sited, financed and built than allowed for under the proposed Clean Power Plan.

The Hamster Wheel of Efficiency

Investing in coal plant efficiencies can be counterproductive, depending on where the plant is in the supply curve. Coal plants on the margin will operate more with improved efficiency, increasing the amount of energy produced and displacing competing natural gas-fired units, increasing total carbon emitted.

Energy efficiency and demand response have similar counteracting forces that inhibit true effectiveness, generally displacing natural gas-fired facilities and deflating market prices for the inframarginal, zero-emitting resources such as renewables and existing nuclear units.

A Moving Target of Cost Accounting

The EPA is mandated to show reasonableness, including an accurate estimate of the costs to implement the proposed regulation. The challenge in assessing the costs of implementing the Clean Power Plan is that costs and benefits depend on the relative price of coal and natural gas.

Taking a carbon tax as an example, the more competitive coal and natural gas prices are, the lower a carbon tax must be to effectuate a coal-to-gas switch. If the electricity supply curve reverts back to its traditional structure where coal plants are inframarginal (which could happen as coal plants retire or operate as seasonal peaking units, natural gas supply retracts in response to fallen oil prices and new demand for natural gas is realized), the carbon tax must be significantly higher to effectuate the same level of switching.

The effectiveness of zero-emitting resources also is affected by whether coal or gas units are displaced, which depends on the relative position of coal and gas prices. The impact of investments in coal plant efficiency also depends on the relative position of coal-to-natural gas prices. Assessing expected costs greatly depends on projected gas and coal prices.

If challenges to other environmental regulations are any indication, litigation surrounding the Clean Power Plan is likely to be fierce and prolonged.

Although the courts have confirmed the EPA’s jurisdiction to regulate carbon, the means of doing so have yet to be tried.

Tanya Bodell is the executive director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. Visit Reach Bodell at [email protected] or 617-416-0651.