EIA releases analysis of Clear Skies Act of 2003


Sept. 29, 2003 — The EIA has released an analysis of S. 485, the Clear Skies Act of 2003, and S. 843, the Clean Air Planning Act of 2003 (09/23), at the request of Sen. James Inhofe.

This report responds to a July 30, 2003, request from Senator James M. Inhofe. Senator Inhofe requested that the Energy Information Administration analyze the impacts of S. 843, the Clean Air Planning Act of 2003 and S. 485, the Clear Skies Act of 2003.

The report analyzes the impacts of limits on nitrogen oxide, sulfur dioxide, mercury and carbon dioxide (for S. 843) emissions from electricity generators. As requested by Senator Inhofe, for S. 485, analysis is included with and without the mercury provisions and, for S. 843, analysis is included with and without the mercury and carbon dioxide provisions.

To access the full report in PDF format, visit http://www.eia.doe.gov/oiaf/servicerpt/ccs/pdf/sroiaf(2003)03.pdf

Background

On July 30, 2003, Senator James M. Inhofe requested “the Energy Information Administration to undertake analyses of S.843, The Clean Air Planning Act of 2003, introduced by Senator Thomas Carper, and S.485, Clear Skies Act of 2003.” Senator Inhofe also asked the Energy Information Administration (EIA) to analyze S. 485 without the mercury provisions and S. 843 without the mercury and carbon dioxide provisions. This service report responds to both requests.

The emissions caps and implementation timetables for S. 485 (Clear Skies) and S. 843 (Carper) are summarized in Table H1. Both bills implement emissions caps on power sector emissions of nitrogen oxides (NOx), sulfur dioxide (SO2) and mercury (Hg). For NOx, the final emissions caps are the same for both bills, but the Carper bill calls for greater reductions earlier than the Clear Skies bill. For SO2 and Hg, the Carper bill calls for both earlier and more stringent reductions. For Hg, both bills use a cap-and-trade system, although the Carper bill requires a minimum level of removal from all plants.

The Clear Skies bill also contains a “safety valve” feature that caps the price that power companies would have to pay for Hg, SO2, and NOx allowances – should one or more of these “safety valves” be triggered, the corresponding cap on emissions would be effectively relaxed. The Carper bill also requires power sector reductions in carbon dioxide (CO2) emissions. Power companies can meet their CO2 targets by directly reducing emissions within the sector or by purchasing approved greenhouse gas (GHG) reductions from international trading programs or domestic projects outside the power sector. An independent review board is set up to establish the rules governing use of international or domestic emission offsets.

Highlights of the S.485 (Clear Skies Bill) Analysis

“- Power generators are expected to rely primarily on the addition of emissions control equipment to comply with the emissions caps.

“- Fuel switching from coal to natural gas is projected to play a secondary role. Coal generation in 2020 is projected to be 6 percent below the Reference case level while natural gas generation is 9 percent higher. Despite the reduction in coal generation, coal generation is expected to grow 24 percent between 2001 and 2020.

“- The Clear Skies cap on mercury affects the regional composition of coal use due to the higher cost of removing mercury from subbituminous coals. While use of western coal falls slightly below Reference case levels in the Clear Skies case, it increases above Reference case levels in a sensitivity case that assumes no Clear Skies mercury provisions and no imposition of Maximum Achievable Control Technology (MACT) standards under existing law requiring all plants to achieve specified mercury removal levels.

“- The safety valve for the mercury allowance price is triggered, so mercury emissions remain above the targets in Table H1. Mercury emissions in 2010 are expected to be 31 tons, compared to 53 tons in the Reference case and 45 tons in a sensitivity case where only the NOx and SO2 caps are imposed. Mercury emissions are projected to reach 29 tons in 2025.

“- Although the Clear Skies bill also establishes safety valves for the SO2 and NOx allowance prices, this analysis projects that neither will be triggered.

“- To reduce SO2 emissions, 85 gigawatts (GW) of capacity are expected to add scrubbers by 2020. Selective catalytic reduction (SCR) equipment is projected to be the key NOx emission reduction technology, with 171 GW added by 2020. In addition, mercury compliance requires 6 GW of supplemental fabric filters with activated carbon injection by 2020.

“- In 2020, under Clear Skies, NOx allowance prices in the East are projected to reach $2,354 per ton (all values given in 2001 dollars), while NOx allowance prices in the West are $1,722 per ton. In 2020, SO2 allowance prices are projected to be $966 per ton, while mercury allowance prices are limited to $35,000 per pound by the safety valve. In a sensitivity case without the mercury safety valve, mercury allowance prices in 2020 are projected to be $68,000 per pound.

“- Resource costs, the amount that power companies spend on fuel, capital, and operations and maintenance, are projected to be higher under Clear Skies than in the Reference case. Over the 2005 to 2025 time period, the discounted change in resource costs and mercury safety valve payments is projected to be $24.4 billion more than that of the Reference case. Of this amount, approximately $3.5 billion is attributable to safety valve payments. Discounted resource costs over the 2005 to 2025 period increase by 1.7 percent relative to the Reference case.

“- Electricity prices are also projected to be higher under Clear Skies. In 2020, the national electricity price is projected to be 2.5 percent above that in the Reference case, but still below the real price in 2001.

Highlights of the S. 843 (Carper Bill) Analysis

“- The role of fuel switching – from coal to natural gas and renewables – is projected to be much more important in the Carper bill than in the Clear Skies bill. This reflects the more restrictive emissions limits for SO2, NOx, and Hg, and the additional limits on CO2 emissions under the Carper bill. However, the results are very sensitive to the availability and cost of greenhouse gas offsets from outside the U.S. power sector. Three alternative cases with different assumptions about the availability of greenhouse gas offsets were prepared.

“- Coal generation in 2020 is projected to range between 12 percent and 32 percent below the Reference case in the three Carper cases with alternative assumptions about the availability of greenhouse gas offsets, while gas generation in 2020 is projected to range between 18 percent and 24 percent above the Reference case level in the three cases.

“- The Carper bill caps on mercury and CO2 emissions affect the regional composition of coal use due to the relatively high carbon content of coal and the higher cost of removing mercury from subbituminous coals. Total coal production in the Carper cases is projected to be between 12 percent and 30 percent below the Reference case level in 2020, depending on the availability and cost of greenhouse gas offsets from outside the U.S. power sector.. However, the impact on western coal use is projected to be larger, because it is generally more difficult to remove mercury from subbituminous coals. In 2020, western coal production is projected to be between 19 percent and 38 percent below the Reference case level.

“- Renewable fuels are also expected to play a large role in the three Carper cases. In 2020, renewable generation is projected to be between 6 percent and 89 percent above the Reference case level in the three cases. The renewables expected to see the largest growth in these cases are biomass and wind.

“- Under the Carper bill, NOx, SO2 and mercury allowance prices are very sensitive to the availability and cost of CO2 offsets. CO2 allowance prices in 2020 are projected to range from $20 per metric ton carbon equivalent to $127 per metric ton carbon equivalent. In general, NOx, SO2 and mercury allowance prices tend to be lower when CO2 allowance prices are higher because of reduced coal use.

In 2020, NOx allowance prices are projected to range from $0 to $1,914 per ton (all values given in 2001 dollars), while SO2 allowance prices range from $1,126 per ton to $1,483 per ton and mercury allowance prices range from $12,855 per pound to $23,501 per pound. The relatively low mercury allowances prices are due to reduced coal use and the requirement in the Carper bill that all coal plants remove at least 70 percent of the mercury in the coal they use after 2012.

“- The change in discounted resource and offset purchase costs over the 2005 to 2025 time period in the three cases ranges from $64.5 billion to $156.1 billion ($ 2001).

“- Electricity prices in 2020 in the three Carper cases are projected to range between 3.9 percent and 6.4 percent above the Reference case.

“- In a sensitivity case where only the NOx, SO2, and Hg caps in the Carper bill are imposed (Carper 3-P sensitivity case), power generators are projected to rely primarily on the addition of emissions control equipment rather than fuel switching. Coal generation in 2020 in this case is projected to be 5 percent below the Reference case level while natural gas generation is 6 percent higher.

Although the emissions targets in this sensitivity are generally more stringent than those in the Clear Skies bill, there is less fuel switching because the allowance allocation scheme in the Carper bill reduces the incentive for generating companies to reduce their output.

“- While the more stringent SO2 cap in the Carper bill tends to make low-sulfur western coal more attractive, the more stringent mercury cap has an opposite and larger effect.

As a result, western coal production under the Carper 3-P sensitivity case is projected to be 14 percent lower than in the Reference case in 2020, while eastern coal production is projected to be 4 percent above the Reference case level. Even with these changes from the Reference case, both eastern and western coal production in 2020 are expected to be about the same or above current levels of production.

“- To reduce SO2 emissions, 72 to105 GW of capacity are expected to add SO2 scrubbers, while 140 to 166 GW are expected to add SCRs, primarily for NOx removal, and 129 to137 GW of supplemental fabric filters with activated carbon injection are added by 2020.

“- In the Carper 3-P sensitivity case, the NOx allowance price in 2020 is projected to be $1,935 per ton, roughly in between the east and west regions’ NOx allowance prices under Clear Skies. In 2020, SO2 allowance prices are projected to be $1,249 per ton, nearly $300 per ton higher than under Clear Skies because of the tighter SO2 target in the Carper bill. In the full Carper bill cases the NOx, SO2, and mercury allowance prices tend to be lower than in this sensitivity case because the CO2 emission target leads to lower coal use.

“- The Hg allowance price in the Carper 3-P sensitivity case is projected to be $29,692 per pound in 2020, higher than the range of Hg allowance prices in the Carper cases with CO2 limitations where there are larger reductions in coal use, but lower than the Hg allowance price in the Clear Skies analysis, even though Carper has a more stringent Hg emissions limit and no safety valve.

The Carper bill requirement that all coal plants achieve at least 70 percent Hg removal after 2012 drives this outcome.

“- In the Carper 3-P sensitivity case, the discounted change in resource costs over the 2005 to 2025 time per are projected to be $51.7 billion. In the same case, electricity prices in 2020 are projected to be 1.9 percent higher than in the Reference case. Due to the output-based allowance approach used in the Carper bill, the projected impact on electricity prices for this case is lower than that for the Clear Skies bill that caps the same three pollutants, even though Carper has more stringent caps and timetables.

Additional Context for the Report

“- As in all projections, considerable uncertainty exists.

“- There have been few full-scale demonstrations of some of the plant configurations that are necessary to meet the requirements of the proposed bills.

“- The measurement of and cost of controlling mercury emissions is an important area of uncertainty in this analysis. In recent years, significant resources have been devoted to studying the factors that influence coal plant mercury emissions and technologies that could be used to reduce them. However, many questions remain to be answered.

“- The potential availability and cost of greenhouse gas offsets is an important area of uncertainty when analyzing the impacts of the Carper bill with its limit on CO2 emissions. There is uncertainty both about what offsets might cost and what sorts of rules and regulations the independent review board called for in the Carper bill would establish for acceptable international trading programs and offset projects.

“- The Reference Case used in this report includes final regulatory action under existing laws. However, consistent with standard EIA practice requiring policy neutrality in baseline projections, it does not include pending or proposed actions, such as the maximum achievable control technology (MACT) standards for mercury emissions from power plants.

The implementation of such actions could affect emissions, generator costs, and electricity prices during the projection period even if there is no new legislation.

“- The EIA analysis contained in this report, like other EIA analyses, focuses on the impact of the two bills under review on energy choices made in all energy-using sectors and the implications of those decisions for the economy. This focus is consistent with EIA’s statutory mission and expertise. The study does not quantify, or place any value on, possible health and environmental benefits of emissions reductions.

Comparison to EPA Clear Skies Analysis

While there are differences, the EIA and EPA analyses of the impacts of Clear Skies are similar in many respects. In terms of overall annual costs, EPA finds that Clear Skies would cost $4.3 billion in 2010, $4.4 billion in 2015, and $6.3 billion in 2020. EIA finds similar values, $4.2 billion in 2010, $5.0 billion in 2015 and $5.9 billion in 2020.18

The results for emissions control retrofits are also similar. For example, EPA finds that Clear Skies will lead to approximately 200 gigawatts of coal capacity having SCRs to remove NOx by 2020, while EIA finds 179 gigawatts of capacity will have them. EPA finds that just over 200 gigawatts of coal capacity will have SO2 scrubbers by 2020, while EIA finds that 171 gigawatts will have them. For supplemental fabric filters and activated carbon to remove mercury, EPA finds that only a few gigawatts of capacity will add them by 2020 while EIA finds that nearly 6 gigawatts will have them. In addition, both EPA and EIA find that the mercury safety valve in Clear Skies will be triggered and that mercury emissions will remain above the emissions cap throughout the projections, reaching 22 tons in EPA’s analysis and 28 tons in EIA’s analysis in 2020.

The key differences between the EPA and EIA analysis are in the amount of mercury that will be removed by the co-benefits associated with NOx and SO2 removal and allowance prices for NOx in the East and West. EPA projects that mercury emissions will fall from about 50 tons of emissions in 2001 to 45 tons in 2010 in its Reference case, and 34 tons in a Clear Skies case without the mercury emissions cap.

On the other hand, EIA projects that, because of increasing coal use, mercury emissions will increase to 53 tons by 2010 in its Reference case and 45 tons in a Clear Skies case without the mercury emissions cap.

Differences in relative electricity demand growth, relative fuel prices, and coal mix (i.e., bituminous, subbituminous, and lignite) appear to be the key drivers in this divergence. EIA’s results show stronger electricity demand growth, higher natural gas prices, and greater use of coal, particularly western subbituminous coal, than EPA’s results.

EIA projects higher NOx allowance prices than does EPA. For example, EIA projects that NOx allowance prices in the East will be over $2400 per ton in 2020 while EPA projects they will be $1500 per ton. The key factor in this divergence is different assumptions about the cost of new SCRs.

EPA assumes that it will cost approximately $65 per kilowatt to retrofit an SCR to a 500-megawatt plant, while EIA assumes it will cost just under $100 per kilowatt.19 EPA’s costs are in line with equipment vendor estimates, but actual realized costs for recently added units have shown much higher costs. Department of Energy experts believe that the costs for a 500-megawatt unit are actually closer to $120 per kilowatt than to $100 per kilowatt.

Clear Skies Act and Carper Bill Under High Gas Prices

Natural gas use is becoming increasingly more important to the electric power industry in meeting their generation needs and achieving environmental compliance. Over the past few years, natural gas price volatility has increased. Because of the uncertainty in natural gas prices, the impact of higher gas prices was analyzed for the Clear Skies 3-P Mercury Safety Valve, Carper 4-P High Offset, and Carper 4-P No Offset cases.

The difference in natural gas wellhead prices between the Reference Case Gas Price and their respective High Gas Price scenarios grows over time with natural gas prices in the High Gas Price scenarios exceeding natural gas prices in the Reference Case Gas Price scenarios by 6-7 percent in 2005 and 26-31 percent by 2025.

Generation, Fuel Use, and Capability

Higher natural gas prices lead to lower natural gas fuel use and increased coal and renewable fuels use across the scenarios. The largest impacts occur in the Carper Bill scenarios because they rely more heavily on natural gas as a compliance strategy to meet the more restrictive SOx, NOx, and Hg emissions limits as well as the additional limit on carbon dioxide emissions.

The impact of higher natural gas prices on the Carper 4-P High Offsets scenario relies relatively more on natural gas generation to achieve compliance than some of the other scenarios examined. Higher natural gas prices result in a 12-percent decline in gas-fired generation and offsetting increases in coal-fired and renewable generation.

The impacts on natural gas fuel use and capacity additions are similar to the impact on natural gas-fired generation. Higher natural gas prices result in less natural gas fuel use across scenarios, as generating fuel share is lost to coal-fired, renewable, and petroleum-fired generation. The higher natural gas prices also affect capacity expansion choices n the power sector resulting in less natural gas-fired capacity and more coal-fired and renewable capacity.

By 2020, cumulative unplanned capacity additions of natural gas-fired generation are 17 to 26 gigawatts less in the High Gas Price scenarios than in the Reference Case Gas Price scenarios. The natural gas-fired capacity displaced in the High Gas Price scenarios is replaced with coal-fired and renewable capacity.

Electricity Prices and Resource Costs

Both electricity prices and resource costs are higher in the High Gas Price scenarios than in the Reference Case Gas Price scenarios in 2020. The smallest increase (2.2 percent) occurs in the Carper 4-P High Offsets High Gas Price scenario and the largest increase (4.2 percent) occurs in the Carper 4-P No Offset High Gas Price scenario.

Typically, the larger the share of natural gas-fired generation the larger the impact of higher natural gas prices; however, the percentage price increase in the Carper 4-P High Offsets High Gas Price scenario is less than the percentage price increase in the Clear Skies 3-P High Gas Price scenario due to the generation performance standard contained in the Carper bill that results in a smaller electricity price increase than in the Clear Skies bill. Resource Costs are higher in the High Gas Price scenarios than in the Reference Case Gas Price scenarios.

The resource costs increases are in proportion to their reliance on natural gas-fired generation and the higher fuel prices and the more capital-intensive coal-fired and renewable generation capacity, replacing natural gas-fired capacity. like coal-fired and renewable technologies. Resource costs increase of 1.3 percent in the Clear Skies 3-P Mercury Safety Valve High Gas Price scenario, 1.6 percent in the Carper 4-P High Offsets High Gas Price scenario and 1.7 percent in the Carper 4-P No Offsets High Gas Price scenario.

To access the full report in PDF format, visit http://www.eia.doe.gov/oiaf/servicerpt/ccs/pdf/sroiaf(2003)03.pdf


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