An assessment of EPA’s transport rule, forthcoming utility MACT

In this report, we predict incremental coal plant retirements and pollution control retrofits resulting from U.S. Environmental Protection Agency proposed and forthcoming air regulations; and assess their impact on electric system reliability.

The specific air regulations we considered in our analysis are the EPA’s proposed Clean Air Transport Rule regulating SO2/NOx interstate pollution transport and forthcoming hazardous air pollutants regulations (utility MACT) described more fully in the Introduction section of this paper.

Implementing these regulations will require some coal generators to install pollution control equipment to continue operations. However, given the recent discoveries of abundant, domestic natural gas supplies, a competing fuel for electric generation, as well as reduced electricity demand, coal plant owners may elect to retire some existing plants rather than investing the capital necessary to install pollution controls.

Nonetheless, we conclude that electric system reliability can be maintained while the industry complies with EPA‘s air regulations.

The number of projected coal plant retirements nationwide is relatively small compared to historical U.S. net additions of generation capacity, and the electric sector has demonstrated repeatedly the ability to expand the generation fleet at a rate well in excess of projected capacity needs.

Although we predict that a handful of areas will have modest shortfalls due to predicted retirements, adequate reserve margins can be maintained by better using existing supply capacity, installing new generation and increasing load management.

Additionally, existing federal statutory, state regulatory, and regional transmission organization (RTO) market safeguards can be used to maintain a reliable electric system.

Some observers have expressed concern that accelerated coal unit retirements might adversely impact electric system reliability. To evaluate that concern, we:

1. Forecasted coal retirements in the US under an aggressive policy representation consistent with the Transport Rule and utility MACT (utility MACT/CAIR NOx)

2. Provided a reliability analysis for the Eastern Interconnection based on expected load growth, likely new generation additions and projected coal retirements at the RTO level, North American Electric Reliability Corporation regional level, and NERC subregional level.

3. Identified actions that can be taken to maintain system reliability.

Our conclusion that EPA air regulations can be implemented without adversely impacting electric system reliability comports with other industry reports that have been released in the past several months.

Specifically, our analysis reaches the following conclusions:

* Coal plant retirements will not adversely impact reliability. The existing U.S. coal fleet has about 314 GW of capacity, about 265 GW of which is located in the Eastern Interconnection. When considering both the currently planned 6 GW of retirements, plus those driven by an aggressive utility MACT/CAIR NOx policy, we project a total of 35 GW of coal retirements in the Eastern Interconnection and 39 GW nationwide by 2015. To put that in perspective, the 35 GW represents less than 5 percent of the Eastern Interconnection’s more than 730 GW of total capacity.

* These projected retirements are relatively small in comparison to historical U.S. net additions of generation capacity. For example, during the five-year period between 1999 and 2004, the net increase in US generating capacity was 177 GW, more than four times what is projected to retire in the U.S. by 2015.

* Notably, the average age of the projected retiring units in the Eastern Interconnection is 55 years. Many of these older units are already nearing the end of their design life expectancy.

* After projected coal retirements, all five eastern RTOs have sufficient capacity to maintain reliability without any new resources beyond those that are already under construction. Even excluding planned new generation in the permitting and site preparation stage, and after accounting for coal retirements resulting from the aggressive utility MACT/CAIR NOx policy, all of the eastern RTOs have more than sufficient total resources to meet overall RTO reserve margin requirements in 2015.

Although we project a few localized resource needs within the RTOs, these can be addressed through existing capacity markets and other tools discussed in this paper.

* Modest capacity needs projected in the NERC regions and subregions can be easily met. At the NERC regional level our analysis shows the utility MACT/CAIR NOx policy drives only de minimis capacity shortfalls in two regions and a modest shortfall in another. At the NERC subregional level, one larger — but still manageable — shortfall is expected. Two other subregional shortfalls are de minimis and modest.

We believe that all of these shortfalls can be met with existing industry tools, such as:

* New Gas Generation Construction — Our economic modeling shows that when new capacity is required, gas-fired generation is often the most economic alternative. In fact, the existence of abundant, inexpensive domestic natural gas resources not only is a driver of retirements but also will facilitate the transition to a cleaner generation fleet. History has shown that new gas units can be planned, permitted, and constructed in short periods of time.

For example, in the Virginia-Carolina NERC subregion (VACAR), which our analysis indicates has the greatest need, almost 12 GW of gas-fired capacity.

* Load Management — Load management tools, such as demand response and energy efficiency programs, are growing rapidly and have the capability to offset some of the projected coal retirements. Some of the NERC subregions with larger capacity shortfalls also have the greatest untapped potential for substantially increasing load management resources.

For example, in the VACAR region, load management accounts for 3.4 percent of resources at peak, while in the New England region, load management accounts for close to 10 percent of peak resources.

* Coal to Gas Conversion — Depending on the local availability of natural gas, existing coal units can be converted to natural gas for a relatively modest cost. For example, in the Southeast Reliability Corporation (SERC) region, which has a de minimis projected capacity shortfall of 0.6 GW, about 11 GW of coal plants already have natural gas pipeline service and have natural gas as a secondary fuel option.

* Alternative Technologies and Tools — Application of alternative and lower cost pollution control technologies and other regulatory tools could realistically result in even less coal plant retirements than we predict by 2015.

Additional regulatory safeguards exist to protect reliability. To address any remaining reliability concerns, the EPA Administrator, the Secretary of Energy, and the president each have authority under the Clean Air Act to extend compliance by one to two years under specific circumstances.

For example, in August 2005, to protect reliability, the Secretary of Energy used his authority to prohibit Mirant from retiring its Potomac River plant. Mirant subsequently retrofitted the Potomac River plant, which is still in service today.

In summary, modeling an aggressive policy implementation of EPA’s proposed and forthcoming air regulations, we demonstrate, consistent with other industry reports, that with prompt action and industry coordination, electric system reliability can be maintained.

Of the areas we analyzed — 5 RTOs, 6 NERC Regions, and 7 NERC subregions — we project that after predicted coal retirements, most still have capacity surpluses. At the NERC regional level, we predict that two regions will have de minimis shortfalls (relative to resource adequacy requirements) and another region will have a modest shortfall.

At the NERC subregional level, there are three subregions that emerge as having shortfalls — one is de minimis, one is modest, and the other is larger, but still manageable. Notably, the larger shortfall would exist even in the absence of the forthcoming EPA regulations and planning processes, new gas-fired plants, and incremental load management can easily address this shortfall.

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An assessment of EPA’s transport rule, forthcoming utility MACT

In this report, we predict incremental coal plant retirements and pollution control retrofits resulting from U.S. Environmental Protection Agency proposed and forthcoming air regulations; and assess their impact on electric system reliability.

The specific air regulations we considered in our analysis are the EPA’s proposed Clean Air Transport Rule regulating SO2/NOx interstate pollution transport and forthcoming hazardous air pollutants regulations (utility MACT) described more fully in the Introduction section of this paper.

Implementing these regulations will require some coal generators to install pollution control equipment to continue operations. However, given the recent discoveries of abundant, domestic natural gas supplies, a competing fuel for electric generation, as well as reduced electricity demand, coal plant owners may elect to retire some existing plants rather than investing the capital necessary to install pollution controls.

Nonetheless, we conclude that electric system reliability can be maintained while the industry complies with EPA‘s air regulations.

The number of projected coal plant retirements nationwide is relatively small compared to historical U.S. net additions of generation capacity, and the electric sector has demonstrated repeatedly the ability to expand the generation fleet at a rate well in excess of projected capacity needs.

Although we predict that a handful of areas will have modest shortfalls due to predicted retirements, adequate reserve margins can be maintained by better using existing supply capacity, installing new generation and increasing load management.

Additionally, existing federal statutory, state regulatory, and regional transmission organization (RTO) market safeguards can be used to maintain a reliable electric system.

Some observers have expressed concern that accelerated coal unit retirements might adversely impact electric system reliability. To evaluate that concern, we:

1. Forecasted coal retirements in the US under an aggressive policy representation consistent with the Transport Rule and utility MACT (utility MACT/CAIR NOx)

2. Provided a reliability analysis for the Eastern Interconnection based on expected load growth, likely new generation additions and projected coal retirements at the RTO level, North American Electric Reliability Corporation regional level, and NERC subregional level.

3. Identified actions that can be taken to maintain system reliability.

Our conclusion that EPA air regulations can be implemented without adversely impacting electric system reliability comports with other industry reports that have been released in the past several months.

Specifically, our analysis reaches the following conclusions:

* Coal plant retirements will not adversely impact reliability. The existing U.S. coal fleet has about 314 GW of capacity, about 265 GW of which is located in the Eastern Interconnection. When considering both the currently planned 6 GW of retirements, plus those driven by an aggressive utility MACT/CAIR NOx policy, we project a total of 35 GW of coal retirements in the Eastern Interconnection and 39 GW nationwide by 2015. To put that in perspective, the 35 GW represents less than 5 percent of the Eastern Interconnection’s more than 730 GW of total capacity.

* These projected retirements are relatively small in comparison to historical U.S. net additions of generation capacity. For example, during the five-year period between 1999 and 2004, the net increase in US generating capacity was 177 GW, more than four times what is projected to retire in the U.S. by 2015.

* Notably, the average age of the projected retiring units in the Eastern Interconnection is 55 years. Many of these older units are already nearing the end of their design life expectancy.

* After projected coal retirements, all five eastern RTOs have sufficient capacity to maintain reliability without any new resources beyond those that are already under construction. Even excluding planned new generation in the permitting and site preparation stage, and after accounting for coal retirements resulting from the aggressive utility MACT/CAIR NOx policy, all of the eastern RTOs have more than sufficient total resources to meet overall RTO reserve margin requirements in 2015.

Although we project a few localized resource needs within the RTOs, these can be addressed through existing capacity markets and other tools discussed in this paper.

* Modest capacity needs projected in the NERC regions and subregions can be easily met. At the NERC regional level our analysis shows the utility MACT/CAIR NOx policy drives only de minimis capacity shortfalls in two regions and a modest shortfall in another. At the NERC subregional level, one larger — but still manageable — shortfall is expected. Two other subregional shortfalls are de minimis and modest.

We believe that all of these shortfalls can be met with existing industry tools, such as:

* New Gas Generation Construction — Our economic modeling shows that when new capacity is required, gas-fired generation is often the most economic alternative. In fact, the existence of abundant, inexpensive domestic natural gas resources not only is a driver of retirements but also will facilitate the transition to a cleaner generation fleet. History has shown that new gas units can be planned, permitted, and constructed in short periods of time.

For example, in the Virginia-Carolina NERC subregion (VACAR), which our analysis indicates has the greatest need, almost 12 GW of gas-fired capacity.

* Load Management — Load management tools, such as demand response and energy efficiency programs, are growing rapidly and have the capability to offset some of the projected coal retirements. Some of the NERC subregions with larger capacity shortfalls also have the greatest untapped potential for substantially increasing load management resources.

For example, in the VACAR region, load management accounts for 3.4 percent of resources at peak, while in the New England region, load management accounts for close to 10 percent of peak resources.

* Coal to Gas Conversion — Depending on the local availability of natural gas, existing coal units can be converted to natural gas for a relatively modest cost. For example, in the Southeast Reliability Corporation (SERC) region, which has a de minimis projected capacity shortfall of 0.6 GW, about 11 GW of coal plants already have natural gas pipeline service and have natural gas as a secondary fuel option.

* Alternative Technologies and Tools — Application of alternative and lower cost pollution control technologies and other regulatory tools could realistically result in even less coal plant retirements than we predict by 2015.

Additional regulatory safeguards exist to protect reliability. To address any remaining reliability concerns, the EPA Administrator, the Secretary of Energy, and the president each have authority under the Clean Air Act to extend compliance by one to two years under specific circumstances.

For example, in August 2005, to protect reliability, the Secretary of Energy used his authority to prohibit Mirant from retiring its Potomac River plant. Mirant subsequently retrofitted the Potomac River plant, which is still in service today.

In summary, modeling an aggressive policy implementation of EPA’s proposed and forthcoming air regulations, we demonstrate, consistent with other industry reports, that with prompt action and industry coordination, electric system reliability can be maintained.

Of the areas we analyzed — 5 RTOs, 6 NERC Regions, and 7 NERC subregions — we project that after predicted coal retirements, most still have capacity surpluses. At the NERC regional level, we predict that two regions will have de minimis shortfalls (relative to resource adequacy requirements) and another region will have a modest shortfall.

At the NERC subregional level, there are three subregions that emerge as having shortfalls — one is de minimis, one is modest, and the other is larger, but still manageable. Notably, the larger shortfall would exist even in the absence of the forthcoming EPA regulations and planning processes, new gas-fired plants, and incremental load management can easily address this shortfall.