Regulation Validating Natural Gas Can Drive Energy, Climate Policy Beyond Congressional Paralysis

by Dan Watkiss, Bracewell & Giuliani

While clean energy and greenhouse gas (GHG) legislation remain mired, regulatory, economic and technical factors may push natural gas to the forefront of U.S. energy independence and climate stabilization. Executive branch environmental policy could leapfrog Congress. Making electricity from domestic natural gas could reduce enough GHG emissions beyond 2020 to avert potentially catastrophic climate change.

The Supreme Court decided in Massachusetts v. EPA that the Clean Air Act empowers the EPA to regulate as air pollution tailpipe emissions of carbon dioxide and other GHGs and that the EPA must give reason if it chooses not to regulate those emissions. The EPA responded Dec. 7, 2009, with its finding under the Clean Air Act that six GHG emissions constitute air pollution that endangers public health and welfare. The decision and EPA finding pertain to emissions from trains, planes, cars and trucks only, but absent Congressional action, they soon will cause certain provisions of the act–Title V permitting and Prevention of Significant Deterioration–to apply to new and modified stationary sources: coal-fired electric generating plants.

Commentators have said this extends Clean Air Act regulation beyond what was intended. That hardly can be said of its application to coal-fired power plants, other emissions from which have long been regulated under the act. Even before the endangerment finding, the analytical framework of the EPA’s new source review under the act was trending toward displacing new electric generation from coal and gas synthesized from coal (syngas) with natural gas as the best available control technology (BACT) required by the Clean Air Act’s new source review. Ten days after the finding, the EPA directed Kentucky air-quality regulators to consider whether the BACT is natural gas-fired electric generation and should be required in lieu of syngas. The EPA in January granted an objection to permitting a large proposed Arkansas pulverized coal plant because state air regulators failed to consider whether gasification of the coal to be burned in an integrated gasification combined cycle wasn’t the applicable BACT. Read with the Kentucky decision, the Arkansas ruling poses the question whether natural gas combined cycle shouldn’t be the BACT for both.

The White House Council on Environmental Quality on Feb. 18 released a draft guidance document describing how and when climate change considerations should factor into federal environmental impact assessments under the National Environmental Policy Act (NEPA). The guidance singles out the energy industry and recommends that federal agencies consider climate change if the proposed action would lead to the release of at least 25,000 tons of GHGs. In any consideration of alternatives to a proposed coal plant–mandatory where NEPA applies–consideration of climate change will favor natural gas over coal (without carbon sequestration).

Advances in extracting natural gas from shale rock have increased domestic reserves as much as 40 percent and lowered natural gas prices substantially. Natural gas exploration and development companies are offering natural gas under long-term contracts at prices competitive with coal for baseload generation. That with the excess capacity of existing natural gas-fired plants from overbuilding in the 1990s make it possible to double the approximately 25 percent load factor of existing natural gas plants and displace one-third of U.S. coal-fired generation, according to Congressional Research Service. Replacement of that much coal generation with natural gas generation by itself could achieve most GHG emission reductions proposed in Congress and to which President Barack Obama committed in Copenhagen.

Steven Pearlstein writes in a Washington Post article that most coal plants are 40 years old, fully depreciated and present no or few stranded costs. On coal jobs likely to be lost, Pearlstein offers this “cash-for-coal-clunkers” proposal: Have the government “offer an annual payment equal to current pay for two-thirds of the nation’s 87,000 coal miners, along with a similar annuity to an equal number of laid-off railroad and utility workers” at an estimated first-year cost of $8 billion, declining anually. In what Pearlstein calls “a stunning bit of politically convenient geology, many states that have the most to lose from declining coal production–Pennsylvania, Ohio, Kentucky, West Virginia and Virginia–would also be among the big winners from shale-gas development.” King Coal will not go away quietly.

“He’ll be up against not only the Sierra Club but also the Petroleum Club of Houston,” Pearlstein said.

Until carbon sequestration becomes available on a commercial scale, regulatory policies that encourage replacing coal-fired generation with natural gas generation offer the greatest potential to reduce near-term GHG emissions without increasing energy dependence. Only by assigning a cost or value to carbon emissions through cap and trade or a carbon tax are GHG emissions likely to be reduced 60 to 80 percent, what climate science indicates is necessary to avert global warming’s worst effects.

Author

Dan Watkiss is a partner with Bracewell & Giuliani in Washington, D.C., representing power companies, exploration and production and midmarket companies, natural gas pipelines, power and liquefied natural gas project developers and lenders, as well as government agencies and regulators. Reach him at dan.watkiss@bgllp.com.

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