Depending on factors like how individual states respond with their own state implementation plans, coal burn at U.S. power plants could fall from a little less than 800 million tons in 2022, the first year for implementation of the U.S. Environmental Protection Agency’s Clean Power Plan, to as low as less than 400 million tons in 2030, the final target year under the CPP.
That is according to a new study on the plan written by Doyle Trading Consultants’ Sherry Orton. Doyle Trading Consultants, based in Colorado, has worked for several years in the area of coal markets, power plant data and issues consultancy.
EPA on Oct. 23 published the final Clean Power Plan, which triggered a wave of lawsuits against it filed at the U.S. Court of Appeals for the D.C. Circuit. The court may rule in early 2016 on requests to stay the CPP while the issues are fought out. The CPP calls for 32 percent greenhouse gas reductions from existing power plants by 2030, with an interim deadline in 2022.
Although the EPA has finalized the standards for CO2 emissions from existing fossil-based Electric Generating Units, the nature of how they will be implemented depends on the actions of the states, the report noted.
The important thing to understand about the Clean Power Plan is that the covered EGUs must comply with an emissions rate of 1,305 lbs CO2/MWh for coal and other gas steam units and 771 lbs CO2/MWh for existing combined cycle natural gas units by 2030, the reported pointed out. The rest of the details are essentially a variety of accounting practices for how to calculate the emissions rate given that means to generate the same amount of electricity from a fossil-fired unit while producing lower CO2 emissions from the stack are limited.
The Doyle study pointed out that currently, most coal units emit between 1,800 lbs/MWh and 2,200 lbs/MWh and existing combined cycle natural gas units generally emit between 800 lbs/MWh and 1,400 lbs/MWh. Although the press releases for the finalized rule describe a “32 percent reduction in CO2 emissions from 2005,” this is an expected result of the application of the rule, not a requirement that units or states must meet, the study said. States can choose to implement a mass-based standard which limits total tons of CO2 emitted from covered sources, or they can adopt a rate-based standard wherein compliance is measured by pounds of CO2 emitted per MWh of generation.
Doyle found that the impact on coal burn is different for each approach. Under the trading-ready, rate-based approach for all states, coal burn in the worst case falls from less than 800 million tons in 2022 to less than 400 million tons in 2030. Under the trading-ready, mass-based option, coal burn in the worst case falls from less than 800 million tons in 2022 to a little over 500 million tons in 2030. These numbers are for the worst case scenarios, which the study says are far less likely than the “middle of the road” solution, which would be right at 400 million tons of coal burn in 2030 for all rate-based and 650 million tons for all mass-based approaches.
The single largest modification from the proposal which complicates modeling the likely compliance outcomes is the development of “trading ready” plans, the study said. Because the EPA has created a mechanism for interstate trading of allowances and rate credits which is not dependent on a formal agreement between those states, each state now has the ability to potentially impact the supply and demand balance of compliance currencies in other states in ways which may or may not have been anticipated by any of the participants.
Said the report: “Although the rate vs mass discussion has received much attention, there are actually three critical categories a state plan could fall into; a trading ready mass-based plan, a trading ready rate-based plan, or a single-or multi-state plan in which the compliance mechanism cannot cross outside the boundaries of that plan. In the third case, the over-or under-compliance of the state or states covered by that plan is quarantined from the rest of the country. While virtually all state representatives which have spoken about their state’s planning process have opined that trading over as large an area as possible is desirable, there are some circumstances where it would be to a state’s advantage to choose isolation.”
EPA has closed what appeared to some to be a loophole in the proposal, the report said. From a federal perspective, new sources are covered under section 111(b) of the Clean Air Act, not 111(d). The emissions rate for new combined cycle natural gas units in the New Source Standards is high enough that an efficient new unit can meet that limit without additional measures. If compliance is being measured in tons of CO2, then a state could conceivably achieve a large reduction in covered emissions by replacing existing fossil units with new combined cycle natural gas.
This was likely also what the EPA had in mind when the proposal was first crafted, however in the meantime, concerns about methane emissions and fracking during natural gas production have “soured” much of the environmental community on natural gas power generation, said the study. Furthermore, while the annual emissions of a new combined cycle natural gas plant are lower than the emissions of most of the existing units which would be replaced, since the new plants would presumably continue to operate for several decades the EPA views this as a net increase in emissions.
As a result of these concerns, states are required to address “leakage” in their plans, which means that a state must demonstrate that its compliance plan for existing fossil units will not incentivize the construction of new ones, the study added. The nature of how a rate-based plan operates is considered sufficient to address leakage concerns. In mass-based plans, leakage is considered an inherent vulnerability.
The two solutions proposed by the EPA are that the state use its regulatory and legislative authorities to include new combined cycle natural gas units in its allowance trading program, or employ an allowance allocation scheme designed to preferentially incentivize generation from existing natural gas units over new, the study pointed out.
“Consecutive waves of coal unit retirements due to EPA regulations for other pollutants, rapid expansion of combined cycle natural gas capacity driven by low gas prices, and unprecedented deployment of new wind and solar has achieved a large portion of early emissions reductions required by the rule,” the study said. “Although many states would not be able to comply in 2022 under either a mass-based or rate-based rule individually without taking actions beyond what is already planned, under the hypothetical scenario of all the states choosing compatible trading ready plans the nation as a whole is in compliance in the first 1-2 years of the program. This is not a probable scenario. In reality, how each of the states are positioned in 2022 depends on whether the states with over-compliance to trade choose to participate in the same type of plan.”
The range of coal burn shown in the study reflects the impact of varying average annual load growth between 0 percent and 0.5 percent relative to total 2014 EGU coal burn and 2014 coal burn only by units which have not announced retirement or gas conversion plans prior to 2022. Decreasing projected natural gas prices by 10 percent reduces coal burn by about 40 million tons in 2022 and 12 million tons in 2030, with a corresponding increase in gas consumption of 600 Bcf in 2022 and 170 Bcf in 2030.