POLITICS:

Scars from last climate bill show up in ambitious EPA power plant rule

Five years is a lifetime when it comes to the politics of climate change.

On June 26, 2009, people jammed the U.S. House galleries to watch the chamber led by then-Speaker Nancy Pelosi (D-Calif.) vote on a bill that would cap industrial carbon dioxide emissions for the first time in U.S. history. In the moments after the bill passed by a razor-thin margin, the familiar sounds of bare-knuckled brawling among corporate lobbyists and environmental groups receded.

But the quiet aftermath became the briefest of respites, and as the dust settled, it became clear that the fight over the future of the carbon-intensive U.S. electricity system had just begun.

The House vote became a pyrrhic victory for House Democrats, who lost their majority in 2010. By the time a decision was made by Senate leaders to drop the Senate's effort to cobble together a climate bill, the economy felt as if it had entered a long malaise. The seams that held together the U.S. financial system were stretched, and jobless numbers remained stubborn. Tea party candidates were revving up their engines to go after big spenders in Congress, and oil tycoons and conservative think tanks ideologically opposed to responding to climate change spent hoards of money to undermine scientific findings and shift public opinion.

Conventional wisdom seemed to coalesce around inaction, even as scientists issued warnings about extreme weather resulting from rising concentrations of heat-trapping carbon in the atmosphere. Today, nearly 40 percent of U.S. carbon emissions come from the smokestacks of electric power plants, and the biggest polluters continue to be first-generation coal plants.

Five years after the House voted on the cap-and-trade bill offered by Rep. Henry Waxman (D-Calif.) and then-Rep. Ed Markey (D-Mass.), the economy is in much better shape. Public support for action appears stronger. A boom in domestic production has already accelerated the switch from coal to natural gas. But the idea of putting the federal government in charge of slashing emissions across a big, complex economy is still contentious.

It's this premise that became the driving force behind yesterday's proposal by U.S. EPA to regulate carbon at existing power plants through the Clean Air Act but give states a lot of latitude. Under the proposal, states would have to submit specific plans for cutting power plant emissions.

"The best way would have been to put a price on carbon. This is closer to second-best than I would have ever imagined," said Gary Yohe, professor of economics and environmental studies at Wesleyan University. "[EPA] worked hard to generate within the confines of what they put forward enormous flexibility to reduce costs."

Yohe participated in drafting the administration's National Climate Assessment released last month that predicted worsening climate conditions. "Nobody's writing climate policy for the next 100 years," Yohe said. "All we're saying is if you don't do something in the next five, it's going to be very expensive."

Outside the plant gate

The proposal, rolled out by EPA Administrator Gina McCarthy at the agency's headquarters in Washington, aims to cut emissions 30 percent by 2030 compared to 2005 levels through programs tailored to individual states or multiple states. If the proposed rule becomes a regulation, it would assign states interim and final emissions targets, starting around 2020. Broadly, states could meet those targets by making improvements at coal-fired power plants, shifting to lower-carbon sources of electricity like solar, nuclear or high-efficiency natural gas plants, or incentivizing energy efficiency by electricity consumers.

"We think the flexibility is commendable," said Jay Apt, a professor of business and public policy at Carnegie Mellon University and director of the school's Electricity Industry Center. "It includes things that are well outside the plant gate. That's something a lot of people asked EPA to do."

Coal as a source of generation is expected to take the biggest hit. For the past five years, coal has become increasingly expensive to burn. Other competing sources of generation are elbowing into spaces that coal dominated in 2007, when coal accounted for half of U.S. power generation. State and federal clean air mandates are requiring expensive retrofits at aging coal-burning plants, and utilities are opting to replace those plants with relatively cheap natural gas plants.

If the cuts to carbon emissions were met almost entirely by switching from coal to cleaner fuel sources, according to an analysis by FBR Capital Markets, the coal sector could see a roughly 12 percent decline in coal demand compared to 2013. Ratcheting down carbon emissions by 25 percent from 2005 levels through 2020 would slash coal demand by 26 percent.

Coal plants that have been operating for 40 or 50 years are already on their way out. Others have to find a way to comply with EPA's Mercury and Air Toxics Standards, putting still others on the retirement list.

According to the U.S. Energy Information Administration (EIA), of the 310 gigawatts of coal-fired power generating capacity available at the end of 2012, 50 GW, or 16 percent, is expected to close down by 2020.

A combined-cycle natural gas plant produces half the carbon emissions that a coal plant does. Without carbon regulations, EIA projects it could take another 20 years for gas to overtake coal as the largest share of electricity generation.

In the years since Waxman-Markey hit the skids, the acceleration of unconventional natural gas production has made gas prices competitive with coal on a regular basis. And that has also accelerated the search for a regulatory approach that could bypass Congress and take advantage of U.S. gas resources to push more conventional coal plants offline.

In February, the Washington think tank Resources for the Future, for example, wrote about a technology-based standard that would set a minimum share of retail electricity sales to be supplied by cleaner sources. Clean energy credits could be bought by local utilities from gas, nuclear, renewable or coal plants that capture carbon.

Utility industry analysts appeared convinced yesterday that the agency will open the door for states to comply in ways that account for the limits of their existing power generation mix. Analysts also blessed the rise of gas and low-carbon alternatives to coal. Fleets of competitive power generators with lower emissions are also likely to benefit from higher power prices.

Emerging economic cushion?

As with other major Clean Air Act amendments since the early 1990s, designed to cut various types of toxic power plant pollution, decades could go by while courts and regulators sort out the details. This is also expected to take time, as critics challenge it and states press for greater flexibility and more time.

Still, the differences between today and the atmosphere in 2009 that ultimately killed the bill are many.

First and foremost: the economy.

"In that era, we had already gone off an economic cliff," said Carnegie's Apt. "Now, while it's not as steep as it was down, an upswing is certainly noticeable."

An upswing in the economy, Apt said, means the costs of complying with a carbon mandate can be absorbed. Further, technology has evolved. Integrated electric utilities like Atlanta-based Southern Co. are already test-running technology and engineering needed to meet standards when electricity producers decide to hold onto coal generation. Solar power and energy storage are also creeping into Southern's lexicon.

"If you look at the patents for sulfur dioxide control technologies, there were virtually zero when the Clean Air Act requirements passed," Apt said. "American companies responded. Initially, the technology costs were high, then the costs started coming down, and now they're something like one-tenth of what they were in the beginning."

Still, utilities face challenges, even in the West, where more non-fossil sources of energy have been deployed. At the Western Conference of Public Service Commissioners yesterday, utility officials reacted to the rule with varying degrees of concern based on their energy mixes.

PNM Resources Inc., the largest electric utility in New Mexico, with 500,000 residential and business customers, is planning to reduce its emissions 22 percent by 2020 with the closure of two units at the coal-fired San Juan Generating Station. Getting to 30 percent will be harder, the utility's top executive said.

"That last piece is going to be expensive," said Pat Vincent-Collawn, president and CEO of PNM Resources. "I think it's going to be tough for a lot of people."

Shutting down the units was cheaper than retrofitting them with selective catalytic reduction systems, she said, even with the specter of EPA regulations providing an economic justification. PNM plans to close the two units and to retrofit two other units to reduce nitrogen oxide emissions, under a pending settlement with EPA to address regional haze.

"Our investors said, 'Why don't you spend a billion dollars and tell your regulators it's federal pre-emption?'" she said. "We said it's not good for our customers."

Public Service Co. of Colorado, which uses coal for 56 percent of its mix, also has 19 percent of its electricity coming from wind. Parent company Xcel Energy Inc.'s pursuit of renewables and energy efficiency has reduced companywide emissions 19 percent below 2005 levels with 31 percent expected by 2020 and 35 percent for Colorado alone, said PSC CEO David Eves, who praised EPA's rules.

"I'm really glad to see EPA recognize the state-by-state capability and investment in this," he said, "to give states the flexibility to accomplish this the right way for them."

Scott Morris, CEO of Avista Utilities, also praised the rule's flexibility. The utility serves electricity customers in Washington state and Idaho and shares ownership of the Colstrip coal-fired power plant in Montana along with five other utilities. Avista's mix includes 50 percent hydropower, 35 percent natural gas and 10 percent coal.

"What's Washington's interests might not be Oregon's interests, Montana's interests, Idaho's interests," he said. "We really encourage a regional dialogue so we can make sure we hear about it and talk about it."

For its part, the U.S. Chamber of Commerce, which says it represents the interests of American businesses, has remained tethered to the same position regarding any program to regulate carbon emissions associated with a changing climate: It's against it because it's too expensive.

When McCarthy rolled out the proposed rule yesterday, she had more political capital to use than President Obama did in 2009.

"We have never -- nor will we ever -- have to choose between a healthy economy and a healthy environment," she said, decrying the "empty allegations from critics" and the "same special-interest playbook."

"We can innovate our way to a better future," she said. "It's what America does best."

Reporter Debra Kahn contributed from Seattle.

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