AIR POLLUTION:

Report highlights split among utilities on 'transport' rule

U.S. EPA's plan to limit interstate air pollution from power plants would not hurt the reliability of the electric grid despite complaints from coal states, according to a new utility-funded report that highlights the battle lines that have formed within the industry.

Utilities will be able to adapt to the agency's proposed "transport" rule, which would seek stiff reductions in sulfur dioxide (SO2) and nitrogen oxides (NOx) in the eastern United States, according to a report released Monday by consulting firm M.J. Bradley & Associates LLC. The report was funded by eight utilities -- Calpine Corp., Constellation Energy, Entergy Corp., Exelon Corp., NextEra Energy, National Grid, PG&E Corp. and the Public Service Enterprise Group (PSEG) -- that together provide electricity to about 20 percent of U.S. customers.

Recent studies have suggested that low energy prices and new emissions rules could lead to the retirement of between 25 and 40 gigawatts of the nation's 1,030 gigawatts of capacity through 2015.

But the power sector added four times that much capacity from 2001 to 2003, the report says, and even without new capacity, the expected retirements would not wear out the "cushions" established by the North American Electric Reliability Corp. to prevent outages. That organization expects to have 107.3 gigawatts of excess capacity nationwide in 2013, most of it in the parts of the United States that would have to reduce their emissions under the transport rule.

"Without threatening electric reliability, the industry is well-positioned to respond to EPA's proposed road map," the report concludes, "provided that EPA, the industry and other agencies take practical steps to plan for the implementation of these regulations and adopt appropriate regulatory approaches."

The transport rule has split utilities into two distinct camps: those that say they are worried about reliability, and those that say they are not. Companies have chosen sides based on their individual circumstances, but more broadly, the factions tend to pit coal-dependent utilities in the heartland against East Coast utilities, which get more of their power from nuclear and natural gas.

The utilities behind the report rely less on coal and more on nuclear, natural gas and renewables.

Jeff Holmstead, the EPA air chief under President George W. Bush, said Eastern utilities have already been required to use a cleaner mix of fuels, so many of them may have little to lose from the transport rule. Some could even gain from it if they end up receiving more emissions allowances than they need.

"For some of them, it's an advantage to have a bigger burden put on their competitors," Holmstead said. But for coal-heavy utilities, which are preparing for EPA's expected standards for mercury emissions as well as the transport rule, "it's very difficult to see how you keep the lights on."

EPA predicts that the proposed transport rule would produce $120 billion in health benefits in 2014 at a cost of $2.8 billion to utilities. Some utilities would need to retire coal plants earlier or spend hundreds of millions of dollars on scrubbers.

A crackdown on coal plants would also likely lead utilities to use more of the existing capacity at natural gas-fired plants run by independent companies. Natural gas plants capable of producing more than 200 megawatts were only being utilized at about 35 percent of their potential in 2008, the report says, compared with 67 percent utilization for the largest coal plants.

Sue Tierney, a co-author of the report and deputy Energy secretary during the Clinton administration, said utilities have typically adapted well to tighter pollution regulations. Though some upcoming rules have not yet been finalized, creating uncertainty for utilities, the last big wave of power plant restrictions during the Clinton administration went off without a hitch, she said.

"The industry is sensational at making the lights stay on when they know what they will have to do," said Tierney, a managing principal at Analysis Group Inc. "When the rules are unclear, it creates an opportunity for people who don't want the rules at all to say that they aren't going to be able to be met."

Among the utilities trumpeting concerns about reliability is Columbus, Ohio-based American Electric Power Co. Inc., which criticized EPA's air pollution regulations in written testimony last month to a Senate Environment and Public Works Committee subpanel.

"The cumulative cost exposure is raising significant concerns about the economic viability of a large number of existing coal-fired units, as well as potential impacts to grid reliability and imposition of substantial increases in retail electricity prices to consumers," wrote AEP, which produces more electricity from coal than any other U.S. utility. "No evaluation of these potential cumulative impacts has been undertaken. Instead, EPA has engaged in only piecemeal examination of individual rules, and ignored the sustained economic pressures created by these increasingly stringent requirements."

In 2008, about 85 percent of the 192 million megawatt-hours of electricity AEP produced came from burning coal, according to a recent report by investor advocacy coalition Ceres (E&ENews PM, June 29).

In comparison, the eight utilities that sponsored the new report got less than 10 percent of their roughly 660 million megawatt-hours from coal. Three of them -- Calpine, National Grid and PG&E -- burned no coal at all.

During a Senate oversight hearing on the transport rule last month, an executive from PSEG told the Clean Air and Nuclear Safety Subcommittee that utilities would be able to achieve the proposed transport rule's emissions reductions within the given time frame.

Sen. George Voinovich (R-Ohio), who has raised concerns about the emissions cuts, questioned Eric Svenson, PSEG's vice president of policy and environment, noting that about 15 percent of the utility's electricity comes from coal-fired power plants.

"I suspect that if you got AEP and [Akron, Ohio-based] FirstEnergy in the room, they'd have a different perspective on things, just because of the fact of what they're burning in order to generate electricity," Voinovich said. "I suspect it's a little bit easier for you to meet some of these things than it may be for them."

Click here to read the report.

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