REGULATION:

Feeling abandoned by Congress, state regulators push for U.S. carbon cap

Congress has "left state regulators in the lurch" by failing to set new national climate policy that could guide regulators' decisions on the fate of coal-fired electric power generators in their states, the new chairman of a task force on climate policy says.

Ron Binz, who heads the climate task force of the National Association of Regulatory Utility Commissioners (NARUC), said in an interview that U.S. EPA will provide some help for state officials next year to fill the vacuum created by Congress' inaction.

EPA is preparing to tighten restrictions on interstate air pollution from power plants under its planned "transport" rule. It will open a second front when it regulates greenhouse gas emissions from coal-fired generators, based on its endangerment finding on the threat posed by man-made greenhouse gases in the atmosphere.

But the move by EPA in the absence of a clear national policy still confronts state regulators with uncertainty, said Binz, who chairs the Colorado Public Utilities Commission.

"NARUC is united that the uncertainty in Congress is hurting state regulatory commissions, and for that reason, we are supporting federal climate legislation to remove those uncertainties," he said.

The tools available to EPA through its plant-by-plant regulation under the Clean Air Act are not ideal for controlling greenhouse gas emissions, he said. "We need a GHG regulatory regime similar to what was used for SO2 -- a nationwide cap," he said. "It's unclear whether EPA can regulate carbon emissions in the way it regulates SO2 emissions."

"There are six or seven rules that are moving forward in EPA. It is most unfortunate that we don't have guidance from Congress on climate" that would help regulators decide whether to close down or clean up old, existing coal-fired generation, he said.

A patchwork view of the future

"We are facing very large decisions right now about the future of the fossil energy utility fleet," Binz said. "To make fully informed decisions, we need to know what the future of greenhouse gas regulation will be."

Biz said his state exemplifies the dilemma. The Colorado commission is considering the fate of 1,300 megawatts of coal-fired generation in the state, he said. The options vary widely, from converting the coal plants to burn natural gas to cleaning up coal boiler emissions, mothballing the plants, or shutting them down permanently and making up the difference with demand response programs or new generation. The commission's decisions are due by Dec. 15, well before EPA's actions take effect.

At the same time, the commission also oversees the state's commitment to obtain 30 percent of its power requirements in 2020 from renewable energy sources.

Every state's situation is different, but all face difficult decisions on the generation choices that will be needed to meet demand and assure reliability, Binz said. "This is the reality right now for what state commissions are doing."

Binz would not speculate on how NARUC may respond to a confrontation between EPA and members of Congress bent on restricting EPA's regulatory authority on air quality and climate policy issues. As in all such cases, NARUC policies must be developed and brought to the membership for approval, he said. "We have a very strong tradition of living within our resolved positions," he said.

But NARUC will continue to press Congress for action, he said. The task force is planning a series of webinar briefings for its members on climate and Clean Air Act issues. "Our goal is to be as ready as possible for a variety of approaches that might happen, with the assumption that nothing happens this year and the elections may make it even harder next year."

"EPA and the White House are clear that EPA will continue to press its authority under the endangerment finding. While I think that's suboptimal in terms of what could be done in designing a good, economywide carbon policy, perhaps EPA pressure will bring people together on a economywide solution," he said.

A chorus of differing opinions

State and federal regulators, the power grid's managers, utilities and generators all face a confounding lack of clarity about the nation's future demands for electricity and how best to respond, said Revis James, director of the Energy Technology Assessment Center at the Electric Power Research Institute (EPRI).

"There are different views as to how long a reduced rate of demand growth will persist," said James. "Some people feel we may not reach 2007 [demand] levels for 10 years. That would obviate the need for a lot of additional generation."

The common assumption is that new generation as it's needed will be supplied by gas generation, as operators increase the output of underutilized plants and, if necessary, build new ones. Others in the industry believe that the ability to capture and sequester carbon emissions underground will keep coal alive as a power plant fuel. Others believe that a combination of more wind power and reduction in demand will shrink the need for new coal or nuclear baseload generation, he said.

"There are just a lot of different opinions, even among the utility commissions," James said. "It's not a very satisfying picture." State regulators are charged with seeking the lowest-cost, responsible choice of generation based on today's conditions, and those may not be the best choices for the future, James said. That is the dilemma.

A report released this week by the consulting firm M.J. Bradley & Associates concluded that the United States can count on a substantial "cushion" of excess generation capacity in this decade that ensures the nation's electricity needs can be met.

While some coal plants will be shut down rather than install new pollution control equipment required by EPA, the reliability of the grid will not be compromised "if the industry and its regulators proactively manage the transition to a cleaner, more efficient generation fleet," according to the report.

It was prepared on behalf of eight energy companies by a team headed by Susan Tierney, a principal with the Analysis Group and a member of the Secretary of Energy Advisory Board, and Michael Bradley of M.J. Bradley & Associates.

Elderly power plants retiring

The report draws on estimates by the PIRA Energy Group that about 30 to 40 gigawatts of power-plant capacity faces retirement across the country over the next few years, but the industry is expected to have 100 gigawatts of surplus generation in 2013. (One gigawatt equals 1,000 megawatts, or enough capacity to serve between 800,000 and 1 million homes.)

"The industry has a proven track record of adding new generating capacity and transmission solutions when and where needed and of coordinating effectively to address reliability concerns," the report says.

There are proven technologies readily available for controlling power-plant pollutants such as nitrogen and sulfur oxides and mercury. A majority of the nation's coal plants have, or soon will have, these controls in place, demonstrating that the costs can be managed, the report says.

"Additionally, the industry is deploying enhanced demand response actions, expanded energy efficiency programs, and new 'smart grid' advances to manage consumption during the transition to cleaner, more efficient generation," it says.

The sponsors of the report -- Calpine Corp., Constellation Energy, Entergy Corp., Exelon Corp., NextEra Energy, National Grid, PG&E Corp. and Public Service Enterprise Group. -- would generally benefit from tighter restrictions on coal-fired power because of their holdings in gas-fired or nuclear generation.

Although most experts are forecasting slower growth trends for electric power demand, the North American Electric Reliability Corp., which oversees grid reliability, cautioned in a report this month that a rapid resumption of economic growth in 2013 could quickly push reserves of generation below targeted reliability levels in parts of the country.

What if the economy and the weather both heat up?

To take one case, the report by Tierney and Bradley cites data from the PJM Interconnection, which operates the wholesale power network between New Jersey and Chicago, as projecting a reserve margin of more than 24 percent in 2013, even with the expected retirements of 10,000 megawatts of older generation facilities. Grid planners generally strive for a reserve generating capacity of 15 percent as a safeguard in case demand or supply suddenly moves in unexpected directions.

NERC's new report estimates that if economic growth and energy demand were to pick up to pre-recession levels in 2013, PJM's reserve margins could drop as low as 6 to 9 percent by 2017 under the most conservative assumptions about new generation construction.

And surprises do happen. Despite the drag of a stagnant economy, electricity consumption in June and July in PJM hit record highs for those months, with peak demand climbing 16 percent over last year's peak, PJM reports. "Definitely because of the weather," summed up PJM Senior Vice President Michael Kormos.

Tierney said her report's optimism about future power supplies depends on rational decisionmaking by power companies and more clarity on the policy end.

"Companies need to make decisions about installation of control equipment, and they're going to have to make those decisions before long, unless they are betting there will be legislation to change the Clean Air Act," she said. "It would be a bad thing if the industry and parties played a game of chicken, and took things to some point where we would begin to face a tighter scheduling challenge because everyone was waiting for solutions."

Big bets on natural gas

"One of the reasons we wrote this was to help get the discussion going about the art of the possible," Tierney added.

"Utilities have to plan for the possibility of unexpected events," EPRI's James said. "And they have plans. What we hear from quite a few utilities is that they are probably going to utilize natural gas [to expand generation capacity] in the next decade."

Between 2001 and 2003, power companies installed more than 160 gigawatts of new generation, virtually all of it gas-fired. That is about four times what analysts project will retire over the next five years, the Tierney-Bradley report says.

Today, much of that gas generation is excess capacity, and tapping into it is an obvious answer if power demand picks up sharply. Some gas generating plant operators hope to increase their operating capacity rate from 40 percent to 80 percent, James said. But that will hinge on whether existing natural gas pipelines can supply enough fuel, whether the gas generators are located in the right places on the grid, and whether there is enough transmission line capacity to carry that extra power to where it is needed, he said.

"The confluence of those conditions may not be met for all those underutilized gas generators," James said.

Want to read more stories like this?

E&E is the leading source for comprehensive, daily coverage of environmental and energy politics and policy.

Click here to start a free trial to E&E -- the best way to track policy and markets.