With U.S. EPA introducing its New Source Performance Standards this week, what impact could the rule have on electricity markets and the future of coal-fired generation in the United States? During today's OnPoint, Howard Learner, president and executive director of the Environmental Law & Policy Center, weighs in on the proposed rule and discusses how it could affect power generation in the Midwest.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Howard Learner, president and executive director of the Environmental Law and Policy Center. Howard, thanks for coming back on the show.
Howard Learner: Good to join you.
Monica Trauzzi: Howard, U.S. EPA has just introduced its new source performance standard to limit emissions from new power plants. What does this mean for the future of electricity markets here in the United States?
Howard Learner: Well, EPA's action today is obviously a huge step forward and it tracks the Clean Air Act and the Supreme Court's 2007 decision Massachusetts v. EPA. It's also a fairly measured action by EPA. The administrators made clear that it isn't applying to existing power plants and there's, in effect, a phase-in, in terms of when it applies to future power plants. So it's a big action, but it's been a very measured approach and, in the short term, we don't think it will have very significant impacts on the way the market is functioning this year or next year and probably the year after.
Monica Trauzzi: You indicated to me before the show that some folks on the Hill might be jumping the gun on acting on these rules.
Howard Learner: Well, that's right. Let's keep in mind this is a proposed rule. The agency has sent it over to OMB for review and you can't act on the Hill on a proposed rule in terms of the Congressional Review Act. Congressional Review Act applies to final rules, not proposed rules. For those who are interested in acting on the agency's action, they'll have to wait until it's final.
Monica Trauzzi: You say in the short term this wouldn't have much of an impact. I'm curious about the Midwest specifically.
Howard Learner: Right.
Monica Trauzzi: Which is your primary focus. What kind of impacts could this have on the Midwest?
Howard Learner: The big impacts in the Midwest are basic economics, the transformation of the market and policy, as well as public pressure. The fact of the matter right now is that operating a coal plant is more expensive than natural gas, than wind power, nuclear power and hydropower. You're seeing a lot of shutdowns of older coal plants in the Midwest because they're simply not economic to run going forward. And in terms of making modernization investments, the companies that own the plants, whether it's Midwest Generation or Dominion or GenOn or FirstEnergy, are deciding that it's not a good economic investment. They see where the policy is today, they see where the policy is evolving, that certainly has an impact. Public pressure certainly has an impact, but also it's the fundamental economics. They're not justified in today's power market in which wholesale power market prices are low, demand is declining or flat and as companies look at whether they can justify investing in running some of the older coal plants in the future, the numbers simply don't work. And that's apart from anything with regard to what the administrator has done with the greenhouse gas standards.
Monica Trauzzi: Do you plan to continue to apply pressure on some of these existing coal-fired power plants to see them shut down?
Howard Learner: Absolutely, but I'd put it differently. What we're saying is that the owners of these plants, many of which have been grandfathered since 1977, that's 35 years ago, it's time for them to either invest in modern pollution control equipment and clean them up or shut them down. We hope and believe that some of the coal plant owners will clean them up. It's time to modernize. Grandfathering wasn't intended to last for 35 years. The public health isn't intended to be at risk for that long, but the time has come. Clean them up or shut them down and let's move forward.
Monica Trauzzi: Industry says that this will make things difficult for them from an economic standpoint and that it might impact the flow of electricity in the United States. Do you see any truth to that or are they stretching things a little too far just to perhaps save some money?
Howard Learner: Well, no, first of all, electricity doesn't flow across the country, it operates within regional markets. And in the Midwest there's pretty good transmission right now, although there needs to be more. Electricity demand is flat and in some places declining. There is a huge overhang of excess generating capacity at a time in which power demand, according to the Energy Information Administration, is going to be flat over the next 10 years. What we're seeing is wind power and natural gas, both of which have low operating costs, being installed and moving forward. And some older plants that economically just aren't making it in the market, shutting down. The transition is difficult in the Midwest. It's painful. It's also one that we've seen in every field from telecommunications to computers. New technologies, new innovation comes in, it operates more efficiently, it operates cleaner and it operates in many cases cheaper. And then the legacy industries have to either adapt or move on. That doesn't make the transition easier, but it's one we've seen in many, many fields.
Monica Trauzzi: Would you expect then consumers in the Midwest to face higher rates as a result of this transition?
Howard Learner: In most cases, probably not for two reasons. First of all, a number of the coal plants that have shut down, for example Midwest Generation's Fisk and Crawford plants in Chicago, Dominion's Stateline plant on the Indiana/Illinois border were merchant plants. Those plants were not in the rate base, they're not affecting consumer rates and, indeed in most cases, the power was being sold out of state. Secondly, what's coming into the power market is less expensive electricity. Natural gas prices are below coal prices. Wind power coming in, once it's installed and operating, much of it driven by the renewable energy standards in the state, is essentially zero fuel cost and zero variable cost. So the power sources that are coming in are cheaper. Wholesale power market prices tend to be declining, so we're not looking at any significant rate increases due to the transition in most of the Midwest.
Monica Trauzzi: What plants do you consider to be on the bubble?
Howard Learner: First of all, look at the merchant plants in the Midwest. And the reason you focus on the merchant plants is because those are plants that are owned by companies that are going to have to make investment or shut down decisions based on spending their own money, not other people's money. So Midwest Generation, a subsidiary of Edison International, has a number of other plants in northern Illinois. They're all merchant plants, as are Dynegy's plants and some of Ameren's plants. Where those companies - and Dominion is the same situation, where those companies are making economic decisions based on spending their own shareholders' money rather than other people's money, those plants are on the bubble. Those owners are going to have to make a decision whether they believe it's economic, as they project the market next year and the succeeding years, to invest in cleaning up their plants or not. Some of them, they'll invest in modern pollution control retrofits and we'll have cleaner air, less pollution. And some of them they'll choose to shut down. But that's being driven both by economics of the retrofits or not. It's being driven by the economics of low-cost natural gas coming into the market, energy efficiency, we're all becoming much more efficient, and wind power in the Midwest and Great Plains are really coming in in a very serious way. Iowa is the number two state in the country when it comes to wind power and Illinois had the second-most amount of wind power installed last year.
Monica Trauzzi: Based on the direction of EPA's air regulations right now, what are your expectations for the next 5 to 10 years?
Howard Learner: A lot depends on what happens with natural gas prices, what happens with the federal production tax credit for wind power and other renewables and how the renewable portfolio standards are implemented in the states. If natural gas stays cheap, right now it's outcompeting coal and I think you've seen people across the industry, John Rowe, as CEO of Exelon, and many others who've said coal can't compete right now where natural gas prices are. If we all knew what the price of natural gas would be two years, five years or 10 years, we'd probably be at NYNEX trading. We don't, but if natural gas stays where it is today or near that, it really is very competitive with coal and, indeed, it will push out some of the coal plants. If the RPSs in the states go forward and the federal production tax credit gets extended, in the windy Midwest you're going to see a wave of new wind power projects come forward. That, of course, produces almost zero fuel cost, wind power, the wind being free, a little bit of operating costs. Again, very, very competitive with some of the coal plants. So, on both those scales we're seeing the economics in the market, combined with policy, tending to really force a decision of coal plant owners of do the economics justify cleaning up the plant or otherwise shutting it down? They're making those decisions based on economics, as well as where the public is going and where policy interests are going.
Monica Trauzzi: All right, we'll end it right there. Thanks for your perspective.
Howard Learner: Glad to join you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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