EPA’s McCarthy tells industry to ignore ‘doomsday’ talk, focus on innovation

By Edward Klump, Nathanial Gronewold, Mike Lee | 04/24/2015 08:55 AM EDT

HOUSTON — As Gina McCarthy spoke for a second straight year at one of the world’s top energy gatherings, the U.S. EPA administrator defended a plan to cut carbon dioxide emissions and told the power industry to focus on its ability to innovate.

HOUSTON — As Gina McCarthy spoke for a second straight year at one of the world’s top energy gatherings, the U.S. EPA administrator defended a plan to cut carbon dioxide emissions and told the power industry to focus on its ability to innovate.

McCarthy made a point at IHS CERAWeek here to outline the thinking behind EPA’s Clean Power Plan, saying a low-carbon future is an "inevitability." She dismissed "doomsday" scenarios she said won’t happen because of the plan, which aims to use Section 111(d) of the Clean Air Act to seek carbon emissions reductions from power plants.

"There is absolutely no scenario, no standard, no compliance strategy that I will accept where reliability comes into question. Period. End of statement," McCarthy said. "EPA is considering all your comments that relate to stringency, timing, phasing in, looking at the glide path, and as we finalize this rule, we will continue to look at those comments and make appropriate adjustments."


McCarthy said that if something not predicted arises on a unit-by-unit basis, reliability issues could be addressed. The final rule "will give you the time and the space you need to take a reliability-first approach," she said, while providing latitude to adapt to market demands.

The proposed Clean Power Plan would cut carbon emissions from power plants 30 percent by 2030 compared with 2005 levels, with targets varying by state. Interim standards could start in 2020. McCarthy said the plan will have "no constitutional defect" and will be delivered this summer.

EPA has been going through some 3.9 million comments on the carbon plan, according to McCarthy. She said a number of comments indicated that the proposal was too aggressive in seeking that, by 2020, states and companies would be ready for an interim goal.

During a news conference, McCarthy said she wouldn’t tip her hand on the final rule, but she said "we have certainly paid attention to the comments that came in."

McCarthy sought to put the plan in context during her speech, saying it will help create a market signal for investments that are being made. She said it’s not accurate to look at compliance with the Clean Power Plan as a liability or a cost.

"Why am I so confident that this makes economic sense? Because you’re already making those investments," McCarthy said. "I see you. I know where you are investing."

Looking for changes

Before McCarthy spoke, a panel of power executives suggested EPA has been thoughtful in its approach to carbon while calling for some changes in the proposal.

Pat Vincent-Collawn, CEO of PNM Resources Inc., said EPA had been responsive to legitimate concerns raised by the industry, even if the Clean Air Act might not be the best tool to reduce carbon emissions. She said the 2020 timeline would be tough for potential reductions in states such as New Mexico, as closing or building a plant can take time.

"I think when the rule comes out, we’ll see some changes" and flexibility, she said. "But the question is: Over what period of time, and how quickly can we do this?"

Vincent-Collawn mentioned the possibilities of a reliability mechanism and reliability safety valve.

Leo Denault, CEO of Entergy Corp., said difference in markets must be kept in mind, as his company operates in utility and restructured areas. He said nuclear doesn’t get the sort of credit seen with other non-emitting resources.

"It seems that EPA has tried to stay within the context of what they can and cannot do, [and] may not have not been able to stay there completely," he said. "It’s going to come under a lot of pressure. The timelines are difficult."

At Calpine Corp., a power producer with substantial gas-fired generation, there is support for what EPA is trying to do, according to CEO Thad Hill. He said, broadly speaking, reliability shouldn’t be a challenge because of the rule. He said there are some market design issues to watch.

But Robert Flexon, CEO of Dynegy Inc., which owns plants fueled by coal and natural gas, said it’s important to remember other leaders would be "talking their own book." In an interview, he said there’s a role for coal in the generation mix, adding that the Clean Power Plan must recognize that.

Flexon said a national energy policy would be more effective on carbon than a state-by-state approach, which he said could pick winners and losers.

"I think there’s a lot of fundamental design issues around it, and hopefully, through the review process, some of those things can be addressed," Flexon said, such as potentially having carbon offsets as a way to comply.

Among the issues cited by Flexon was the possible need to build natural gas pipeline infrastructure, which intervenors could slow down. The CEO said Dynegy already looks for heat rate improvements at coal plants, so more of that may be tough.

Knowing how to innovate

During her talk, McCarthy took on unnamed studies she said didn’t use the best data or ignored economic benefits of cutting air pollution. McCarthy said she hadn’t seen support for claims of massive job losses from lowering pollution, and said that environmental protection is a foundation for strong economic growth.

"You need to give yourselves more credit, because this sector knows how to innovate when they’re facing pollution challenges," McCarthy said. "Frankly, regardless of snappy soundbites, underneath it all, industry is right now investing in clean energy because it’s the marketable thing to do."

She said spending from 2000 to 2010 on electric and gas utility customer-funded energy efficiency programs more than doubled, while money for utility efficiency programs quadrupled between 2006 and 2013. McCarthy said that, in 2013, investor-owned utilities spent almost $17 billion on transmission.

FERC Commissioner Colette Honorable, speaking on a separate panel, said her agency’s role will be to assist state utility regulators in implementing the Clean Power Plan and modernizing the grid as the country moves to a heavier reliance on natural gas and renewable power.

State and federal power regulators are in discussion on using FERC as the "protector of reliability," she said. Honorable said talks are underway toward developing a "reliability assurance mechanism."

In an interview, PNM’s Vincent-Collawn said her company uses a good deal of coal, and she understands her customers want the company to transition its fleet. She said she has sought to be involved in the carbon discussion.

"When you’re constructive about it, I think you have much more say into how the final rule comes out," she said. "If people know you’re trying to solve a problem, they’re going to listen to you, as opposed to if people just think you’re throwing rocks at it, they’re not going to listen to it."

Role for coal

Stephen Whitley, CEO of the New York Independent System Operator, said a rising share of natural gas in the generation mix worries him. He pointed to New York’s experience during the "polar vortex" event, when natural gas supplies were constrained, forcing the state to turn to oil for power.

Whitley said assuming the gas will be there leaves "too many eggs in one basket" and poses a great risk.

McCarthy said every fuel will have an opportunity to have a place in the market. She said that by 2030, an analysis shows coal will be a significant part of the energy supply.

Still, Gregory Boyce, CEO of Peabody Energy Corp., a coal producer, said in prepared remarks yesterday that the United States is moving ahead on a carbon plan with little regard for possible consequences. He said studies suggest power costs could rise, while reliability could suffer.

During a press conference, Boyce said the coal industry is suffering not just from government regulations. It’s also losing market share to low-cost natural gas as a power plant fuel, he said.

Peabody and other coal companies are trying to get policymakers to focus on what they see as the benefits of coal-fired generation — price and reliability — ahead of talks on a global climate accord scheduled for December in Paris.

McCarthy said energy sense and economic sense can go together. While the challenge related to climate change may be large, she said it’s dwarfed by the opportunities ahead. And with forecasts of flattening demand amid economic activity, she said the old model for power is out of step.

McCarthy also took on the idea that EPA actions are aimed at choosing winners or losers in a race to a future with clean energy.

"It’s about the United States of America choosing to lead that race," she said.