How could changes made in U.S. EPA's final Clean Power Plan affect natural gas markets and infrastructure development? Where do the greatest challenges exist to meeting the plan's renewable energy goals? During today's OnPoint, Kevin Book, managing director at ClearView Energy Partners, discusses how the final rule will impact utility planning and investments.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. With me today is Kevin Book, managing director at ClearView Energy Partners. Kevin, nice to have you here as always.
Kevin Book: Great to be back, Monica.
Monica Trauzzi: So, Kevin, EPA managed to cause quite a stir in environment and energy circles this week with a final Clean Power Plan that included some pretty significant changes to what we saw in their draft proposal. What do you consider the biggest headline?
Kevin Book: Oh, I think the biggest headline far and away is natural gas. The bridge got cut a lot shorter. Whether or not you think about the broader legacy questions of what the fuel is going to be that replaces coal in the generation mix, natural gas was doing a pretty amiable job of it. It was getting along well with other fuels, it was playing nicely, and it was effectively the president's climate policy. It seems like he's changed policies.
Monica Trauzzi: Why do you think they did this?
Kevin Book: Well, if you're going to go green, I guess you're going to go for sending an indelible signal to renewables and to clean sources that they've got a home in the generation mix. It's harder to do than just to put out a rule. You also have to contend with markets and with the infrastructure buildout and all of the related and supporting efforts that have to go with it, but this certainly seems like a decisive effort to say that the president is looking for more than fossil fuels.
Monica Trauzzi: So what impact, then, do these changes have on natural gas markets, pipeline infrastructure and all the natural gas planning that's been happening?
Kevin Book: Well, if you looked at the projections that EPA had for the initial stage of the rule, the interim target for 2020, that was going to induce somewhere between 2.3 and 4.9 billion cubic feet per day of utility-sector, power-sector natural gas demand. The new projections are a lot lower, a fraction of that, between three-quarters and a little over one bcf a day. And then, relative to baseline, the demand is actually not induced, but destroyed. So if you're thinking about making big investments predicated upon satisfying tomorrow's generation mix, you may be revisiting exactly how you're going to do it. the resource of which we have so much readily available and close to the demand centers, relatively easily built power generation facilities, that's no longer the favorite fuel of the Obama administration.
Monica Trauzzi: Building Block 3, it seeks to increase generation from renewable sources. There's this Clean Energy Incentive program that was created to help states ramp up their use of renewables. Does the technology and infrastructure exist to support that?
Kevin Book: Well, part of what EPA seeks to do, and they've done this in other proposals and rules in the past, is to essentially be technology driving, to force a market to mature to meet a regulatory standard. We've seen where that can work and where it can't. Acid rain, it works. Ethanol, for a second-generation biofuels, not so much. So if you ask can this be done, the answer's almost certainly yes. The technology is maturing rapidly, but at what price? To do this, to achieve the kind of reliability and the diversification of the resource geographically, to achieve this kind of continuity, this kind of buildout, it may not be as affordable as it seems right now, particularly if incentives roll off. Monica, we're about one Republican president away from renewables having to decide whether or not they're really a trend or whether they were just being subsidized.
Monica Trauzzi: So that's the other big question. Does the PTC remain necessary and relevant long term if you have a program like the Clean Energy Incentive program in place?
Kevin Book: Well, implicitly the idea of a cap-and-trade system was that you could monetize the buildout for renewable infrastructure by selling forward these valuable allowances that would be effectively fiat currency minted by the EPA or by the government. This is a little bit less clear. It's not obvious to what extent the value of these CEIP credits, these ERCs and these megawatt and gigawatt equivalents, are going to be useful in actually stimulating and replacing the financing that drove the buildout of wind and solar to this point.
Monica Trauzzi: Under the final plan, coal's expected to hold 27 percent of the market in 2030. So then is the rule a coal killer?
Kevin Book: I think it's unmistakably a coal killer. It's part of a suite of coal killers. If you look at the coal generation fleet 10 years ago, 330 gigawatts of infrastructure, the Obama administration's rules, MATS and the Clean Power Plan effectively taking out a third of that in the space of a decade, 15 years' time. That's hard to describe another way. Whether you want to call it a war on coal or not, it is a decisive portfolio switch away, and if you look at the supply side and what it means at the mine mouth, it's a very significant downturn for producers here in the U.S.
Monica Trauzzi: My colleague, Rod Kuckro, suggests that this is essentially the all-of-the-above energy policy. You have a mix of natural gas, coal, renewables and efficiency. Do you agree with that?
Kevin Book: I mean, that's certainly the rhetorical stance that's been put out. We've tended to refer to it as more of a give a little, take a little energy policy. Some things are essentially accommodated by the Obama administration that were surprising, but this seems like it's more takes than gives. The natural gas support that we'd seen from the administration does seem to be fading in this rule, and so when you think about which of those all-of-the-above fuels you're going to get, it's not so clear that it's as inclusive as it once was.
Monica Trauzzi: And this is kind of an energy policy and a climate policy all rolled into one.
Kevin Book: Well, the two are hard to separate. My colleague, Christi Tezak, handles the electric power side for us, and I handle the upstream, but the two connect very much in a policy like this one. You cannot disconnect the upstream supply and all the incentives for demand that come from a program like this from the downstream consuming sectors. And here in the U.S., we actually have a very robust source of energy in natural gas, and so it's sort of surprising to think that it wouldn't be the first resort and maybe sort of backload some of these other technology-leading ideas for the future.
Monica Trauzzi: Reliability was a huge concern going into the release of this final rule. Do you think the agency sufficiently addressed the reliability concerns with the additional time that they're giving states and also that reliability safety valve?
Kevin Book: Well, reliability concerns are a function of demand stress. If we look ahead at the future and we ask is demand really going to grow as meekly as the EPA projects that it will, it may turn out that it does, or even declines as it does in some of the EPA scenarios, but it might also turn out that it looks more like California in the early 2000s when projections of demand were vastly outstripped by realities. There's some hilarious stories, some things that -- that you wouldn't think of as demand drivers. Marijuana growers in Denver, for example, putting load on the grid that you see in the news. But this is the stuff of American consumption. We like our devices, we like our gadgets, they're labor-saving. It's hard to imagine electric power being as flat as EPA is doing. So reliability becomes much more of a concern in a faster-growing demand scenario.
Monica Trauzzi: There are still elements of Building Block 4 throughout the rule, so how significant is the removal of that building block?
Kevin Book: Well, it's been removed but not retired. The building block has been removed in a tacit admission that the EPA cannot actually work through the PUCs and the generators to change customer behaviors. That seemed like an easy setup for a lawsuit, and they've dodged it. But it's still very much a part of attaining a compliance mechanism that's affordable to the end users. And there's always room for skepticism about energy efficiency. Every abatement supply curve you've ever seen and sort of the climate doctrine where there's the sources listed from lowest to highest cost along the way always shows these negative costs for efficiency gains that could be realized, but is there such a thing as a negative cost? Is there free money on the ground that we've been failing to pick up? There's usually structural impediments that make it very hard, sometimes infrastructure, sometimes economic limitations. We'll have to see whether or not that can be realized.
Monica Trauzzi: Let's talk about the states. The agency made some changes to the way they determine state targets, including sort of this uniform standard for looking at power plants. Which states fared the best following Monday's release?
Kevin Book: Well, the upticks in rebasing for some of the Western states that really would have been poised to get much, much lower targets in rate terms means that they essentially have more inventory to sell into a regional trading program. So if you're a clean state now and you've been given an uptick -- Connecticut, California, Washington state -- in some cases, that's a net benefit for you. Some of the more coal-fired states, including some that have increased their generation share of coal -- Nebraska, North Dakota, Iowa -- they've actually see that their rates have been tightened and, for that matter, their mass budgets tighten. So from their perspective, they're actually facing a much more dire circumstance thanks to the rebasing of the program.
Monica Trauzzi: How does that FIP look to you?
Kevin Book: Well, you know, we'll have to see what the FIP looks like when the FIP comes out. It seems still more generic than tailored. I think there's been a lot of question about whether or not the next administration is going to have the same enthusiasm for federal override of states that want to say no.
Monica Trauzzi: All right. We're going to end it there. Thank you for coming on the show. A lot to watch in the coming months.
Kevin Book: Thanks so much.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
[End of Audio]