By: Joel Kirkland and Peter Behr
June 26, 2013
President Obama's plan to use a mixture of mandates and flexible regulation to cut greenhouse gas emissions is being viewed by energy industry experts through an age-old axiom: The devil is in the details.
The plan appears to be a shot in the arm for natural gas, as Obama's proposed regulation of carbon dioxide emissions from existing coal-fired power plants would provide a boost to cleaner-burning gas generators.
The White House's second-term climate agenda faces daunting head winds. Opposition from Republicans and resistance from coal-state Democrats, and the nuts and bolts of crafting a policy that would mark a significant shift for the nation's electric power industry, are immediate hurdles. Court challenges could create a protracted process for regulating carbon, as it has for U.S. EPA regulations of toxic air pollutants pushed through by the Obama administration.
But the daily stir of coal, natural gas and electricity markets in the United States also matters. With details of the new carbon policy still to come, unpredictable market prices will continue to be an underlying driver of decisions by electricity producers about where to invest and what energy sources to dispatch. Abundant coal will battle it out with growing shale gas production, several experts interviewed by EnergyWire predicted.
"There is no disagreement that the environmental regulations, many of which were proposed during the Bush administration, are going to bind and cause several -- tens of gigawatts -- of coal plants to be uneconomic," said Jay Apt, director of the Electricity Industry Center at Carnegie Mellon University. "If gas prices stay reasonable, then people will be buying gas plants.
Obama rolled out his climate plan in the blistering summer heat. Yesterday's speech on a Georgetown University quad rested on the premise that rising concentrations of heat-trapping gases in the atmosphere are the result of industrial emissions and that unregulated U.S. power sector emissions are contributing too much to rising temperatures.
The White House directive for EPA to begin drawing up a proposal to regulate existing coal-fired power plants had already been set in motion. In 2007, the Supreme Court ruled that EPA could not sidestep its authority to regulate emissions tied to climate change. The agency later issued an "endangerment finding" that created a legal foundation for regulating carbon.
"We limit the amount of toxic chemicals like mercury and sulfur and arsenic in our air and water, but power plants can still dump unlimited amounts of carbon pollution into the air for free," Obama said in the speech. "That's not right, that's not safe, and it needs to stop."
Carbon economics
How you get there might be left up to the most unpredictable factor of them all: the economy.
"If you want to stabilize the concentration of carbon dioxide in the atmosphere, you need a substantial reduction of emissions," Apt said.
"Meeting greenhouse gas targets in a flat-growth economy, where the industrial use of electric power is the same now as it was in the early 1990s, is very different than a scenario in which you blithely say growth is going to be 3 percent a year," he said.
A range of factors affect the immediate future of electric power generation, said Metin Celebi, a principal with the Brattle Group. "The most important one is the gas price relative to the coal price," Celebi said.
The future direction of that price is anyone's guess, given how many questions remain about the pace of shale gas production.
Of the nation's approximately 300 GW of coal-burning power generation capacity, nearly 40 GW was targeted for retirement by 2016, according to a Brattle analysis.
More "lenient" regulatory controls, along the lines expected from the Obama administration, could cause that total to rise to nearly 60 GW, the Brattle report says. A very strict policy could raise that to 77 GW of coal plant capacity retirements.
Lower gas prices plus strict regulations could cause almost half of the U.S. coal fleet to retire, a scenario that Celebi and his colleagues concluded in an October 2012 report would likely be untenable for electricity producers.
This shift is occurring for both short-term price and longer-range policy reasons that are not easy to separate. Most energy companies expect that at some point, an explicit or implicit price will be placed on power plant carbon emissions, and that particularly burdens coal plants, whose carbon footprint is twice that of efficient gas generators, said Katherine Spector, executive director of commodities strategy for CIBC World Markets Corp.
That expectation affects companies' decision on retiring or retaining older, inefficient coal plants. "It's actually a combination of the two" -- price and policy -- "and the policy environment could significantly accelerate the trend," Spector said.
The drop in natural gas prices over the past two years has tilted production in gas's favor, particularly in competitive power markets where the two kinds of power plants seek low-bid opportunities to run hour by hour.
Until shale gas production flattened gas prices, coal held a solid lead. In April 2011, coal-fired plants accounted for 41 percent of electric power output, compared to 23 percent for natural gas. A year later, the two fuels' shares were almost identical. Then gas prices moved up again from less than $2 per thousand cubic feet to $4 recently, and coal made a comeback. Its share of electricity production was 38 percent this April compared to 26 percent for gas.
But an expectation of relatively cheap gas also affects decisions on the future of coal plants. "It is a different world in gas prices than we had three or four years ago," Celebi said. "Gas price projections have come down substantially, and that's something you can put more weight on."
The Energy Information Administration, the statistical arm of the Energy Department, noted in its 2013 annual energy outlook that "the interaction of fuel prices and environmental rules is a key factor in coal plant retirements."
For all the price and production scenarios EIA considered, less than 15 GW of new coal-fired capacity would be added between 2012 and 2040. "For new builds, natural gas and renewables generally are more competitive than coal, and concerns surrounding potential future GHG [greenhouse gas] legislation also dampen interest in new coal-fired capacity," EIA said.
Shutting one-third of coal
A 2012 paper by a team led by Massachusetts Institute of Technology researcher Henry Jacoby said the increased gas supply boosts the power industry's flexibility to meet baseload electricity demand if expectations about nuclear power don't pan out or coal retirements speed up.
Under an aggressive policy to slash carbon that requires a 50 percent emissions reduction below 2005 levels by 2050, there would have to be "substantial changes in energy technology."
If the development of shale gas became too expensive, gas use would "grow slightly for a few decades." Toward the end of that period, however, "it would be priced out of this use because of the combination of rising producer prices and the emissions penalty."
Renewable energy would grow to 29 percent of power demand, and coal would keep a substantial position in the power pie.
Fact sheets issued by the administration yesterday left crucial questions about the policy plans unanswered, noted ClearView Energy Partners, "especially the threshold levels of emissions that will govern new and existing [generation] units."
On a back-of-the-envelope assessment, ClearView said that if the administration adopts a formula proposed by the Natural Resources Defense Council calling for a limit of 1,500 pounds of CO2 equivalent per megawatt-hour of electricity production, it could add another 70 GW of coal plant retirements by 2020. That's on top of the 40 GW of expected retirements tied to current EPA rules on mercury emissions and air toxins, the ClearView analysis said.
"In the aggregate, this adds up to a shutdown of roughly one-third of U.S. coal-fired generating capacity within the space of a decade," ClearView said. "Program design matters, too. The inclusion of offsetting emissions reduction mechanisms could keep more coal online."
Republicans in Congress have accused the Obama administration of threatening grid reliability through its pressures on coal-fired generation.
Celebi said that remains a big question. "It depends on where and when those plants retire," he said. "If it's a long period of time, the markets will have a chance to respond by cutting consumption or adding other resources.
"If it's too much, too quick, that will not be feasible," he said.
State foot-dragging
Politics soured the policy debate starting in 2009, electricity demand declined as the economy slumped, and natural gas prices fell to record lows in 2012.
Meanwhile, the technology-driven onshore drilling boom has turned up a "bridge fuel" to cleaner forms of electricity. And the White House has been openly supporting gas's role in combating climate change and spurring economic growth, despite concerns about methane emissions -- a potent greenhouse gas -- tied to upstream gas production.
"Sometimes there are disputes about natural gas," Obama said yesterday. "But let me say this: We should strengthen our position as the top natural gas producer because, in the medium term at least, it not only can provide safe, cheap power, but it can also help reduce our carbon emissions."
For electric utilities, the latest White House climate plan comes nearly four years after a bruising period of political wrangling over carbon cap-and-trade legislation. In 2009, the Edison Electric Institute was mired in the details of a bill that would distribute emissions credits for power generators to buy and sell under a carbon pollution cap. EEI's Tom Kuhn, president of the trade group of investor-owned utilities, had put together a fragile coalition of companies that could support the approach to ratcheting down emissions.
The premise behind the coalition-building had been that it's better to have a "market-based" program shaped by Congress than to leave it to top-down EPA regulations under the existing Clean Air Act.
The House passed the cap-and-trade bill by a slim margin in the summer of 2009, a signature achievement for House Democrats, but one that rested on compromises too politically hot for the Senate. The divisive debate revved up an opposition campaign targeting the science and politics of climate change. Republican leaders used the defeated legislation as a cudgel in the 2010 elections.
Since then, EPA has continued to tighten rules around conventional pollutants. New plants will have to comply with Mercury and Air Toxics Standards (MATS) rules. Other regulations addressing water intake and cooling water discharge are also shaping utility industry plans. Conventional coal gradually is being forced out of power portfolios.
Also on the table is an EPA draft rule that would cap carbon emissions at 1,000 pounds per megawatt-hour of generation for newly built power plants. The standard, which encourages fuel-switching to gas, would put the kibosh on new coal-fired power plants.
In a prepared statement after the president's speech yesterday, EEI's Kuhn urged EPA to put in place measures that "contain achievable compliance limits and deadlines" and "are consistent with the industry's ongoing investments to transition to a cleaner generating fleet and enhanced electric grid."
"It is also critical that fuel diversity and support for clean energy technologies be maintained, not hindered," Kuhn added.
The slowdown in electricity demand in the United States has helped enable efficiency technology and power plant retrofits to control pollution. But analysts and executives from powerful utilities like Georgia-based Southern Co. and Ohio-based American Electric Power Co. Inc. have said carbon limits pose the biggest risk to their coal fleet.
State utility commissions responsible for regulating power plants could slow the shift to low-carbon standards, analysts said.
"There will be litigation and foot-dragging on the part of some states in developing implementation plans," said Adele Morris, an energy economist at the Brookings Institution. "I think EPA is in the early stages of what they would even propose."