The Final Clean Power Plan An Initial Assessment

Transcription

1 August 2015 The Final Clean Power Plan An Initial Assessment

2 Final Clean Power Plan An Initial Assessment The EPA released the final Clean Power Plan (CPP) rule regulating carbon emissions from existing electric generators on August 3, While many state environmental agencies, utilities and other key stakeholders were already organizing in advance of the final rule, they are now armed with final emission goals, timelines, and details to take definitive action, including compliance planning, legal action or both. The final rule has changed significantly in structure relative to the proposed rule that has been analyzed, criticized, and commented upon at length since its release a little more than a year ago. The final CPP includes a number of changes, including more lenient timing for compliance and compliance planning, a reliability safety valve, and features to reward early reduction measures. The approach to calculate the emission targets has changed notably in the final rule, resulting in different state goals. For some states, this moves the finish line farther away than it was in the proposal; for others, the emission requirements in the final rule are closer than initially expected. In aggregate, however, the total emission reductions expected to result from this final rule are likely on par or slightly more than what might have occurred from the proposed rule. Because the states will still maintain much authority in terms of how they will meet prescribed emission goals, the actual impact to emissions from the power sector as a whole could vary somewhat from the estimates proclaimed by the EPA in headlines. First, it is important to understand which of the more than four million comments on the proposed rule received by the EPA resulted in changes for the final rule. Understanding the implications of what is included in the final CPP is the first step for states in their efforts to develop tailored compliance plans. This paper presents Pace Global s initial assessment of the final rule, including the key changes and implications for state-level compliance. We will continue to analyze the rule, leveraging our comprehensive suite of electric and fuel market models and industry experts, and follow up with additional insights on compliance planning in the coming weeks. Key Changes to the Final Clean Power Plan The final rule includes a number of changes that address some of the most contentious components of the proposed rule. Pace Global views the final CPP as very different from the proposed rule. The EPA made changes in response to the many comments received and also a number of changes that aim to put the rule on more solid legal footing. From our view, the three most prominent changes to the rule are timing, the definition of Best System of Emission Reduction (BSER) that applies building blocks to ultimately calculate state goals, and the details behind state compliance plans. 1. Timing Relative to the proposal, the one-year extension for states to develop compliance plans, along with two additional years before the compliance implications begin, is a much more realistic timeline for states to align and implement the best means of compliance. Further, the aggressive interim standards in the proposed rule would have required states to achieve the bulk of their reductions by 2020 to meet interim standards averaged over the 2020 to 2029 time period. The delayed compliance start date and glide path assumed in determining standards in the final rule make compliance more realistic. However, this delayed start will be viewed negatively by the natural gas industry, which had hoped that power sector natural gas demand would be pushed up significantly for 2020 compliance, likely lifting prices from currently depressed levels. 2 P a g e

3 2. BSER and State Goal Determination The changes to the EPA s definition of BSER and changes to both the building blocks themselves and their application in BSER result in substantially different state emission goals. In the proposed rule, the EPA applied four building blocks to state baseline emissions to generate state-specific goals based on respective baseline generation mixes. In the final rule, to account for the interconnected nature of electric grid, these building blocks were largely applied at the regional level and ultimately converted into average national emission factors for the two major generation source categories affected under this rule: steam (coal and oil) generating units and natural gas combined cycle (NGCC) units. The state goals were then computed by applying the relative share of steam and NGCC generation to these national source category emission rates. 1 Exhibit 1 summarizes the EPA s changes to the building blocks and implications of these changes in the determination of the final goals. Exhibit 1: Summary of Application of Building Blocks in Draft and Final Rules Proposed Rule Final Rule Implications Building Block 1 6% heat rate improvement to all affected steam units based on equipment and operational improvements Heat rate improvement potential based on operational improvements by region Eastern Interconnect: 4.3% Western Interconnect: 2.1% ERCOT: 2.3% More reflective of regional fleet differences and achievable levels, although still aggressive to assume that all units could achieve these levels Building Block 2 Re-dispatch existing NGCC up to 70% (nameplate capacity); re-dispatch occurs in 2020 Re-dispatch NGCC up to 75% (summer capacity); re-dispatch phased in through 2030 This change results in more of a glide path for reductions, and disincentivizes a rush to gas in the early years of compliance Building Block 3 Re-dispatch to zero emitting sources, based on state-level renewable potential and at risk nuclear averaged over all states Re-dispatch to renewables only, based on revised regional renewable potential for new (post-2012) additions; renewable technologies include new utility solar, onshore wind, hydro, and geothermal Removing at-risk nuclear from BSER helps to raise target for all; this building block is applied before building block 2 in goal setting, which increases re-dispatch to renewables over gas Building Block 4 1.5% EE improvement / yr Not included in final rule goal determination Although removed to improve legal footing of rule, efficiency can still play a role in compliance The prominent impact of this approach relative to the proposal is that it shifts the bulk of the compliance burden to the states that are currently most reliant on coal generation. The proposed rule, on the other hand, left many coaldominant states with a relatively mild reduction target, while impacting states with underutilized NGCC capacity more significantly. Nuclear is no longer considered in the building blocks, however, the continued operation of existing units and expansions are still expected to play a key role in compliance. Exhibit 2 illustrates how the proposed and final rules treat existing coal and natural gas generation in goal determination, driving very different magnitudes of reduction at the state level. 1 Emission Performance Rate and Goal Computation Technical Support Document, EPA, P a g e

4 Exhibit 2: Summary of BSER Treatment of Coal and Natural Gas Generation Proposal Final Rule Existing Coal Treatment Existing NGCC Treatment Reduction driven from application of building block 1, as proposal assumed a 6% improvement in efficiency Kentucky Example: Baseline emission rate: 2,158 lbco2/mwh Rate after BB#1: 2,028 lbco2/mwh 6% reduction Reduction driven by difference between baseline utilization of existing NGCC units and building block 2 re-dispatch limit of 70%. Arizona Example: Baseline NGCC utilization: 27% Baseline emission rate: 1,453 lbco2/mwh Reduction Attributable to BB#2: 551 lbco2/mwh ~38% reduction (varies by state) Reduction driven by difference between state s average coal emission rate and the national benchmark of 1,305 lb/mwh Kentucky Example: Baseline coal emission rate: 2,166 lbco2/mwh Coal Benchmark rate: 1,305 lbco2/mwh ~40% reduction Reduction driven by difference between state s average NGCC emission rate and the national benchmark of 771 lbco2/mwh Arizona Example: Baseline NGCC rate: 900 lbco2/mwh NGCC benchmark rate: 771 lbco2/mwh ~14% reduction In short, the method to determine goals in the final rule will drive the most aggressive reductions relative to the baseline in states with the heaviest share of coal generation, with lower reduction requirements in more gas-reliant states. 3. State Compliance Plans The EPA clarifies and offers more guidance on the structure of compliance plans that will be acceptable relative to the proposal. By and large, the two compliance approaches, one placing a compliance obligation on EGUs (ie, unitspecific targets) and the other at the state level (allowing for compliance flexibility across generating units), have not changed in concept from the proposed rule to the final. The EPA details how these concepts might work in the rule, along with a proposed federal plan representing an approvable structure for states to consider in the planning process and a default plan for states that do not submit a plan. The development of the source category emission factors for affected units in the final rule certainly lends itself to a straightforward structure by which states would require EGUs to meet their respective targets; this could be accomplished in any fashion, but would likely include trading among affected facilities. From a compliance perspective, these standards at the EGU-level would be legally binding and federally enforceable. However, the EPA seems to push states to take a mass-based approach to compliance rather than a rate-based approach, stating that it would be the most cost effective and least administratively burdensome option. The opt-in federal trading scheme would allow for interstate trading without formal agreements so long as the state agrees to recognize the federal instruments for compliance. States will need to assess options and determine what compliance approach is 4 P a g e

5 optimal for them. The federal implementation plan, once finalized, will offer an approvable plan for states or an example from which states can pick and choose elements for inclusion in their own customized plans. One new requirement for state plans is the requirement that state plans address leakage of emissions to new sources under mass-based trading programs. 2 Under this requirement, the EPA is essentially saying that simply moving generation from affected sources to new NGCC units that are not covered under the CPP 3 will not be an acceptable plan for compliance. The EPA also definitively states in the final rule that under rate-based goals, new NGCC generation cannot be included as a compliance measure, to remove the incentive to simply build new gas plants as a means to reduce its emission intensity for compliance. 4 The EPA also offers a separate set of mass-based caps referred to as New Source Complements that account for what they consider to be a reasonable increment of new emissions from new NGCC installations. 5 These requirements under the final rule are expected to have an impact (ie, limit) on the magnitude at which states can simply move from coal to new gas generation as a means to comply. If utilities exceed the limit that EPA considers reasonable, emissions from existing units would be squeezed. Thus, EPA is implicitly promoting more renewables and efficiency at the expense of new gas generation through this restriction to limit total emissions sector-wide, not just affected units covered under the CPP. Aside from the more obvious impact of moderating the replacement of coal generation with natural gas generation, this provision is also likely to impact certain states that currently have little coal capacity, but might otherwise be good candidate locations for new NGCC plants. For example, the current boom in construction of NGCC plants in regions that traditionally import coal power but now have access to low natural gas prices (ie, parts of Eastern PJM) could be slowed. However, on the whole, Pace Global still expects that states will increase reliance on natural gas for generation needs, a trend that was anticipated with or without the CPP. Based on our initial analysis of the final CPP, Pace Global expects more retirement of existing coal capacity and development of efficient new NGCC capacity relative to our business as usual outlook to meet load and still comply with the mass-based constraints. 6 The result is complying with the CPP but with a much heavier reliance on new natural gas to do so. Although renewables and energy efficiency are two compliance options and likely to be greater with the CPP than without it, Pace Global finds EPA s analysis to be aggressive with regard to the contributions of these resources in meeting CPP compliance. Pace Global s Initial CPP Assessment Pace Global has analyzed the CPP with a comprehensive dispatch simulation of the U.S. power sector under a regime with state-by-state compliance under the mass-based targets (inclusive of the New Source Complements). This analysis helps answer three major questions: How much does the CPP impact national CO2 emissions versus a future without carbon regulation? 2 Clean Power Plan Final Rule section VIII.J.2.b 3 Note that new units do not fall under the jurisdiction of the Clean Power Plan, but are separately regulated under section 111(b) of the Clean Air Act. 4 Clean Power Plan Final Rule section VIII.K.1.b 5 New Source Complements to Mass Based Goals Technical Support Document, EPA, Table 3-11., Regulatory Impact Analysis for the Clean Power Plan Final Rule, EPA, P a g e

6 An Initial Assessment of the Final Clean Power Plan August 2015 How is the national power generation mix likely to change? Which states are likely to be impacted most versus a business as usual situation? How much does the CPP impact emissions? Pace Global compared total carbon emissions from the power sector in our CPP compliance scenario to emissions resulting in the business as usual (BAU) 7 outlook. Pace Global s analysis supports the EPA findings that the final rule would drive carbon emissions sector-wide 32 percent below 2005 levels. While the U.S. is currently more than half way towards that achieving that goal, the CPP is still likely to push emissions significantly (17%) below the levels that are likely to persist through 2030 without carbon regulation. This is shown in Exhibit 3. Exhibit 3: Power Sector CO2 Emissions (million metric tonnes CO2) 3,000 2,500 Actuals Projections 2,000 1,500 1,000 32% redution v levels Historical Business As Usual CPP How is the national power generation mix likely to change? In reviewing the expected generation mix over time for the power sector, the CPP, not surprisingly, is likely to result in decreased coal generation relative to the BAU scenario. While natural gas generation s share of total generation is likely to be roughly the same over time under both futures, renewables and energy efficiency are expected to pick up the share of the lost generation from coal. However, the penetration of either of these resources is highly uncertain since compliance can be achieved in 7 The BAU outlook assumes no carbon regulation, which has different expectations for load growth, coal retirements, new capacity additions, and fuel prices when compared to the CPP case. 6 P a g e

7 TWh TWh An Initial Assessment of the Final Clean Power Plan August 2015 any number of ways. 8 Market factors like the price of natural gas will ultimately impact the magnitude to which states rely on gas versus other low and no emitting generation sources for compliance. Pace Global s projections are shown in Exhibit 4. Exhibit 4: Lower 48 Generation by Fuel Type, CPP v. BAU 5,000 Business as Usual 5,000 Clean Power Plan 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1, Coal Gas Nuclear Hydro Renewables By 2030, Pace Global projects that coal will only comprise 22 percent of total generation, as compared to 30 percent in the BAU scenario and 28 percent in the EPA s final CPP analysis. The share in generation from natural gas is projected to be 33 percent in both scenarios, which is similar to the EPA s projections on a percentage of total generation basis. Renewables and energy efficiency are projected to have a six percent greater share in the CPP case, while nuclear generation is also expected to increase slightly. This is summarized in Exhibit 5. Pace Global s projections of total generation from renewables in 2030 under the CPP is 840TWh, similar to the EPA s projection of 850TWh. Due to the EPA s more aggressive assumptions on energy efficiency, however, the renewables represent a greater share of total generation on a percent of total standpoint in the EPA s analysis. 8 For example, as compared to the EPA s assessment of the final CPP, Pace Global s total load in 2030 is around 4,500TWh which is almost 10 percent greater than EPA s assumed total load in 2030 of 4,110TWh due to their aggressive energy efficiency assumptions. 7 P a g e

8 Exhibit 5: Generation by Fuel Type (2030) Business as Usual Clean Power Plan 6% 13% 30% 15% 4% 22% 6% 18% 33% 20% 33% Coal Gas Nuclear Hydro Coal Renewables Gas Nuclear Hydro Renewables EE Coal Gas Nuclear Hydro Renewables EE Which states are likely to be impacted most? At the state level, because of the significant changes to the building block application and approach, Pace Global warns against making simple comparisons between the draft and final standards, as they are not fair apples to apples evaluations. Rather, to assess the goals included in the final rule, it is more instructive to look at the expected changes to the regional generation supply between now and 2030 and compare the final CPP state-level goals to that of the BAU scenario. The expected required emission reductions from BAU conditions in 2030 to the requirements set out in the CPP for each state on a mass basis are summarized in Exhibit 6. There are several key observations from this comparison, including changes to expected conditions under the draft rule: States that are currently retiring or planning to retire significant amounts of coal capacity may end up progressing relatively easily towards compliance (ie, much of the Southeast) States that have aggressive RPS standards are likely to be in compliance with the CPP without further action (ie, California) States with younger, controlled coal fleets that are unlikely to retire in the next two decades in the absence of carbon policy have significant reductions to make (ie, Western coal-heavy states like Colorado and Wyoming and parts of the Midwest like Wisconsin and Indiana) States that are prime candidates for new NGCC development, but don t have much existing coal may have new challenges that weren t present in the draft rule (ie, New Jersey and Maryland) 8 P a g e

9 States that have under-utilized existing NGCC fleets are now likely to have an easier compliance trajectory than under the draft rule, but still have reductions to make (ie, Texas and Arizona) Large percentage reductions don t necessarily imply difficulty in complying if the baseline emission levels are very low and can be influenced dramatically by small changes in generating capacity (ie, Washington and Maine) Exhibit 6: Relative Difference (%) CPP Final Goals v. BAU in 2030 >20% 5-20% <5% Note: analysis assumes mass-based targets including New Source Complements and emissions from affected units and new NGCC generation In the course of compliance planning, individual utilities and states will have to undertake the exercise of comparing prior plans for their future generation mix to the CPP goals to assess the most appropriate compliance strategy for their individual situations. Who are the Winners and Losers Under the Final Regulations? The final plan has changed in such a way that significantly alters the list of hardest-hit states. There are some clear winners and losers in the new plan. The winners will include renewable developers, as there is a clear push for the 9 P a g e

10 development of new renewables, not only after 2022, but in the early incentive program between 2018 and States with underutilized natural gas natural gas capacity that were disproportionately burdened by building block 2 in the computation of the proposed goals are in a much better position. The final rules not only limit the reduction for these states, but also phase in the impacts of building block 2 to drive a more gradual reduction trajectory relative to the 2020 cliff in the proposed rules. Finally, the final rule gives a big nod to states bringing online new nuclear capacity, recognizing this generation as a compliance strategy and not a baseline assumption. This is likely to be realized in the Southeast, where there is a predominance of vertically integrated utilities investigating new nuclear capacity. On the flip side, this rule is much harder on the coal states and particularly those that do not have existing plans to retire a larger portion of their existing fleet such as Wyoming, Montana and several Midwestern states. The outlook for natural gas exploration and production companies is a bit more uncertain. Natural gas producers were looking for a boost in demand by 2020 by virtue of significant switching between coal and gas generation that was required in the draft rule, but this has been pushed back to Beyond this time, the compliance strategy of the states will have a big impact on the development of new gas plants. We note that the opportunity under a federal trading system, should many states opt in, will have the potential to make this more of a national cap than a state by state cap, offering more reduction options for states in meeting their respective goals. State plans would indicate whether or not they will opt into a federal trading scheme. At this time, it appears that states can maintain the flexibility to opt into the federal program, and allocate or auction allowances as they like under their own plans. The generators then would trade amongst each other to meet compliance. So What Next? This remains a very complex set of regulations that will require a great deal of thought and analysis. What is presented herein is just an initial look at the rule and prominent changes. One of the first questions is how legal challenges to the rule will play out. Litigation will require both a showing of harm and unfair practices. There are arguments supporting proponents and opponents of the EPA s rule. Although the industry acknowledges legal challenges have a good chance of altering or delaying the rule, states that have not taken a stance to ignore the rule all together are moving forward prudently with compliance planning. The second question is to assess how to position in negotiations with the state. The obvious questions are whether a mass based standard is the most advantageous goal structure versus a rate-based standard. A second question relates to whether a cap and trade approach like the national trading structure outlined in the federal model trading rule is beneficial and whether rules can be set (for example through the ISOs) to benefit the region as a whole. Because the final rule would separate trading amongst rate-based states and mass-based states, these decisions not only at the state but regional level are important to consider along with their implications to clearing prices in wholesale markets. Unlike preparations for commenting on the draft rule where the utilities were well aligned in their interests, planning based on the final rule will not necessarily drive alignment for utilities in the state or across states. Much analysis of options will be required to sort out solutions and to drive consensus. There will be winners and losers in 10 P a g e

11 this rule, and we anticipate that there will be changes between now and the eventual adoption of standards, much as in previous environmental regulations. The process has just begun. As this unfolds, Pace Global will continue to provide perspective to the issues. Key issues that we will analyze in more detail include the implications of the EPA s leakage provisions in the final rule and the outlook for the role of natural gas, energy efficiency and renewable energy in compliance under different market conditions. Further, Pace Global will also assess compliance strategies to understand better how the broad adoption of a single national trading scheme like that proposed under the mass-based model rule will impact the cost of compliance and how can utilities that have portfolios that significantly different than that of the state as a whole position for compliance? Finally, Pace Global will be providing insights in getting prepared for state SIP negotiations. Stay tuned for more analysis from Pace Global. 11 P a g e