Is a carbon price the best way to implement the EPA's Clean Power Plan?
Many suggest it is the best way to both comply with and preserve reliability under the proposed carbon rules.
With the EPA's Clean Power Plan set to be finalized this summer, there is one question that seems to worry utilities and regulators more than any other: Will utilities still be able to maintain grid reliability under the soon-to-be-mandated carbon emissions cuts?
As proposed by Environmental Protection Agency (EPA), the plan aims to cut U.S. greenhouse gas emissions 30% from 2005 levels by 2030, and allows state governments to come up with their own state implementation plans (SIPs) to comply with the mandated emission cuts. If states fail to develop SIPs, they will be given a federal implementation plan (FIP) from the EPA—but details of the FIP won’t be released until after the regulations are finalized this summer.
The compliance period for the proposed rule begins in 2020. States would have to start showing meaningful emissions reductions by then—and that timeline has many stakeholders worried. The North American Electric Reliability Corporation (NERC) released a report last week that suggests the 2020 compliance date will need to be altered to ensure electric reliability.
EPA officials have hinted numerous times over the past few months that the timeline will change, but it already has many states rushing to devise plans about how to best meet the required cuts and make sure all the lights stay on.
For many stakeholders, the idea of a price on carbon is gaining traction as a compliance strategy that’s easy to implement, promises efficient carbon reductions, and preserves electric reliability. But like many other aspects of the climate debate, the carbon price idea is fraught with implementation difficulties, legal questions, and deriders at nearly every turn.
The regional carbon adder
The basic premise of a carbon price is to account for and price the economic externality of greenhouse gas pollution. The idea is about as old as the problem itself, but the concept of using it to comply with EPA's proposed carbon rules has recently started to catch on with stakeholders.
While there are thousands of proposals about how to best implement the Clean Power Plan, two schools of thought have begun to emerge with regard to a carbon price. There are those who want a "carbon adder" — a price on carbon added to generators’ bids in electricity markets — in regional electric markets, and those who want the EPA to designate a national carbon price as a compliance option.
To be clear, these perspectives do not account for the spectrum of compliance strategies that use a price on carbon. However, for the sake of conceptual clarity, they will be our focus here.
In November last year, the regional transmission organization PJM released a report that found a regional approach to compliance based on a carbon price would be 30% cheaper than if states go it alone with SIPs. Under that model, states would agree in their SIPs to add a price on carbon emissions in PJM's wholesale markets, making more carbon intensive generation sources more expensive—ultimately causing them to run less often and/or retire earlier than they otherwise would.
The PJM report caught the attention of state utility regulators like Ohio PUC Commissioner Asim Haque. Haque showed up at the National Association of Regulatory Utility Commissioners' (NARUC) winter meetings in February ready to float the regional carbon adder strategy to his fellow regulators across the nation. “Less cost and fewer resources at risk for retirement,” was how he described the benefits to his colleagues. Officials from both PJM and the Midcontinent Independent System Operator (MISO) endorsed the idea at the meeting.
In March 2015, PJM released a revised report looking at the idea of a regional carbon adder again. The report found again that the adder would be cheaper and easier to implement than having states implement their own carbon prices or choose an entirely different strategy. Without a price on carbon, states would have to cap emissions from each individual power plant to comply with emissions coals, a laborious and time-intensive process that could result in serious reliability issues, according to Haque.
“What I espoused at NARUC has now been fortified again with this study that the regional carbon adder is better for cost impacts,” Haque told Utility Dive in an interview.
Central to the logic of the carbon adder is that it preserves the current economic dispatch model for generation plants. Today, generating units bid into wholesale markets based on their per-kWh cost to generate electricity. Cheaper plants bid in first and run more often, while more expensive plants bid in when prices are higher and they can make a profit — typically during peak hours or a severe weather event. Without a price on carbon, dirty coal plants are among the first generators to bid into the market, which means they run quite often. With a price on carbon, the dirtiest plants would move behind other sources in the dispatch line, meaning they would run less while still preserving the framework of the dispatch model.
“What [PJM] has said, and what our staff concurs with is … if you’re unable to actually price [carbon], it won’t exist within the present security constrained economic dispatch model,” Haque said. “So, in order to make security constrained economic dispatch to continue as economic dispatch, you have to be able to put a price on everything.”
Just how steep a carbon price should be is still an open question. Set the price too low and states that implement it will find themselves unable to comply with EPA-mandated emissions cuts. Set it too high and market conditions will force generation offline that the regulation doesn’t require.
The PJM study analyzed a number of possible scenarios to determine the optimal price. In a scenario where utilities dramatically build out natural gas capacity — as is widely expected under the finalized Clean Power Plan — the prices were $40 per ton in 2020 for a regional approach in PJM. The Southwest Power Pool, another regional transmission organization, released a report pinpointing $45 per ton as the optimal carbon price for its area.
The specific numbers may change when the EPA releases its finalized Clean Power Plan this summer. But barring any significant alterations to the framework of the regulation, regional carbon adders are seen by many as cheaper and easier to implement than state-by-state prices or plant-by-plant emissions caps.
A national carbon adder
While some grid operators and state utility regulators are intrigued by the concept regional carbon adders, other stakeholders are asking the EPA to go big and offer a national carbon adder as a compliance option for the Clean Power Plan.
The Edison Electric Institute (EEI), the trade group for the nation’s investor-owned utilities, is one such stakeholder, along with a number of its members. EEI wants the EPA, rather than states or regional markets, to designate a national carbon price that states could elect to add in to their in-state generation sources.
“[S]tates could choose to require in-state resources to include a carbon adder pre-determined by EPA when bidding resources into the market,” EEI’s comments on the regulation read. “This would alter the dispatch of units to better reflect their CO2 emissions and provide a mechanism for continued emission reductions from existing units in a way that both respected system requirements and ensured reliable operation of the portions of the grid administered by the RTOs.”
Chicago-based Exelon, an investor-owned utility and member of EEI, has been one of the utilities advancing the concept. Kathleen Barrón, Exelon’s vice president of federal regulatory affairs and policy, explained further to Utility Dive how the model would work:
Under the proposed rule, states are required to reach an interim goal expressed in terms of a rate — pounds of carbon emitted per megawatt-hour — or convert that rate into a goal based only on the mass of carbon emissions.
Under the Exelon proposal — which mirrors EEI’s comments — states would be freed from reporting annually to EPA on their progress toward either mass- or rate-based goals. Instead, if states require their emitting generators to reflect a certain carbon adder price, then that would be sufficient to comply with the EPA rule. The price would be determined by the agency and the option would be the same for and available to all states.
That national carbon adder proposal contrasts with the regional approach. Haque told Utility Dive that the regional option is especially useful for compliance with Building Block 2 of the carbon regulations, which focuses on increasing the use of natural gas to replace retiring coal generators. However, the national carbon adder is appealing for many of the same reasons, he said.
The national carbon adder has the added benefit of being easy and quick to implement, according to Barrón. While it could take years of legal and legislative wrangling to get states to commit to a regional carbon adder, giving them the option of a national adder could allow states to comply immediately — a big plus given the CPP’s tight timeframe.
“If the state chooses that tool, then the state is demonstrating compliance just by virtue of having done that, and it doesn’t need to negotiate with its neighbors,” she said. “It can continue to negotiate with its neighbors to put together an interstate compact for implementation whenever it wants, but in the meantime it is in compliance as long as its emitting generators are reflecting that carbon adder into their bids if they’re in an organized market, or into their dispatch if they are in an non-organized market.”
The national carbon adder would be a uniform price throughout the nation, eliminating possible incentives for generators to move to states with lower carbon prices.
“The benefit of that is that it eliminates the seams in between regions as much as possible to not have a situation where a power plant is built in State A even when it might be more economic and cheaper to have it built in State B because there was a different carbon price in State A than State B," she said. “Plants should be built in the place where they’re going to be cheapest, so things like pipeline and transmission costs are minimized."
Some observers—like Haque—question whether the EPA would approve such a plan. It may be a long shot for the agency to allow states to get out of annual compliance reporting on emissions cuts simply because they adopt a carbon adder, they say. If market conditions change for any number of reasons over time, that could impact the effectiveness of a national adder in cutting carbon emissions, meaning that states could fall behind their goals.
Haque stressed that he is not critical of the national carbon adder proposal, and that there are various ways to solve the conundrum. “If the adder is constantly being adjusted, I suppose that would allay the concern,” he said.
Reliability benefits and concerns
Besides cutting carbon emissions, the biggest benefit of a regional or a national carbon adder is that it helps ensure the reliability of the electric system during a time of great change. Without some sort of price on carbon, states would have to mandate either a rate- or mass-based emissions cut from each power plant to comply.
Not only is that a logistical nightmare compared to implementing an adder—it could lead to serious reliability problems, according to Haque and Barrón. If the industry is regulated under emissions caps—and not through a carbon adder—plants would simply not be able to generate past a certain emissions point, lest they face sanction from the EPA.
“[I]f states have no option but to just run limit their fossil plants, that might raise both economic efficiency challenges in terms of how the market works when you have some of the plants unavailable, and potential reliability questions,” Barrón said.
But if there’s a price on carbon, the question becomes an economic one. The dirtiest plants will cost the most, meaning they would not run as much as they do now. But during peak demand times, severe weather events, or any other time when power prices spike, the plants could come back online and help satisfy some of the demand. That's why some stakeholders refer to the carbon adder concept as a “safety valve” or “safe harbor” for states.
“The safe harbor, this price-based compliance option, would be a way to address some of [the reliability] concerns during the interim period,” Barrón said.
But reliability experts warn that keeping the lights on during CPP implementation isn’t as easy as flipping the switch on a usually-idle coal plant. If the costs of the regulation or carbon adder are too high, the coal plants that would normally run to ensure reliability will simply retire.
“If the cost impacts are great and coal is moved to the back of the dispatch line, that could yield uneconomical coal plants, creating a reliability problem,” Haque said.
That isn’t a reason in and of itself to abandon the idea of an adder. If anything, the commissioner said, states should be looking at regional partnerships to keep the cost as low as possible.
It's important to keep in mind that the rule is not yet finalized—and we don’t have a good idea of how much and how fast coal generation will actually retire under the rule. But as the proposed regulation is currently written, 45 GW of coal generation is estimated by Navigant Research to retire under the plan, forced into unprofitability by the regulations and the proliferation of cheaper natural gas. That’s on top of the 60 GW of coal retirements that are already expected from the EPA’s Mercury and Air Toxics Standards.For context, the U.S. had about 310 GW of coal-fired capacity in summer 2012.
Waves of coal plant retirements could cause power supply issues in some states, even as they work to build out more gas, renewables and transmission to support the shift away from coal.
That idea is one of the central points of a NERC report released last week that examined reliability concerns with the proposed rule. NERC analysts recommended in that paper that the EPA amend its proposed compliance timeline because states simply do not have enough time to build the necessary new generation and transmission required for compliance. That fact won’t change with a carbon adder, they say.
“The [carbon] prices can be an indicator of the changes that are expected either in the capacity or the resource dispatch, [but] that still doesn’t really address the need for the new infrastructure or assure reliability while the associated transmission or pipeline [construction] activities have to be implemented,” Tom Burgess, vice president of reliability assessment and performance analysis at NERC, told Utility Dive.
His colleague John Moura, director of reliability assessment at NERC, explained that coal plants can’t play the same role in ensuring reliability as the gas generators that do so today.
“When prices fluctuate and you’re asking coal units to do things that they’re not designed or built to do, such as cycling, such as saying ‘Can you start ramping up in the morning and be there for the peak that day?’ That’s just not physically possible,” he said.
“You don’t have the flexibility from this generation fleet [under the Clean Power Plan] that you did when you had a lot less utilization of gas fired generation,” he said.
Even so, the NERC analysts appreciated the logic of a carbon adder. Burgess said that although NERC did not address specific compliance strategies in its report, it ended up developing theoretical carbon prices anyway, because that was the best way to model what would happen to the generation mix under the new regulations.
“You have to develop these prices in order to flip-flop the whole generation mix,” he said about moving coal from the front of the dispatch queue to the back. “That’s kind of how you understand how the new dispatch and the price would affect the generation mix.”
Opposition to a carbon price
While the concept of a carbon adder appears to be gaining traction among many important stakeholders, not everyone is thrilled.
Jim Hunter, head of the utility department at the International Brotherhood of Electrical Workers (IBEW), which represents utility linemen and plant workers, worries that it won’t be enough to ensure grid reliability.
“When you start talking about an adder and CO2, you’re putting something into a system that’s not real,” he said. “You’re adding a cost, or adding something in that has nothing to do with the reliability of the system.”
Hunter, whose union represents thousands of workers at coal plants that are threatened by the carbon regulations, echoed the NERC analysts’ point about the physical limitations of gas plants. He says the power system will—and should—continue to rely on large, centralized coal and nuclear power plants for the next 25 years.
“When we start putting things in, such as a carbon cost, doing things that are favorable for one generation source over others ... in the real scheme of things that doesn’t really work,” he said. “Understand from the IBEW’s perspective, we install wind and we install solar, so we’re seeing it from all angles, and centralized, base load power plants today and probably for the next 25 years are essential.”
The American Coalition for Clean Coal Electricity (ACCCE), a key lobbying group for the coal industry, agrees with many of Hunter’s critiques.
“We do not support a cap and trade system or any other current carbon pricing plan,” spokesperson Laura Sheehan told Utility Dive.
ACCCE’s position is that the most EPA can legally do to bring down carbon emissions is to make plants operate more efficiently, as Building Block 1 of the Clean Power Plan prescribes. When asked if they have a preferred compliance strategy if the regulation is upheld and implemented, Sheehan simply said the ACCCE has none.
Hunter acknowledged that the IBEW does see a compelling reason to cut carbon emissions, and that the union could potentially support a finalized CPP rule if reliability concerns were satisfied. But he says he would have preferred a legislative effort to cut carbon to the EPA regulations.
“We would have been further down the road in reducing our CO2 emissions,” if cap-and-trade legislation had passed five years ago, he said.
That puts a little daylight between him and ACCCE, one of the most vocal critics of the EPA. When asked if her organization believes the U.S. should cut its carbon emissions, Sheehan said the ACCCE does not have a policy on that issue.
Politics: ‘The wild card’
As is often the case with environmental regulation in the United States, politics may be even bigger stumbling block than technical barriers to implementation.
For a regional carbon adder, it is still unclear who would be able to designate the price of carbon. Would each state legislature have to pass a resolution approving it? Would the utility regulators implement it? Or would it be the domain of an RTO or an ISO? There are simply no clear answers to these questions yet, according to Haque.
Similar questions plague the idea of a national carbon adder as well. If a state chooses the hypothetical national carbon adder compliance option from the EPA, does that mean it does not need approval from its state legislature, neighbors, or RTO to implement it? That remains unclear as well, according to Haque.
Many states are sending signals that they may try not to comply at all. 15 states are supporting two lawsuits aimed at striking down the Clean Power Plan entirely, along with a group of fossil fuel interests. If they decide to try to fight the regulations to the death in court, it could delay compliance preparations. Even worse, if some states refuse or fail to put together compliance plans and are instead handed Federal Implementation Plans from the EPA, the situation gets even stickier.
Could the EPA, in an FIP, mandate that a state implement a carbon adder on the grounds that they had the opportunity to choose alternative compliance strategies and didn't? Everyone Utility Dive has talked to thinks that is a stretch, but none wrote the possibility off completely.
What may be more likely is that Barrón’s concerns about non-uniform carbon pricing could be exacerbated. If a handful of states decide to implement higher carbon prices, generation resources could gravitate toward lower-priced states, hampering overall decarbonization and exacerbating transmission costs and timelines. That’s what we have today, Barrón noted, with some states, like California or the RGGI participants, assigning some sort of price to carbon while most have not. In other words, it wouldn’t be the end of the world if that happened for the CPP; in fact, it could make the national adder scheme look more like a regional one in practice.
“It’s not the case that it doesn’t work if there’s more of a regional safe harbor than a national safe harbor,” she said. “That could work too, but it doesn’t solve the seams or the leakage issues that exist today.”
For Asim Haque, the politics are the “wild card” of the situation. Ohio is one of the 15 states challenging the Clean Power Plan in federal court. Gov. John Kasich (R), who appointed Haque, has not even made the decision about whether or not Ohio will attempt to comply with the regulations. Given the fact that he may soon be running for President, the chances that Kasich will go along with one of the most contentious regulatory programs of the Obama administration seems increasingly unlikely.
Aware of the political tension with the rule back home, Haque himself does not endorse any carbon adder proposal. He says he is simply trying to be proactive in case his state does decide to comply.
“We have not even made a decision about if we will seek to comply, and that is the nature of this,” he said. “My job is to do my best to try to advise and provide facts to all of the relevant decision makers associated with this.”
“You could exist in a situation where some states buy in, some states that don’t,” he said. “Whether the state’s that don’t buy in do so for political or economic reasons, that could very much be the case.”
Some observers see the controversy as little more than political posturing. After all, these observers say, the fossil fuel industry has fought virtually every expansion of federal air quality regulation from the Clean Air Act since 1970 all the way up to today. Each time, they have found adequate compliance avenues after losing in court.
Some analysts, like Ken Colburn of the Regulatory Assistance Project, think that may be similar to what will happen with the Clean Power Plan. Many of the states challenging the regulations in court are similar to Ohio, he told Utility Dive.
There’s been a “near bifurcation of approach” in how many of the skeptical states are handling the regulation. While some may be deeply skeptical of the rule, they’re making sure their regulators prepare for it in the event that they have to comply.
“The governor’s office and attorney general office express the public or political opinions that they have and then proceed with whatever litigation or steps they wish to take,” he said. “In case that litigation or other approaches are not successful, the first thing the governors and attorneys general are going to do is come back to the regulators and say ‘Oops! I lost, now what do we do?”
Looking ahead: ‘Death by a thousand cuts?’
Colburn, a veteran New England air quality regulator, hopes that states and energy stakeholders see the changes under the Clean Power Plan as an opportunity to push for innovation and reform of other parts of the energy system. As ambitious as it is, there are many important aspects of the energy system that the CPP doesn’t touch.
“There’s nothing in the building blocks about optimizing the grid, there’s nothing in the building blocks about CHP (combined heat and power), there’s nothing in the building blocks about demand response, there’s nothing about building codes or appliance standards or a number of things that can be done,” he said.
Colburn told Utility Dive that whether apprehensive states like it or not, change is coming to the electricity system—and stopping the Clean Power Plan won’t stop progress.
“If there’s an industry in a state of dynamic flux at the moment, it’s the power sector. So one cannot suggest that but for the CPP everything would be hunky dory and we wouldn’t have much to worry about in the power sector,” he said. “Quite to the contrary. In fact, maybe this is an ideal time to consider not only carbon but the further requirements on ozone and particulate matter that EPA is compelled to revisit periodically under the Clean Air Act."
“Let’s have [other] emissions in that regulatory mix too so that whatever does settle out of this stew of issues can comprehensively address all them, not death by 1000 cuts of issue after issue going forward for the next few decades,” he said.
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