Obama's Climate Clean Up!

Published on 04 Aug, 2015

Obama Climate Clean Up

The Long & Short Of It

The US Environmental Protection Agency’s (EPA)’s Clean Power Plan (CPP), which EPA unveiled in 2014, is expected to be finalized in early August. This plan mandates all states to reduce their carbon dioxide emission from existing power plants. It is the mantelpiece of the Obama administration’s Climate Action Plan, which the President announced in June 2013. This also reinforces the President’s recent pledge to the United Nations that the US will slash its carbon emissions by as much as 28 percent from the 2005 levels by 2025.

In our view, the CPP may have an adverse impact on the utilities in the short term, which can become favorable in the long term if some of the infrastructure cost can be passed on to the consumers, and the sector begins to benefit from the fuel and grid efficiencies envisaged in the CPP.

Demand is fairly inelastic to tariffs, which may result in increased tariffs for the consumers. However, the federal and state governments’ strategy to tackle this remains to be seen. Another school of thought believes that consumers will benefit from such a plan. A new study claims that consumers will save on energy bills, but how this would transpire for various stakeholders is not yet clear. This may be the first big step that the US has undertaken toward the global climate action.

Stakeholders: How Does It Impact Them?

The EPA’s CPP will affect various stakeholders across the value chain of the power sector in the US. The stakeholders have varying perspectives on this plan. Quite a few stakeholders acknowledge that they may benefit directly or indirectly from this Plan. However, many are apprehensive about its repercussions.

How are Stakeholders impacted?

Concerns Of The Naysayers

There are many concerns regarding the CPP by various stakeholders. While largely debatable, there is definitely an air of disbelief in the stakeholders as to the intentions and actual impact of this plan.

Federal overreach

Critics are equating CPP, the first such federal rule to limit carbon emissions from existing power plants, to federal overreach. They are arguing that this federal government initiative is another effort to advance its climate change agenda onto the states without giving due regard to the impact it may have on the general economics and regulatory electricity rates for the consumers. Furthermore, the critics believe that the federal government intends to limit the state’s control over its energy assets by setting state-specific goals and mandating them to achieve such goals.

Higher electricity prices

With the utilities having to close down low-cost, coal-fired power plants and incur capital expenditures toward infrastructure development, the electricity tariffs are set to rise in the near term. Regulated utilities are allowed to pass on any regulatory capital expenditure toward infrastructure development and efficiency. Each case is approved by the state’s public utility commission, which allows a gradual rise in electricity rates such that these expenditures can be financed. Many states fear that without a proper mitigation strategy/grants for such expenditure, the utilities would decide how much of these regulatory costs they would bear or pass on to the consumers.

Too much cost, too little benefit

In the hearing of the House Science, Space and Technology Committee, held on July 09, 2015, EPA Administrator Gina McCarthy provided a testimony on CPP. The committee grilled EPA Chief on the massive costs associated with the plan compared with the limited returns. Committee Chairman US Rep. Lamar Smith (R-TX) commented “even EPA data shows that this regulation would reduce sea level rise by only 1/100th of an inch. (source)" He went on to claim that the plan was “all pain and no gain”.

McCarthy countered this argument in a holistic view by claiming that the plan’s value was not in the measurement of decreasing sea or temperature levels, but in demonstrating strong domestic support and spurring global action on climate change, by leading from the front.

In another development, in the first week of July 2015, the Supreme Court struck down a major EPA mercury rule, MATS, which was forcing hundreds of coal-fired power plants to prematurely retire. However, the plants will shut down as they have already made investments required by the rule. Critics are drawing parallels with this ruling of the Supreme Court, stating that significant costs being the underlying reason for the quashing of MATS, would also result in a similar decision against the CPP.

The EPA argued that this would have no impact on the CPP and that EPA has long considered cost as the main factor while setting standards under the section 111 of the Clean Air Act.

Not enough time for implementation

Coal utilities are urging the White House to push back the EPA’s power plan, claiming that the aggressive deadlines may pose a threat to electric reliability in the states. The EPA claims that utilities have enough time to meet the 2030 deadlines once the state-specific plans are tabled by 2016. The utilities, on the other hand, point to EPA’s interim goals, which need to be achieved during 2020–29, before even meeting the 2030 goals. They claim that majority states (~84%, i.e., 41 of 49 states) have to achieve over 75% of their final goals, starting 2020, as part of their interim goals. This, the critics claim, is not achievable without shutting down existing coal-fired plants even before they have a replacement for it, which is bound to cause power outages and create reliability issues across the states.

As seen in the graph above, about 47% of the states’ interim goals cover more than 85% of their final goals, which they need to achieve starting 2020. The EPA assured the utilities that it is planning to address these concerns once the plan is finalized. In a recent update as stated in an article in Washington Post, the Obama administration during last week of July 2015 decided to give the states more time to achieve their interim goals and will extend the interim goal deadline to 2022.

State's Interim Improvement Goals

Adverse impact on minorities

Although this is not being raised as a concern by many, but it finds some support in a study conducted by the National Black Chamber of Commerce, a body that represents 2.1 million Afro-American-owned businesses in the US.

The study conducted to evaluate the impacts of EPA’s CPP on minority groups revealed that there would be a 23% rise in poverty and loss of about 7 million jobs in the afro American community by 2035. The study found evidence that the Hispanic community would also be adversely impacted, with a 26% rise in poverty and a resultant loss of 12 million jobs by 2035.

Key Elements of CPP

The EPA’s CPP proposal has two main elements, which encompass the essence of the plan and establishes the actionable plans.

State-specific emission rate-based CO2 Goals and their Mass Equivalents The emission rate-based CO2 goals are different for each state. These are pollution-to-power ratios that the states are required to meet by the year 2030, after successful implementation of various measures under their respective plans. Many states and utilities have existing plans to curb carbon emissions in the power sector. The EPA utilized this information to formulate practical and affordable state-specific emission rate-based CO2 goals for the states to achieve by 2030, with meaningful progress toward reductions by 2020.

The basic formula for the state goal rate is:

Obama’s Climate Clean Up

The formula applies uniformly to all the states, with each state having a unique set of emission and power sources to plug into various parts of the formulae. This provides an equitable basis for states to work toward their respective goals, which are strategic and achievable in the timeframe set under the CPP.

The EPA has provided the states with an option to convert this emission rate-based CO2 goal into mass equivalents, which would specify the target metric tons of CO2 emission as their goal. The agency provided states with two approaches to convert the emission rates into their mass equivalents with the basic formula as:

Obama’s Climate Clean Up

The state goals are not requirements of any specific fossil fuel-based electric generating units (EGUs). Instead, these are the requirements of the states as a whole and the state can fulfill these goals based on their individual plans. States have various emission rates and hence different emission rate goals. The states with the highest and lowest emission rates are Montana (~2,245 Lbs/MWh) and Idaho (~340 Lbs/MWh), respectively. The goals of such states are set taking into account many factors, such as their position as a net importer/exporter of power, types and composition of generation capacity, and plans underway for improvement of emission rates. More examples of states with high and low emission rates are provided below, along with their targeted goals for 2030.

Highest Emmision Rates States and their Goals

Lowest Emmision Rates States and their Goals

To set these goals, the EPA considered the strategies and initiatives adopted by many states and utilities to curb carbon emissions in the power sector. This analysis culminated in the creation of the Best System of Emission Reduction (BSER).

In addition to setting the final goals for the states in terms of emission rate-based CO2 goals and their mass equivalents, which they need to achieve before 2030, the EPA has identified certain interim goals in line with each state’s ability to achieve such goals in the short term.

The ideology underlying such interim goals is that the states can recognize certain emission reductions in the short term, although the full effects of other initiatives, such as the energy efficiency program and renewable energy capacity expansion, may take longer. Considering this, the EPA has set interim goals, which need to be achieved by 2020.

Guidelines for development, submission, and implementation of state plans

The EPA has provided the states with their respective goals, which they have to meet by 2030. However, it allows the states to figure out a plan to achieve these goals. Each state has to determine emission performance levels for its affected EGUs that add up to the total emission goal requirements for that state.

The state has to specify the measures it would be undertaking to achieve such levels and the overall goals. As a part of setting these levels, the state has a choice of following the rate-based emission goals or the mass equivalents of CO2 emissions. These are documented in the State Plan, which needs to be submitted to the EPA as per the set timelines specified earlier. The state has to ensure adherence and implementation of its plans across the EGUs and other stakeholders. The measures to be utilized for achieving these goals can include, but are not limited to, those provided by the EPA in its four building blocks approach.

Considering the interconnected nature of the power sector, the states have been accorded the flexibility to create multi-state plans with neighboring/partnering sates to achieve their respective goals. As mentioned earlier, the states can choose the measures best suited to meet their goals. The states can:

  • - Utilize their existing plans focused on emission reductions/renewable energy initiatives;
  • - Invest in energy efficiency initiatives;
  • - Upgrade aging infrastructure;
  • - Design plans using innovative, cost-effective strategies; and
  • - Identify best practices in the power sector for emission reduction and implement these across the EGUs in the state.

All states need to submit their initial or complete plans by June 30, 2016, with an option to extend the submission of a complete plan in one or two years, depending on whether it is a single- or multistate plan, respectively.

After submission of the complete plan, the EPA would have 12 months to review the plan. In case, a state does not submit a plan by the stipulated date, the EPA would provide the state with a plan to follow. The latter option confers certain authority to the federal authorities to intervene and ensure the implementation of the plan by the EGUs of the state.

Cost Versus Benefit: Is It Really Worth The Effort?

The CPP, with its emissions reduction goals, has an environmental agenda. Furthermore, the EPA believes the plan has monetary benefits compared with the costs associated with the achievement of these goals. The states will determine as to how the various emission guidelines are to be met. Thus, the costs and benefits may vary for each state. The EPA has calculated illustrative costs and benefits in two ways: based on individual state plans, and by assuming that the states will choose multi-state plans. These are explained in further detail in the following sections. Note that the figures provided below are illustrative in nature.

State plans

  • 3. This is calculated using the Integrated Planning Model (IPM) and include end-use energy efficiency and participant costs along with the monitoring, reporting and recordkeeping costs.
  • 4. The reduction in exposure to ambient PM2.5 and ozone through emission reductions of precursor pollutants.

Win-Win Situation

The EPA’s CPP has been doing the rounds of various legislative bodies and discussions for a while now, and the discussions and debates about its feasibility, effectiveness, and requirement as an immediate measure will culminate into a legislation being brought in in early August. Stakeholders have different stances on this plan. And, all await it with bated breath.

For contesting against such a regulation, the states may take legal recourse. However, there are recent examples, such as the state of Oklahoma’s lawsuit against the CPP, which was quashed first by the US Court of Appeals for the DC Circuit in June 2015 and later by the US District court on July 17, 2015. Both cited lack of jurisdiction and its premature nature, as the proposed rule is not yet finalized. As such, the states and utilities are gearing up to meet the goals set in the CPP, and it may be a bit late to roll back these investments after the finalization of the rule.

From an environmental and social perspective, this initiative by the US federal government and agency is commendable and in the right direction. From an economic standpoint, this initiative is quite bold in terms of the stringent deadlines and infrastructure requirements that it poses for the states and hence the utilities. Conventional utilities and coal-rich states, such as Kentucky, with high carbon dioxide emission rates may feel the heat due to this regulation. However, if steps are undertaken to ensure smooth transition to less or zero emitting sources of energy, it could be a win-win situation for the energy providers as well as consumers.

The EPA used historic data from 2012 as a basis to draft four building blocks, that together, are the best system to curb carbon emission from fossil fuel-based power plants. Click to know more.

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