The Clean Air Act to the Climate Rescue?

President Obama and Governor Romney are making their final push for the White House, talking up their economic, energy, and foreign policy plans. But one issue is getting the silent treatment this year: climate. You’ll probably hear more about the tired memes of Big Bird, Binders of Women, and Horses and Bayonets in the final weeks than you’ll hear about the climate.  Frontline aired a great piece 

the other night about how climate has gone from a key political issue in 2008 to untouchable in 2012.  Regardless of climate policy getting the cold shoulder, researchers will continue studying potential impacts, risks, and explore policy solutions.

This week Resources for the Future (RFF) released an interesting discussion paper by Dallas Burtraw and Matt Woerman that found the US is nearly on pace to meet its pledge to reduce greenhouse gas (GHG) emissions by 17 percent from 2005 levels, despite lacking comprehensive climate policy.  In fact, the authors found that if the US adopted the 2010 Waxman-Markey climate bill, emissions would have only declined 13.6 percent by 2020.  I’ll go out on a limb and say climate policy opponents are loading that finding into their arsenal in case momentum builds for climate legislation again.  Regardless, the paper – “US Status on Climate Change Mitigation” – is an insightful and thought-provoking read (ok, maybe if you are an energy/climate econ wonk).

Michael Levi from the Center on Foreign Relations commented on the paper over at his blog, and I share his curiosity about the paper, as well as his skepticism. 

RFF found that the greenhouse gas (GHG) reduction measures in the Clean Air Act (CAA) will account for about 10 percent of the 16.3 percent emissions reductions by 2020. Waxman-Markey would have also reduced emissions, but not as much as the CAA alone according to the RFF paper. Additionally, the Waxman-Markey bill would have preempted CAA measures, thus leading to higher emissions than our current trajectory.  I am skeptical, however, of the CAA’s ability to regulate GHG emissions from existing stationary sources (e.g., power plants, refineries) and significantly reduce emissions.

For one, the CAA’s existing stationary sources standard is not yet finalized, and it is unknown what the standard may even look like (or if it's perpetually delayed). In regards to the political uncertainty surrounding the regulation, Levi writes in his blog, “[W]hether you think emissions would have been higher or lower under Waxman-Markey depends fundamentally on what you think the prospects for regulation of stationary sources (particularly existing ones) under the CAA are. This is almost entirely a matter of political, rather than economic, projection.”

I’m staying away from political projections, but I will walk through why I believe one CAA proposal being considered won’t result in emissions reductions – and may actually increase carbon emissions. 

In proposed rulemaking, the EPA noted that existing power plants could achieve modest efficiency improvements of about 2-5 percent, which, as cited in the RFF paper, results in a comparable reduction in emissions without changing electricity output from the facilities.  The problem is electricity output would change at plants that improve their efficiency.  Their production would increase because of what economists call the “rebound effect.”

The rebound effect is a phenomenon in which energy savings from efficiency gains are offset by increases in consumption. The RFF paper reviews the rebound effect in regards to Waxman-Markey, but the same principle holds true for the potential CAA standard.

To improve the efficiency by 2-5 percent, coal-fired power plants would need to install new equipment like fans and turbines. The upgrades not only improve the unit’s heat rate[1]  - and therefore make the unit cheaper to operate – but new turbines can increase the capacity of the unit. The table below shows a simple hypothetical example of the efficiency gains, cost reductions, and CO₂ emissions at a 100 MW coal plant, before and after efficiency upgrades.

Prior to the upgrade, the 100 MW plant has a 10 MMBTU/MWh heat rate.  Assume that it consumes coal at a cost of $3.50/MMBTU, resulting in a production cost of $35/MWh and an annual capacity factor of 60 percent. The plant would emit 538,740 tons of CO₂ per year (Column 2 in table).   If a new turbine is installed (Column 3) and improves the heat rate by 5 percent, the production cost falls to $33.25/MWh. The lower production costs means the unit moves down the supply curve and  likely dispatches more often. So assume the capacity factor increases modestly to 63 percent. The annual CO₂ emissions are 537,393 tons in this scenario – a reduction of only 0.25 percent from the “Prior to Upgrade” scenario.  

As I mentioned earlier, new turbines also increase the capacity of units. Let’s assume the new turbine improves the heat rate by 5 percent and adds 3 megawatts of capacity, while keeping the capacity factor steady at 63% (Column 4). The CO₂ emissions in this scenario increase above the “Prior to Upgrade” scenario by 2.7 percent, leading to annual emissions of 553,515 tons.

In my opinion, mandating efficiency upgrades at coal-fired power plants is not a particularly attractive option for emissions reductions, and may actually increase emissions in some cases.  I don’t have an answer as to what a GHG standard for existing sources might look like under the CAA. However, I do believe a mechanism like cap and trade that increases the marginal costs of production for high-emitting sources  – rather than decreasing their costs like efficiency gains – is a more efficient policy option for reducing emissions in the long-run.

This is not meant to take away from the RFF report – I think it is a valuable piece of research. Moreover, I think we need more critical research like it. That way we can understand the complex interactions and ensure we achieve the policy goal of GHG reductions in an economically efficient manner. That is, of course, if any politician still has that goal…

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[1] Heat rate is the measure of a unit's efficiency of converting fuel into electricity.

Power Plant Emissions Down Despite Court Ruling

The coal industry is having a rough year, but it seemed to got a reprieve when the a federal appeals
court overturned the EPA’s Cross State Air Pollution Rule (CSAPR). The rule required reductions of power plant emissions that contribute to ozone  and fine particle pollution.

The coal industry cheered the court’s decision while environmental groups panned it Me? I say, “meh.”

I say “meh” and “seemed to get a reprieve” because I spent several months analyzing CSAPR and potential compliance strategies. After some restless nights induced by national hysteria over the rule’s short compliance period, I concluded that complying with the rule was not a big deal. Compliance would
require operational changes such as shifting generation towards lowering emitting units like renewables
or natural gas units. For the most part, coal plants would not require environmental control retrofits,
nor would they be retired. There would be little to no price impact for electricity consumers. Moreover, it became clear those operational changes (and therefore emission reductions) were bound to happen – with or without CSAPR – because of falling natural gas prices.

As natural gas prices fall, gas-fired power plants become cheaper to operate than higher emitting coal
units. Given the steep decline in gas prices, grid operators have therefore shifted generation from coal-
fired power plants to those consuming natural gas. This has led to significant emissions reductions as
seen in recent EPA emissions data – despite the court overturning CSAPR.

The year-over-year reductions for the first half of 2012 are remarkable. For over 450 coal-fired units
included in the EPA’s dataset:

Coal-fired SO2 emissions fell 34% 

Coal-fired NOX emissions declined 24% 

A portion of the reduction is due to installation of environmental controls at some coal-fired power
plants (the SO2 emissions rate in lbs/MMBTU fell 17%, while the NOX emissions rate fell 5%). Most of the reduction, however, is due to natural gas power plants displacing coal-generation. The fuel switching is evident in the EPA’s coal burn data. During the first half of 2012, 20% less coal was consumed than the first half of 2011, a reduction of over 76 million tons of coal. That is equal to 694,000 railcars of coal, which would span over 7,200 miles.

So despite the coverage of CSAPR and the court's ruling, power plant emissions continue to decline.  The declines will likely continue as natural gas prices remain low and coal-fired power plants install controls or retire to comply with EPA's Mercury and Air Toxics Standards.

For a Friend

Note: A hectic summer has prevented me from using this space as much as I would have liked, and I hope to pick back up in the coming weeks. Today I am casting energy issues aside, and I write for a friend – one of the best in the energy business – and for his family.

Last Friday night my friends and I went out to the Washington Nats game to catch up before one friend shipped off to Africa for a year.  We had a great time and shared many good laughs as we usually do, but it ended up being a night we’ll never forget, and one that will ultimately make us stronger.

We grabbed drinks after the game and I headed home around 10:45. My friends stayed out a little while longer before calling it a night. As my friend Thomas “TC” Maslin made his short walk home to his wife and son, he was assaulted and left in critical condition.

Those who know me know I prefer keeping my emotions private – like many guys do.  I will say that it has been an exhausting and emotional week. Knowing what could have happened to him, however, has made it a week I am grateful for.

TC on Mt LeConte 

TC has a beautiful wife and son, and an unbelievably strong family. Friends and the community are rallying around them, and the display of strength TC and his family are showing is inspiring – and not at all surprising.

Among our friends, he is the paragon. I liked to joke with TC that it was good for us unmarried guys to have him around because it was comforting to know that at least one us had life figured out. 

TC is also full of humility. He’ll never admit it, but he’s one of the brightest solar energy minds out there.  The only time we knew he was quoted in the New York Times or Bloomberg was when we stumbled upon it ourselves.  

I was reading an energy book a few months ago and flipped to the back of the book to look up a citation. There was TC’s name.  I took a picture of it and sent it to our friends, because if he wasn’t going to brag about it, I was happy to do it for him. (He’ll probably shake his head when he reads this post… sorry TC!)

TC and his family mean a lot to my friends and I. We want to ensure they get the best medical care and support they deserve during the recovery process, so we’ve set up this donation site to help: http://www.simpleregistry.com/loveforthemaslins/

The Gassy Electric Sector

Last week I was in Portland, Oregon for the National Association of Regulatory Commissioners (NARUC) summer conference.  I was fortunate enough to land on the agenda several times to discuss my recent report, asses the interdependence of natural gas and electricity, and to provide a natural gas market update.  It was a great trip despite foregoing a brewcycle endeavor in favor of a business dinner.  

Putting my suds-less induced sorrows aside, it is quite remarkable how natural gas has changed our energy landscape in a few short years. Here are the highlights of my natural gas market update.

Natural gas is an important fuel for the nation. It heats homes, is used in industrial processes (like creating chemicals and fertilizers), and fuels electric power plants.  Domestic production of natural gas was stagnant between 1997 and 2007, which led to rising prices (see graph below – also note the impact Hurricanes Katrina and Rita had on production and prices in 2005). Around 2007, gas producers began unlocking vast natural gas reserves in shale formations and because of the widespread use of hydraulic fracturing [1] and production has been soaring since.

On the consumption side of the equation, total natural gas demand was relatively flat between 1997-2007. Despite the recession beginning in 2008, natural gas usage has increased since 2007 because of lower fuel prices.  The electric sector is driving the growth (see graph below). In comparison, demand from the commercial and residential sectors has been constant the past 15 years, while industrial consumption steadily decline. In 1997, the electric sector trialed the residential and industrial sectors in gas demand, but in 2011 the electric sector was the largest consumer of natural gas, accounting for 34% of demand. 

So what’s behind the electric sector’s growing gas appetite?  One reason is there is a growing number of gas-fired power plants.  But the primary reason is power plant dispatch economics are causing higher utilization rates of natural gas-fired power plants.

Electric system operators dispatch power plants based on variable production costs, have the goal of cost minimization.  Variable production costs for power plants include fuel, emissions allowances, and variable operations and maintenance. The capital costs to build power plants are not considered in the dispatch equation ( i.e., those costs are sunk).  To minimize costs, operators dispatch the lowest cost units first, and then more expensive units as electricity demand grows.  

For many years power plants dispatched in a predictable order.  Operators would dispatch – from lowest to highest cost – baseload hydro (because it has no fuel cost!), then nuclear, coal, natural gas, and finally oil-fired plants. (I’ll discuss how wind and solar are handled in a separate post).  Decade low natural gas prices has shuffled that order.

Many natural gas plants are now displacing coal plants in dispatch, resulting in higher utilization of gas units and lower output from coal units (which can lead to coal unit retirements). 

I calculated illustrative production costs for a few different types of power plants in the table below.  Based on current fuel prices, natural gas combined cycles (CC) produce electricity for about $25.5/MWh.  That puts CCs near price parity with units burning some of the nation’s cheapest coal from the Powder River Basin (PRB), especially PRB units east of the Mississippi River where rail shipping costs can be up to 75% of PRB’s delivered cost.  The picture is bleaker for coal units using coal from Central Appalachia (CAPP).  Gas-fired CC units are about $12/MWh cheaper than units burning CAPP.

On a national level, the pace and scale of fuel-switching from coal to gas has been remarkable. In 2008, coal produced 48% of the nation's electricity, while natural gas produced 21%. In 2011, coal's share slipped to 42% and natural gas generation rose to 25%.  Then in April 2012, coal and natural gas generation were equal for the first time, with each fuel producing 32% of the nation's electricity (see graph below).

With the electric sector becoming so gassy, I’m sure coal plant operators are hoping the industry gets a dose of Beano.* 

*Sadly I am not an heir to Beano fortunes.  Nor am I related to THE Mr. Bean, but I will answer by the name.

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[1] Shales are geologically poor reservoirs because they have low porosity (gaps in the formation to hold gas), and low permeability (the connection of pores to allow the flow of gas).  Hydraulic fracturing increases the permeability by cracking the rocks with high-pressure water, lubricants and materials like sand.  The practice unlocked vast reserves of natural gas, and production soared while prices steadily fell. 

Why King Coal Isn't Dead

The hits keep on coming for the coal industry since my post earlier this week about the “War on Coal”. On Wednesday the Senate voted down Senator James Inhofe’s resolution to scrap the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standard, by a vote of 46 yes to 53 no.   

Perhaps the biggest and most surprising news from the Senate's deliberations was a speech by Senator Rockefeller.  The Democrat from West Virginia rebuked the coal industry he represents, and told them to "face reality" rather than blame their troubles on EPA.  It was a powerful, honest speech that you should check out if you have 15 minutes to spare (or check out his editorial). 

The bad news continued for the coal industry on Thursday, as Arch Coal announced 750 job cuts in Appalachia because of lower demand for coal-based electricity.  In other words, it was a decision based on the current comparative economics between coal- and natural gas-fired generation. 

So with all this bad news for coal, is King Coal really dead? Or did natural gas put him on life support and the new EPA rules are the coup de grace.

As I mentioned in my previous post, the proclamations of coal's death - imminent or otherwise - because of natural gas prices and regulations, are overblown.  Coal will remain a significant contributor to our nation's electricity mix for the next 10-20 years. Here's why:

Most of the coal-fired power plants scheduled for retirement in the next five years are older, smaller and inefficient.  That combination makes it harder for utility planners to justify spending millions of dollars on environmental controls to maintain unit operation.  SNL Financial is reporting that announced retirements for 2012-2016 total roughly 21,000 megawatts (MW).  In the scatterplot below, you can see that most of the retiring units are below 300 MW and were built 50 or more years ago.

Many of the plants do not operate at high utilization rates. In total, the retiring units produced just 5% of the total 2011 coal-fired electricity, or approximately 2% of all electricity in 2011.  Not an overwhelming amount.  The real work-horses of the coal fleet are the newer and larger units.  Most of these units already have environmental controls because the units are more efficient and the economies of scale for environmental controls make the projects economically justifiable.  The larger coal plants produce the brunt of coal-fired generation, and will continue to operate in the next 10-20 years.

Just how much coal capacity will remain? The Energy Information Administration’s (EIA) estimates in its Annual Energy Outlook 2012 Early Release takes into account approximately 21,000 MW of coal retirements and estimates that 288,000 MW of coal will remain operational in 2015. 

Historically, EIA’s estimates are conservative and often criticized as such. If we assume 70,000 MW of total coal retirements, as estimated this week by ICF, that leaves us with roughly 240,000 MW of operational coal plants.  That is more than any other type of generation plant. As a comparison, EIA estimates the 2015 natural gas combined cycle capacity at roughly187,000 MW.

Here are some quick back-of-the-envelope calculations showing why coal will still be a significant player in the electricity market:  240,000 MW of coal would produce roughly 34% of our electricity generation in 2015.[1] Under that scenario, the electricity industry would consume about 670 million tons of coal in 2015. [2].[3]

Coal’s market share (and influence) are certainly diminished, but there's a long way to go before "King Coal" is etched into a headstone.

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[1] Assumes a 62% capacity factor based on EIA’s Annual Energy Outlook results.  Forecasted 2015 electricity generation is also based on EIA projections.

[2] Assumes a 10.25 MMBtu/MWh heat rate and an average heat content of 10,000 Btu/lb of coal.

[3] That would be the lowest consumption level since the 1980s. The ICF report, however, finds that coal consumption will remain flat through 2020, which implies the remaining coal units would have a higher capacity factor than the 62% I assumed.