which limits total tons of CO2 emitted from covered sources, or they can
adopt a rate-based standard wherein compliance is measured by pounds
of CO2 emitted per MWh of generation.
Doyle found that the impact on coal burn is different for each
approach. Under the trading-ready, rate-based approach for all states,
coal burn in the worst case falls from less than 800 million tons in
2022 to less than 400 million tons in 2030. Under the trading-ready,
mass-based option, coal burn in the worst case falls from less than
800 million tons in 2022 to a little over 500 million tons in 2030.
These numbers are for the worst case scenarios, which the study says
are far less likely than the “middle of the road” solution, which would
be right at 400 million tons of coal burn in 2030 for all rate-based and
650 million tons for all mass-based approaches.
The single largest modification from the proposal which
complicates modeling the likely compliance outcomes is the
development of “trading ready” plans, the study said. Because the EPA
has created a mechanism for interstate trading of allowances and rate
credits which is not dependent on a formal agreement between those
states, each state now has the ability to potentially impact the supply
and demand balance of compliance currencies in other states in ways
which may or may not have been anticipated by any of the participants.
Said the report: “Although the rate versus mass discussion has
received much attention, there are actually three critical categories a
state plan could fall into; a trading ready mass-based plan, a trading
ready rate-based plan, or a single-or multi-state plan in which the
compliance mechanism cannot cross outside the boundaries of that
plan. In the third case, the over- or under-compliance of the state or
states covered by that plan is quarantined from the rest of the country.
While virtually all state representatives which have spoken about their
state’s planning process have opined that trading over as large an area
as possible is desirable, there are some circumstances where it would
be to a state’s advantage to choose isolation.”
EPA has closed what appeared to some to be a loophole in the
proposal, the report said. From a federal perspective, new sources are
covered under section 111(b) of the Clean Air Act, not 111(d). The
emissions rate for new combined cycle natural gas units in the New
Source Standards is high enough that an efficient new unit can meet
that limit without additional measures.
If compliance is being measured in tons of CO2, then a state
could conceivably achieve a large reduction in covered emissions by
replacing existing fossil units with new combined cycle natural gas.
This was likely also what the EPA had in mind when the proposal
was first crafted, however in the meantime, concerns about methane
emissions and fracking during natural gas production have “soured”
much of the environmental community on natural gas power
generation, said the study. Furthermore, while the annual emissions of
a new combined cycle natural gas plant are lower than the emissions
of most of the existing units which would be replaced, since the new
plants would presumably continue to operate for several decades the
EPA views this as a net increase in emissions.
As a result of these concerns, states are required to address
“leakage” in their plans, which means that a state must demonstrate
that its compliance plan for existing fossil units will not incentivize
the construction of new ones, the study added. The nature of how a
rate-based plan operates is considered sufficient to address leakage
concerns.
The two solutions proposed by the EPA are that the state use its
regulatory and legislative authorities to include new combined cycle
natural gas units in its allowance trading program, or employ an
allowance allocation scheme designed to preferentially incentivize
generation from existing natural gas units over new, the study pointed out.
“Consecutive waves of coal unit retirements due to EPA
regulations for other pollutants, rapid expansion of combined cycle
natural gas capacity driven by low gas prices, and unprecedented
deployment of new wind and solar has achieved a large portion of
early emissions reductions required by the rule,” the study said.
“Although many states would not be able to comply in 2022
under either a mass-based or rate-based rule individually without
taking actions beyond what is already planned, under the hypothetical
scenario of all the states choosing compatible trading ready plans
the nation as a whole is in compliance in the first 1-2 years of the
program. This is not a probable scenario. In reality, how each of the
states are positioned in 2022 depends on whether the states with over-compliance to trade choose to participate in the same type of plan.”
The range of coal burn shown in the study reflects the impact
of varying average annual load growth between 0 percent and 0.5
percent relative to total 2014 EGU coal burn and 2014 coal burn only
by units which have not announced retirement or gas conversion
plans prior to 2022. Decreasing projected natural gas prices by 10
percent reduces coal burn by approximately 40 million tons in 2022
and 12 million tons in 2030, with a corresponding increase in gas
consumption of 600 Bcf in 2022 and 170 Bcf in 2030.
The company can be contacted at: Doyle Trading Consultants
LLC, P.O. Box 4390, Grand Junction, Colorado 81502, Fax: 970 256
8933, Phone: 970 241 1510.
