Navigant Research Blog

Federal Carbon Regulation Likely Dissolves, but Some States Fill the Void

— January 13, 2017

Cyber Security MonitoringA version of this article was originally published on Energy Central.

After months of litigation, a decision by the DC Circuit Court on the future of the Clean Power Plan (CPP) is expected to be announced early this year. Congressional Republicans and incoming president Donald Trump were both critical of the CPP on the campaign trail during the 2016 election, so the outlook for the CPP is bleak. The demise of the plan seems likely, though it will not be quick, however, as states that support the rule have promised to fight to protect it. New York, California, and other states are stepping up to fill the CPP’s void and continue to work toward decarbonization.

States Stepping Up

Continued progress is expected in greenhouse gas emissions reductions in New York as the state has implemented the Clean Energy Standard (CES), Reforming the Energy Vision (REV), and other emissions-related initiatives. The CES targets the use of renewables for 50% of electricity consumption by 2030. Navigant’s 2017 outlook for New York shows significant increases in energy efficiency, wind, and solar over previous cases without the CES. Some of these additions are already happening around the state, and growth is expected to continue through at least 2030. Additional initiatives at the state level that put an emphasis on distributed energy lead us to forecast that nearly half of all the solar capacity added in the state through 2040 will be distributed solar. New York is a member of the Northeast’s Regional Greenhouse Gas Initiative (RGGI) along with states from New England and PJM. As New York increases its deployment of energy efficiency and renewables, CO2 prices on the RGGI market will be driven down and other states in the market will be affected. This would also otherwise affect energy efficiency and renewable development in other RGGI states, except that these are mostly driven by other state imperatives.

California has also been a leader in decarbonization efforts for many years, and it is not expected that leadership from California will taper off anytime soon. California’s cap-and-trade market for CO2 is linked to Quebec, with plans to link with other Canadian provinces in the near future. The state is also on track to meet its aggressive Renewable Portfolio Standard (RPS) targets of 33% by 2020 and 50% by 2030.

Higher Emissions

Even though state policies are expected to continue to push the grid toward decarbonization, without a federal regulation on carbon, overall emissions from the industry will be higher. Without the CPP in place, MISO and other areas are expected to see less coal capacity retire. However, the economics of some older coal plants and even a few nuclear plants make it unlikely they will continue to operate through 2040.

Uncertainty in the industry will likely continue, and can make planning for the future difficult, particularly in a sector where planning is so important and highly regulated. Navigant’s 2017 Integrated Energy Market Outlook and Industry Trends webinar on January 25 will analyze how fundamental policy shifts are expected to impact coal retirements, energy, capacity, and prices as well as the potential impacts regarding supply and transmission expansion for gas and power over the next 25 years.

 

Key Takeaways from the CPP Oral Arguments

— September 30, 2016

AnalyticsOn Tuesday, September 27, the hottest ticket in Washington, DC was for a seat in the courtroom to hear oral arguments in the US Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP) appeals. Below are some key takeaways from the proceedings.

Oral arguments were thorough and the judges were well-prepared. The discussion took almost twice as long as scheduled; the court allotted 218 minutes for arguments, and the hearing lasted nearly 7 hours.

Transforming the Sector?

A key issue was whether or not the CPP rule is transformative to the electric sector. The EPA is walking a fine line here because it wants to tout the positive impacts the rule will have on climate change and air pollution without indicating that the CPP is transformative enough to warrant a clear directive statement from Congress. Questions included whether the Clean Air Act was intended for this purpose, and what to do when Congress fails to act. The fact that a number of utilities intervened in support of the EPA and spoke to the issue of the ongoing shift to low-carbon generation sources (e.g., natural gas and renewables) may weaken petitioners’ case that the EPA overstepped its authority, meaning congressional action is required for such a change.

At Navigant, we have been modeling regulations on CO2 from power plants since President Obama first announced that this kind of regulation would be a part of his Climate Action Plan in 2013. A number of factors, including continuing low gas prices and ever lower renewable costs, make emissions reduction actions more cost-effective. This is to say that the CPP is not as costly to achieve in our current future outlook than it appeared a few years ago. The court’s focus on this point indicates that the judges recognize the nature of the ongoing energy transformation may be in line with current trends.

Other challenges brought in front of the judges on Tuesday included whether a Best System of Emission Reduction (BSER) that extends beyond the fence line (i.e., outside of the regulated generation plant) is allowed under section 111(d) of the Clean Air Act. Based on feedback from attendees, this issue did not seem as contentious as originally expected. Discussions on differences between the House and Senate versions of the 1990 Clean Air Act amendments also seemed less contentious than originally thought.

Procedural Notice

The other challenge that I found interesting was the issue of procedural notice. Petitioners’ challenge that there are major differences between the proposed and final rules and contend that the EPA should have reissued the rule allowing for additional comments prior to finalizing it. If the judges agree, the court may not have to rule on the merits of the case and the CPP could be sent back to the EPA for additional comments. At that point, it would be up to the next president and administration to move the CPP forward. Under those circumstances, the reissued CPP would also likely see appeals through the DC Circuit and US Supreme Court, likely pushing back compliance.

The case was heard in front of 10 judges, 6 Democratic appointees, and 4 Republican appointees. Regardless of the DC Circuit’s decision (expected in early 2017), most agree that this case is likely to be appealed to the US Supreme Court. In its current makeup, the Supreme Court is largely assumed to be split 4‑4 on the issue.

 

Impacts of the Clean Power Plan, Revisited

— September 22, 2016

AnalyticsOral arguments in the litigation of the US Environmental Protection Agency’s (EPA’s) Clean Power Plan (CPP) are upon us. Let’s revisit what the CPP could mean for power generation in the United States.

Navigant’s Energy Market Outlook (NEMO) includes a regional CPP policy with the mass targets and compliance deadlines laid out by the EPA in the final rule. NEMO shows that impacts of the CPP are regional in nature, and in many regions are not as drastic in the early years of compliance as one might expect. In fact, most states do not see additional costs driven by the policy in the first few years of implementation. This is partly due to the fact that the EPA’s final rule includes a glidepath where targets are not as steep in the early years, partly due to expected changes that lower CO2 emissions before CPP compliance begins.

Coal Retirements

Navigant continues to forecast the retirement of significant coal capacity over the next few decades. Our current modeling shows approximately 73 MW going offline between 2017 and 2035. About 40% of these retirements have already been announced, and just over 20% are forecast based on plant age. These two categories can be ruled out as being “driven” by the CPP. The remaining 40% is shown to be uneconomic and is therefore shown to retire in our modeling.

Retiring Coal Capacity by Region, United States: 2017-2035

CPP Retirements

(Source: Navigant)

A decision to retire a plant before the end of its useful life is very complicated, and it is very rare that a single driver can be identified as causing such a decision. The more influential factors we have seen include competition with cheap natural gas and increases in costs caused by environmental regulations (including the CPP). NEMO shows that the largest shares of announced coal retirements are located in MISO and WECC, while the largest share of modeled coal retirements are located in SERC territory.

Renewable Growth

On the other side of the equation, NEMO also includes continued low natural gas prices due to shale abundance, as well as continued growth in large-scale renewables, distributed energy resources, and energy efficiency. Large-scale solar capacity additions continue to grow due to falling costs, with additions on par with wind in some regions. Early in the forecast, solar becomes the renewable of choice in California, driven by the state’s aggressive renewable and carbon goals, which go above what the CPP requires. Wind continues to be installed in areas with high potential, helping states like Texas meet their CPP targets.

Low-Cost Compliance in Early Years

NEMO includes over 29 GW of coal coming offline in the Eastern Interconnection before the CPP targets begin, making compliance in the first interim compliance period (2022-2024) relatively painless. Our modeling of the CPP uses a cap-and-trade mechanism to approximate a compliance framework. Across most of the country, carbon allowance prices are forecast to be zero for the first 2 years of compliance, meaning no additional costs are needed to meet the targets. As others have found, compliance costs are lower when regional trading is allowed. Our modeling confirms that states that go it alone tend to have higher compliance costs overall.

 

States’ Roles in the Clean Power Plan

— June 25, 2015

The U.S. Environmental Protection Agency (EPA) plans to finalize the Clean Power Plan (CPP) this summer. As part of the plan, states will have 1 to 3 years to submit State Implementation Plans (SIPs) to the EPA for review. Some states are already starting the planning process to develop an SIP, and most are beginning with stakeholder meetings that include utilities and other major players in their state. Other states are waiting to see the final regulation before they begin.

States face a complicated web of decisions when crafting SIPs. The figure below shows a simplified hierarchy of the paths that they may take. States are unlikely to go through the decision process in a linear fashion; instead, they will need to consider all options and narrow them down based on their existing policies, resources, and stakeholder goals, among other factors.

SIP Example Decision Process

 

CPP Decision Tree - Recreated

(Source: Navigant Consulting)

SIP or FIP?

The first decision a state needs to make is whether to submit an SIP. If a state does not submit an SIP, the EPA will impose a Federal Implementation Plan (FIP). The EPA has indicated that it may include insights on what an FIP will look like when it releases the final rule this summer. Some states have passed legislation limiting their state agencies from submitting an SIP without legislative approval, which could impede those states from submitting an SIP at all.

A decision that will need to be made early in the process is whether or not a state wants to work with other states to submit a regional plan. There have been proposals, for instance, from Duke Nicholas Institute, that individual plans could be crafted to be standalone and still allow trading of credits with other states, similar to the way that renewable energy credits (RECs) can be traded among states even though Renewable Portfolio Standard (RPS) policies were not coordinated prior to implementation. However, many states are already in discussions about coordination efforts—for example, 14 Midcontinent states submitted comments to the EPA on its proposal and held a stakeholder event on June 5.

If states do work together on regional implementation plans, under the proposed rule they would have an additional year before their plan is due to the EPA. This allows additional time to coordinate among the many players involved across all coordinating states, but narrows the amount of time between when the implementation plan is approved by the EPA and compliance begins—potentially as little as 1 year.

Targets and Policies

Another decision that states must weigh in on is whether or not to use the rate-based target laid out by the EPA or to convert it to a mass-based target. This decision is interrelated with the kind of policy regime a state chooses to include in its SIP. A rate-based target may be more appealing to states that impose individual unit obligations on fossil units in their state, as it eliminates the uncertainty surrounding future load growth. Conversely, a mass-based target may be easier to implement in the northeast, where a mass-based cap-and-trade system already exists.

States will also need to determine how to integrate existing renewable and energy efficiency policies into their SIPs and decide if new policies are needed. These include RPSs, energy efficiency standards, and updates to building codes and can be combined with cap-and-trade, as in California, or standalone.

There are many additional considerations for states to take into account as they craft implementation plans. For the best overall outcome, it is recommended that states start early, have meaningful stakeholder involvement throughout the process, and leverage modeling and analytical tools where possible.

 

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