Carbon Regulation and State Emissions Markets

The EPA’s new proposed Carbon Regulation is designed to reduce U.S. Power Generation carbon emissions by 30% 2005-2030.  In addition to the ‘social benefit of reducing carbon’ and ‘health benefits’ of shutting down or cleaning up the most polluting U.S. Power Generation capacity, the EPA estimates that Consumers “electricity bills will shrink by roughly 8%” in 2030.   

The new rule sets individual carbon reduction standards for each State and requires that all States develop individual or group (multi-state) compliance plans to achieve required carbon reductions by 2030.  EPA’s developing Carbon Regulation encourages building significantly on current States’ ‘market based greenhouse gas flexible (carbon trading) programs’.  The EPA advocates that existing ‘market based’ carbon reduction programs could successfully reduce total U.S. carbon emissions and minimize costs.  Based on recent States’ market based carbon (trading/exchange) programs and the overall new proposed regulation, what will the likely impacts be on current and future power costs (or affordability) for most U.S. Consumers?  Will they decrease as the EPA claims or possibly double over the next 15 years?

EPA Regulatory Focus on Maximizing Compliance Flexibility – The developing carbon regulation requires each State to reduce their Power Generation carbon emissions by different levels as listed for individual States within the policy’s compliance targets.  The regulation also emphasizes the need and ability of States to plan and utilize a ‘flexible approach to cutting (their) carbon pollution’.  Included in this flexible approach is the option for multiple States to develop regional plans to achieve collective or combined carbon reduction targets.  An EPA referenced example includes the ‘Regional Greenhouse Gas Initiative’ (RGGI) developed by 10 Northeastern States.  The current Northeastern RGGI(-10) includes: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

The EPA’s ‘Clean Power Plan Flexibility’ recommendations also includes many of the strategies developed and implemented on the West Coast; i.e. California.  Flexible lower carbon strategies include: increased generation and consumer efficiencies, expanded lower carbon (natural gas/nuclear) and renewable power generation, and increased T&D efficiency upgrades.

Besides the broader range of options potentially possible from multi-state/regional compliance plans, the new regulation extends the required compliance plan development schedule-period from one year (for individual states) up to two years (for regional-multiple states).

Comparison of Northeast and West Coast Power Generation Performance to Other States – The EPA appears to be advocating that States possibly duplicate the apparent performance of the RGGI-10 and California in reducing their Power Generation carbon emissions.  A brief analysis was developed to compare the regional-lower carbon generating States to the balance of U.S. States.  Refer to Table 1.

Table 1 – Power Generation and Associated Carbon Emissions

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Data Source: EIA ’State Electricity Profile’ for 2012.

EIA data shows that the power carbon intensity (pounds carbon dioxide emissions per MWh) of RGGI-10 and CA States are currently about half the other 39 States.  Even though the RGGI-10 + CA only represent 14% of total U.S. net power generation currently the substantially lower carbon emissions compared to the balance of the U.S. could definitely serve as a excellent example of how other States can successfully reduce their carbon emissions in the future.

The obvious question from the above data is why are the carbon intensities of power generation in RGGI-10 and CA States substantially lower than other States?  The primary reason for reduced carbon emissions generally has to do with ‘power generation mix’.  Refer to the Table 2.

Table 2 – Power Generation Sources

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Data Source: EIA ‘State Historic Tables: Total Electric Power Industry’. for 2012. 

EIA data shows that the primary reason for lower carbon intensity of RGGI-10 and CA is a combination of very low Coal Power generation, very high Natural Gas + Nuclear Power generation and relatively high Hydropower + other Renewable (primarily Wind+Solar PV Power) generation; compared to Non-RGGI/CA States.  Clearly with 43% of net power generation coming from coal for the 39 Non-RGGI/CA States, this is the primary reason why most these States’ power carbon intensities are about double RGGI-10 and CA.

The above EIA data also shows that the RGGI-10 ‘baseload’ power generation comes primarily from Nuclear, followed by Natural Gas Power.  CA baseload power generation comes primarily from Natural Gas, followed by a combination of Hydro, Nuclear and (somewhat uniquely) Geothermal (42% of ‘other renewables) Power.

New EPA Carbon Regulation Compliance Costs – Another question recently raised by some individuals that live in the RGGI-10 and CA states is: “Why are these lower carbon intensity power generation States required to further reduce their emissions under the new EPA regulation?”.  The answer to this question is fairly complex, as is the new regulation overall.  Re. Regulatory Impact Analysis.  The primary reason has to do with the regulation being based primarily on carbon intensity or pounds carbon emissions emitted per MWh net generation and some level of attempting to equitably distribute the cost burden across the U.S.  Another factor appears to be due to the fact that most the RGGI-10 and CA States must import power from higher carbon intensity power generation (non-RGGI/CA) States in order to fully meet their total in-state demands.  Refer to Table 3.

Table 3 – Power Generation, Retail Sales and Costs

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Data Source: EIA ’State Electricity Profile’  for 2012.  Note: the balance of Non-RGGI/CA power exports includes Mexico and unaccounted for T&D system losses. 

EIA shows that lower carbon intensity RGGI-10 and CA States must import (11% and 23% respectively) of their power from higher carbon intensity (non-RGGI/CA) States.  This clearly increases the (direct + indirect) carbon emissions of RGGI-10 and CA States above those accounted for from in-state power generation only.  This directionally should be factored into all States required carbon reduction targets under the new regulation. 

In 2012 the average U.S.-wide retail power cost was 9.84 cents/KWh.  Table 3 shows that the average retail power costs in lower carbon intensity RGGI-10 and CA States is about 50% greater than other (non-RGGI/CA) U.S. States.  These data possibly represent a real world case of the minimum cost increases that could be expected in the 39 higher power carbon intensity (non-RGGI/CA) States in order to comply with the new EPA carbon reduction regulation.

Are the EPA’s Carbon Regulation Compliance Cost Estimates Reasonable? – The EPA estimates that compliance costs to reduce U.S. Power Generation carbon emissions by 30% 2005-2030 will be between $4-9 Billion per year by 2030.  Re. ‘Carbon Pollution Emission Guidelines’ pages 571-579.  This estimated compliance cost is a small fraction of other estimates such as the Chamber of Commerce analysis and my own past analyses (Re. Shutting Down Most U.S. Coal Power Part 1Part 2 and Part 3 ).  To evaluate the EPA’s recent cost estimate a brief review was made of the EIA data and analysis covered in above Tables 1-3.  Using current States carbon emissions and retail cost data, an estimate of carbon reduction costs was developed based on the comparison of RGGI-10 and CA States vs. the other 39 States average power costs.  Refer to Table 4.

Table 4 – Power Generation, Sales and Equivalent Carbon Reduction Costs

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Data Source: EIA ’State Electricity Profile’  for 2012. 

EIA data shows that total U.S. net power generation carbon emissions were 2.5 billion MT in 2005.  To achieve the EPA regulation target of 30% reduction in 2030 requires reducing carbon emissions by 0.7 billion MT.  Based the current real world carbon reduction cost (RGGI-10 + CA vs. the other 39 States) of about $13 per MT, this would result in a increased average electric power expense of just over $9 billion.  Based on this fairly rough current-actual cost analysis it would appear that the EPA’s ‘highest range’ compliance cost estimate could possibly be reasonable.

However, there are a couple key factors or assumptions the EPA has made that need review.  1) the EPA estimates or assumes that U.S. total power consumption (and costs) will decrease by about 8% in 2030; due to efficiency improvements.  This is a very questionable and unprecedented assumption particularly when compared to the most recent EIA AEO 2014 projection, which estimates U.S. total power consumption could increase by about 16% 2012-2030.  This (8% + 16% =) 24% difference in U.S. total power consumption by 2030 will have a substantial impact on future carbon reduction compliance costs.  And 2), by coincidence or design the EPA has possibly assumed that future carbon reduction costs will be nearly equivalent to RGGI-10 and CA actual costs in recent years.  While this assumption can have some level of validity, the actual costs could be significantly higher due to the very aggressive 15-year compliance/construction schedule requirement vs. the fact that most the lower carbon power generation capacity currently in service (hydropower, nuclear and most natural gas) was built over 30 years ago; high efficiency CCGT natural gas power generation capacity, however, was built more recently.  Substantially reducing the time allowed to design, build and startup roughly 1/4th or up to 1/3rd of total new U.S. power generation capacity in the next 15 years may not be as efficient, economic or feasible as the EPA apparently assumes.

By another comparison, the Chamber of Commerce analysis estimates carbon reduction costs could be up to $100/MT.  If this analysis proves to be directionally more accurate than the EPA’s, the Carbon Regulation compliance costs could be many times, up to a magnitude greater than the EPA’s highest estimates.  This would likely result in U.S. average electricity retail prices increasing to similar levels found in the EU overall or higher, such as possibly Germany.  Compared to many U.S. States such as the RGGI-10 and CA, EU and Germany retail power costs are currently 2- and 3-times greater, respectively.

Another factor that will affect compliance costs is the fact that even lower carbon intensity RGGI-10 + CA States will be required to reduce current (2012) power generation carbon (lbs./MWh) by about 30% in 2030.  The level of these increased costs are yet to be determined.

In Conclusion – There little doubt that if the Federal Courts valid the EPA’s authority to implement the proposed Carbon Regulation that the U.S. can reduce its Power generation carbon emissions by 30% 2005-2030.  The priority question or debate then becomes what will be the actual cost impacts and the affect on U.S. Businesses, Consumers and the overall Economy. 

To comply with the new EPA Carbon Regulation will probably require replacing of most existing Coal Power and less efficient Petroleum/Natural Gas Power generation capacity by 2030.  Utilizing regional-market based strategies towards achieving carbon reduction target compliance should help make the process more efficient and minimize compliance costs.  Based on the actual RGGI-10 and CA States carbon emissions/costs, the shutdown of most Coal Power capacity will very likely be replaced first by new/expanded high efficiency Natural Gas Power capacity, followed by expanded Nuclear Power, and some feasible level of increased Wind/Solar Renewable Power.  The maximum feasible level of variable Wind & Solar Power will generally be a function of available/new Natural Gas ‘intermediate/peaking’ Power capacity.  Also some significant level of efficiency improvements (or reduced consumption) will be feasible, but not necessarily to the level assumed by the EPA.  Since the EIA projects that average U.S. electric prices could increase by 40% 2012-2030 (projection developed before the new proposed EPA Carbon Regulation), Consumers should probably expect their power costs to at least double within the next 15 years.

The EPA and other Federal Agencies need to very closely monitor the costs and other impacts of shutting down most U.S. Coal Power capacity over the next 15 years.  Since electric power costs make up a significant percentage of the Industrial and Commercial Sectors’ operating expenses, substantially higher power costs will significantly reduce profit margins and possibly curtail or shutdown numerous future Business/Commercial operations.  Increased power costs will also negatively impact Residential Consumers directly (increased power & heating costs) and indirectly (increased goods & services costs).  If the negative impacts on the Industrial, Commercial and Residential Sectors become excessive, the overall economy could be put at substantial risk.  To avoid another future economic recession caused by out-of-control energy costs, the EPA may be forced to modify or delay the schedule of reduced Power Generation carbon emissions implementation plans in the near future.  It could take more than 15 years to cost effectively or feasibly reduce U.S. Power generation carbon emissions by 30%.  It normally takes 10+ years to justify, design, permit and build a new Nuclear Power plant these days.  Since Nuclear Power will likely be a very critical part of substantially reducing U.S. carbon emissions, it might take an additional decade or so (2040?) to feasibly achieve the EPA’s 30% carbon reduction goal.