USEPA's Electric Reliability Roulette: Can We Keep the Lights On?

Sue Tierney's EPA Regs by Region Impacts

The biggest casualty of EPA’s aggressive regulatory push may be electric reliability.  There are growing warnings even from experts inside the government at EPA and FERC that taking out perhaps as much as 25% of the installed coal-fired power generation base to achieve EPA’s emission reduction goals will result is loss of resources integral to reliability.

The North American Electric Reliability Corporation (NERC) is the independent body responsible for monitoring grid reliability. It released its 2011 Long-term Assessment Report on the impact of regulations and other issues affecting bulk power system reliability. NERC President Gerry Cauley said the report described “considerable operational challenges to complete, coordinate and schedule the necessary environmental retrofits” that are required by the proposed EPA regulations.

This was a clear and present danger ahead warning for the grid from the consequences of rapid policy changes resulting falling reserve margins and the forced retirement of a substantial share of baseload coal fired generation resources integral to reliability; growing dependence on natural gas as a peaking fuel; grid changes and new transmission construction required to integrate renewable energy resources.

EPA’s Air Quality division head Gina McCarthy denied adverse impacts on grid reliability in defending the agency’s rulemakings: “In the 40-year history of the Clean Air Act, EPA rules have never caused the lights to go out. And the lights will not go out, and we won’t let it happen going forward.”

Installed power Generation Capacity by Fuel

But the growing chorus of voices to the contrary is causing alarm across the country:

  • The Midwest Independent System Operator (MISO) told TransmissionHub: “Reliability in the Midwest will be severely challenged throughout the implementation period of the proposed rules. The compliance time allowed by the proposed rule and the time required to accomplish the installation of new control equipment or capacity replacement is exactly the same, meaning owners of all these units must remove them from service simultaneously leaving inadequate generation resources to sustain reliable electricity supply.  As a result, 62,000 MW of coal units could potentially be unavailable for reliability purposes — all at the same time. Even though most of these units would not necessarily retire, they would still need to be shut down for many months to install environmental control equipment to comply with the EPA regulations.”
  • NERC’s Report said the Electric Reliability Council of Texas, could run short of reliable resources by 2013 in part because ERCOT is a separate power grid with limited import and export potential to the WECC and Eastern Interconnect.  So when Tex has reliability issues they can quicken get out of control.  Texas has added a tremendous amount of wind energy and is building transmission to bring it to market.  But there is great uncertainty about how strict the EPA will be enforcing a new rule on mercury and air toxics expected to be released in December 2011.  By setting a short period for compliance, US EPA rules have the effect of stampeding utilities into making a choice between staying in compliance and shutting down the plant.  Even plants that could be retrofitted to be in compliance may shut down since there will not be enough time to make the retrofits given all the environmental procedures they must follow before making the changes.  This can cause substantial reliability issues in a closed market like ERCOT and gives the USEPA outsized influence over the resource mix choices and options available to solve the problem substituting EPA’s judgment for ERCOTs.  This enrages Texans who created ERCOT back in the 1930s for the sole purpose of avoiding Federal regulation of its wholesale electric power system.
  • Once Thru Cooling is a killer regulation for older plants.  Many older power plants were built with cooling towers that draw water from cooling ponds built along with the plants or from nearby ocean or river sources to pump through the cooling towers once and return them to the source.  Environmental challenges to once through cooling are affecting many older plants.  In fairness, this is not a new problem since litigation by environmental groups is forcing EPA to issue regulations consistent with court approved settlements that date back over a decade.  But compliance likely means these older plants will be shut down in many cases since the cost of retrofitting them is greater than replacing them.  In California, for example, these once thru cooling units represent 27 percent of capacity, but only 7 percent of the annual energy generated.  This means that shutting the plants down can seriously harm reserve margins and prevent their use even on a limited basis for reliability.  This rule covers roughly 1,260 existing facilities that each use at least 2 million gallons per day of cooling water. EPA estimates about 590 of these facilities are manufacturers, and the other 670 are power plants.   Adding rule enforcement such at OTC now on top of the other more recent rules on emissions reduction is causing a pancaking of impacts that seriously harm electric reliability.
  • 83 GW of Coal fired Generation at Risk. In November 2011 Fitch Ratings raised its estimate of the coal-fired generation capacity likely to be forced into retirement by EPA proposed regulations on emissions to 83 GW from 51 GW it had forecast last February.  Fitch said it now expects coal plants smaller than 400 MW and more than 40 years old will also be at risk. In February 2011 Fitch said it thought units smaller than 200 MW with a weighted average age of nearly 50 years would end up being the primary casualties of the changing rules.   The Eastern Interconnect states most affected include Pennsylvania, Ohio, Indiana, Illinois, Michigan, Virginia and the Carolina all traditionally heavy coal users. Among utilities most affected Fitch says DTE Energy has 27% of its 7.6 GW of coal capacity at risk for retirement while AEP, Duke Energy and Ameren each have 25% of their coal-fired capacity at risk. Progress Energy has 23% of its coal capacity at risk, and Dominion Resources has 20% at risk. AEP announced that EPA rules will force it to shut down 6,000MW (25%) of its coal-fired capacity and spend $6 billion to $8 billion in bringing the rest of its fleet into compliance.

The primary reason for concern about reliability is the cumulative impact from the pancaking of EPA rules and the short compliance time of the SO2 emissions limits scheduled to take effect Jan. 1, 2012, under Cross-State Air Pollution Rule, or CSAPR.  The practical consequence of this pancaking is to force utilities to make investment versus retirement decisions sooner on about 39 GW, or 47% of the at-risk coal-fired capacity operating without compliant SO2 controls.  While EPA’s proposed Mercury and Air Toxics Standards Rule will likely drive more retrofit than retirement of plants on its own, the pancaking and scheduling of compliance dates forces utilities into noncompliance before they complete the retrofits in a logical, orderly manner.  Thus EPA is betting it can stampede utilities into early retirement of coal before its time runs out.

Gary L Hunt

About 

Gary Hunt is a global business executive with 20+ years experience as a “C’ level trusted adviser on corporate strategy, M&A, and recurring revenue business model strategies.

His focus is information technology and energy vertical “sweet spots” where IT and OT converge to offer scalable growth opportunities to leverage data and analytics into advanced predictive analytics solutions using recurring revenue business models.

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