Flexibility and its implications dominate NARUC talk on EPA carbon plan

Source: Edward Klump, E&E reporter • Posted: Tuesday, July 15, 2014

DALLAS — The watchword was “flexibility.”

Representatives from across the electricity sector kept coming back to that point as they gathered here yesterday to discuss paths forward under U.S. EPA’s Clean Power Plan, which seeks to reduce carbon dioxide emissions from power plants.

Three panel members — from PJM Interconnection LLC, the Natural Resources Defense Council and the Regulatory Assistance Project — agreed that states face a buffet of options in how to tackle the carbon proposal. They bandied about the benefits of the Obama administration’s approach, as well as their concerns.

“There’s so much flexibility that’s been given that dare I say in some ways it’s almost ill-defined,” said Paul Sotkiewicz, a chief economist at PJM Interconnection, during a greenhouse gas-themed session at the summer meeting of the National Association of Regulatory Utility Commissioners, or NARUC. “There’s no sense of who actually bears the compliance obligation.”

PJM is a regional transmission organization that operates in 13 states and the District of Columbia, and Sotkiewicz said the sprawling power grid operator could end up with 14 different plans for tackling carbon. It’s too early to say if such plans would work together, he said.

Derek Murrow, director of federal energy policy at the Natural Resources Defense Council, called EPA’s proposal “pretty complicated” and said there’s been “a fair amount of confusion” about its structure.

So he sought to add some context, noting that EPA developed state-by-state targets from the bottom up and gave each state an opportunity to develop a plan. It used an intensity-based target based on pounds per megawatt-hour that is supposed to decline over time, he said.

Murrow cited four building blocks in the targets: coal plant efficiency improvements; increased use of existing natural gas plants and less use of coal; more use of renewable energy and some nuclear; and greater use of energy efficiency technology.

“There’s a lot of specifics in the way they develop the target, but a lot of flexibility — as everyone’s mentioned — in terms of how you achieve it,” he said.

Broadly, EPA’s proposal released last month seeks to reduce carbon dioxide emissions at power plants 30 percent by 2030 compared with 2005 levels. The targets vary by state.

“We would encourage states to develop market-based policy approaches, ideally with their neighbors across their market region,” Murrow said.

It’s relevant to consider who will fund the carbon plan, said David Farnsworth, a senior associate with the Regulatory Assistance Project, whose website says it provides technical and policy assistance to regulators.

“I think it’s most important to remember that it’s consumers, and it’s not generators, that are going to pay for carbon management costs,” he said.

In the past, Farnsworth said, some programs in the sector may have involved companies paying for scrubbers. But electricity buyers will pay for a cleaner power mix in this approach, possibly including using less coal and more natural gas, renewable energy and efficiency, he said.

This shift “could be very expensive, but it doesn’t need to be expensive,” Farnsworth said. States should look for the least-cost solutions, he said, and cited an approach known as cap and invest that can be defined as recycling revenues raised through an allowance auction.

More generally, it can be a deliberative effort to rationalize and coordinate energy and carbon policies in a state and with neighbors, he said. States can look at specific items, including areas EPA may have overlooked, in moving forward, he said.

“They’ve got a significant amount of flexibility, and I think that’s in this case a really good thing,” Farnsworth said.

The panel’s moderator, Susan Tierney with the Boston-based consulting firm Analysis Group, weighed in on the variety of options as well, saying there “are tools to help the industry address reducing carbon emissions while also keeping the lights on.”

Building plans state by state

Last night, Analysis Group made public a study that found states prepared to curb carbon pollution from power plants and help the economy while protecting consumers financially and environmentally, according to a news release.

“Several states have already put a price on carbon dioxide pollution, and their economies are doing fine,” Tierney, a senior adviser with the group and former U.S. Department of Energy official, said in the release. “The bottom line: the economy can handle — and actually benefit from — these rules.”

According to the report’s executive summary, “The impacts on electricity rates from well-designed CO2-pollution control programs will be modest in the near term, and can be accompanied by long-term benefits in the form of lower electricity bills and positive economic value to state and regional economies.”

For one thing, the study said, states have a history of using policy tools to encourage utility programs that can minimize the cost of electricity. The group also cited flexibility, saying states can plan around their own circumstances. Changes can be phased in during the 2020 to 2029 timeframe, according to the report.

“Although states differ in many ways — including their electric systems, their regulatory culture, and their electric industry structure — all states have programs, policies and practices that will allow them to develop plans that align well with their different circumstances while still complying with the new” carbon dioxide emissions requirements, Analysis Group said.

For example, the group said, states that have vertically integrated utilities can look at options such as integrated resource planning processes. States with restructured power sectors can select from market-based options that “dovetail” with competitive wholesale and retail structures, according to the study.

States also will be able to utilize energy efficiency programs in carbon compliance efforts, the group said.

Analysis Group said EPA hasn’t required work among states, but the plan “anticipates that many states may find it worthwhile to do so,” according to the report.

Pricing carbon also can send efficient signals for new resource investment in areas such as renewable and nuclear energy and in further energy efficiency efforts, according to the report.

The group cited the Regional Greenhouse Gas Initiative, or RGGI, and California’s cap-and-trade program as ways for states to obtain economic value of carbon dioxide emission allowances. Revenues could be directed to areas that benefit consumers and the public.

Analysis Group said states are positioned to help shield low-income customers when power costs rise. That includes discounted rates, dedicated funding for low-income weatherization and efficiency plans and emergency assistance programs.

“How compliance plans are designed by the states will strongly affect the magnitude and distribution of costs and benefits among consumers, power plant owners, and the general economy,” the group said.

Discussions are sure to continue today in Dallas, with EPA Administrator Gina McCarthy scheduled to address NARUC’s gathering this morning (EnergyWire, July 11).

PJM’s Sotkiewicz said yesterday that potential retirements of 50 gigawatts of coal-fired generation over several years could affect reliability planning. He said there are a lot of questions that need answers, and he said a reliability safety valve may be needed.

“There’s so much flexibility that’s been given that it almost makes it impossible for us to understand what we could be facing,” Sotkiewicz said.

At Analysis Group, the idea was to share information and remind state regulators that they’ll be looking at how to design programs, Tierney said in a recent interview.

“We know that conversations are happening all over the country, and we wanted to ask and to answer these questions about what could we expect for consumer impacts,” she said.