Hopes for Impact of Carbon Rules in U.S. Are Modest

Source: By CLIFFORD KRAUSS and DIANE CARDWELL • Posted: Thursday, June 5, 2014

Production of alternative energy, like that made at the Ivanpah Solar Electric Generating System in the Mojave Desert in California, is expected to increase under new carbon rules. CreditEthan Miller/Getty Images
The new carbon pollution rules the Obama administration announced on Monday will help spur the natural gas industry and renewable energy like wind and solar power, but executives and analysts said they did not see the nation’s reliance on coal disappearing anytime soon.

The intent of the Environmental Protection Agency proposal — to reduce carbon pollution from the nation’s power plants 30 percent from 2005 levels by 2030 — is to reduce the dependence on coal, which generates roughly 40 percent of the country’s electricity.

To achieve that target, states will have broad flexibility, meaning that reductions in coal use will come not only from relying more on other power sources, but also from making homes and buildings more efficient, both of which are already happening.

Changes, analysts said, will differ with each energy industry.

Leaders in the fossil fuel industries said they would need time to read the fine print of the long E.P.A. draft, and they noted that there were sure to be years of lawsuits and negotiations over compliance. But many of them said they could live with the new policy.

“It’s clear the increased use of natural gas in the existing power sector could create the opportunity for the U.S. to further capitalize on abundant North American natural gas supplies, furthering an energy renaissance,” Marvin Odum, Shell Oil’s president, said in a statement.

Chris Faulkner, chief executive for Breitling Energy, predicted that more gas generation plants would be needed to displace coal and meet new demand from population growth and that gas prices would rise perhaps as much as 25 percent. Gas prices have already risen over the last two years, but from historically depressed levels following the extraordinary boom in shale gas drilling that began around 2006.

A rebound in prices, Mr. Faulkner said, will most likely spur more drilling in several shale gas fields that are now nearly moribund, boosting supplies and averting a big price spike.

Clean energy advocates and executives said that the emerging renewable and energy efficiency sectors stood to benefit from the new regulations, but only moderately.

Analysts said that the ruling could make it easier for renewable developers to secure financing for projects because banks would be even more confident that they would have customers for their electricity. The biggest winners could be the companies offering services and technology to the power industry.

Part of the success of renewable energy would depend on the states.

“The states that already have aggressive plans — the Californias, the New Yorks, the Washingtons, the New Jerseys — they’re going to keep pushing ahead, but those aren’t the places where the real challenge is,” said Daniel M. Kammen, an energy professor at the University of California, Berkeley. “The real challenge is in finding ways to alter the rules in places that aren’t on what’s now considered the cutting edge of clean energy.”

States heavily dependent on coal-fired generation like Kentucky and Georgia are likely to bear the highest costs of reducing carbon pollution.

The proposed rule also opens the door for nuclear power plant operators to collect extra revenue because their reactors do not generate carbon dioxide. The nuclear industry has long touted its carbon-free nature, but has not been able to collect cash for that attribute.

Most utilities should be able to make the transition without undue stress, experts said.

Xcel Energy, a major Minneapolis-based electric company that operates across the Midwest and Rocky Mountain states, is one example. It depends on coal for 46 percent of its power, but it has already reduced emissions by 19 percent since 2005 and is on track to reduce its emissions by 31 percent by 2020.

The company has already retired two coal plants in recent years and is retiring two more in the Denver area, replacing them with a combination of natural gas, wind and customer efficiency improvements. But Xcel also reduced emissions in Colorado while building a new 750 megawatt coal unit in Pueblo.

“We think you can see significant reductions and still have coal in our system,” said Frank Prager, Xcel’s vice president for policy and strategy, in a recent interview.

Xcel’s experience is one reason some analysts see the E.P.A.’s target as realistic.

In an investment note, FBR Capital Markets emphasized that the national carbon emissions reduction target of 25 percent by 2020 from 2005 levels, when carbon emissions were at their highest level before the recession, would mean a reduction of only 11.5 percent from 2012 levels. And much of the mandated 30 percent reduction by 2030 could come from replacing the current housing and office building stock with new, more efficient buildings, which is already happening.

Jim Orchard, Cloud Peak Energy’s senior vice president for marketing and government affairs, said that last winter underscored the nation’s reliance on coal, when many utilities had to draw on reserve sources of coal-fired power during periods of peak demand.

While acknowledging that the “coal fleet is in a bit of flux at the moment,” Mr. Orchard said he was confident in Cloud Peak’s business of mining and selling coal from the Powder River basin region of Wyoming and Montana, where coal is economically mined and has a lower sulfur content than other regions. He predicted that while there would a smaller number of coal-fired power plants in the future, some existing plants would potentially burn more coal to meet electricity demands.

“At the end of the day the E.P.A. have their own priorities they need to meet,” Mr. Orchard said in a recent interview, “but as well-informed folks they understand the need for the coal fleet to continue to run, or at least a substantial portion of it.”

Experts said the new rules were also likely to spur innovation.

“There’s a variety of technologies that could pop up,” said Michael E. Webber, deputy director of the Energy Institute at the University of Texas at Austin. “With the 1849ers, going to California, the guys who mined the gold didn’t get rich; it’s the guys who made picks and shovels and denim jeans that got rich. So the support industries are often a path to wealth more than the commodity itself.”