Southeast carbon market could be a struggle, but groundwork is there

Source: Kristi E. Swartz, E&E reporter • Posted: Monday, June 9, 2014

Some Southeast utilities share the same parent company. They also are interconnected through power lines and cooperate with regional planning.

Most are heavily regulated, investor-owned utilities that were once dominated by coal. They share boundaries and have common political, cultural and social attitudes.Whether any of that boils down to the Southeast forming a regional carbon market to comply with U.S. EPA’s proposed greenhouse emission requirements is unclear, however.

Joining forces to cut 30 percent of their carbon emissions by 2030 is a matter of practicality versus political ideology, environmental lawyers and advocates say.

“I think it would be shortsighted for the Southeast state air regulators to not at least explore the idea,” said Stephen Smith, executive director for the Southern Alliance for Clean Energy. “I’m just not sure that the ideological inertia will let it be fully vetted.”

The major utilities, regulators and environmental agencies that responded to¬†EnergyWire‘s request for comment essentially all said the same thing: They were still reviewing the 645-plus-page rule EPA released early Monday and were far from even considering the best options for moving forward.

They and others will be able to share their written opinion with the federal agency during an extended 120-day comment period. EPA also will hold public forums in four cities, including Atlanta, at the end of July.

Each state has its own target. In the Southeast, most of those states have electric companies that are owned by one of three major utilities, however. The Tennessee Valley Authority touches seven states. Atlanta-based Southern Co.’s territory spans all or parts of four. Charlotte, N.C.-based Duke Energy Corp. has a heavy presence in North and South Carolina and Florida.

Supporters say a regional approach would lower the cost to comply with EPA’s proposals. That would temper the fears of EPA critics who say the rule will drive up consumer electricity prices.

“If they [utility executives] care about the bills they send their customers as much as they say they do, I think they should figure out a way to make it work,” said Frank Rambo, who heads the Clean Energy and Air program at the Southern Environmental Law Center. “If they design it right, everybody can benefit.”

Environmental advocates acknowledge that setting up a carbon market isn’t easy. But the Southeast may have one major hurdle that could be more difficult to overcome than figuring out how to auction carbon credits.

Politics.

“There’s still a lot of conservative governors who are critical of the EPA and what they are doing,” said Smith, who is also a member of the TVA’s 20-member Regional Energy Resource Council. “I’m not sure whether you can overcome that and have an intelligent conversation.”

What’s more, working together on environmental issues already has proved to be challenging. Alabama, Florida and Georgia have been involved in a dispute over water for more than two decades (Greenwire, March 3).

“We don’t have this tremendous regional collaborative effort in general,” Smith said.

Buying time

One of the biggest advantages a regional market would give the Southeast and other states is time. Individual states have until 2016 to submit their carbon-reduction plans to EPA. Those that file multistate compliance plans have until 2017.

The only practical way to comply with EPA may be for states to add a carbon tax or set up a cap-and-trade program, said Jeff Holmstead, an attorney with Bracewell & Giuliani and former assistant administrator for air and radiation in the George W. Bush administration.

This is because the rule essentially asks states to continue to shift toward natural gas and away from coal, he said. To do that, it must always be cheaper for utilities to operate natural gas plants — at least 70 percent of the time — instead of coal-fired ones.

“Plants are dispatched based on cost,” Holmstead said. “To change the dispatch order, you have to have some way to advantage some plants over others.”

Natural gas prices have fallen sharply and remained cheap because of increased supplies. Coal, however, is also a cheap resource and was used heavily in the winter time during the Polar Vortex. In recent earnings calls and annual shareholders meetings, utility executives routinely brought up how much they had to lean on their coal-fired plants to keep the lights on and heaters running for their customers, as if to send a signal to EPA even before the carbon rule was released.

For utilities to continue to use natural gas the majority of the time, coal has to be more expensive. That’s where a carbon tax or cap-and-trade system comes in.

“There are really significant legal issues with this proposal,” Holmstead said. “If this is finalized, and if it is upheld in court, I wouldn’t be surprised to see some regional market. I think you’d almost have to have one to make sense out of all of this.”

Electric companies in the Southeast are already interconnected in other ways. Most, if not all, are members of the nonprofit Southeast Reliability Corp., which handles reliability for bulk power supply systems for 560,000 square miles in 16 central and Southeastern states.

The Southeast has one of the largest regional transmission planning processes in the United States.

The Southeastern Regional Transmission Planning (SERTP) process includes portions of 14 states and 84,000 miles of transmission lines. SERTP recently expanded to include Duke Energy.

The utility regulators have their own separate association of Southeast public service commissioners. And many of the utilities participate in a regional exchange program to assist each other during hurricanes and other major storms.

“There is, at least on that front, a move toward greater coordination,” said Rambo, referring to SERTP. “Whether that factors into companies’ feelings on regional compliance on carbon pollution standards, I don’t know.”

Other regional approaches

The EPA proposal has spurred talk of regional markets elsewhere. Utility regulators at a conference of Western public service commissioners discussed the possibility but agreed there are challenges for reasons unique to that region (EnergyWire, June 5). Some states get electricity from coal-fired plants that are outside their own borders, for example.

States that operate in the Northeast’s non-state carbon market known as the Regional Greenhouse Gas Initiative (RGGI) said earlier this week they were ahead when it came to meeting EPA’s requirements (EnergyWire, June 3). The states are already 40 percent there in terms of meeting the 2030 target, according to the director of RGGI’s board.

California also developed a system just for its state, but it is open to letting others join (Greenwire, June 3). Businesses submit carbon allowances along with tallies of their greenhouse gas emissions. The state auctions the allowances.

California, Oregon, Washington and British Columbia formed an agreement called the Pacific Coast Collaborative last fall to take steps to reduce emissions but have not made any joint moves yet.

As for the South, only Florida had a provision to set up a cap-and-trade system. Former Republican Gov. Charlie Crist authorized the state to develop one as part of the Florida Climate Protection Act that passed the Legislature in 2008.

After Crist left office — and eventually switched parties — the majority-Republican Legislature repealed his efforts in 2012.