This section buried in EPA’s rule may be the most important

Source: Benjamin Storrow, E&E News reporter • Posted: Thursday, August 23, 2018

When Joe Craft, the coal mining executive whose wife serves as President Trump’s ambassador to Canada, was asked by financial analysts earlier this year what the White House could do to help the fortunes of the coal industry, he offered two ideas.

One: Subsidize struggling coal units in the name of grid resilience. And two: Revise EPA’s New Source Review (NSR) program, which Craft said ties “into the need to really focus on the long term and our ability to build new coal-fired power plants.”

“So No. 1, let’s protect the fleet,” the Alliance Resource Partners LP CEO continued. “No. 2, let’s look to see if we can’t replace our old — older, inefficient plants with newer, efficient plants so that we can have the lower-cost energy that would still be environmentally acceptable.”

The Department of Energy’s initial subsidy plan was rejected by the Federal Energy Regulatory Commission. DOE has since revised its strategy and is now looking to aid coal and nuclear plants deemed critical to national security. And yesterday, Trump moved even closer to meeting Craft’s request. Buried in the president’s plan to water down the Obama administration’s Clean Power Plan is an overhaul of how NSR is applied to existing power plants.

NSR is a permitting program that sets emissions standards for new and modified power plants. It has long been in the crosshairs of the coal industry, which argues that the program sets unrealistic standards for new facilities and makes upgrades to existing ones prohibitively expensive.

Industry analysts said the NSR changes may be the most consequential aspect of the Affordable Clean Energy (ACE) plan — potentially opening the door to new investment in existing coal plants, extending their useful lives and increasing carbon emissions.

“If you lay this next to what DOE is trying to do to directly subsidize coal plants and think about ACE as a pro-coal policy, it seems the administration is betting the way to offset the adverse coal economics of the market is to provide some sort of regulatory subsidy,” said Joseph Goffman, a former Obama EPA official and one of the chief architects of the Clean Power Plan. “The NSR reform embedded in the proposal might be where the rubber meets the road.”

NSR fight is an old one

Jim Thompson, an analyst who tracks the coal industry at IHS Markit and pens an influential industry newsletter, agreed that an NSR overhaul may be the most consequential element of the president’s plan, if for an entirely different set of reasons.

NSR has effectively prohibited decades of upgrades to coal-fired power plants, hindering the industry while its competitors forged ahead with new technology, Thompson said.

He likened the result to a boxing match between a fighter who has been starved of food for months and a competitor who is well-fed and healthy.

“The two guys have boxing gloves and it all looks equal, but in reality it is not a fair fight,” Thompson said. “Coal technology has been starved at least in part because of NSR.”

EPA’s proposal calls for changing the emission measurements used to trigger New Source Review (Greenwire, Aug. 21). In the past, a plant would be subject to an NSR permit if a proposed modification increased its annual emissions output. The updated proposal would allow plants to avoid NSR, provided the improvements reduce a facility’s hourly emissions rate.

The idea is not new. Bill Wehrum, EPA’s air quality chief, advocated a similar proposal during a previous stint with the agency during the George W. Bush administration. It was ultimately shot down in court.

A statement by the National Mining Association, a trade group, did not address the NSR reforms but made clear the coal industry’s pleasure with the wider proposal.

“Advancing the nation’s environmental protections does not have to come at the expense of American families, risking the reliability of our grid and sidestepping the law,” NMA President Hal Quinn said in the release. “The EPA and the Trump administration should be applauded for articulating a clear, legal proposal that considers the interests of all Americans.”

Increased emissions?

The NSR changes are likely to lead to an increase in carbon emissions if implemented, climate analysts said. That’s because any improvement in a plant’s emissions rates would make coal facilities more efficient, increasing their competitiveness and prompting them to run more.

An analysis by Resources for the Future, a think tank, estimates that carbon dioxide emissions under EPA’s revised proposal would be 63 percent higher than under the initial Clean Power Plan. The study also found emissions under ACE would only be 2.3 percent lower than if EPA did nothing.

Whether utilities will make the efficiency improvements envisioned by EPA is a matter of some debate. The rule gives states significant leeway for setting coal plant efficiency standards (see related story).

And if analysts agree that NSR reform has the potential to extend the lifetime of America’s coal fleet, they disagree over whether it would actually lead to new utility investments in existing coal-fired power plants.

Some argue that the impact would be relatively muted, limited to a handful of plants. Their argument is largely based on the premise that wider economic trends in the power sector would counteract EPA’s deregulatory moves.

The longer gas prices stay low, the more coal plants will retire, said Michael Wara, a senior researcher at Stanford University’s Woods Institute for the Environment.

“I think the economics of the fuels is driving this transformation,” Wara said. “Unless that changes, it’s not a tail that can wag the dog.”

Others disagreed. They argued that the impact could be particularly significant in vertically integrated states, where utilities operate as regulated monopolies and can pass on the costs of environmental upgrades to consumers.

Utility regulators tend to look favorably on utility proposals intended to comply with federal standards, said Miles Keogh, executive director of the National Association of Clean Air Agencies.

The plan, Keogh said, “will not make it easier to build new coal-fired power plants. It will lower the perceived regulatory risk of investing in existing coal-fired power plants.”

‘One bite at a time’

Thompson, the IHS analyst, said he believes the impact of NSR reform is greater when taken in combination with other administration moves, like DOE’s proposed subsidy plan. Taken together, those moves could ultimately alter the power company calculus and spark new investment in coal plants.

“It seems to be the path the administration is taking is to say, ‘The playing field hasn’t been level for a very, very long time, so we are going to try to level the playing field with these new rules,'” Thompson said.

The focus on existing plants hints at the bigger challenge facing the coal industry and the Trump administration, namely how to inspire utilities to build new coal-fired power plants, Thompson said.

More work from the administration is likely needed before a power company makes an investment in a new coal plant, he said.

But, Thompson added, “if you can’t find the appetite to keep existing plants open, then surely you can’t find the appetite to incentivize construction of new plants. I think it is an apple. You have to take it one bite at a time.”

On that much, Craft, the mining executive, would likely agree.