Utility regulators fret over grid reliability as EPA preps emission rules

Source: Hannah Northey and Jean Chemnick, E&E reporters • Posted: Tuesday, October 22, 2013

State utility regulators at the forefront of implementing upcoming federal rules to reduce carbon emissions from existing power plants in the United States are concerned that a fast-tracked schedule could trigger reliability issues.

Philip Jones, president of the National Association of Regulatory Utility Commissioners (NARUC), said the most important question is how much time industry will have to carry out the new rules.

“Even if you know [that] the end goal is clean energy sources, more demand response, more energy efficiency, more gas, how much time do you have to comply?” he asked.

At issue is President Obama’s call for U.S. EPA to propose new guidelines for existing power plants under Section 111(d) of the Clean Air Act by June 1, 2014, and finalize them a year later.

States must then craft plans to implement the rule by June 30, 2016 — leaving the Obama administration a few short months to approve or reject them before the president leaves office.

EPA is currently collecting input from stakeholders — including states — ahead of beginning a formal rulemaking process. Agency officials have declined to say how they plan to approach the standard, but many observers say EPA would minimize its risk of seeing the rule overturned in court if it proposed a standard based on efficiency measures that can be taken by individual power plants.

But that approach severely limits the emissions reductions that would be achieved by the rule, say other stakeholders. More carbon can be avoided at a reasonable cost if the agency crafts a rule that encourages utilities to shift to lower-carbon alternatives like natural gas and renewable energy and boost efficiency across the power system, not just at a power plant’s site

The Natural Resources Defense Council has released a proposal urging EPA to set stringent state-by-state standards based on the electricity portfolios of the individual states, and then allow state regulators to use a variety of tools — including renewable energy standards — to satisfy those requirements.

Industry and states have also advocated for flexibility, albeit usually coupled with less ambitious standards tied to emissions reductions that can be made “inside the fence line” of a plant (Greenwire, Oct. 7).

But it isn’t clear how EPA will proceed, especially because it is crafting its rule so late in Obama’s second term that it would have difficulty revising a standard that was thrown out by the courts.

“From a legal perspective, there’s uncertainty about all this,” said Dallas Burtraw, an electricity expert with the group Resources for the Future, in a recent interview. Burtraw also proposes that EPA introduce some form of emissions averaging across the fossil fuels power plant fleet, saying such a standard would still be in the “green zone.”

Jeff Holmstead, an attorney at Bracewell & Giuliani who represents several utilities, said there are concerns on the state regulatory level that some options EPA is considering could infringe on states’ ability to oversee the dispatch of certain resources. And many states are still digesting the Mercury and Air Toxics Standards, he said.

“If EPA does anything very aggressive, they have some legal risks, and there’s a good chance if they go beyond what can be accomplished [under the law], they run the real risk that the program can be thrown out,” he said.

But while the statute limits EPA to what can be achieved “inside the fence line,” Holmstead said it does allow states considerable flexibility to decide how to meet that standard.

“The Clean Air Act is pretty clear that the states can do things in different ways as long as they meet an equivalent reduction,” he said.

But whatever approach EPA takes, state public utility commissioners warn that it must not compromise reliability by forcing coal plants to retire prematurely in states that can’t bear the loss of power.

Agency personnel, including Administrator Gina McCarthy and Joseph Goffman, senior counsel for EPA’s Office of Air and Radiation, are already consulting with state regulators before beginning the formal rulemaking, Jones said.

Jones hopes regulators from the country’s patchwork of states — some heavily reliant on coal, others already curbing emissions — can reach a consensus on how to move forward.

“It’s fair to say there are significant regional differences on this, so we’re still discussing this internally,” he said.

Grid operators are also weighing in on coordination and flexibility of the 111(d) rule. But Paul Sotkiewicz, the chief economist for PJM Interconnection’s Market Services Division, said it’s too early to gauge how industry will respond or what reliability issues will surface until EPA releases a formal proposal.

“There’s a lot of speculation,” he said. “Our role here is not to tell them whether anything’s a good or bad policy, it’s what are the potential impacts.”

Listening mode

Jones said the next two to three months will be a critical time for states to comment on the rule, and “formally, once the rule comes out, maybe next June, that’s when everyone really starts to scramble, trying to figure out how they’re going to comply.”

EPA officials have shown keen interest in exactly how states would develop measures for crediting states like California and Colorado that have already taken measures to reduce their carbon emissions, Jones said.

Discussions have also centered on whether reductions could be “rate-based,” or measured in pounds per megawatt-hour, or possibly “mass-based” — such as a statewide average of emissions per year.

“I think it’s fair to say EPA is very helpful, but they can’t make definitive statements yet because they’re in this listening mode,” Jones said.

State regulators, on the other hand, are hoping to get a clearer picture next month about exactly how the grid will be affected from Gerry Cauley, the president and CEO of the North American Electric Reliability Corp., Jones said.

Cauley is slated to discuss reliability and technical considerations related to implementation of the rule at NARUC’s annual conference near Orlando, Fla.

NARUC has not yet weighed in on the rule, but a task force the group set up last year — the Task Force on Environmental Regulation and Generation — could help craft a resolution to define the group’s position, Jones said. The panel is co-chaired by Colorado Public Utilities Commission Chairman Joshua Epel and Maine Public Utilities Commission Vice Chairman David Littell.

The task force has discussed the effects of other EPA rules that affect mercury and toxins, cooling water towers, and coal residuals, and has held various Web-based seminars to discuss 111(d). It will do so again in Florida at the group’s annual meeting next month, Jones said.

“It might be a little difficult, although I personally think there are some high-level principles, whether it’s flexibility, regional differences, credit for early action, stuff like that where we might be able to reach a consensus,” he said.

One fear is that certain areas of the country that are already constrained may be forced to close large fossil fuel plants and find replacement power while ensuring that the grid is stable.

Even so, grid operators say EPA officials — as they did while implementing MATS — have been communicative and receptive to system reliability concerns.

PJM was able to ensure grid stability through a number of transmission projects when plants closed under the MATS rule, Sotkiewicz said. Language in the rule also provided flexibility, including a “safety valve” that gave companies more time to comply, he pointed out.

Sotkiewicz said he hopes any future carbon rule for existing plants will be equally flexible.

“You can’t say there aren’t any reliability issues at all, but we’ve been able to solve them in a timely manner,” he said.

Game changer?

Obama’s original pick to head the Federal Energy Regulatory Commission, Ron Binz, who withdrew from consideration last month, had his own views about how EPA should structure its rule and what it might do for the renewable energy sector.

Binz said last week at a clean energy conference in Maryland that he believed EPA would base its guidance on emissions reductions that plants can achieve on-site, but would then leave room for states to propose a flexible emissions reduction standard that would cap emissions across the entire fossil fuels sector.

Plants can then choose the least-costly way of reducing their emissions, he said. “Some will be converted; others won’t change.”

EPA would require states to ratchet down their emissions by 2 percent a year “for quite a while,” he said.

Binz did not say why he believed EPA would set this emissions reduction target. It would be less stringent than the NRDC proposal, which the authors say would lead to 26 percent reductions by 2020.

But Binz said the standard would “remake the utility industry in a way that nothing else we’ve talked about will.”

It would act as a powerful incentive for energy efficiency, and demand response, and especially renewable energy, he said.

“This will provide, finally, the thumb on the scale, or actually the equity on a carbon basis, that renewable industry, and particularly the smaller renewable industry, have needed for a very long time,” he said. The renewable industry would no longer be dependent on a production tax credit to compete in a market dominated by incumbent fuels like coal and gas.

Holmstead said 111(d) is unlikely to have any meaningful effect on the deployment of renewable energy.

“Renewables are a pretty expensive way of reducing CO2,” he said. A stringent standard of the kind NRDC advocates, he added, would be more likely to prompt efficiency upgrades and fuel switching from coal to natural gas than to encourage investment in renewables

Robert Wyman, a spokesman for the National Climate Coalition, which draws its membership from the energy sector, said the rule may encourage deployment of some renewable energy.

“If states can get credit for investments in renewable energy, and if the EPA program sets a carbon price … on fossil generation, then of course the 111(d) program will be beneficial from a standpoint of encouraging renewable energy,” he said.

Jones, meanwhile, said that a very aggressive emission-reduction standard would not work for broad swaths of the country.

“Ron [Binz] may say what he wants to say about more ‘progressive states’ or less ‘coal-dependent states,’ but for many of the coal-dependent states in the Midwest and the Southeast, I don’t think the NRDC plan will fly very far,” he said.

Jones said states would have to craft implementation plans that work for their own circumstances and power mix. A coal-dependent state, for example, could lean on energy efficiency. Other states, like California, have implemented rules for dispatching various fuels at certain times. Switching from fossil fuels like coal or fuel oil to natural gas could be another option, but that may raise problems, he said.

“That brings issues about heat content, Btu content, how do you measure it, and how would it comply under the” state implementation plan, Jones said. “These are all the very detailed but very important issues, and of course they all affect reliability.”