Thursday, June 19, 2014

EPA's New CO2 Rules Create Opportunities for Natural Gas, for Now

  • EPA's proposed rule for reducing CO2 emissions from power plants could increase natural gas demand in the utility sector by as much as 50%, at the expense of coal.
  • Cutting emissions by regulation rather than legislation entails legal and political uncertainties that could hamper the investment necessary to meet EPA's targets.
Earlier this month the Environmental Protection Agency announced its proposal for regulating the greenhouse gas emissions from all currently operating US power plants. Unsurprisingly, initial assessments suggested it favors the renewable energy, energy efficiency and nuclear power industries--and especially natural gas--all at the expense of coal. However, the longer-term outcome is subject to significant uncertainties, because of the way this policy is being implemented.

EPA's proposed "Clean Power Plan" regulation would reduce CO2 emissions from the US electric power sector by 25% by 2020 and 30% by 2030, compared to 2005. Although it does not specify that the annual reduction of over 700 million metric tons of CO2--half of which had already been achieved by 2012--must all come from coal-burning power plants, such plants accounted for 75% of 2012 emissions from power generation.

It's worth recalling how we got here. In the last decade the US Congress made several attempts to enact comprehensive climate legislation, based on an economy-wide cap on CO2 and a system of trading emissions allowances: "cap and trade." In 2009 the House of Representatives passed the Waxman-Markey bill, with its rather distorted version of cap and trade. It died in the US Senate, where the President's party briefly held a filibuster-proof supermajority.

The Clean Power Plan is the culmination of the administration's efforts to regulate the major CO2 sources in the US economy, in the absence of comprehensive climate legislation. Although Administrator McCarthy touted the flexibility of the plan in her enthusiastic rollout speech and suggested that its implementation might include state or regional cap and trade markets for emissions, the net result will look very different than an economy-wide approach.

For starters, there won't be a cap on overall emissions, but rather a set of state-level performance targets for emissions per megawatt-hour generated in 2020 and 2030. If electricity demand grew 29% by 2040, as recently forecast by the Energy Information Administration of the US Department of Energy, the CO2 savings in the EPA plan might even be largely negated. EPA is banking on the widespread adoption of energy efficiency measures to avoid such an outcome.

Since we have many technologies for generating electricity, with varying emissions all the way down to nearly zero, many different future generating mixes could achieve the plan's goals, though not at equal cost or reliability. Ironically, since coal's share of power generation has declined from 50%  in 2005 to 39% as of last year, it could be done by replacing all the older coal-fired power plants in the US with state of the art plants using either ultra-supercritical pulverized coal combustion (USC ) or integrated gasification combined cycle (IGCC). 

That won't happen for a variety of reasons, not least of which is EPA's "New Source Performance Standards" published last November. That rule effectively requires new coal-fired power plants to emit around a third less CO2 than today's most efficient coal plant designs. That's only possibly if they capture and sequester (CCS) at least some of their emissions, a feature found in only a couple of power plants now under construction globally.

It's also questionable how the capital required to upgrade the entire US coal generating fleet could be raised. Returns on such facilities have fallen, due to competition from shale gas and from renewables like wind power with very low marginal costs--sometimes negative after factoring in tax credits. Some are interpreting EPA's aggressive CO2 target for 2020 and relatively milder 2030 step as an indication that the latter target could be made much more stringent, later.

So while coal is likely to remain an important  part of the US power mix in 2030, as the EPA's administrator noted, meeting these goals in the real world will likely entail a significant shift from coal to gas and renewable energy sources, while preserving roughly the current nuclear generating fleet, including those units now under construction.

If the entire burden of the shift fell to gas, it would entail increasing the utilization of existing natural gas combined cycle power plants (NGCC) and likely building new units in some states. In the documentation of its draft rules, EPA cited average 2012 NGCC utilization of 46%. Increasing utilization up to 75% would deliver over 600 million additional MWh from gas annually--a 56% increase over total 2013 gas-fired generation, exceeding the output of all US renewables last year--at an emissions reduction of around 340 million metric tons vs. coal. That would be just sufficient to meet the 30% emissions reduction target for the electricity demand and generating mix we had in 2013.

The incremental natural gas required to produce this extra power works out to about 4.4 trillion cubic feet (TCF) per year. That would increase gas consumption in the power sector by just over half, compared to 2013, and boost total US gas demand by 17%. To put that in perspective, US dry natural gas production has grown by 4.1 TCF/y since 2008.

EPA apparently anticipates power sector gas consumption increasing by just 1.2 TCF/y by 2020, and falling thereafter as end-use efficiency improves.  Fuel-switching is only one of the four Best System of Emission Reduction "building blocks" EPA envisions states using, including efficiency improvements at existing power plants, increased penetration of renewable generation, and demand-side efficiency measures. The ultimate mix will vary by state and be influenced by changes in gas, coal and power prices.

I mentioned uncertainties at the beginning of this post. Aside from the inevitable legal challenges to EPA's regulation of power plant CO2 under the 1990 Clean Air Act, its imposition by executive authority, rather than legislation, leaves future administrations free to strengthen, weaken, or even abandon this approach.

Since EPA's planned emission reductions from the power sector are large on a national scale (10% of total US 2005 emissions) but still small on a global scale (2% of 2013 world emissions) their long-term political sustainability may depend on the extent to which they succeed in prompting the large developing countries to follow suit in reducing their growing emissions.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.


Geoffrey Styles said...

I wanted to add some additional information.

1. I participated in a Google Hangout on the proposed EPA rule, sponsored by the Energy Collective and mediated by Jesse Jenkins. The Youtube version can be found here:

2. Resources for the Future hosted an excellent panel on the subject on June 5th, including initial assessment of the legal issues. Highly recommended:

Kristahiles said...

Well that is good, taking a step ahead to produce clean power and stop the emission of co2 is great.

Ed Reid said...

The two most important words in this piece are the final two words in the title: "for Now".

US EPA came after oil in 2009 with its Endangerment Finding. It has now come after coal. Is there any doubt that natural gas is next? US DOI is already restricting and impeding E&P on "federal lands", which will limit supply and drive NG prices up as demand increases in the power generation sector.

Natural gas pipeline companies and their investors and creditors need to constantly be aware of the risk that their investments will not be permitted to be "used and useful" long enough for them to be fully recovered.

Geoffrey Styles said...

I don't discount that risk, though I think it would be much bigger if the current administration were still in its first term, rather than nearly into lame duck territory in its 2nd. As it is EPA will have its hands quite full getting New Source and Clean Power past legal challenges and implemented by 20 Jan 2017. I fully expect these plans and their possible extension to NG, which has been one of the few bright spots in the entire economy in the last four years, to be a major point of debate in the 2016 election.