Federal and state climate change policies promoting carbon-free energy sources are more likely to have an impact on the types of resource used to meet US electricity demand in the medium- or long-term time frame than in the short term. The US electric industry’s reliance on fossil fuels (particularly coal) to meet rising energy demands is driven primarily by cost considerations, as, for many years, coal has been a cheap and plentiful domestic fuel source. That dynamic is shifting, however, as the influx of low variable-cost renewable projects and the continued development of shale gas resources (and the resultant low natural gas prices) have narrowed the energy cost advantages of coal generation, particularly for older, less efficient coal units. Although recent federal and state legislative initiatives have provided down payments toward the creation of cost-competitive renewable energy technologies, the large-scale deployment of these technologies is still hampered by variability of resources such as wind, the need for additional backbone transmission capacity between regions, and the lack of storage capacity.
Other proposed state and federal legislation (for example, cap-and-trade schemes) and foreign policy initiatives could impose additional costs on electricity generators using carbon-rich fossil fuels. In general, legislative proposals and environmental regulations are likely to impose greater costs on the energy that is consumed. State or federal governments could subsidise renewable energy and carbon mitigation initiatives by surcharges on electricity generation or consumption. Compliance costs incurred by utilities arising from state or international cap-and-trade legislation, federal regulations, or state regulation of vehicular carbon emissions would be passed on through every transaction involving electricity.
The Environmental Protection Agency (EPA) is the chief US agency tasked with issuing regulations under the Clean Air Act (CAA) regarding pollutants and carbon dioxide emissions from power generation sources. For instance, new and existing coal-fired plants may be incentivised or required to have carbon capture and sequestration (CCS) capabilities. In 2011, the EPA issued the Cross-State Air Pollution Rule under the Clean Air Act that requires coal companies in 28 states to reduce emissions of sulphur dioxide and nitrogen dioxide by 73 per cent and 54 per cent, respectively, from 2005 levels by 2014. The rule was controversial, with many in the coal industry claiming that it will be cost-prohibitive to obtain and install the CCS technology necessary to meet the standard. As a result, the coal industry warns that coal generating facilities will be forced to prematurely shut down. In April 2014, the US Supreme Court upheld the EPA rule, affirming EPA’s authority to regulate existing power plants for greenhouse gases so long as they are being regulated for other pollutants as well.
The issue of how to properly account for compliance costs of pollution reduction was at the heart of a 2015 US Supreme Court case. There, the US Supreme Court remanded an EPA rule setting limits on mercury and other toxic pollutants from power plants, ruling that the EPA violated the CAA by failing to consider costs when deciding whether to set those emissions limits in the first place, although the EPA did eventually undertake a cost-benefit analysis when subsequently deciding how to regulate. As the EPA continues to issue new regulations related to pollution and climate change, whether and how to account for compliance costs will remain a key issue.
Perhaps the largest and most impactful regulatory initiative pertaining to climate change concerns the regulation of carbon dioxide emission limits from existing power plants. In June 2013, the US president Barack Obama ordered the EPA to create the first ever carbon emissions limit for existing power plants, stating that the US should lead the world in a ‘coordinated assault’ on climate change. In August 2015, pursuant to the president’s directive, the EPA promulgated its final regulations under part 111(d) of the CAA, which is known as the Clean Power Plan (CPP). In general, the CPP establishes broad carbon-dioxide emission targets for coal- and natural-gas fired power plants intended to cut carbon dioxide emissions by 32 per cent by 2030, leaving the states (excluding Vermont, Hawaii, Alaska, and the District of Columbia) to choose from a variety of methods - such as renewable energy sources, efficiency improvements, or participating in an emission credit trading programme - to develop a plan to meet individual targets.
However, in February 2016, the US Supreme Court stayed implementation of the CPP, while court challenges to the plan were pending before the US Court of Appeals for the District of Columbia Circuit. Then, in March 2017, President Trump issued an executive order requiring the EPA to review the CPP so as to consider whether to ‘suspend, revise, or rescind’ it. Importantly, however, if the EPA rescinds the CPP, the EPA has not proposed revoking its 2009 ‘endangerment finding’ - a determination that greenhouse gases, including carbon dioxide, are a threat to human health - and as such, the EPA is required to regulate greenhouse gasses pursuant to the statutory directive of the CAA.
As such, and in accordance with the March 2017 executive order, in August 2018, the EPA proposed a new rule that would rescind the CPP and instead, replace it with a new set of regulations, known as the Affordable Clean Energy (ACE) rule. The proposed ACE rule establishes guidelines for states to develop plans and programmes regarding greenhouse gas emissions from existing coal-fired power plants. According to EPA, approximately 600 coal-fired electric generating units at 300 facilities in the US would be subject to the proposed ACE rule. The legal framework of the proposed ACE rule includes only existing generation sources and therefore falls under section 111 of the Clean Air Act. The proposed ACE rule empowers states to craft plans establishing standards of performance for existing sources. Upon evaluation of those submittals, EPA ultimately determines the best system of emission reduction (BSER). EPA is preemptively designating a range of candidate technologies that may be used to demonstrate the BSER for coal-fired power plants. In the proposed ACE rule, EPA defines the BSER as a technological solution to improve the heat rate efficiency of individual coal-fired units, a distinction from the broader, portfolio-level mandate of the CPP. Notably, the timelines for states to comply with the ACE rule to develop their plans for EPA and, if necessary, for a federal plan to be implemented if a state plan was not submitted or rejected have all been extended significantly as compared to the CPP. States may now take up to three years to draft and submit their respective plans (versus nine months under the CPP), and EPA would then have up to one year to review and act upon those submittals (versus four months in the CPP). It is expected that any final rule issued by the EPA would immediately be challenged in court. Moreover, with another presidential election looming in 2020, it is possible that a new presidential administration could decide to change course yet again.
Nonetheless, even without the CPP, and even if its successor the ACW rule goes into effect, the development of renewable resources is expected to continue. This is due in large part to state initiatives aimed at incentivising development of renewable resources and technological developments making the use of renewable resources more and more economical. However, it should be noted that the increased integration of renewable resources into the electric grid raises issues around grid reliability. In general, FERC and NERC are tasked with maintaining reliability for the Bulk Electric System. As generating capacity from coal-fired and other traditional baseload resources decreases, it will be important to develop suitable replacement generation and transmission resources that are sufficient to maintain capacity to meet electricity demand, particularly during times of peak usage in order to avoid reliability problems. Moreover, as most renewable generation resources, such as wind and solar sources, are in remote locations, additional transmission infrastructure must be constructed. Energy storage resources may also be needed to ensure reliability, such that sufficient energy can be saved and then deployed during times of peak usage given that generation from variable resources inherently fluctuate.
In addition, a number of utilities have closed or announced plans to shut down certain, mostly older, less efficient, coal power plants. Meanwhile, the US coal reversed course from a four-year trend of declining levels, with exports increasing in 2017 to 97 million short tons, which is 61 per cent higher than 2016. In 2017, exports to markets in Asia more than doubled (particularly owing to steam coal, used for electricity generation), comprising a bulk of the increase from 2016 and the broader downward trend.
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