Uncertain future of emissions regulation
As noted above in question 6, the CPP is all but dead now that the EPA under the current administration has proposed the ACE rule, which is intended to rescind and replace the CPP. Similar to the CPP, however, industry observers and legal professionals have expressed scepticism over the proposed ACE rule’s viability. Many states and environmental protection organisations will almost certainly sue to stop a final EPA rule from going into effect. Under the proposed rule, the ACE would direct states to set relatively modest limits on emissions from power plants, and these limits can be achieved with upgrades to existing coal power plans. Opponents argue the effect therefore is to increase greenhouse gas emissions by allowing coal facilities to stay operational instead of reducing emissions through retirements to coal facilities and shifting resources to less polluting sources (eg, natural gas or renewable sources). The EPA, under a 2007 Supreme Court ruling, is required to regulate greenhouse gas emissions under the CAA, and opponents argue the ACE fails to do so by allowing for greenhouse gas emissions to increase. On the other hand, utility companies and others in the power sector stand to benefit by saving hundreds of millions of dollars in compliance and reporting costs.
From a market perspective, proponents of renewable energy are concerned that the proposed ACE rule would slow development as well as exacerbate the effects of climate change. However, low natural gas prices and other environmental regulations are still expected to lead to the retirement of coal-fired generation and an increase in natural gas-fired generation. This in turn will increase the demand for natural gas resources. As a result, natural gas prices could rise and there will be opportunities for the development of supporting infrastructure, such as extraction or transportation. Nonetheless, utilities will continue to need to devote additional investment capital toward developing new generating capacity to replace the loss from the retirement of coal-fired plants. However, there may be some offset by a decreased demand in electricity as consumption becomes more efficient through technological advancements.
Given that the EPA is not contemplating rescinding its ‘endangerment’ finding, even without the CPP there is still likely to be a continued drive toward developing variable energy resources, including wind and solar generation. Variable resources entail reliability concerns as well. In general, as government environmental policy shifts generation capacity away from coal-fired generation toward natural gas-fired and variable resources, grid operators must be prepared to meet the challenges that will arise from having to adapt to decreased capacity and with the inherently variable nature of those resources. It will also be incumbent on regulators at both the state and the federal level to develop emissions regulations with reliability concerns in mind.
Wholesale market design considerations
In recent years, the combination of low natural gas prices, advancements in generating technology and flatter demand for electricity have shifted the economics against older, less-efficient generating resources, including coal and nuclear sources, in the wholesale power markets. In addition, many states have enacted policies to further development of particular generating resources, such as renewables but also credits for nuclear facilities, which may have the effect of suppressing wholesale electricity prices.
In May 2017, FERC held a technical conference to explore this issue. On the one hand, states are passing legislation favouring development of certain kinds of generating resource over others (and, in the case of nuclear subsidies, the state legislation actually targets specific generating units). Doing so, however, may undermine the fundamental construct of the wholesale markets, which is based on principles of economic and operational efficiency to select generating resources, without regard to resource type. FERC’s intent is to develop a framework within the wholesale market construct that preserves the fundamental economic principles of the wholesale markets while allowing for states to support particular resource development. As a result, it is likely that individual RTOs and ISOs will explore changes to their market construct to balance the dynamic between wholesale electric markets and state policy prerogatives.
The current presidential administration has also sought to counter market forces by introducing policies that have the effect of propping up the coal, and to a certain extent, the nuclear industry. Most notably, in September 2017, DoE directed FERC to develop a rule that would change wholesale markets by requiring them to price a generating resource’s reliability characteristics. The focus of DoE’s effort was around ‘grid resiliency’ (in contrast to grid reliability, which FERC already regulates pursuant to section 215 of the FPA). Under this framework, all qualifying generating units would have been either coal or nuclear power plants, many of which were subject to financial stress. DoE cited the trend of coal and nuclear retirements as a threat to fuel-secure generation. FERC, as an independent agency, was not obliged to follow the DoE’s order, instead voting unanimously to reject the DoE’s proposal and terminated the proceeding. However, according to recent news reports citing a draft memorandum drafted by the office of the US President, DoE will try a new strategy to boost the economic viability of coal and nuclear power plants. Under this strategy, DoE would invoke authority under a World War II era law that would require regional grid operators to purchase power from coal and nuclear generators under the guise of national security. If implemented, this would represent an unprecedented intrusion by the US government into the competitive wholesale marketplace by seeking to subsidise otherwise uneconomic generating facilities. As of August 2018, the DoE has not formally announced it will go forward with this controversial plan, but if it does, it is likely to be subject to intense scrutiny by stakeholders throughout the industry.
Recent news reports have highlighted the risks posed by state-sponsored cyberattacks on the bulk electric system leading to an increased focus on ensuring the US electric grid is adequately protected against similar sophisticated cyberattacks. Some reports estimate that a widespread hack of the US electric grid could cause as much as US$1 trillion in damages. As grid modernisation efforts continue, older components of the transmission network will be replaced by more sophisticated components that can be controlled over an internet-connected network and software. In addition, many utilities have replaced older meters at their customers’ homes with new, digital smart meters, creating risk of cyber intrusion into the distribution network.
To that end, FERC, along with NERC, the US Department of Homeland Security (DHS), the DoE, and the National Institute for Standards and Technology have commenced a number of initiatives aimed at increasing grid security. For instance, in May 2017, the president issued an executive order on cybersecurity efforts, directing the DoE and DHS to work with state and local government officials to assess vulnerabilities in the electric grid and the potential impact of an outage caused by cyberattack. More recently, FERC, in July 2018, issued Order No. 848 directing NERC to modify its mandatory reliability standards to improve the mandatory reporting of cybersecurity incidents by utility companies, including attempts that might facilitate subsequent efforts to harm reliable operation of the nation’s bulk electric system. In the face of constantly evolving cyber threats, government and utilities will need to continue developing preventative measures to secure the grid against cyberattacks while also devising contingency measures to minimise the impact of an attack, were one to occur.
Shale gas revolution
For the first time in 60 years, the United States became a net exporter of natural gas in 2017, particularly driven by the development of extraction methods from shale gas reservoirs, such as those in Texas, Pennsylvania and North Dakota. However, many energy related laws and regulations rest on the assumption that the United States is a net importer.
Moreover, in April 2018, FERC commenced a new proceeding to review its decades-old policy governing the certification of natural gas transportation facilities pursuant to Section 7 of the Natural Gas Act. Among the many issues FERC will consider as part of the proceeding are changes to how FERC reviews the potential environmental effects of a proposed project. FERC has to date rejected arguments that it must consider the impact a project will have on climate change as part of the review process, but in this proceeding FERC has solicited feedback from stakeholders over whether it should take a broader look at climate impacts as part of its public interest determination in pipeline certificate proceedings. FERC has significant discretion over how it reviews proposed new pipeline infrastructure projects, and the extent to which it decides to change the environmental review component of its review stands to impact whether or not a utility decides to build new pipeline infrastructure and, as a result, will impact continued support in evaluating whether to build new pipeline infrastructure to serve increased demand for natural gas.
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