Peer Review Discredits Electric Industry Claims While PJM Demonstrates Potential for Alternative Resources

Contrary to industry claims, the standards that EPA has proposed to control air pollution from power plants can be safely implemented while maintaining the integrity of the grid.  A January 2011 report published by Edison Electric Institute (EEI), a utility industry trade group, suggested that EPA regulations would compromise both the economics and reliability of the electric generating system.  This is not the case for two reasons.  First, EEI’s analysis is fraught with inaccuracies.  Second, making use of the resources available and planning ahead sensibly will maintain grid reliability and deliver benefits including affordable energy and emissions reductions.

Last month, Susan Tierney’s Analysis Group and Charles Cichetti released a peer review (the review) exposing the fallacies in EEI’s report.  The review concludes that EEI’s misguided policy assumptions produced exaggerated results that undercut industry claims and that the electric generating industry is, in fact, well-positioned to comply with EPA’s regulations on the proposed schedule.

The key findings of the review are:

1. Key assumptions are excessively conservative;
2. Market fundamentals are responsible for half of the predicted retirements;
3. Even EEI’s most plausible scenario overstates the number of retirements; and
4. Incremental retirements driven by EPA’s regulations are manageable.

Key Assumptions are Excessively Conservative.  Each of EEI’s nine scenario cases contained at least one assumption that contradicted the facts available at the time EEI conducted the analysis.  The unrealistic key assumptions for each scenario describe the worst possible cases and give little credence to EEI’s analysis.  For example, in six of nine scenario runs, EEI assumed that the Waxman-Markey bill would be in effect by 2016 with a price on carbon increasing from $26/ton, even though the legislation failed to pass in the Senate close to one year before the analysis.  EEI’s assumptions also failed to recognize the substantial portion of units that have already installed environmental control equipment.   An August 2010 M.J. Bradley report  confirms that over 150 GW of the total 320 GW of coal capacity in the U.S. have already installed control equipment that would bring those units into compliance with the rules, with an additional 55 GW of retrofits in progress.  This amounts to more than two-thirds of the nation’s coal fleet that could avoid closure. 

Market Fundamentals are Responsible for Half of the Predicted Retirements.  Only 21-24 GW of the 70-80 GW of coal plant retirements that EEI predicts can be attributed to the EPA regulations.  In the reference case, market fundamentals (current fuel prices, economic and market assumptions, state and federal policies), particularly low natural gas prices, are independently responsible for the 22-25 GW of total retirements.  Differentiating the basis of the capacity retirements makes it clear that EPA regulations can be responsible for only a fraction of the total capacity retired.  EEI’s claim that 70-80 GW of coal capacity would deactivate thus overstates the direct effect of EPA regulations by up to three times.

Even EEI’s Most Realistic Scenario Overstates the Number of Retirements. EEI’s third run, titled “Scenario 1 + Alt Air,” contains the most plausible assumptions because it accounts for the use of dry sorbent injection (DSI) as a compliance pathway for acid gases.[1]  Even so, this scenario run assumes a cooling water intake rule that requires all plants to install cooling towers.  The standard in EPA’s actual rule proposal was substantially more relaxed, deferring regulation to the states.  Since cooling towers are significant capital expenditures, EEI’s stringent assumption drives a large number of retirements that would likely not happen under the rule as proposed.  Even with the more reasonable assumptions incorporated into this run, as the review mentions, the results still represent the high bound of the range of possible outcomes instead of the low bound as EEI intended.

Incremental Retirements Driven by EPA Regulations are Manageable.  Looking again at the third run as the high bound case, the incremental 24 GWs of estimated retirements driven by EPA regulations represents less than 8 percent of the total national coal capacity (about 320 GW based on the M.J. Bradley analysis here).  The review also points out that in two years between 2003 and 2005, the electric generating industry constructed 160 GW of new combined cycle generation.  This capability to add capacity in a short period of time dwarfs the estimated retirements in the EEI high bound case.  And, with the lower electricity demand forecasts in EIA’s AEO 2011, there is little to suggest that new power plant construction would have to keep this pace.  If history is any judge, we are more than equipped to build new capacity where necessary, but lower overall demand forecasts indicate that coal capacity lost as a result of EPA regulations may not need replacement in the near term.   

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One of the critical omissions in EEI’s analysis, in addition to those identified in the review, is that it failed to contemplate the available alternative resources available to meet reliability requirements and reduce air toxics emissions.  Such widely available resources, as presented on page 40 of North American Electricity Reliability Corporation’s (NERC’s)[2] October 2010 Special Reliability Scenario Assessment, are important tools that can mitigate grid reliability impacts stemming from resource adequacy concerns.  Increased participation in demand response (DR) programs, for example, has the potential to reduce peak electricity demand up to 20%, as shown in the Full Participation scenario[3] of the Federal Energy Regulatory Commission’s (FERC’s)[4] June 2009 National Assessment of Demand Response Potential.

Demand response is proving to be a viable resource in practice as well, particularly in the PJM footprint.[5]   PJM’s capacity market model, the Reliability Pricing Model (RPM), is an auction market designed to create long-term price signals stimulating investment in maintaining existing generation and in new sources of capacity, including demand response.  The goal of the RPM auction is to ensure that electricity providers have enough capacity to reliably serve customers in the PJM region.  The May 13, 2011 PJM RPM was the first capacity auction to address the period during which the EPA regulations, (the Clean Air Transport Rule  and the mercury and air toxics standards) will take effect.  The results of this auction, for the delivery year starting June 1, 2014 and ending May 31, 2015, indicate that the PJM region, as Sue Tierney writes in a May 17 letter to the EPA Administrator Lisa Jackson, “will have ample electricity supply after proposed EPA air and water rules take effect on or after January 15, 2015.”  The level of demand response cleared was above expectations and suggest healthy growth in 2014, highlighting the important role of demand response in addressing peak capacity needs going forward.  More specifically, demand response capacity that cleared this auction increased 52% from the prior year’s 2013/14 auction with three demand response products available (compared to one last year) and reaching over 9% of total resources cleared (versus 6% in the last auction).  It is clear that PJM will be calling on a diverse range of solutions to simultaneously address customers’ demand requirements and environmental requirements, demonstrating that the system does indeed have the tools and resources available to compensate for lost generation from coal plant retirements.  Apart from the continued growth of demand response and energy efficiency resources in the auction, the results showed that PJM will have more than enough capacity to meet reliability standards for the region set by NERC.  The results of PJM’s latest capacity auction are hard proof that there is no tradeoff between reliable electricity and cleaner air.

In theory and in practice, demand response and energy efficiency are low-cost resources that are available and accessible to the generating system to meet customer demand.  Despite industry claims, it has been demonstrated both in theory and in practice that the EPA rules can be implemented without dramatic consequences for the nation’s electric generating system.  Incorporating these solutions into the resource mix with careful planning will deliver important health and economic benefits, including affordable energy and decreased emissions of air toxics and greenhouse gases with minimal impact on grid reliability.  

[1] Installation and operation of DSI equipment requires significantly less upfront capital commitment than scrubbers, for example, with somewhat higher operating and maintenance costs.  DSI has been used successfully for acid gas control and was favored heavily in the Regulatory Impact Analysis that EPA released along with its proposal for mercury and air toxics standards.

[2] The North American Electric Reliability Corporation (NERC) is an independent organization whose mission is to ensure the reliability of the bulk power system in North America.  Founded in 1968 by the electric utility industry, NERC oversees reliability for a bulk power system that provides electricity to over 330 million people across the United States and Canada.

[3] The Full Participation scenario in the Federal Energy Regulatory Commission’s (FERC) June 2009 National Assessment of Demand Response is where advanced metering infrastructure is universally deployed and dynamic pricing were made the default tariff with all customers responding to dynamic prices.  The report is available here.

[4] The Federal Energy Regulatory Commission (FERC) is an independent agency of the United States government that regulates the interstate transmission of natural gas and oil.  Pursuant to the Energy Policy Act of 2005, FERC’s responsibilities also include regulating the transmission and wholesale sales of electricity in interstate commerce, protecting the reliability of the high voltage interstate transmission through mandatory reliability standards and monitoring and investigating energy markets.  http://www.ferc.gov/default.asp

[5] The PJM Interconnection is a regional transmission organization that coordinates the movement of wholesale electricity for over 50 million people across 13 states from New Jersey to Illinois.  It comprises about one-sixth of the nation’s generation as well as a substantial portion of the nation’s coal plants which could be subject to EPA’s regulations.  http://www.pjm.com/