Final transport rule may drive power costs up by as much as 30 percent

August 05, 2011

In early July, the Environmental Protection Agency released the final version of what the agency had been calling the Transport Rule. The agency gave the rule a new consumer-friendly name, but took away some of the allowances that had been proposed in the draft version. EPA also publicly issued its own estimate of what it believes the rule will cost electric consumers -- strikingly far below industry estimates.

Now called the Cross-State Air Pollution Rule (CSAPR), the former Transport Rule is designed to discourage emissions of sulfur dioxide and nitrogen oxides (as well as locally created ozone) from traveling across state lines and impacting other communities’ ability to meet tighter federal air quality standards.

“EPA is also referring to this as a ‘good neighbor’ rule, because it forces upwind states to take actions so they don’t affect their downwind neighbors,” explained Terry Hogan, , Manager of Environmental Affairs who has been analyzing the 1,324-page rule to determine its potential impact on Wabash Valley and its member systems. Terry is examining the rule with some urgency, because the first phase goes into effect on January 1, less than five months away.

“The rules themselves haven’t changed all that much,” he added. “What has changed is the number of allowances that are being given to existing sources of emissions. You have to have one allowance for each ton that you emit. For example, the draft rule allowed our Gibson 5 generating unit 12,703 allowances for SO2 in 2012. But when the final rule came out, it provided only 8,346 allowances for Gibson 5. That’s a loss of 4,357 allowances between the draft and final rules.”

“In practical terms, that means between now and January 1, we have to either find ways to reduce our SO2 emissions to meet the number of allowances we have or find someone who is willing to sell sufficient allowances to meet our 2012 actual emissions,” Terry explained. Complicating matters is that fact that the new rule tightly constrains interstate trading of allowances. “Since the Gibson plant is within Indiana, we’d have to find someone else in Indiana who is willing to sell the bulk of the additional allowances that we anticipate will be required.” Under the draft rule, the statewide limits were not supposed to begin until 2014, but the final rule moved them up to 2012.

The new rule divides covered states into two groups, and Wabash Valley’s generating facilities fall into Group 1. That means we’re expected to meet the immediate reductions in 2012, along with an even more stringent set in 2014. “The SO2 and NOx rules are annual programs, while the ozone rule applies only from May 1 to September 30, annually, when sunlight, heat, volatile organic compounds and NOx  react to create atmospheric ozone,” he said.

Further complicating the new rule is that its enforcement will be permanently tied to the National Ambient Air Quality Standards (NAAQS), which are updated separately. “Each time the EPA reconsiders those standards and makes them more stringent, they’ll look back at CSAPR and make corresponding reductions in allowances,” Terry predicted. EPA is scheduled to release new NAAQS levels later this month, so it’s possible that the planned 2014 allowances could be scaled back even farther. “That provision makes this even more of a moving target for us.”

Why are power producers so concerned about these new rules? The lack of sufficient number of allowances means that power plants will need significant upgrades to meet the rules, Terry said. But while the rules go into place in less than five months, it typically takes more than three years to engineer and install emission-control equipment such as scrubbers and SCRs. “Plus, if everyone has to install new equipment, demand for materials and skilled labor is also going to affect timetables,” he added. “Demand for allowances will drive the prices up, and the overall economics are going to force operators to shut down smaller and older coal-fired units. That’s especially likely when you look over the horizon at all the other proposed rules coming out of the EPA.”

In materials describing the new rule, EPA admits that it will increase power costs, but projects that those increases will amount to an average of about 1 percent. Power producers disagree. One study from the National Economic Research Associates projects that CSAPR and the new mercury rules will increase the nationwide average price for retail electricity by 11.5 percent. Some sources within utilities that are heavily dependent on coal generation estimate that the increases will be closer to 30 percent.

“Right now, we’re assessing the regulation and talking with the co-owners of our power plants to determine what we’ll need to do to comply with the new rules,” Terry noted. “We’ve been preparing for this, but we couldn’t do a lot of the detailed planning until the final rule was issued, because we didn’t have firm targets. It’s a big rule coupled with a very short amount of time for compliance.  And, of course, we have no idea of what the economy and the weather are going to do, which will influence the demand for electricity. There are lots of variables.”