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Coal-Fired-Power-PlantBy David Tucker and Lexi Kay

In June 2014, the U.S. EPA proposed the Clean Power Plan rule for the regulation of existing electric power plants under Section 111(d) of the federal Clean Air Act. A comment period for this proposed rule will soon end on December 1, 2014, which makes this a good time to ask some basic questions: What is this proposed rule for power plants? What might be some of the potential cost and pricing impacts on electric power utilities and their customers? How might North Carolina be impacted by the proposed rule?

On Friday, September 19, 2014, the UNC Center for Law, Environment, and Adaptation and the UNC Institute for the Environment convened a forum to discuss the Clean Power Plan and its potential impacts. The “Clean Power Plan: What EPA’s Carbon Rules Mean for North Carolina” forum featured panelists from the US EPA and many other organizations who spoke about the proposed carbon regulations and their legal and policy aspects from both a national and a North Carolina perspective. Some of the key take-aways from this forum are summarized below.

What is the Clean Power Plan?

According to the EPA, power plants are the largest source of carbon pollution in the U.S., accounting for roughly a third of all domestic greenhouse gas emissions. And while there are already standards for the levels of various pollutants that electric power plants can emit, there are currently no federal limits on carbon pollution levels. As part of his June 2013 Climate Action Plan (CAP), President Obama asked EPA to set carbon pollution standards, regulations, or guidelines with a focus on stakeholder engagement, flexibility, costs, and the continued importance of relying upon a range of energy sources to supply the nation’s electric power needs. Given this directive from the President, the EPA proposed the Clean Power Plan to cut carbon pollution from power plants.

The proposed Clean Power Plan is designed to achieve the following goals by the year 2030:

  • Cut carbon emissions from the electric power sector by 30% nationwide below 2005 levels, which is equivalent to eliminating the carbon emissions needed to power more than half the homes in the United States for a year;
  • Cut particulate pollution, oxides of nitrogen, and sulfur dioxide by more than 25 percent as a co-benefit;
  • Avoid up to 6,600 premature deaths, up to 150,000 asthma attacks in children, and up to 490,000 missed work or school days—potentially providing up to $93 billion in climate and public health benefits; and
  • Shrink electricity bills roughly 8% by increasing energy efficiency and reducing demand in the electricity system.

According to Marguerite McLamb, Policy Advisor for the Sector Policies and Programs Division of the Office of Air Quality Planning and Standards at the US EPA, the Clean Power Plan is intended to keep a focus on flexibility. States have a 10 to 15 year time window for planning and achieving carbon reductions and can choose how to meet their goals through measures that reflect each state’s particular circumstances. States can also choose to collaborate to propose regional solution plans. State plans must be submitted to the EPA by June 30, 2016, though states may request a 1 or 2 year extension under certain circumstances.

Although the EPA designed the Clean Power Plan to allow flexibility for states, regulating carbon emissions is nonetheless a controversial and politically sensitive issue. Jeremy Tarr, Policy Associate at the Nicholas Institute for Environmental Policy Solutions, believes that there will be litigation on each of the key decisions EPA has made in regards to the propose rule. As such, it is difficult to predict the final fate of the rule, but we can begin to explore the impacts the rule may have if it is passed as it currently stands.

Potential cost and pricing impacts on electric utilities and customers

As with any environmental regulation, the potential cost impacts of the proposed Clean Power Plan are a key concern for many stakeholders. There is significant uncertainty around the potential cost and pricing impacts that will result from the adoption of the Clean Power Plan in its current form. Economic projections of any kind across a time period as long as from now to 2030 will always be subject to doubt and to change.

According to McLamb, the EPA projects that:

  • Coal and natural gas will remain the two leading sources of electricity generation, though also with growing use of renewable energy sources;
  • By 2030 total costs will reach between $7.3 – $8.8 billion; cost savings will reach between $54 – $89 billion; and net benefits will result in $47 – $80 billion in net savings;
  • National average retail electricity prices will increase roughly 2.7% to 3.1%; but
  • The national average impact on electric bills will be roughly 8% lower as a result of demand side efficiency measures, even as prices per unit rise.

It seems likely that EPA’s projections on cost increases for electric rates nationally and overall customer savings due to energy efficiency leave considerable uncertainty as to where those numbers ultimately will end up. Would compliance costs be passed on to consumers by electric utilities solely through rate increases? Or would some kind of a rider system be set up, similar to what we have already seen with the Renewable Energy and Energy Efficiency Portfolio Standard (REPS) law in North Carolina, which allows for electric power companies to make use of riders on customers’ bills to pass along some of the cost associated with compliance with the REPS law?

Impacts of the proposed rule on North Carolina

Representatives from both the North Carolina Department of Environment and Natural Resources (NCDENR) and the North Carolina Utilities Commission (NCUC) were present at the the forum to discuss how the state is responding to the proposed rule.

Shiela Homan, Director of the NCDENR Division of Air Quality, raised some important questions from the state’s perspective. North Carolina’s coal-power plant fleet is currently one of the most efficient in the country, and NC has already adopted a Renewable Energy and Energy Efficiency Portfolio Standard (REPS) law. Holman expressed concern that these efforts may present an obstacle to implementation of the Clean Power Plan rule in North Carolina.

There is also concern in the state about the costs that the Clean Power Plan will have on electricity rate payers. According to Chris Ayers, Executive Director of the Public Staff of the NCUC, the plan will be a complicated subject to regulate. In North Carolina, the general rule is that a utility can’t recover any costs until they have actually spent the money. Thus the utility must first incur the costs and then prove that they were reasonably incurred. Environmental compliance costs are recovered by the utility by passing them on to the customer, and for-profit electric utilities such as Duke Energy must request such rate changes by means of bringing a rate case before the NCUC for their consideration. The NCUC Public Staff are concerned that:

  • Costs incurred for Clean Power Plan compliance are done in the most efficient and least cost manner possible to ensure that rate payers are protected and the least cost portfolio is put together;
  • There is potential that some plan components – such as increased dispatch of natural gas units – could cause gas prices to rise, even though they are currently at a relatively low point
  • North Carolina’s energy system is (in terms of Duke Energy’s infrastructure), a NC/SC based system. What Duke Energy builds in SC is paid for by NC (at roughly 60% of the cost) because power flows back to NC across state lines.

Several other panelists, including representatives from the Environmental Defense Fund (EDF) and Environmental Entrepreneurs (E2), spoke to the benefits of the proposed rule. Greg Andeck of EDF expressed faith in the private sector to absorb some of the costs associated with reaching carbon reduction goals. And while potential benefits for North Carolina may be difficult to quantify, between the US EPA nationwide projections and the comments of several panelists, it was asserted that the Clean Power Plan would continue a statewide trend in the growth of clean energy jobs, which are already up 20% in the state. It was proposed that 275,000 new jobs will results nationwide from the Clean Power Plan, including 6,700 in North Carolina, and that NC would save $713 million in power costs across the period ending in 2030.

While all that has been discussed in this blog post is subject to revision as the final rule is published later on, and as economic, financial, technological, and policy environments change between now and 2030, we hope that this posting contributes to constructive discussion of, and further research on, a very complex and very important piece of regulation that will doubtless have lasting effects on energy finance in North Carolina and around the country for many years to come.

 

 

David Tucker is a Project Director at the Environmental Finance Center at UNC Chapel Hill. Lexi Kay is the Outreach Coordinator. We are thankful to the UNC Center for Law, Environment, and Adaptation and the UNC Institute for the Environment for hosting the “Clean Power Plan: What EPA’s Carbon Rules Mean for North Carolina” forum that inspired this post.

This post is a product of the Environmental Finance Center at the University of North Carolina, Chapel Hill. Findings, interpretations, and conclusions included in this post are those of the authors and do not necessarily reflect the views of EFC funders, the University of North Carolina, the School of Government, or those who provided review.

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