Energy Policy Implications Under Greenhouse Gas Regulations for New and Existing Power Plants in Kentucky

President Barack Obama’s June 2013 executive order directing the Environmental Protection Agency to develop greenhouse gas emission standards for the nation’s fossil fuel power plants signaled a new era in protection of air quality under the Clean Air Act. For the first time, new and existing power plants will have to meet standards for carbon dioxide emissions under Section 111 of the act. This article explores the environmental and socioeconomic implications of this initiative and how effective it will be in achieving emission reductions.

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About the Authors
John Lyons is the assistant secretary for climate policy in the Kentucky Energy and Environment Cabinet. He has 25 years experience in environmental protection as a director, researcher, policy analyst and speaker on various issues that have helped shape state, regional and national regulatory landscapes on air quality and energy policy.

Karen Wilson is chief of staff in the Kentucky Energy and Environment Cabinet. She has been with the cabinet for 17 years, with experience in energy and environmental policy analysis and development. Her various roles within the cabinet also have included public outreach and communications, speech writing and legislative support.

Climate change has become a mainstream issue and one that will continue to demand attention, regardless of one’s personal beliefs. For heavy manufacturing states like Kentucky that rely predominantly on coal for electricity generation, helping to shape this discussion has become a primary focus during the past year.

In a controversial move that has further divided the houses of Congress along party lines, President Obama issued his climate action plan in June 2013, outlining a multifaceted approach to reducing carbon dioxide and other greenhouse gases to combat climate change. In addition to outlining goals such as increased energy efficiency and further development of renewable energy resources, the president directed the Environmental Protection Agency to issue separate rules that would limit carbon dioxide emissions from both new and existing power plants.

Section 111 of the Clean Air Act, better known as New Source Performance Standards, is the statutory authority for both sets of regulations. Specifically, Section 111(b) is for new sources and Section 111(d) for existing. EPA is using Section 111 because carbon dioxide is neither a health-based criteria pollutant like sulfur dioxide or nitrogen oxides, which fall under Section 108, nor is it a hazardous air pollutant as defined in Section 112 of the act. Therefore, Section 111 is reserved for those instances where a pollutant is not covered under the more traditional approaches set out in those other sections.

On Jan. 8, 2014, EPA issued its final rules under Section 111(b) for new electric generating units, creating subcategories for natural gas and coal fired power plants. The EPA tweaked its final rule from its original 2012 proposal, and the proposed standard for coal-fired generation would set a carbon dioxide emissions limit of 1,100 pounds per megawatt-hour of electricity generated. However, this is still far below a limit any current coal combustion technology can achieve without costly carbon capture and storage technology, and effectively rules out construction of any new coal-fired plants. The EPA contends carbon capture and storage is adequately demonstrated and therefore uses the technology as the basis for setting the limits for coal plants; others dispute the EPA’s assertion. Meanwhile, current combustion technology for natural gas can easily meet the prescribed 1,000 pounds of carbon dioxide per megawatt-hour of electricity standard, giving natural gas a decidedly prominent competitive advantage over coal as the fuel of choice for electricity generation. 

As for existing power plants, the EPA is poised to issue a proposed rule under Section 111(d) by June 1, 2014. Unlike the process used to issue standards for new power plants, the EPA has conducted extensive and unprecedented stakeholder outreach to gather information prior to the proposal. What this stakeholder process has revealed is that there are no easy answers to addressing carbon dioxide emissions reductions from an aging fleet of coal fired power plants. Furthermore, like most EPA rules, litigation and delay in action is expected and inevitable. Many stakeholders, including the Kentucky Energy and Environment Cabinet, have weighed in on the discussions.

Perhaps the single most important aspect in setting these standards under the Clean Air Act is in how economic impacts are taken into consideration. Unlike when the EPA establishes National Ambient Air Quality Standards, where human health clearly outweighs cost of implementation, under Section 111, the cost of implementation is an important factor. Therefore, if the proper economic factors are not considered, as discussed below, a one-size-fits-all standard clearly will determine winners and losers under requirements to control greenhouse gases from the power sector.

Producers Versus Consumers
The Kentucky Energy and Environment Cabinet has completed significant work during the past three years in forecasting energy needs and the impacts on Kentucky’s energy profile.1 In consideration of those impacts, especially those expected by the implementation of greenhouse gas regulations on the electric generation sector, the cabinet has focused on the manufacturing sector and employment by energy-intensive industries. Kentucky has long enjoyed a robust manufacturing tradition due to reliable and affordable electricity rates for its industrial customers. In fact, Kentucky is the third largest automobile manufacturing state; produces 30 percent of the nation’s stainless steel and 40 percent of the country’s aluminum, and along with other manufacturing, employs approximately 220,000 Kentuckians.

As a result, Kentucky ranks No. 1 in the nation in terms of the amount of electricity used to produce $1 of state gross domestic product, shown in calculations with kilowatt-hour as $SGDP. As can be seen in Table A, this measure varies more than fourfold from the highest to the lowest. Producer states like Kentucky cluster on the high end at about 0.5 kwh/$SGDP, while consumer states like New York are on the low end at about 0.13 kwh/$SGDP. It is not a coincidence that states on the upper end of the scale have very carbon intensive electricity generation sectors and, therefore, are much more susceptible to fluctuations in electricity prices. In fact, a 2012 Energy and Environment Cabinet study predicted a 25 percent rise in electricity rates could result in a net loss of 30,000 full-time jobs in the state.2

EPA’s Economic Analysis in Setting Air Quality Standards
The EPA is prohibited from considering cost of implementation when setting a National Ambient Air Quality Standard. The same restriction is not required when setting a New Source Performance Standard, where cost of implementation, especially on existing sources, is a prominent consideration. But it is clear in the 111(b) final rule that the EPA has not completed the level of economic analysis that will avoid devastating consequences to individual state economies. The EPA has never conducted this type of in-depth economic analysis before; however, that does not negate the need to complete such analysis. In an attempt to explain its economic analysis, the EPA acknowledges this and plainly states in the rule’s regulatory impact analysis that:

“EPA modeling does not typically incorporate a ‘demand response’ in its electric generation modeling to the increases in electricity prices. …Electricity demand is considered to be a constant in EPA modeling applications.”

The Energy and Environment Cabinet’s modeling indicates changes in electricity prices are associated with second-order economic implications, including changes in employment and economic growth. These second-order costs of environmental policy can outweigh the costs of physical compliance. The EPA’s social cost analysis, as presented in the regulatory impact analysis, is incomplete. The analysis is deficient in addressing the secondary price effects corresponding to the increased opportunity costs of goods produced in manufacturing intensive states, like Kentucky. EPA’s analysis should reflect what portion of GDP loss is due to the proposed rule’s effect on market conditions. In fact, the EPA already has recognized this deficiency by requesting comment on the role of economy-wide modeling in the U.S. EPA analysis of air regulations.3

The Changing Face of Electricity Generation
Energy profiles in most states have been changing dramatically during the past five years. A combination of market and regulatory forces too numerous to detail here have driven these changes and will continue to do so in the next several years. Examples of market changes include cheap, abundant natural gas, the growth of renewable resources in many states, and reduced growth in overall energy demand as a result of a weakened economy and from gains through improved efficiency. Furthermore, environmental regulations, such as the Mercury and Air Toxics Standards and rules to address the interstate transport of particulate and ozone-causing pollutants, coupled with the boon in natural gas supplies, are causing a dramatic shift from coal-fired electricity generation to natural gas. The latest information from the U.S. Energy Information Administration expects 60 gigawatts of coal-fired capacity to retire by 2020. Even without a New Source Performance Standard on carbon dioxide, Kentucky will experience a drop in coal-fired generation from its current 92 percent to 78 percent by 2020. At the same time, Kentucky’s traditional coal markets in other states have been declining as utilities switch to natural gas-fired generation.

Mass Emission Reductions or Rate Based Standards?
Not surprisingly, opinions differ widely on what approach the EPA should take in setting greenhouse gas standards. As we have seen, federal officials have set strict numeric rate-based standards for new plants based on fuel type. If the EPA uses the same methodology for existing facilities and the limit is set at a rate existing plants could not meet, the result would be additional coal-plant shutdowns. This, in turn, could raise electricity rates, impact reliability and threaten grid security. The current line of thinking, however, is that the EPA will employ an approach that provides extensive flexibility and looks at the electric generating unit sector from a system wide basis. That is, rather than having a strict numeric emission limitation on the electric generating unit and only allowing emission reductions through unit-specific efficiency improvements, the EPA may look more broadly and provide the ability to use multiple options, such as demand-side energy efficiency, renewable fuel sources or allowance-based regimes, to meet an overall reduction goal. These types of programs exist across the U.S., but they are conspicuously absent from the Southeast region of the country due to historically low electricity rates provided by coal-fired generation.

As 111(d) discussions have evolved, stakeholder positions generally fall into two camps—those who advocate the system wide approach described above and those who contend the EPA only has the authority to provide guidelines for standards that apply at the plant site. The latter approach is often referred to as “inside the fence,” which simply means the EPA can only set standards that require a cost-effective reduction of emissions at individual electric generating units. Cost-effective reductions would include things like boiler efficiency improvements to generate more electricity with less input. These types of improvements could result in estimated carbon dioxide reductions of only about 1 to 5 percent. Such a limited reduction likely would not meet the EPA’s stated goal of achieving meaningful reductions from the electric power sector, which accounts for about 40 percent of the nation’s carbon dioxide emissions. This inside the fence approach has been the most frequently used argument by industry representatives and ultimately may be the legal linchpin in what will undoubtedly be a protracted litigation.

For people unfamiliar with implementing regulations under the Clean Air Act—in other words, for most people—it is very difficult to convey the enormity of the challenges facing us as the EPA proceeds with fulfilling the president’s climate goals. Congress has no appetite to address greenhouse gas emissions; therefore, the EPA is following a path that presents many legal, practical and economic challenges. The states, which are ultimately responsible for implementation of the act, are entering into very new territory. Maintaining affordable, reliable electricity generation is in the nation’s best interests. The fear many have is that the electricity sector and a handful of states will carry most of the burden for reducing emissions that will have limited impact on a global scale.

1 Kentucky Energy and Environment Cabinet. (2012). Economic Challenges Facing Kentucky’s Electricity Generation Under Greenhouse Gas Constraints. Department for Energy Development and Independence, Frankfort. 
2 Kentucky Energy and Environment Cabinet. (2012). The Vulnerability of Kentucky’s Manufacturing Economy to Increasing Electricity Prices. Department for Energy Development and Independence, Frankfort. 
3 79 FR 6899.