Not an ACE for Coal
So, yesterday the Trump Administration’s EPA released its proposed replacement to the Obama-era Clean Power Plan (CPP), which it is calling the Affordable Clean Energy (ACE) rule.
As you recall, the CPP aimed to reduce CO2 emissions from existing power plants by 32% by 2030. It was panned by opponents as being a legal overreach from an environmental agency seeking to regulate the energy sector. Ultimately, the U.S. Supreme Court placed a stay on the rule’s implementation, perhaps indicating preliminary sympathies with opponent arguments.
As expected, ACE sticks to emissions reduction measures that can be executed “inside the fence line” of the plant (i.e. heat rate improvements), rather than the CPP’s approach that allowed for measures implemented throughout the broader electricity system (e.g. renewables, switching to natural gas) to qualify for compliance.
ACE identifies a portfolio of commercially proven technologies that states could choose to improve plant heat rates. But, unlike the CPP, ACE does not establish an emissions standard for states to achieve. Therefore, the ultimate reductions expected from the rule are unknown.
While the CPP was seen as an overreach, the ACE proposal represents the minimum possible action EPA could justify given they are mandated to regulate GHG emissions from these power plants.
Legal Overreach. ACE may also stand on shaky legal ground. The proposal includes a modification to the New Source Review (NSR) program that would allow coal plants making major facility modifications to improve heat rates to avoid triggering additional regulatory requirements. This is accomplished by focusing on the facility’s hourly emissions rate, rather than net annual emissions. This is meaningful because a more efficient plant (i.e. improved emission rate) may be dispatched more frequently, thus increasing overall emissions.
The NSR provision is a big deal, and a change in policy that could eventually impact industries beyond the power sector.
But you might be wondering, is this rule going to bring back coal? Certainly, for the coal industry this rule represents a preferable approach to limiting power sector CO2 emissions compared to the CPP, but the answer is no. This proposal is not an ACE for coal. Here’s why, and who the real losers are.
Higher Compliance Costs than the CPP. EPA’s regulatory impact analysis (RIA) indicates that certain ACE implementation scenarios could have greater compliance costs compared to the CPP. (See RIA, Table 3-12) There was not a detailed explanation for these figures, but I am assuming these increased compliance costs are associated with elimination of some lower-cost emissions reduction options afforded by the power-sector-wide “system” approach in the CPP.
EPA Sees Coal Capacity and Use Declining. In all scenarios explored, ACE will result in decreases to coal capacity compared to a no CPP baseline, ranging from a 0.2% to 3.5% decrease in gigawatts installed (RIA, Table 3-20, 3-22). EPA’s analysis indicates that total coal production will continue to decline in almost all scenarios (RIA, Tables 3-27 through 3-29).
Nuclear and Gas Capacity Lose Out. EPA’s analysis shows that the CPP would have increased new combined cycle gas capacity by 50% and nuclear capacity by 3%, in 2025. With ACE, these numbers go down to a range of 5.6% to 32.1% increase for combined cycle gas, and a 0.3% to 2% decrease for nuclear. Renewables will also lose out (RIA, Table 3-22).
Emissions Impacts. Surprisingly, EPA notes that ACE will result in only a 1 to 2% annual increase in CO2 emissions in 2025 compared to the CPP, and 3% above the CPP base case in 2030 and 2035. EPA also states that a complete repeal of the CPP (i.e. with no ACE replacement) would result in a 3% increase in annual emissions in 2025, and a 4% increase in 2030 and 2035 (RIA, Table 3-4).
In sum, the ACE rule might be slightly better for the coal industry than the CPP, but it is not a silver bullet. Compliance costs might be higher than the CPP and coal capacity and production will still decrease.
It will take four to six years before there is a compliance requirement on the books.
Inevitable legal challenges may further delay or forestall implementation altogether. It is unlikely that any rational investor will choose to deploy capital at a marginal coal plant to improve efficiency and dispatch order, given such uncertainty.
Both competitive markets and cost of service regulated jurisdictions are moving away from coal based on economic forces, not regulations. ACE won’t do much to stop this trend.
There is one important caveat to all of this. The EPA did not factor in the potential impact of the Trump Administration’s as-yet unsuccessful goal of subsidizing economically at-risk coal plants.
