Environmental Policy

Environmental Compliance for the Power Industry

In our recent white paper, we identified what we think are the four most pressing energy and environmental policies facing states this year. Among these policies, we believe two policies in particular are creating significant challenges for the power industry:  the EPA Clean Power Plan and State Renewable Portfolio Standards.

  • EPA Clean Power Plan (CPP). This federal rule was recently finalized in August. Under the CPP, each state has a target CO2 emissions rate it must achieve by 2030 for existing fossil fuel plants. States are responsible for devising their own compliance plans.
  • State Renewable Portfolio Standards (RPS).  States with renewable portfolio standards require or encourage electricity producers to supply a certain minimum share of their electricity from designated renewable sources like wind or solar. The purpose of these policies is to diversify the state’s mix of generating technologies as well as reduce their carbon footprint.

Why do these policies represent a challenge to the power industry?

Both the EPA CPP and the State RPS programs favor some technologies and fuels over others.  The CPP targets were calculated using assumptions about each state’s ability to improve power plant efficiency, switch from coal generation to natural gas generation, and expand renewables, while state RPS programs provide incentives for a variety of renewable technologies, and in some cases, energy efficiency measures.  Some states have more renewable resources than others, and some states rely more heavily on coal than others, so no single compliance strategy will work throughout the country.  As power producers make changes to adapt to these government policies, there will be winners and losers, with some power plants being forced to close in some cases.

Although renewable technologies have been gaining in popularity in recent years, siting these new plants remains controversial.  Strong political opposition to offshore wind has so far stalled the expansion of this technology in the U.S., and environmental concerns related to land and wildlife impacts of solar and wind farms can also slow down progress in building new renewable generation.

Another challenge facing regulated utilities is cost recovery uncertainty. They need to persuade their regulators that they have made the right choices in order to get the necessary rate increases to cover each policy’s compliance costs.

Finally, some reviewers of these policies have raised concerns about electricity reliability. The timeframe for meeting targets, potential power plant shut downs, and greater reliance on variable renewable energy such as wind and solar have implications for the reliability of electricity supply and grid stability.  The ultimate challenge to electricity producers is to balance these competing demands.

How should power market participants respond to these policies?

If we agree that the  goals of safe, reliable, affordable and clean generation are common to all,  then developing a clear picture as to how each of these measures are impacted by these environmental compliance policies is key. To gain a complete picture, it is important to understand how the policies will affect the power industry as a whole, including the consumers, large power companies, individual power plants, and power markets. It is also important to consider the impact of various compliance strategies on electricity and other energy prices, grid reliability and fuel suppliers.

To accurately compare different compliance options, a consistent set of assumptions must be used for measurement. This “scoring” involves finding the right metrics for comparing the benefits and costs of various compliance options.

The best approach for taking this kind of holistic view of an energy policy and measuring its impact is integrated modeling. Most current energy models are focused on only a single energy sector. They fail to take into account that different energy sectors can be interconnected. It’s very often the case that the full effects of an energy policy won’t be evident if the focus is only on a single sector.

An energy model that employs an integrated modeling approach uses a consistent set of assumptions to analyze multiple sectors and their interactions, including how actions in one sector might stimulate or dampen activity in another. This can be very useful for the power industry as its members attempt to grasp the complexities of the EPA CPP and state RPS programs.

Our free white paper, “Top Environmental and Energy Policy Challenges,” discusses integrated modeling in the context of the EPA CPP, state RPS programs, and two other important energy policies.

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