That was the message from American Electric Power in announcing that it will retire 6,000 MW of coal fired power generation to comply with new US EPA regulations. The stunning announcement by AEP on June 9th rattled power markets and sent politicians running for cover. The decision will cost more than 600 jobs and $40 million per year in payrolls.
On June 10th US EPA spokesman Roy Seneca said:
“These long-overdue Clean Air Act standards will slash hazardous emissions of mercury and other acid gases, preventing thousands of asthma and heart attacks and premature deaths. Utilities have known for decades that these standards — which are still in the proposal stage and have a built-in 3-year-compliance timeline, have been coming for decades. They also know that they are free to approach EPA with serious, fact-based compliance plans, and that state governments also have the ability under the law to seek more time for the plants in their jurisdictions.”
AEP Chairman and CEO Mike Morris said the utility will take other actions in its proposed compliance plan including adding advanced emissions reduction equipment on 10,100 MW of remaining coal capacity, converting 1,070 MW of coal generation to 932 MW of natural gas, and adding 1,220 MW of new natural gas-fueled generation to restructure its power portfolio.
AEP to Replace coal with Natural Gas Generation
AEP said in a press release that the cost of the EPA compliance plan was between $6 billion to $8 billion in capital investment over the next 8 years but could go higher because of the high demand for labor and materials caused by EPA’s aggressive 3-year compliance time frame which AEP has called unreasonable. The costs of the compliance plan could also change based on the final form of the EPA regulations and the actions by state regulatory commissions that must approve the plan and fund it likely through higher rates.
48,000 MW of Coal Power Plants Affected by EPA Rules
AEP’s announcement is the first of what likely will be a string of bad news stories resulting from the proposed EPA’s Clean Air Transport Rule (CATR) and Utility Maximum Achievable Control Technology (MACT) rulemaking to limit nitrogen oxides, sulfur dioxide and mercury emissions by the electric power industry.
EPA Rules Cost the Economy $184 Billion
A economic impact study of the proposed EPA rules done by NERA, a nationally recognized economic analysis consultant, hired by a power industry trade group, the American Coalition for Clean Coal Electricity said the rules will force 48,000MW of coal fired generation to shut down at a cost of about $18 billion per year or $184 billion total to consumers for added coal unit compliance costs, fuel price impacts, and the costs of replacement energy and capacity including the stranded cost of power plants that still have substantial remaining useful life and thus revenue requirements that will also have to be recovered in higher rates. NERA estimated average U.S. retail electricity prices in 2016 would increase by about 12%, making the CATR and MACT rules the most expensive EPA regulations ever imposed on power plants.
So stumping for votes for reelection in West Virginia, Ohio, Virginia, Kentucky and Indiana just got a lot tougher for President Obama who must not only defend these new EPA rules but also the economic impacts they cause on industry, job creation and economic recovery in Midwest, South and Texas where coal is important.
- EPA responds to American Electric Power on closing coal-fired plants (genomega1.wordpress.com)
- BROWN OUT: New EPA regs force five power plants to close… (thehill.com)
- Boiler MACT Rule Rescinded by Retreating EPA (insightadvisor.wordpress.com)
- AEP says it will close five coal plants to comply with EPA regs (farxistreport.wordpress.com)
- AEP Predicts Need to Shutter 25% of Coal Fleet (nytimes.com)
- AEP lays out power-plant closings to meet proposed EPA rules (dispatch.com)
- Trend Watch After EPA Rules: Time to Rethink Utilities? (AEP, XLU, IDU, RYU, UPW, ETR, ITRI) (247wallst.com)
- Daily Benefactor News – Thanks Barack… American Electric Cuts 600 Jobs, Closes Several Plants To Comply With Oppressive EPA Regulations (thedaleygator.wordpress.com)
- New Analysis Finds EPA’s Power Plant Regulations Would Increase Electricity Costs; Lose Jobs (pumabydesign001.wordpress.com)
Once upon a time in a land not far away from our memory, we experienced an extended period of economic growth. We actually manufactured things here in the US instead of importing them from China. We built homes by the subdivision instead of tucked them into some odd-ball sized inner city space. We needed mobility so we built the interstate highway system. We sent men to the moon and imagined entirely new ways to communicate with each other. I’m describing, of course, the post WWII America that gave rise to the baby boomers and the technology revolution they created.
We needed energy to run that America and we built power plants that were fueled with coal because we had plenty of it and it was cheap. Yes it polluted the air and over time we got progressively more serious about cleaning it up with new rules and better technology.
And then the world turned upside down with oil embargos, energy crisis after crisis, the Fuel Use act which prevented using natural gas and then the Natural Gas Policy act which encouraged it, the Energy Policy act which allowed wholesale power competition and then the emergence of renewable energy from wind and solar since Three Mile island scared us off from building more nuclear plants and inflation and regulatory delays made them prohibitively expensive.
We went from being optimistic and growth focused to pessimistic and constraints focused.
Fast forward a decade and we’ve reached a middle ground where we’d like to manufacture things in America AGAIN to create jobs, but we’re worried about global warming (or climate change or climate disruption depending upon how Al Gore explains the latest meltdown of his Inconvenient Truth) so today we focus on optimization and venture capital is being thrown at smart grid and its assorted technology disciples to conquer this middle kingdom.
Coal has not gone away but we don’t build as much of it anymore. Nuclear power has not gone away and we plan to build one new nuke in the South if the Japanese will build the containment vessel, the Chinese will let us into their AE queue, and the NRC will stick with the plan approved instead of changing it constantly whenever some group gets nervous.
Living in a scenario driven by optimization around green goals is a wonderful place to be if you can get there. But the costs are high because the technologies are new. Wind and solar are plentiful but intermittent and need back-up and besides the wind blows in places far removed from the markets we need to serve and the transmission lines are not always adequate to the task. And then there is still the Chinese quest for market share buying every commodity they can for domestic use, building export capacity to drive down prices just enough to discourage US manufacturing competitiveness in wind turbines, solar panels and many other products which as an intended consequence reduces industrial demand enough to discourage building the kind of baseload power plants with cheap domestic coal we used to build.
The question is are we getting the energy future wrong?
- Lower Average Energy Costs with Baseload. If we want to manufacture more things here at home and create jobs we will need steady or lower energy costs. The kind of energy costs we got from building baseload generation in a market environment where the incremental costs of new capacity brought down the average costs for all.
- Improve Efficiency through Competitive Market Forces. We’ve learned that wholesale competition for power generation is great at driving out the excess costs and driving up the capacity factors and efficiency of the plants. In a study we did of divested old power plants in the last decade we found that the improvements in the way the divested coal plants were operated produced enough efficiency gains to power 25 million typical American homes for a year. Similar improvements were found in the divested nuclear plants.
- Create Competitive Market Conditions for Manufacturing and Job Growth. There is much the US can do to restore its competitive market position and create jobs—driving up taxes and the costs of doing business are not among them. When we get serious about growth again we can get our groove back. The recession has officially ended but the pain continues, but America seems ready for changes in tax laws, investment policy and a focus on growth and job creation to create those competitive conditions.
There is nothing wrong with adding renewable energy, smart grid, efficiency and other technologies and strategies to our energy mix. But they are not sufficient to get the job done without tax and investment policies and certainty in our regulatory conditions to attract investment, restore economic growth and create jobs.
Our policy should focus on bringing down the average cost of doing business and that includes lower average energy costs. The only way to achieve that is through economic growth to increase energy demand with the baseload energy and competitive market policies (not un-sustainable dependence upon subsidies) to achieve it.
The place to start is creating a ferociously attractive market in off-peak energy use to jump start manufacturing and production again and then sustain that with the baseload resource to live into our long term economic growth strategy of getting our groove back.
After the collapse of the COP15 treaty prospects, proponents of curbs on emissions are scrambling to find Plan B. It is not an easy thing to do. In the US the best prospect to breathe life back in the emission reduction campaign, the Waxman-Markey cap and trade bill, is dying a slow death in Congress where fears about another hit on the economy in the face of persistent 10% unemployment has sent members running to the exits.
Carbon Allowance Prices Fall
Meanwhile, in carbon markets in Europe and the US carbon credit prices are plummeting and with them hope that cap and trade will provide the incentive for significant reductions. EUA (European carbon allowance) futures ended 2009 at 12.53 euros/tonne, down 21 percent from 2008 closing prices as reported by Reuters. The Regional Greenhouse Gas Initiative covering the Northeastern states held an auction for CO2 allowances and the price came in at a little over $2.00 per tonne.
On voluntary carbon markets, where allowances are traded based upon bets about demand for them in the future prospects for passage of Waxman-Markey were not good and futures prices for allowances fell. 2010 vintage carbon futures on the Chicago Climate Exchange fell from $1.65/tonne to only $0.15/tonne in 2009. Reuters reported that 2009 volumes for voluntary carbon offsets were 40-50 percent below 2008 volumes, and demand fell substantially in December, which is usually a busy month is that market.
Going into 2010 the futures markets in allowances was horrible. European industrial firms were busy estimating their emissions output for 2010 in order to sell excess EUAs early while prices were higher than forecast for later in 2010. Not a good sign for the allowance market or policy makers who expect dumping EUA early will lead to even lower prices later in 2010.
The Ticking Time Bomb in Cap n’ Trade Models
That allowance price problem was the context for the questions put to Dr Severin Borenstein, Director of the UC-Berkeley Energy Institute. Severin is a very smart, very savvy guy who has been at the front lines of energy research long enough to know a few things about policy analysis. Speaking recently at a meeting of private equity players focused on the clean tech and energy space he commented on allowance prices and whether cap and trade legislation could revive prospects for effective green house gas emissions reduction policies.
“There is a ticking time bomb under these cap and trade models. Most studies ignore the supply elasticity of fossil fuels. Analysis to date hasn’t focused on resource price change in response to cap and trade – resource scarcity and price changes are likely to be central,” he said. 
He went on to say that he felt that it would require a carbon allowance price of between $80 and $100 per tonne to displace coal. Achieving significant reductions in greenhouse gas emissions needed to focus on that coal displacement goal or market participants would simply pay a lower carbon tax and make only modest changes in their behaviors.
Coincidentally, this is almost exactly what the California Energy Commission and California Public Utilities Commission said in their implementation report on AB32 the California Global Warming Solutions Act to the California Legislature. In short, these state agencies charged with implementing GHG emissions reduction concluded that natural gas prices would need to be $13.87 or higher per MMBtu and the applicable carbon tax would have to be $100 per tonne or higher for the program to be effective in achieving its goals for emissions reduction.
The BIG PROBLEM Waxman-Markey supporters and environmental advocates face is to get their policy goal implemented they must raise gas prices and carbon taxes so high it will crater the economy and keep them there long enough to drive a stake through the heart of the coal industry once and for all so it cannot be resurrected.
If you think the greenmail price was high for a vote for ObamaCare in Nebraska and Louisiana wait until you see what it will cost to buy off enough politicians to get 60 votes for this cap and trade program in an election year.
And if Waxman-Markey cannot find 60 votes, then Plan B logically would be to unleash US EPA with its endangerment finding to wreak havoc on the coal and utility industries. The problem with such blunt instruments of torture as regulations is that a lot of unintended consequences can happen along the way.
US DOE’s Short Term Energy Outlook (STEO) is out. Not surprisingly, total U.S. electricity consumption was down 4.4% in the first half of 2009 compared to 2008, because of the impact of the recession on industrial electricity sales—we made less stuff!
As a result, carbon dioxide (CO2) emissions from fossil fuels are down by 6.0% in 2009 (U.S. Carbon Dioxide Emissions Growth Chart). This is the second year in a row that CO2 emissions have fallen in the US. But as the economy recovers and natural gas prices rise, the Department expects 0.9-percent increase in CO2 emissions in 2010.
US DOE said CO2 emissions from coal-fired power plants fell almost 10% because low natural gas prices encouraged fuel switching. EIA projects monthly Henry Hub natural gas spot price will average $2.32 per thousand cubic feet (Mcf) in October 2009, the lowest monthly average spot price since September 2001. And, as you might expect, such low gas prices are causing new record highs at the end of this year’s injection season (October 31) to more than 3.8 trillion cubic feet (Tcf) in an effort to lock in the cost savings ahead of the expected rise in natural gas prices. The STEO projects Henry Hub annual average spot price to rise from $3.65 per Mcf in 2009 to $4.78 in 2010 but how much it will go up depends upon the fuel demand for power generation and the pleasantly surprising continued growth of U.S. natural gas production from unconventional gas sources like shale formations.
Lower fuels costs should result in lower electricity retail prices year-over-year for the first time since early 2003 with the STEO projecting annual average 2010 residential electricity price of 11.4 cents /kWh or about 2% lower than the 2009 average.
Other factors helping to reduce both fuel consumption and emissions include the addition of 102 wind farms totaling 8,400 MW with another 300,000 megawatts of wind projects are proposed.  Solar projects also grew rapidly but the solar industry hit a financing speed bump during the recession because of limits on capital access.
While the growth in renewable energy capacity was impressive, don’t forget that those 8400 of wind capacity that came on line are the equivalent of only 8 typical sized coal plants. And that represents the biggest challenge to renewable energy today. Can we scale the additional of renewable energy sufficiently—and cost effectively enough—to continue the emission reduction process without more onerous government mandates?
But remember, our insurance policy is natural gas combined cycle generation along with the growing supply of domestic gas from unconventional sources.
If the US is truly serious about reducing greenhouse gas emissions, it can be accomplished by the continued growth in renewable energy. But we also need to see growth in construction of baseload nuclear power and the use of natural gas fired combined cycle generation to reduce the market share of coal in the overall fuel mix.
Waxman-Markey is primarily driven by imposing a political solution to a market economics problem. It is industrial policy of the worst kind locking the US into a rigid Washington-driven formula rather than letting the market adapt to changing conditions with a fuel mix and technology mix that works.