A Free-Market Energy Blog

EPA’s Powerplant Rules: Serfdom for the States

By -- September 4, 2014

“FERC Commissioner Tony Clark seems to be about the only person currently on record to see what’s coming…. In Commissioner Clark’s words, each state with an approved plan ‘will have entered a comprehensive “mother-may-I?” relationship with EPA that has never before existed’.” 

If you’re an impressionable economist, the U.S. Environmental Protection Agency’s powerplant carbon abatement proposal looks like a winner.  Different people have different costs of reducing emissions, and the draft rule proposes several alternative paths that a state might take in formulating its implementation plan. Flexibility allows a state (or possibly a group of them) to choose among direct limits on generator emissions, to implement policies that substitute renewables for coal, or to use a “portfolio” approach that includes increased end-use efficiency.  Just get EPA to sign off on your compliance plan, adhere to it, and you’ll be part of America’s low-carbon future.

Not quite. Even a charitable reading of the scoping and support documents forces the conclusion that this will be the end of markets as we know them.

FERC Commissioner Tony Clark seems to be about the only person currently on record to see what’s coming. He sees an unavoidable binary choice – a state can submit its plan to EPA or it can fail to do so and let EPA make a plan for it. The proposed rule is silent on refusal to submit so we do not know what EPA might include in the plan or what the alternatives are for a state that is unhappy. Not nice, but neither is a filed plan.

Say a state includes a newly enacted renewable portfolio standard in its compliance plan. It is now jurisdictionally trapped. Even if the state later decides that RPS was a poor idea EPA has no reason to allow repeal. In fact the Agency has every reason to see what it can pressure states into enacting as things get negotiated. In Commissioner Clark’s words, each state with an approved plan “will have entered a comprehensive ‘mother-may-I?’ relationship with EPA that has never before existed.”

Go a step deeper and ask what happens to state jurisdiction over new generation and transmission. If new investments in these are part of the plan, EPA probably gets to decide whether that plan can be changed, and in what ways.  Or its plan can entail dispatch restrictions, once the sole jurisdiction of state PUCs and maybe FERC.  The existing split of state and federal jurisdiction, whatever its continuing problems, is at least predictable.  Now add EPA to the mix and place your bets with the DC Court of Appeals on who controls what.

Adding RTOs and regional markets adds  to the fun.  What were once standardized transactions must now respect all of the EPA-related details for individual states and utilities if indeed they can be reconciled.   Do we get some sort of force majeure policy that treats EPA as an insuperable constraint?  And what about reliability (and liability) if some transactions become impossible or will be at variance with state carbon plans?   System operators and market participants must now somehow harmonize fuel-based and carbon-based dispatch.  The only certain outcome is that markets will lose their value because the power prices that originate in them will be as much political as economic.

Some of the surest signs that things will be different are buried in support documents.  Some see the plan’s differences in state carbon quotas as cheap politics but that doesn’t square with the geography of interest groups.  Coal-dominated states often have lower quotas than those with lots of gas-fired capacity.

EPA’s reasoning is that the former have fewer alternative low-carbon plants and its unspoken objective is to minimize aggregate pain.  (The Agency seems to believe that power stays in the state where it was produced.)  And a foresighted state that earlier built gas-fired plants to replace coal capacity?  It gets whacked.

Once we get down to the numbers it’s clear that energy efficiency will carry a lot of the load, particularly in non-coal states.  Planning for this means that EPA must estimate the amounts and costs of the carbon that improved efficiency must abate.  The amounts?  EPA did a literature survey and settled on figures close to those from the American Council for an Energy-Efficient Economy, which never saw a kilowatt folks couldn’t do without.

Contrary to ACEEE’s testimonies on feasibility in Ohio and some other states, EPA chose to treat efficiency as a bottomless well.  And the cost?  As one example, official Texas data put the cost of cutting a kwh at 17 cents in 2006 and 25 cents in 2012.   Starting elsewhere EPA somehow concluded that the levelized cost of reducing a Texas kwh would be 7.90 cents in 2016.  Bottomless?  Texas’ cost rises slowly to 11.1 cents in 2023 and miraculously stays there until 2050.  Oh, and before I forget – EPA assumes that every state has the same cost of killing a kwh in all but the nearest years, regardless of its industrial mix, weather or anything else.  It goes without saying that this includes Alaska and Hawaii.


The EPA Technical Documents are at http://www2.epa.gov/carbon-pollution-standards/clean-power-plan-proposed-rule-technical-documents

Commissioner Clark’s statement is at https://www.ferc.gov/CalendarFiles/20140729091839-Clark-07-29-2014.pdf

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