In June 2014, the Environmental Protection Agency (EPA) promulgated the Clean Power Plan (CPP), the first-ever proposal to regulate CO2 emissions from existing power plants under Section 111(d) of the Clean Air Act. The EPA proposed average CO2 emissions rate goals for each state by defining state-specific best systems of emissions reductions (BSERs) comprised of four “building blocks.” This proposal has been found to have critical limitations. Over the past several months, the EPA has fielded more than two million comments, many of which question the ability to achieve various state goals on the timeline and at the costs assumed for each building block. In addition, there has been much discussion around the rationale behind excluding certain CO2 abatement mechanisms from the four-block BSER framework.
In a Notice of Data Availability released in October, the EPA acknowledged some of these myriad concerns, and expressed openness towards significantly revising the initial proposed parameters of the CPP. Between now and summer 2015, when the EPA is due to release a final rule, decision makers in the utility and energy spheres face vast uncertainty surrounding the rule’s timing and stringency. Moreover, in the following year (or two), public service commissions and interested stakeholders will wrangle over the details of each state’s implementation plan, particularly around whether to form multi-state trading compacts (e.g., Regional Greenhouse Gas Initiative (RGGI)).
In such an environment, resource planners and policymakers alike can greatly benefit from a set of modeling tools that (1) allow for formulation of scenarios that encompass a range of possible CPP futures and (2) can simulate impacts to both unit-level electric dispatch and broader macroeconomic indicators.
CRA’s National Electricity & Environment Model (NEEM) and the Multi-Region National Model (MRN-NEEM) are the culmination of over two decades of development, designed specifically to account for policies like the CPP. NEEM’s logic and algorithms are similar to those in the Integrated Planning Model (IPM) used by the EPA in its initial CPP analyses, and complements the IPM and the Energy Information Administration‘s (EIA) National Energy Modeling System (NEMS) as one of the nation’s most comprehensive modeling frameworks for analysis of impacts of emissions regulations on the power sector. Further, in MRN-NEEM, CRA has developed a state-of-the-art, computable general equilibrium, top-down model of the US macro-economy. MRN-NEEM offers the most realistic simulation of the ability of the economy to respond to the structural and cross-sector changes created by CO2 policies. Importantly, MRN-NEEM estimates natural gas and coal price responses to demand shifts, particularly in the electric sector.
Throughout the past six months, CRA has been using NEEM and MRN-NEEM to investigate variations of the proposed CPP on behalf of our clients. Table 1 shows the key questions CRA has helped our clients answer. Sorting through these kinds of questions will be pivotal for those hoping to shape the direction of CPP policy and for those utility decision makers looking to develop a robust business plan in whatever CPP future materializes. Arriving at the right answers requires a thoughtful approach grounded in a sound understanding of how the power sector and broader economy might transform under different CPP scenarios.
Table 1: Key CPP questions and approach
Is a 6% heat rate improvement at $100/kW realistic for all US coal?
- Impose a retrofit or retire decisions on each coal-fired electricity generating unit, so that the model decides whether the heat rate improvement makes economic sense in the presence of CPP CO2 emissions rate limits
- Vary the assumed heat rate improvement and costs to assess how compliance pathways change in scenarios where the heat rate improvements do not materialize at the scale assumed by the EPA
Are EPA’s assumed renewable and demand-side energy efficiency (DSEE) penetrations achievable? Are EPA’s DSEE costs reasonable?
- Examine worst-case scenarios in which renewables and/or DSEE penetrate at some small percentage of EPA’s assumed ramp rates
- Will a utility’s coal-fired assets be more vulnerable to reduced dispatch and/or retirement?
- Will new natural gas-fired combined cycle plants be built to replace retired coal capacity, and how will this affect natural gas prices?
What are the benefits of my state establishing a multi-state cap-and-trade market with surrounding states?
- Quantify any decline in total electric system costs by state
- Determine how the generation mixes in my state and across the multi-state compact change
If adding carbon capture and storage (CCS) retrofits were viable compliance mechanisms, how less stringent would the CPP goals be?
- Assess whether CCS retrofits come online under varying assumptions for retrofit costs/penalties, CO2 storage and transport, and offsetting enhanced oil recovery revenues
- Will coal prices at particular basins change significantly due to the penetration of CCS?