Blog Post

What to Watch For in EPA’s Final Clean Power Plan: Protecting Electricity Reliability

Jul 23, 2015 | Karen L. Palmer

Later this summer, the US Environmental Protection Agency (EPA) will release its final Clean Power Plan, setting carbon emissions goals for existing power plants. This is the seventh post of ten in a series—What to Watch For in EPA’s Final Clean Power Plan—in which RFF experts address what to look for when the final regulations are released.

Like trailers for a summer thriller designed to keep viewers on the edge of their seats, many previews of life under EPA’s proposed greenhouse gas regulations for the electricity sector feature a mythical beast lurking in the woods: that the Clean Power Plan could cause the lights to go out. But flexibility—spreading cuts over time, trading among emitters and states, and other creative approaches—can ensure the reliability beast remains mythical.

Some states are concerned that their emissions rate targets are very ambitious and will be difficult to achieve with existing generation resources. Constructing new generators and the planning and permitting that accompany these new investments take time and 2020, the first year of the initial compliance period is only a few years away. An inflexible translation of state targets into source specific limits on total emissions or emissions rates would impose serious operating limits on some generators. Planners have expressed concern that if stringent targets lead older existing fossil generators to retire early then capacity margins will fall and the likelihood of generation shortfalls during peak demand periods will rise. If retiring generators are located in isolated parts of the grid, local reliability consequences could be even more severe until additional transmission investments are made to facilitate access to a broader range of generation sources.

The Clean Power Plan does pose a need for serious planning for both infrastructure investment and operation of the electricity system. New investments will be required to meet the needs of the electricity system by 2030, especially taking into account changes in the relative prices of fuels and technologies. New transmission infrastructure will likely be needed to bring renewable power from places where the resources are located to electric load centers and new pipeline capacity will be required in some places to feed the increased demand for gas at power plants. The Clean Power Plan introduces new considerations into this planning problem. For example, as intermittent renewables are becoming an increasingly important share of electricity supply in some regions, grid operations are already adapting to accommodate this change and the need for such accommodations will likely increase under the Clean Power Plan.

If the planning challenge posed by the Clean Power Plan is viewed strictly as an engineering problem, there are some local areas on the grid in states that choose a go-it-alone strategy where compliance entities will have difficulty doing what is necessary to achieve the state’s goals. However, if the problem is not viewed as a set of constraints but instead as a collection of incentives, it is transformed from an engineering problem into an economic one. That transition is possible because of the opportunities for flexible implementation available to states. Flexibility inherently allows for the consideration of tradeoffs, including relative costs of various emission-reduction measures. Flexibility in timing helps and EPA promises such flexibility during the initial decade of the interim compliance period, allowing states to phase in their emissions reductions over time. Another option that has been proposed by companies and analysts including RFF is the introduction of a reliability safety valve that allows emitters to pay a per unit fee for emissions in excess of their assigned portion of state goals, called an alternative compliance payment. For compliance purposes, exceeding the goal in one year would likely have to be offset by future emissions reductions. However, states could use the revenue from such a payment mechanism in the future to encourage investment in clean technologies.   EPA may choose to allow such a feature in final plans for states that choose to pursue a single state strategy.

Entering into a formal agreement with other states that includes inter-state trading is another way to introduce flexibility and provide more options for regional emissions reductions to all compliance entities. But, formal cooperation can be cumbersome and may raise political concerns. A more streamlined solution for states would be preapproval for inter-state trading . A state that has been preapproved for trading opens up the option for compliance entities to buy emissions allowances from other states, avoiding the need for more draconian limits on grid operations.

As has been said elsewhere, the currency of power markets is prices. Assigning a price to carbon emissions similar to the prices paid for fuels and other inputs to electricity production creates incentives that have lead power markets to work exceptionally well. Clean Power Plan compliance, if viewed as an engineering problem can throw a wrench into the smooth operation of power markets and raise concerns about reliability. But if compliance is viewed as an economic problem, the mystical beast is slain.

Read the other posts in the series, What to Watch For in EPA’s Final Clean Power Plan: