Earlier this week we watched history being made as President Obama and EPA Administrator McCarthy announced the release of the final Clean Power Plan, setting the first-ever limits on carbon emissions from power plants. The final plan includes a major improvement that UCS has championed over the last year: measures that help limit a rush to natural gas as states work to cut their carbon emissions. That’s good news for consumers, and for the climate.
The climate and economic risks of a rush to natural gas
Coal-fired electricity generation has been in a steady decline since 2007, as the market shifts to cheaper, cleaner sources like natural gas and renewable energy. In fact, for one month in April 2015, for the first time since 1973 when the EIA started tracking monthly data, the share of natural gas in our electricity mix exceeded the share of coal.
But a rush to natural gas brings considerable consumer, health and climate risks. Natural gas is still a fossil fuel (albeit cleaner burning than coal), and also has risks of methane leakage in its production, distribution and storage. Natural gas plays an important role in our efforts to decarbonize the power sector and can complement generation from renewable resources. But simply switching our dependence on coal for an overreliance on natural gas isn’t sufficient for the deep cuts in carbon emissions required by mid-century.
Furthermore, an overdependence on gas exposes consumers to the risks of electricity price spikes related to natural gas price volatility. UCS has previously pointed the risks of natural gas overreliance that a state like Florida faces, for instance.
The final CPP takes measures to limit this rush to gas in four ways:
- Increasing the role of renewable energy. The final plan increases the contribution from renewable energy in setting state emission reduction goals, and encourages more renewable energy in the early years, through the Clean Energy Incentive Program (CEIP). This strategy points states in the direction of a more diversified electricity mix with a strong role for zero-carbon energy resources, and a contained role for natural gas. Ramping up renewable energy is also a sure way to reduce the pressure on natural gas prices that may come from a rush to gas.
- Allowing renewable energy to displace coal and natural gas generation. A formula change in the calculation of state targets in the final rule now takes into account the opportunity for renewable energy to displace coal and natural gas generation, as well as natural gas to displace coal. This is in contrast with the draft rule where the formula was set up in a way that just focused on a coal to gas switch. This change is a common-sense one, allowing for a shift from coal to cleaner resources including RE and natural gas that reflects real world trends. According to the EIA, in 2015, nearly 13 gigawatts (GW) of coal-fired generating capacity is expected to retire. At the same time the agency estimates that electric generating companies will add 9.8 GW of wind, 6.3 GW of natural gas, and 2.2. GW of solar. (Note that EIA tends to consistently underestimate the amount of cost-effective renewable energy available and the solar estimate is likely to turn out to be too low).
- Phasing in the coal to gas switch. In response to comments on the draft proposal, the EPA has delayed the initial compliance start date from 2020 to 2022 and has allowed for a more gradual phase-in of the coal to gas switch. This gives more time for resource planning, including planning for any needed transmission or pipeline infrastructure. It also creates time for states to ramp up options that will truly pay off over the long term to help drive down emissions and keep bills down —i.e., renewable energy. Rushing to gas would provide near term benefits but those would be more than outweighed by the climate and economic risks, and may result in stranded natural gas assets as we work to drive down emissions beyond the 2030 horizon in the current CPP. The EPA uses two parameters to limit the amount of the shift in generation from coal to gas in calculating state targets.
- By 2022, the first year of the compliance period, natural gas combined cycle (NGCC) generation is limited to a maximum of a 22 percent increase from 2012 levels in each region. This is equivalent to the single largest annual increase in power sector gas-fired generation since 1990, which occurred between 2011 and 2012.
- In each subsequent year, regional NGCC generation is limited to a maximum of a 5 percent increase from the previous year, based on the historical average annual growth in gas-fired generation in the power sector between 1990 and 2012.
- Ensuring that there aren’t perverse incentives to build new natural gas plants. The draft proposal included a big loophole that we and others pointed out: state could simply shut down existing fossil-fired generation (covered by this rule for existing power plants) and open new NGCC plants (which are not covered under this rule, but under a separate rule for new power plants which a new NGCC plant would easily meet). Those emissions from new NGCC plants would not count toward state targets, creating a perverse incentive to build new natural gas plants. In the final rule, the EPA has taken steps to ensure that states don’t use this strategy to grow their emissions without accounting for them. In the formula for calculating state targets, they didn’t include the option for replacing generation from covered fossil-fired units through the construction of new NGCC capacity. They provide a clear and sensible rationale for this approach:
“…emission reductions achieved through the use of new NGCC capacity require the construction of additional CO2-emitting generating capacity, a consequence that is inconsistent with the long-term need to continue reducing CO2 emissions beyond the reductions that will be achieved through this rule. New generating assets are planned and built for long lifetimes –- frequently 40 years or more –-that are likely longer than the expected remaining lifetimes of the steam EGUs [power plant units] whose CO2 emissions would initially be displaced be the generation from the new NGCC units. The new capacity is likely to continue to emit CO2 throughout these longer lifetimes, absent decisions to retire the units before the end of their planned lifetimes or to install CCS technology in the future at substantial additional cost. Because of the likelihood of CO2 emissions for decades, the overall net emission reductions achievable through the construction and operation of new NGCC are less than for the measures including in the BSER, such as increased generation at existing NGCC capacity, which would be expected to reach the end of its useful life sooner than new NGCC capacity, or construction and operation of zero-emitting RE generating capacity.” (emphasis added)
The EPA also requires that states that adopt mass-based plans clearly address any emissions “leakage” that might occur as a result of shifting generation from sources covered by this rule to sources, such as new NGCC plants, that are not.
“The extent to which electricity providers opt to rely on this increase in unaffected new source utilization as a substitute for improving the emissions performance across existing sources would be fundamentally inconsistent with relying on the BSER to reduce emissions as the basis of the subcategory-specific emission performance rates… The EPA is therefore requiring that states adopting a mass-based state plan include requirements that address leakage, or otherwise provide additional justification that leakage would not occur under the state’s implementation of mass-based emission standards.”
States can chart their clean energy future
The final rule provides ample flexibility for states to chart their own clean energy future as they cut their carbon emissions. As my colleague points out, this is a huge opportunity for them to ramp up low cost renewable energy resources. The good news is that the Clean Power Plan creates a framework for natural gas to play a complementary but less risky, contained role as we make a clean energy transition.