As U.S. policymakers consider how to tackle the challenge of greenhouse-gas constraints, the U.K.’s approach to the problem offers instructive examples.
Facing the Climate Challenge
Climate risks are entering the calculus for utility investment strategies.
factor for the U.S. power industry for decades. Indeed, it was one of the main factors that sparked deregulation and the rise of the independent power-development industry in the 1980s and 1990s.
Specifically, power prices were increasing because utilities were not building enough power plants to maintain comfortable reserve margins. Their caution was understandable, as many companies were hurt badly by nuclear cost-recovery disallowances in the aftermath of the Three Mile Island accident. Risk-averse utility shareholders shunned companies that had assumed significant plant-construction risks, and the fallout from that era still permeates the utility landscape today.
However, utility companies have learned and re-learned many lessons in the past two decades, and today they are eager to invest in new power capacity—in part as a rate-base building endeavor, and in part because they recognize the danger of relying too much on any single fuel source. The dominance of gas-fired plants during the 1990s construction wave has exposed many utilities to uncomfortable levels of fuel-price volatility.
“We believe it is in the best interests of our company, and the country as a whole, to have a diverse energy base,” says Skiles Boyd, vice president of environmental management and resources at DTE Energy in Detroit. “In the long term, diversity is probably the biggest factor in our decision-making process.”
Environmental issues, however, are adding greater complexities to company strategies for achieving fuel diversity. DTE, for example, relies mostly on coal, natural gas and uranium to meet its power demands—already a diverse mix. But stricter environmental requirements have compelled DTE to commit more than $1.3 billion to install low-NOX burners at its gas-fired plants, and scrubbers and selective catalytic reduction (SCR) equipment at its coal-fired plants. The company’s biggest investment involves SCR retrofits at three of four 780-MW coal-fired units at its Monroe facility. Over the next decade, DTE expects to invest about $2.2 billion to comply with the Clean Air Interstate Rule (CAIR) and new mercury standards.
“Our strategy is to build what we need,” Boyd says. “We are focusing on emissions-control equipment to meet standards to the extent we can, and we will supplement that by buying emissions credits in the market.”
DTE is in a relatively comfortable position, both in terms of fuel diversity and readiness for tighter environmental constraints, in part because the company staked out a leadership position more than a decade ago, when it joined the Department of Energy’s Climate Challenge program in 1995 and began systematically reducing its carbon footprint.
“Our actual emissions are at about 1990 levels right now,” Boyd says. “Our carbon position is pretty good, because we ramped up operations at [the Fermi 2] nuclear unit since 1990, and we have an unregulated subsidiary, DTE Biomass, that offsets our emissions by capturing landfill gas and converting it to energy.”
However, not all utilities find themselves in DTE’s position. Many companies are even more heavily dependent on coal than DTE is, and many of the rest are hoping to build more coal-fired capacity in the next five years. At least 150 coal-fired units are now