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Why You Should Care About CAIR

New provisions nearly eliminate the financial impacts of the rule’s ozone regulations.

Fortnightly Magazine - January 2007

planning and strategic points of view. In addition, we examine how the pace at which NOx control retrofits, selective catalytic reduction systems (SCRs) and selective non-catalytic reduction systems (SNCRs) can be brought online affects NOx allowance prices under CAIR Ozone and CAIR PM2.5.

The Rules: NBP and CAIR Ozone

Under the NBP, the seasonal cap on NOx emissions from affected plants is 520,957 tons. 3 The caps under the NBP and CAIR NOx regulations are summarized in Table 1.

The NBP currently places a cap on NOx emissionsduring the ozone season at 342,500 MW of existing generating capacity. Of this capacity, about 55 percent, or 191,900 MW, is coal-fired. The existing capacity by fuel type regulated under the various regulations is shown in Table 2. NOx emissions from new plants built in states regulated by the NBP and by the CAIR NOx provisions also will be subject to the emissions caps shown in Table 1.

Moreover, the CAIR Ozone will replace the NBP in 2009 and, initially, will impose an annual cap of 580,000 tons through 2014. Beginning in 2015, the cap will decline to 480,000 per year. 4

The NOx emissions from 449,200 MW of existing capacity will be regulated under CAIR Ozone, of which 241,900 MW is coal-fired. Of the 449,200 MW, 301,700 MW 5 is already regulated under the NBP.

It is important to note that even though the cap under CAIR Ozone is less stringent than the cap under the NBP over the 2009 through 2014 period, the ratio of the annual allowances allocated per megawatt of regulated capacity is lower under the CAIR Ozone provisions than under the NBP. This strongly suggests that the first phase of CAIR Ozone will be more restrictive than the NBP.

CAIR PM2.5

Under CAIR PM2.5, the annual cap on NOx emissions from affected plants will be set at 1,500,000 tons per year from 2009 through 2014. Beginning in 2015, the cap will be 1,300,000 tons.

There are 512,300 MW of existing generating capacity that will be regulated under CAIR PM2.5. Of this, 227,100 MW is existing coal-fired capacity. Also, 323,600 MW of this total is currently regulated by the NBP. 6 Finally, 399,500 MW of the 512,300 MW will be regulated under both of the CAIR provisions. 7

The caps under CAIR Ozone and CAIR PM2.5 discussed above do not reflect federal or state imposed restrictions on the use of allowances.

Analysis of NOx Allowance Markets

To facilitate understanding of how the NBP interacts with the NOx CAIR regulations, our starting point is an electric generating industry with the NBP in place but without either the CAIR Ozone or the CAIR PM2.5 provisions in place. 8 Starting from this perspective, we clearly can see how the two sets of CAIR NOx regulations interact with the NBP, how they interact with each other, and the implications they have for planning.

For this analysis, we used Economic & Management Consulting Group’s (E&MC) Electric Power Market Model (EPMM) of the U.S. and Canadian electric systems that projects, among other things, the mix of new