Clean Air by 2015:
Which utilities and states will be most affected by the new rules?
The May issue of included a lengthy discussion by EPA officials of the Clean Air Interstate Rule (CAIR), explaining the details behind the landmark regulations in terms of benefits and costs (). But which states, companies, and generating units will be most affected by the new rules?
The CAIR rulings affect 28 Eastern states and the District of Columbia. The map below illustrates the amount of annual emissions reductions from 2004 levels necessary to comply with the two phases (2009/10 and 2015) of CAIR. Twenty-six of the affected states were granted allowance budgets for annual SO2 and NOX emissions. Two of the 28 (Arkansas and Massachusetts) are required to comply only with seasonal ozone limiting regulations and are exempt from annual caps under CAIR. The final rules excluded Kansas, based on new analysis of its contribution to downwind particulate emissions.
When full compliance is reached in 2015, SO2 emissions will have dropped by more than 83 percent and NOX by nearly 81 percent since the Acid Rain Program was created under Title IV of the 1990 Clean Air Act Amendments. Today the 28 CAIR-regulated states account for more than 90 percent of the SO2 and 77 percent of the NOX emissions from electric plants nationwide.
Table 1 () summarizes the amount of reductions from 2004 levels by electric generating units necessary to comply with the CAIR rules:
The EPA regulations require the CAIR-affected states to develop a compliance strategy by September 2006. Utilities in the affected states will need quickly to decide where to put their money. The consensus is that most will, and already have begun, to invest in emissions controls; however, given the backdrop of high natural gas prices and implementation of state renewable standards (19 states and counting), some will opt to increase their generation portfolios with renewable energy or invest in new clean-coal projects.
Which States Are Affected?
Five states currently account for 39.3 percent and 27.9 percent of the nation's SO2 and NOX emissions, respectively. Generating companies in Ohio (10.7 percent), Pennsylvania (9.9 percent), Indiana (8.2 percent), Georgia (5.4 percent) and Texas (5.2 percent) are the most heavily impacted by the EPA regulations. Of these five states, only Ohio (11.2 percent in 2003) and Texas (5.5 percent in 2003) reported a smaller share of SO2 emissions last year.
To put the impacts of CAIR into perspective, consider Ohio-the largest state emitter of electric plant emissions. To comply with 2015 CAIR standards, 49 of Ohio's largest non-scrubbed units (16 GW) would need to be retrofitted with emission controls, and the cost would range from $4 billion to $6 billion. Since 33 of these 49 generating units were built more than 35 years ago, decisions to retrofit would need to be carefully weighed against investment in new generation and other compliance strategies.
Which Companies Are Affected?
To better understand the impacts of the new EPA rules on companies, consider the 25 largest electric generators in the United States (). The group as a whole accounted for 71 percent of all electric generating unit SO2 emissions and 59 percent of all NOX emissions in 2004. The top three companies, American Electric Power, Southern Co., and the Tennessee Valley Authority account-ed for more than 23 percent of the annual SO2 emissions and 20 percent of the NOX emissions nationally. Rounding out the top 5 in terms of emissions score (the combined SO2 and NOX ranking) are Cinergy and Progress Energy.
At the other end of the spectrum is the merchant power company Calpine, with a predominately new gas-fueled fleet. Calpine ranked fifth in fossil generation in 2004, but 198th and 100th respectively in SO2 and NOX emissions. Along with Calpine, Texas Genco LLC and Dynegy Inc. represent the largest fossil-fuel generators with the least amount of emissions.
The recently proposed merger be-tween Cinergy and Duke Energy will move the new holding company to third place nationally, while the proposed merger of Exelon and PSEG would create the 20th largest emitter nationally.
Which Generating Units Are Most Affected?
To better understand the benefits of emission-control investment, consider the 25 largest SO2 emitting generating units (). The group consists of coal units built during the 1960s and 1970s. In 2004, the group accounted for 14 percent of the nation's electric plant SO2 emitted, and represented nearly 19 percent of the CAIR rule clean-up necessary to meet 2015 standards. The average size of each unit is more than 760 MW, and during 2004, the group ran at nearly 71 percent of capacity. Based on those parameters, their allocated 2015 emission budgets, and assuming the addition of new emissions controls, the group could generate nearly 50,000 surplus emission allowances annually by the first year of phase II compliance in 2015.
Nationally, based on 2004 annual emissions, older units (more than 35 years old) emitted 423 times more SO2 and 33 times more NOX than newer units built since 1999, yet at the same time, these older plants generated only 1.8 times more electricity () . The newer units are predominately cleaner gas-fired units with state- of-the-art emissions-control equipment. Most of the units operating prior to 1980 are not scrubbed; 86.4 percent of the nation's SO2 emissions are generated by fossil units currently without emissions-control devices. This is about to change as many of the largest emitters in the country are in the process of announcing, or have recently announced, plans to invest in control technologies.
To comply with the CAIR rules, generating companies will need to carefully weigh the costs and benefits of adding emissions controls, expanding their renewable generating portfolio, building new clean-coal generating plants, or securing and banking enough emission credits to comply with the stringent EPA caps.
The cost of complying with CAIR is estimated by industry experts at be-tween $50 billion and $60 billion during the next 15 years. Several heavily affected companies are adding scrubbers and NOX controls or have announced their intentions to invest heavily in emissions technologies. American Electric Power is expected to spend $5 billion retrofitting its fossil plant fleet during the next 15 years. The Tennessee Valley Authority recently announced plans to invest an additional $4 billion to $5 billion on to the nearly $4 billion invested in emissions controls since the 1970s. Recent decisions have been made by Southern Co., Cinergy, Duke Energy, and Progress Energy to invest in emissions controls as well.
Additionally, according to the EPA, to date there have been nine settlements addressing New Source Review violations, with a combined effect of reducing nearly a million tons of emissions through the installation of $5.5 billion worth of pollution controls.
At the same time as investments are being made for emissions controls, companies are investing heavily in renewable energy-for example, wind development is at an all time high. Driven by the hoped for extension of the federal production tax credit (PTC), wind capacity is expected to more than quadruple during the next 5 years. In addition, according to Global Energy's NewEntrant project tracking system, more than 37 GW of new coal projects are planned-more than 15 GW are clean-burning coal gasification and fluidized bed technologies. Also adding to the myriad of complex compliance decisions, the prices of SO2 and NOX allowances have increased dramatically since the EPA's CAIR rules were put into effect this past March. In May, average trades for SO2 and NOX allowances were $840 and $3,300, respectively. SO2 allowance prices were running four times higher.
As CAIR and state renewable energy standards converge, one thing is certain: "Clear Skies" will become a reality. Global Energy projects more than $100 billion will be invested in a combination of emission controls and renewable energy projects nationwide during the next 15 years, not including additional investments in new clean-coal and long-term nuclear power projects.
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