Good News for Coal

Deck: 

Resolving the climate debate gives coal a path forward.

Fortnightly Magazine - December 2008

I met Congressman Rick Boucher (D-Va.) in November. He was speaking to attendees at EEI’s Finance Conference in Phoenix, and after his speech many people remarked that they wished other members of Congress were even half as well versed about the utility industry’s issues as Boucher seems to be.

Boucher has his finger on the pulse of the U.S. utility industry for good reason. He represents southwestern Virginia, the heart of the Appalachian Basin coal fields, where the economy lives and dies on the fortunes of the U.S. coal-burning power industry. As such, Boucher has advocated coal’s interests in virtually every major piece of energy legislation arising before the House of Representatives during his 26-year term.

As chairman of the House Energy & Air Quality Subcommittee, Boucher is leading the charge on two pieces of legislation that might prove vital to the future of coal-fired power in this country. First, H.R. 6258, the Carbon Capture and Storage [CCS] Early Deployment Act, would levy a retail electricity surcharge to finance research, development and demonstration of CCS technology (see “Debating the Boucher Bill”). Second, together with Rep. John Dingell (D-Mich.), outgoing Chairman of the Energy & Commerce Committee, Boucher is advancing cap-and-trade legislation aimed at reducing U.S. greenhouse gas emissions 80 percent below 2005 levels by 2050.

Despite today’s all-consuming economic worries, these pieces of legislation stand a good chance of being enacted in the new Congress. At the EEI conference, Boucher said climate legislation would be among Congress’s top priorities in 2009—an observation that seems especially believable now with environmental advocate Rep. Henry Waxman (D-Calif.) taking the gavel in the House Energy & Commerce Committee. Further, President-elect Barack Obama confirmed recently that climate change would be among the top priorities of his administration—second only to economic recovery.

On the surface, carbon regulation might seem like bad news for the coal-fired power industry—and bad medicine for a suffering economy. But protracted uncertainty about greenhouse-gas regulation has paralyzed many types of infrastructure investments—more so, in fact, than any politically and economically viable legislation likely would. Ironically, by clearing the logjam of regulatory uncertainty, enacting climate legislation now will get coal moving forward sooner.

“Carbon constraints are coming very quickly,” Boucher said. “We’ve designed a bill that can be economically digestible and will not dislocate any sector.”

Deseret Denied

EES North America

To the degree coal suppliers and coal-based generators hoped climate concerns would simply go away, events during the past two years have dashed those hopes.

For example, in April 2007, the U.S. Supreme Court ruled in Massachusetts v. Environmental Protection Agency that carbon dioxide is a pollutant under the Clean Air Act, opening the door to federal regulation under existing law. In subsequent administrative decisions, EPA declined to issue such regulations, in some cases denying it has the authority to do so. But then, in mid-November 2008, EPA’s Environmental Appeals Board rejected arguments against that authority.

In a case involving an air permit for a waste-coal fired project in Utah (In re: Deseret Power Electric Cooperative), the appeals board ordered EPA’s Region 8 office to reconsider whether to include CO2 emissions in its analysis of the best available control technology (BACT) for the new plant. “The Region maintains it does not now have the authority to impose a CO2 BACT limit,” wrote Judge Edward E. Reich for the appeals board. “This conclusion is clearly erroneous because the Region’s permitting authority is not constrained” in the way the Region argued.

As if that didn’t create enough regulatory uncertainty, the judge added, “This matter potentially raises issues of national significance and … our decision may benefit from further briefing and argument, including from interested persons not yet before the Board in this matter.” Further, in another part of the ruling, he wrote: “[The Act] does not impose upon the Region a duty to conduct an analysis of ‘alternatives’ not identified by an interested person during public comment.”

In other words, if coal’s opponents really want to derail the new-source review (NSR) process, their public comments should propose the full panoply of other ways of satisfying electricity demand without emitting as much CO2. The appeals board’s ruling didn’t say EPA regulators will be obliged to analyze those alternatives—but it implied they will, or at least that they will have to justify the decision not to do so.

In effect, the Deseret ruling creates more uncertainty about future climate regulation—especially with an Obama-administration EPA taking office in January.

Carbon Certitude

Uncertainty can be lethal to any type of investment, and uncertainty about the timing and magnitude of carbon regulation is killing coal-fired power development in America. Overcoming that uncertainty seems to be a primary goal of the one-two punch of legislation proposed by Rep. Boucher.

“The debate about whether we’re going to have federally imposed control of CO2 emissions is now over,” Boucher said. “As a practical matter the U.S. Supreme Court settled that debate last year. So regulation is coming, either by EPA or Congress. And virtually all parties would rather have Congress adopt these controls than have it done administratively by EPA.”

Boucher wants Congress to do it, because it’s his best chance of ensuring the regulation accounts for coal’s interests. “EPA can’t consider fully the effect a regulatory program will have on the economy,” he said. “[Congress] can and we certainly will.”

Boucher’s preferred approach to cap-and-trade—option “A” among those described in the current discussion draft—provides 100-percent free credits. Then, as the cap comes down after 2016, emissions would be covered by a combination of free credits plus purchased credits from domestic and foreign sources. Boucher said his favored approach would account for all emissions-reduction requirements through 2020—when, not coincidentally, the Boucher-Upton electricity surcharge bill aims to make CCS technology commercially available.

“This legislation is absolutely essential if coal-fired electric utilities are to continue using coal in a carbon-constrained economy,” Boucher said.

Of course, some uncertainty would persist despite enactment of these two bills. Namely, $1 billion a year might be insufficient to commercialize CCS by 2020. In fact, the whole concept of industrial-scale CCS raises practical and political questions that R&D funding alone seems unlikely to resolve. Nevertheless, the combination of cap-and-trade legislation and carbon capture and storage funding goes a long way toward eliminating the single greatest uncertainty that’s preventing coal-fired power development.

And with an Obama-administration EPA ready to pick up where the Deseret decision left off, Boucher’s legislation might be the best offer coal is going to get.

 

Editor’s Note: This special generation-exclusive issue of Fortnightly presents a series of feature articles focusing on the outlook for coal, nuclear, renewable and gas-fired power development. Fortnightly’s regular departments will return in January 2009.