Cleanup Time

Deck: 

Retrofitting early protected North Carolina ratepayers.

Fortnightly Magazine - November 2012

While utilities and utility commissions across the country grapple with how to comply with more stringent federal air emission regulations, North Carolina coal-fired power plants have already invested in pollution controls that will ease compliance and could save consumers millions, thanks to a 2002 state law to improve air quality. North Carolina’s experience suggests that other states might discover advantages to moving ahead of proposed and foreseeable federal regulations, especially when these efforts can simultaneously address noncompliance with existing federal regulations and state environmental goals.

With the Clean Smokestacks Act, North Carolina required the state’s investor-owned utilities, Duke Energy and Progress Energy, to reduce coal-plant sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions approximately 70 percent by 2013. Clean Smokestacks set an 11-year compliance schedule, allowed Duke and Progress to decide how to reduce emissions, and provided for recovery of compliance costs. The significant drop in SO2 and other emissions has created between $6 and $16 billion in health benefits for North Carolina residents and helped the state’s two fine-particulate nonattainment areas and six of seven eight-hour-ozone nonattainment areas achieve the national ambient air quality standards. As a co-benefit of new SO2 and NOx controls, mercury emissions from coal-fired power plants dropped 63 percent between 2002 and 2009.

The now-merged utilities’ plants in North Carolina are well positioned to comply with the Mercury and Air Toxics Standards (MATS) and the Clean Air Interstate Rule (CAIR) as a result of investments to comply with Clean Smokestacks, including the more stringent CAIR budgets effective in 2015. When the U.S. Court of Appeals for the D.C. Circuit rejected the Cross State Air Pollution Rule (CSAPR), it left CAIR in place until EPA replaces CSAPR. North Carolina electricity sector emissions in 2010—less emissions from units scheduled to retire—are below the prior 2014 CSAPR caps and CAIR 2015 caps (though this doesn’t factor in emissions from new and existing generation units, which will have to operate at higher capacity to replace generation from retiring units). EPA modeling of the MATS rule similarly projects that all Duke and Progress coal units in North Carolina can comply with the acid gas emissions standard using currently installed control technologies.

Seeking Certainty

In its ruling on CSAPR, the D.C. Circuit directed EPA to develop a new rule to address interstate air pollution as expeditiously as possible. While the D.C Circuit has found EPA’s previous attempts to regulate in these areas to be flawed—including the CAIR, CSAPR and Clean Air Mercury Rule—the court has also affirmed the agency’s mandate to establish rules governing interstate transport of air pollution and hazardous emissions from power plants.

Frequent litigation over new EPA rules contributes to complexity, but also provides space for states to move ahead on matters that coincide with state public health or environmental goals, providing regulatory certainty for utilities and reducing risks for consumers. When North Carolina passed the Clean Smokestacks Act with the stated purpose of improving in-state air quality, states throughout the East were already experiencing difficulty attaining national ambient air quality standards due to upwind emissions, and EPA had already listed coal- and oil-fired power plants as a new category of sources of hazardous air pollutants.

Despite the arrival of new federal rules with short compliance timelines, states such as North Carolina that acted ahead of federal environmental regulations have spread out environmental compliance costs for ratepayers, improved air quality, and protected consumers from potential compliance-cost escalation. Ratepayers in many states that didn’t act early face a sudden jump in electricity rates as utilities make multiple capital investments over the next few years to comply with MATS, CAIR, and the replacement for CSAPR. Proposed rules for coal combustion residuals, cooling water, and potential greenhouse gas standards for existing plants are likely to drive additional investments.

States often focus on keeping rates as low as possible in the near term, which helps to keep in-state industries competitive. But this focus also creates cost risk for ratepayers and makes them vulnerable to sudden electricity price spikes. When new federal rules arrive, a sudden increase in demand for environmental retrofits can increase retrofit costs. Short compliance timelines can exacerbate the increase in demand for retrofits associated with new federal regulations—and because EPA is often constrained by the Clean Air Act or the courts, new federal rules are unlikely to afford the 11 years that North Carolina granted under the Clean Smokestacks Act.

Industry analysts acknowledge this risk. The frequently cited North American Electric Reliability Corp. analysis of forthcoming EPA regulations includes a scenario with 25 percent higher capital costs to account for potential increases in retrofit prices and the short compliance timeline. A Brattle Group study commissioned by Midwest ISO similarly found that MATS will likely cause bottlenecks and cost escalation because of its short compliance period. Their earlier, 2011 analysis of the forthcoming regulations also included a scenario with a 100-percent increase in capital costs.

It’s difficult to predict the requirements and timelines for potential future federal regulations, and opportunities to move ahead of federal environmental requirements will vary by state. As a result, determining how state goals overlap with potential future federal requirements isn’t a simple task. Yet, coupling state energy and environmental goals with legislation to move beyond current federal standards is likely to be the optimal solution for states that choose to do so. North Carolina’s experience suggests that forward-looking states could provide the capital-intensive electricity sector with something the federal government seems incapable of and the courts cannot: the regulatory certainty and long compliance timelines necessary to make strategic investments.