Recent environmental regulations in the electric power sector
Release Date: 4/30/14
Several environmental rules recently implemented at the federal and state levels affect the AEO2014 projections for the electric power sector. While not considered in the AEO2014 Reference case, the EPA is also currently in the process of developing new rules to address electric power plant air emissions, the impact of cooling water intake systems on aquatic life, and coal ash disposal methods. New rules that may be promulgated could have significant impacts on the projected fuel mix for electric power generation. The following discussion summarizes programs and rules included in the AEO2014 Reference case.
Recent regional policy modifications
The Regional Greenhouse Gas Initiative (RGGI) is a regional cap-and-trade program for CO2 emissions that applies specifically to fossil-fueled electric power plants larger than 25 megawatts (MW) located in each of the nine participating Northeastern states . When it took effect in 2009, RGGI became the first mandatory market-based (cap-and-trade) CO2 reduction program in the United States. The cap was tightened primarily because actual CO2 emissions in the region since the start of the program in 2009 have been roughly 35% below the cumulative cap. The lower level of emissions is attributed primarily to historically low natural gas prices, which have shifted a large share of electricity generation in the region toward natural gas, and to lower overall electricity demand.
CO2 emissions in the RGGI region comprised only 4% of the total emissions from the electric power sector in the United States in 2012. RGGI is one of the two legally mandated CO2 cap-and-trade reduction programs in the United States, the other being the California cap-and-trade program that was an outgrowth of California's Assembly Bill 32, the Global Warming Solutions Act of 2006 (AB 32) .
In 2005, when CO2 emissions in the participating states reached their annual peak, coal comprised 23%, natural gas 25%, and petroleum 12% of the regional generation mix. By 2012, coal's share had declined to 9%, the natural gas share had risen to 44%, and the petroleum share had fallen below 1%.
At the same time that the shift in fuels for electricity generation has lowered the carbon intensity of electricity generation in the region, demand for electricity in the Northeast has been flat or declining. Average annual retail electricity sales in the nine participating states from 2009 through 2012 were 6% below the annual sales in 2005.
Despite the reduction in the cap beginning in 2014, it remains to be seen whether the updated program caps will result in significant emissions reductions compared to the outcomes that might occur absent the new caps. CO2 emissions in 2012 in the participating states were still only 92 million short tons, close to the 2014 target cap of 91 million short tons. However, the cap is designed to tighten annually through 2020. In the first half of 2013, CO2 emissions from coal-fired generation were up both in the RGGI region and nationally compared with 2012 levels, which indicates that the revised cap could become more binding in the future.
Because of a surplus of allowances during the initial years of RGGI, the CO2 value of the allowances remained close to the program's price floor of $1.93/ton of CO2 allowed in each quarterly auction. The value of allowances increased to $3.00/ton of CO2 in the latest auction, as market participants may be anticipating a rise in the future value of allowances. RGGI states use allowance revenues for a variety of programs that support cleaner generation and/or energy efficiency programs that reduce demand. Unless the programs supported by RGGI auction revenues are funded at the same level using other funding sources in the absence of RGGI, they will provide a tangible incremental reduction in emissions.
The RGGI program update grants the ability for previously unused allowances from the early years of the program to be saved and applied after 2014, as limits become more stringent—a strategy often referred to as "banking allowances." Additional flexibility exists in the program through the recently created Cost Containment Reserve, which effectively creates a price ceiling for allowances. When the price hits a given level, program participants can purchase a set level of allowances at a defined fixed price. This ceiling is intended to prevent allowance prices from rising above defined levels. The price trigger starts at $4/ton of CO2 in 2014 and rises to $10/ton of CO2 in 2017.
The program also allows for the limited use of CO2 offsets as a compliance option. RGGI program participants are permitted to cover 3.3% of their emissions using offsets. Although the RGGI caps have been lowered, it remains to be seen how much the new caps will affect generation choices and related emissions.
Recent federal environmental regulations modeled in AEO2014
The Mercury and Air Toxics Standards (MATS)  requires fossil-fuel steam electric generators to meet limits based on maximum achievable control technologies (MACT) to control emissions of acid gases, toxic metals, and mercury. The standards will take effect by April 2015 for electric generation units with capacities greater than 25 MW. The rule allows for state environmental permitting agencies to grant one-year compliance extensions, which AEO2014 assumes will be granted, and all applicable units must begin to comply with the rule at the beginning of 2016. AEO2014 assumes that, in order to comply with the rule, all qualifying coal-fired power plants will be equipped with either flue gas desulfurization (FGD) scrubbers or dry sorbent injection (DSI) systems and activated carbon injection if warranted for mercury control. The control equipment needed to reduce mercury is specific to each plant configuration and coal type .
MATS is currently being challenged in the U.S. Court of Appeals for the District of Columbia Circuit in White Stallion Energy Center et al. v. U.S. EPA . The case was heard in December 2013, and a decision is expected in the spring of 2014.
The Clean Air Interstate Rule (CAIR)  is a cap-and-trade program aimed at reducing emissions of sulfur dioxide (SO2) and nitrogen oxides (NOX) from fossil-fueled power plant units with capacities greater than 25 MW in 27 eastern states and the District of Columbia. The emissions caps went into effect in 2009 for NOX and in 2010 for SO2. Both caps are scheduled to be tightened in 2015. AEO2014 includes the CAIR cap-and-trade program for the applicable regions. The FGD scrubbers or DSI systems required by MATS result in SO2 emissions falling to levels lower than the CAIR cap. Therefore, after MATS is in full effect starting in 2016, SO2 emissions decline significantly below the CAIR cap, essentially making CAIR's SO2 cap nonbinding .
CAIR was reinstated after the Cross-State Air Pollution Rule (CSAPR) was vacated by the U.S. Court of Appeals for the District of Columbia Circuit in August 2012 . However, the U.S. Supreme Court agreed in June 2013 to review the D.C. Circuit Court's decision and heard the case in December 2013 . A court decision is expected in the spring of 2014. If the Supreme Court reverses the D.C. Circuit Court's ruling, CSAPR will replace CAIR.
- The nine participating RGGI states are Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, Delaware, and Maryland.
- California Environmental Protection Agency, Air Resources Board, "Assembly Bill 32: Global Warming Solutions Act" (Sacramento, CA: September 27, 2006), http://www.arb.ca.gov/cc/ab32/ab32.htm.
- U.S. Environmental Protection Agency, "Mercury and Air Toxics Standards (MATS)" (Washington, DC: last updated March 27, 2012), http://www.epa.gov/mats.
- U.S. Energy Information Administration, Assumptions to the Annual Energy Outlook 2013, DOE/EIA-0554(2013) (Washington, DC: May 2013), http://www.eia.gov/forecasts/aeo/assumptions. Table 8.8 indicates how much of a plant’s uncontrolled mercury emissions are removed by a specific configuration of environmental control equipment for a given coal type. The strategies used by coal plants to comply with the mercury, acid gases, and toxic metals are discussed in the documentation.
- White Stallion Energy Center, LLC, et al. v. United States Environmental Protection Agency, USCA Case #12-1100 (January 22, 2013), http://www.4cleanair.org/Documents/AdminBriefMATS.pdf.
- U.S. Environmental Protection Agency, "Clean Air Interstate Rule (CAIR)" (Washington, DC: December 19, 2012), http://www.epa.gov/cair/index.html#older.
- Further details on the modeling strategies for MATS and CAIR can be found in the forthcoming report, Assumptions to the Annual Energy Outlook 2014, and the forthcoming Electricity Market Module of the National Energy Modeling System Model Documentation 2014.
- United States Court of Appeals for the District of Columbia Circuit, EME Homer City Generation, L.P., v. Environmental Protection Agency, et al., No. 11-1302 (decided August 21, 2012), http://www.cadc.uscourts.gov/internet/opinions.nsf/19346B280C78405C85257A61004DC0E5/$file/11-1302-1390314.pdf.
- U.S. Environmental Protection Agency, United States Environmental Protection Agency, et al., v. EME Homer City Generation, L.P., et al., Petition for a Writ of Certiorari, http://www.epa.gov/airmarkets/airtransport/CSAPR/pdfs/EME_Homer_City_Pet.pdf.