Abby L. Harvey
GHG Monitor
11/21/2014
The U.S. energy market will change as a result of the proposed Environmental Protection Agency carbon emissions standards for existing coal-burning power plants, likely resulting in increased use of natural gas, according to an analysis released this week by the Center for Strategic and International Studies and the Rhodium Group. The EPA’s proposal, dubbed the ‘Clean Power Plan,’ would set emissions reduction targets for each state and require the states to develop implementation plans to reach these targets. “The ability to meet CPP emission rate targets at relatively modest cost to consumers can be distilled into four words: cheap, abundant natural gas,” the report says, explaining further that the study “demonstrates that natural gas is likely to be the primary supply- side compliance option through which states and regions meet their CPP emission rate targets … The CPP proposal is silent about the role that natural gas will play in the electric system beyond 2030, and it is not clear where natural gas will fit or what kind of role it will play if steeper emissions reductions are required to meet long- term GHG reduction goals.”
Two variables were taken into consideration in the report, the level of cooperation among the states in developing and implementing plans and to what percent energy efficiency is credited. Cooperation between the states is significant, the study finds, because of the interconnectivity of electric markets which do not follow state lines. For this reason, the actions of one state will affect the states around it. “We chose these in large part because we had a sense that they would be important granted the market implications,” John Larson, Senior Analyst at the Rhodium Group said during an event hosted by CSIS for the report’s release. “So we have four policy scenarios … with regard to energy efficacy crediting, we’ve got all the states either crediting … or no states use crediting as part of their state plans. And the other variable, the cooperation, we put out a single national tradable performance standard, which is kind of the gold standard for cooperation that would definitely be a big undertaking under the Clean Power Plan or you have a regional fragmentation where we use the electric market regions … and each individual region has to reach its own emissions rate goal on its own.”
Natural Gas Use Likely to Increase
Analyzing those scenarios, the group came to several conclusions about the effect of the Clean Power Plan on U.S. energy market, specifically related to natural gas. “Because natural gas is relatively cheap there is a lot of dispatch in the country that’s kind of on a razors edge where the marginal economics between coal and natural gas are very small which means that small changes in power market incentives can have a big impact on dispatch,” Trevor Houser, partner at the Rhodium Group, said at the event. “That emissions standard that is proposed in the Clean Power Plan shifts the incentive in favor of natural gas in a way that leads to pretty large change in dispatch.” The reason for that market shift is due, in part, to low natural gas costs, a large fleet of natural gas combined cycle power plants and the fact that such new-build plants are relatively inexpensive. “We see that dynamic across all of our policy scenarios, the magnitude just changes,” Houser said.
That shifting market incentive follows through when energy efficiency is considered, according to the study, though to a lesser extent as the use of energy efficiency reduces the need to cut back on coal use to meet the EPA’s targets. “If states credit efficiency as a compliance mechanism that means you have to do less fuel switching so the downside for coal generation is smaller and the upside for natural gas generation is smaller, but in all of those scenarios gas remains the least cost compliance pathway,” Houser said.
New Infrastructure Needed
The report also finds that under all their scenarios, new infrastructure would need to be built to cost-effectively meet the goals in the proposed rule. “If natural gas is to play a growing role in electricity generation, as forecast in our scenarios, cheap, abundant gas is a necessary condition but not a sufficient one. The unprecedented pace and scale of domestic natural gas production has resulted in a need for rapid changes in the U.S. natural gas infrastructure system. In order to seamlessly and cost- effectively incorporate more natural gas into the U.S. electric system, the necessary infrastructure— pipelines, pumping stations, gathering lines, and so forth— will need to be in place in a timely fashion,” the report finds.
