Abby L. Harvey
GHG Monitor
12/5/2014
Because of the many variables created by the flexibility of the Environmental Protection Agency’s proposed carbon emissions standards for existing coal-fired power plants, developing an accurate estimate of the costs of implementing the plan is extremely difficult, according researchers from the Electric Power Research Institute and Resources for the Future presenting during a webinar hosted by RFF this week discussing the regulatory design of the proposal. The proposal, dubbed the Clean Power Plan, sets state-specific carbon emission reduction targets and requires states to develop action plans to meet those targets. Because of the many ways a state could meet their target and the effect that one state’s action could have on their neighbors due the interconnectivity of the electricity system, trying to assess the costs of implementation can result in a wide range of estimates. This is apparent in analyses released since the rule was proposed which range from net benefits to billions of dollars lost. “There will be a lot of numbers out there … to understand and learn from that you really have to work pretty hard,” Tom Wilson, senior program manager with EPRI explained.
Wilson addressed three analyses currently in circulation, the EPA’s own Regulatory Impact Analysis, an analysis done by the Natural Resources Defense Council and one done by National Economic Research Associates (NERA) Economic Consulting. The EPA estimates that compliance would cost $7.3 billion to $8.8 billion annually while NERA’s analysis reports costs of $366 to $479 billion between the years of 2017-2031. The NRDC estimates net benefits from implementation “because the cost of providing energy efficiency is lower than the savings you get from reducing electricity generation,” Wilson explained. The wide range in estimates is due to a few key factors, Wilson said. “Analysts ask different questions, they take different perspectives,” he said. “The other thing is the proposal is always changing, we already know that EPA has released [Notices of Date Availability], we all know they’re thinking about changes. Whenever you see analyses you have to check when they were released and what kind of policy they’re trying to look at. They can assume fundamentally different views on technology costs and rates of deployment.”
All three of the analyses take into account energy efficiency, but treat it differently and make different assumptions about the technology which contributes to the wide-range of uncertainties in implementation cost. “EPA basically subtracted energy efficacy off the top, it wasn’t part of the optimization in the model. It just assumed that a certain amount was available for a certain cost … comparing NRDC and NERA estimates to the EPA estimate basically both of them modeled energy efficacy endogenously,” Wilson explained. “NRDC assumed lower costs than EPA for renewable energy and efficiency; basically they were 50 to 80 percent lower than what EPA assumed. NERA assumed costs that were 60 to 70 percent higher for energy efficiency than EPA assumed. Both are based on published studies. They’re both based on … data that’s out there, so that’s part of the idea that there’s a wide variety of views on what energy efficiency might cost and when it might be available.”
The NERA model further differs from the others in that the high-end estimate is addressing a different variable than the EPA and NRDC estimates. The proposed regulations suggest a path to emissions reductions using four “building blocks”—heat rate improvements at the coal units, increased use of natural gas units, increased use of renewable and nuclear energy and demand-side energy efficiency. However, the legality of the “out-side-the-fence” measures in the last two building blocks has been questioned and many states have noted policy-based constraints within their state governments which would make them unable to implement the last two building blocks; renewables/nuclear and demand-side energy efficiency. For this reason, NERA examined the economic impact of the regulation in two scenarios, one in which all four building blocks could be utilized and one in which only the first two building blocks could be implemented. “Their question is basically, what if building block three and four can be used for setting the target, but cannot be used for compliance and so they actually have to achieve the targets EPA handed out using just power plant efficiency improvement and fuel switching,” Wilson explained.
Flexibility Essential but Leads to Cost Uncertainty
Because the plan takes a state-by-state approach while the electricity systems in the U.S. do not follow state boarders, what is done in one state is likely to affect those states around it. However, the flexibility that is built into the rule is necessary because each state has a unique set of circumstances so what works for one state may not work for another, Dallas Burtraw, Darius Gaskins Senior Fellow with RFF said. “The role for flexibility [is] in ensuring the cost that is achieved is as low as possible. It’s going to be crucial going forward for the Clean Power Plan to offer maximum flexibility to the regulated parties and to the states because it is so difficult to anticipate the way that costs are going to change in the future and where the uncertainties are. The costs of the Clean Power Plan are uncertain for all the usual reasons like fuel prices and demand and technology changes and because the rule isn’t final yet, but even within the construction of the proposed rule the costs are uncertain,” Burtraw said.
