Exelon (NYSE:EXC), due to its heavy amount of nuclear generation, stands to reap enormous profits from the U.S. Environmental Protection Agency’s Cross-State Air Pollution Rule (CSAPR), while coal-fired generators like EME Homer City Generation would need to shut in at least some of their capacity to meet the rule.
Scott Wilson, the Managing Director of Analytics for Edison Mission Marketing and Trading, made that contention in Sept. 16 testimony filed at the U.S. Court of Appeals for the D.C. Circuit. That appeals court decided on Dec. 30 to stay the effect of the rule, which had been due to take effect Jan. 1, while further arguments about the merits of the rule are made.
The appeals court, in a case where a number of appeals of EPA rulemaking had been combined, said that EPA is expected to continue administering the Clean Air Interstate Rule, which CSAPR replaced, pending the court’s resolution of petitions for review. The request to designate the case as “complex” was granted. The parties were ordered to submit by Jan. 17, 2012, proposed formats and schedules for the briefing of these cases that would allow the cases to be heard by April 2012.
EME Homer City Generation is an indirect subsidiary of Edison Mission Energy (EME), an independent power producer controlled by Edison International (NYSE:EIX). EME Homer City operates one of the largest coal-fired power plants in western Pennsylvania, the 1,884-MW Homer City station.
EME Homer City has spent over a quarter of a billion dollars over the past decade to install NOx and SO2 emission controls, Wilson noted. In 2003, it installed NOx controls that have resulted in reductions of about 68,000 tons of NOx. In 2001, it installed flue gas desulfurization (FGD) on one of the plant’s three units to control SO2. The FGD has resulted in emissions reductions of about 170,000 tons of SO2 and 2,500 pounds of mercury, with mercury emissions at a rate within the range of 0.5 to 0.9 Ibs/TBtu. As a result of its emission reduction efforts, Homer City is not even in the top 30 power plants with regard to its rate of SO2 emissions during 2010, Wilson said.
Another EME subsidiary, Midwest Generation, has also taken costly steps to control emissions at its Illinois coal plants. In 1999, Midwest Generation purchased from Exelon six uncontrolled coal plants. It has since spent $1.5bn to install emissions controls on these plants. For example, in 2008 and 2009, Midwest Generation installed at those plants activated carbon injection (ACI) for mercury controls. Since those controls were installed, Midwest Generation has reduced mercury emissions by 862 pounds though the end of 2010. Midwest Generation has also installed or is installing state-of-the-art controls to reduce NOx and SO2 emissions at its plants.
EME has also assisted in reducing emission through the purchase of allowances under the Clean Air Interstate Rule and other cap-and-trade programs, including the Acid Rain Program and the NOx SIP Call. Congress and EPA intentionally designed these programs so that the most costly controls would only be installed on a subset of plants that were the most cost-effective to control. Because these programs allowed sufficient lead-time for companies to develop their control strategies and distributed allowances equitably based on historic levels of operation, all plants could choose whether to install controls or purchase allowances, Wilson noted.
Plants without advanced controls have been required for many years to purchase allowances from those that do have them. For example, between 2003 and 2011, EME Homer City purchased over $285m of SO2 allowances. This is about equal to the cost of one FGD for a mid-sized coal plant in 2011 dollars. In this way, EME Homer City shared in the cost of controls that were installed on other plants, Wilson argued.
Unscrubbed plants would see huge cost hike
“The Transport Rule will increase the marginal cost of running the plant at EME Homer City,” Wilson testified. “Based on our internal modeling, the unscrubbed EME Homer City units 1 and 2 may only be able to run 25% of the time. EPA’s assertion to the contrary is based on unrealistic model inputs. EPA’s model shows two of EME Homer City’s units emitting approximately 87,000 tons of SO2 under the Transport Rule. EPA also shows that Pennsylvania does not violate its variability limit. In EPA’s comparison of Homer City’s emissions under the Transport Rule and the base case, the model implies that Homer City can reduce SO2 by switching from higher-sulfur bituminous coal to lower sulfur bituminous coa. EPA’s model implies that there are large amounts of low-sulfur bituminous fuel available for sale at a cost of approximately $2.00 per mmBtu. That estimate is much lower than current prices. Low sulfur bituminous coal is currently selling for $3.26 per mmBtu. When the actual price and availability of low sulfur bituminous coal are factored in, it is clear that this compliance approach does not make it viable to operate Homer City at historic levels.”
Another underlying factor that Wilson didn’t get into is that while low-sulfur coal bituminous coal from Central Appalachia is generally more expensive at the mine than the Northern Appalachia coal from nearby mines that Homer City normally burns, there is also the cost to transport that low-sulfur coal from more distant mines.
Wilson noted that Luminant Generation Co. LLC, which like EME had also filed a petition for review and requested a stay of the Transport Rule, announced in September 2011 that it will be forced to shut down two generating units in Texas with a capacity of 1,200 MW at its Monticello plant. Luminant also announced plans to stop mining high-sulfur lignite at several of its mines in Texas, and to use coal instead from the Powder River Basin in Montana and Wyoming at Monticello Unit 3 and Big Brown Units 1 and 2.
CSAPR would alter power dispatch curves
“The Transport Rule may also fundamentally change how electricity is dispatched in the market and thereby increase the price of electricity,” Wilson said. Each competitive electricity market in the country has an independent system operator (ISO) which is responsible for determining which electricity generating units run on any given day at any given hour to meet demand. The ISO for the Mid-Atlantic region in which EME Homer City is located is PJM Interconnection. PJM forecasts an electricity load for each hour of every day, incorporating a reserve margin in case electricity demand is higher than anticipated. Also, PJM receives offer curves from each generator in the region, offering to dispatch electricity from the generator’s assets for a specified price per asset. In simplest terms, PJM sorts those dispatch offers from lowest to highest cost. The highest cost unit which is dispatched in that hour sets the electricity price which is paid by consumers, and at which all generators are paid for generating during that hour, Wilson noted.
CSAPR would change how electricity dispatch occurs in one of either two core ways. First, if a unit lacks sufficient allowances to operate, and can’t purchase those allowances, it must raise its offer so that the ISO dispatches higher marginal cost units to satisfy its demand and reserve requirements, Wilson said. Electricity prices will rise for consumers, while the generator will incur a loss in revenue because its unit cannot generate.
Second, if a unit purchases allowances to enable it to run, that allowance price must be factored into the dispatch cost for the unit. EME Homer City estimates, based on EPA’s predicted allowance prices, that the cost of allowances will substantially increase electricity prices for units without additional controls. As an example, if unscrubbed coal today costs an estimated $30/MWh to dispatch, while scrubbed coal costs approximately $32/MWh, once the Transport Rule takes effect, the cost of unscrubbed coal could jump to as high as $45/MWh. “As such, the ISO would not dispatch those units so long as it can meet its demand and reserve requirements by dispatching other generating units with a lower marginal cost,” Wilson noted. “The net result, again, is that the unit with a Transport Rule shortfall is dispatched less frequently – even if it has purchased sufficient allowances – and electricity prices rise for consumers, while the generator incurs an irrecoverable loss in revenue because its unit cannot generate.”
Exelon, a big proponent of CSAPR, as of 2009 was about 93% nuclear and is shutting down its only coal plants, located in Pennsylvania, in 2011 and 2012, Wilson noted. “The remainder of Exelon’s generation fleet is primarily gas-fired and needs very little in terms of emissions controls to comply with the Transport Rule,” Wilson added.
Nuclear power is substantially less expensive to generate than either gas or coal. For example, the average cost of nuclear dispatch is $10/MWh. By comparison, unscrubbed coal cost about $30/MWh before the Transport Rule, but $45/MWh if the Transport Rule takes effect, while scrubbed coal costs about $32/MWh, Wilson said. “Lower cost plants are more likely to be dispatched and are more profitable when they are dispatched, due to the higher spread between operating costs and the market clearing price,” he added. “As an operator of the low-cost assets, Exelon’s nuclear fleet will always dispatch, and as the market clearing price increases under the Transport Rule, Exelon will make enormous profits from those assets without having to invest in any emissions controls.”
In 2010, Exelon had about 172 million MWh of nuclear generation, Wilson noted. For every $1/MWh (or $0.001 kWh) increase in power price due to the Transport Rule, Exelon will gain $172m in revenue without any additional investment or operating cost. For every $0.01 kWh increase in power prices due to the Transport Rule, Exelon will gain $1.7bn in revenue, Wilson added.