Minnesota commission looks at continued usefulness of years-old CO2 externality rule

Dairyland Power Cooperative and Minnesota Power have a different take on the usefulness of a CO2 externality rule, with Dairyland telling the Minnesota Public Utilities Commission that the rule should be suspended because other state and national coal-killing rules have made it obsolete, while Minnesota Power finds the rule to be a useful planning tool.

The commission issued a notice July 23 seeking comments on the proposed 2012 update to the range of cost estimates for future cost of CO2 regulation of electric generation filed by the Minnesota Pollution Control Agency (MPCA) and the Department of Commerce Division of Energy Resources (DER) on July 19.

Dairyland said in Aug. 20 comments that it believes these externality costs have become obsolete as a regulatory matter, and asked for clarification as to what role—if any—the cost estimate should play in utilities’ integrated resource plans. Minnesota statute requires the commission to establish and annually update an estimate of the likely range of costs of future CO2 regulation on electricity generation. The cost estimate “must be used in all electricity generation resource acquisition proceedings.” The purpose of requiring the development and use of a CO2 cost estimate in resource acquisition proceedings is to account for the risk that the cost of new generation—and coal-fired generation in particular—could substantially increase over the 30-year life of any plant built today, Dairyland noted.

Regulatory developments since the commission’s establishment of an initial interim estimate and subsequent revisions to the range of cost estimates have greatly diminished the need for the estimate in resource acquisition proceedings, Dairyland noted.As of 2009, a state statute effectively imposed a moratorium on both new coal construction and imports of electricity from new coal plants.

“Recent federal regulatory developments also make it highly unlikely that new coal plants will be built in the foreseeable future,” Dairyland told the commission. “On April 13, 2012, the EPA published in the Federal Register standards of performance for all new fossil fuel-fired electricity-generating units requiring them to meet an electricity-output-based emission rate of 1,000 lb of carbon dioxide for every MWH of electricity generated. The only plants that can meet this standard without implementing costly carbon capture and storage technology are natural gas plants. The New Source Performance Standards are likely to end new construction of conventional coal-fired power plants as utilities will choose natural gas over coal. … The State of Minnesota moratorium on new coal plants, as well as EPA’s New Source Performance Standards, are sufficiently effective to prompt utilities to modify their resource plans regardless of the upper limit of the estimated range of likely CO2 costs arrived at by the Commission. As such, Dairyland disagrees with the comments of MPCA and DER which conclude that there have been ‘no significant changes’ to warrant re-evaluation of the current range of cost estimates.”

The commission decided in 2007 to begin applying the CO2 cost estimate to projected emissions from 2012 forward, based on the 2012 implementation date of the “most active federal bill addressing CO2 emissions—the America’s Climate Security Act of 2007.” The rationale for using a 2012 effective date was not substantively re-evaluated in the commission’s successive orders in 2009 and 2011. That bill, also known as the Leiberman-Warner bill, died in the Senate in 2008. A successor bill, the American Clean Energy and Security Act (Waxman-Markey), met a similar fate. “Since that time, EPA rulemaking has been the major focus of regulatory efforts to control greenhouse gases, and the consensus of most commenters is that climate change legislation has been indefinitely delayed due to economic and political conditions,” Dairyland noted.

Dairyland concluded: “Given that the 2012 date has no basis in any current federal legislative initiative, and that there is no more recent legislation that could reasonably be used to mark the anticipated effective date such costs would begin to be incurred, Dairyland believes that application of the CO2 cost estimate should be suspended.”

Minnesota Power says rule is a useful resource planning tool

Minnesota Power, on the other hand, said in its own Aug,. 20 comments that it believes that the most accurate approach the commission can take is to update the previously approved ranges in the CO2 plan, adjusted for inflation. Until federal legislation is enacted and more specific regulatory costs are known, Minnesota Power said it also believes the commission should update the start date for applying these ranges to no earlier than 2021. This date reflects the continued regulatory uncertainty around carbon policy, Minnesota Power noted.

Minnesota Power is part of Allete (NYSE: ALE).

As was recently discussed in Minnesota Power’s 2010 Integrated Resource Plan and the evaluation of its Baseload Diversification Study, carbon assumptions, including their dollar level and particularly their timing, are a key determinant of baseload modeling outcomes, the utility noted. If the commission continues to require carbon valuation numbers be applied on all resource planning decisions, the date for application should again be prospective and be updated to reflect when the commission reasonably expects it is likely that carbon regulations will actually begin affecting electricity costs, given the continued and even greater policy uncertainty around CO2 penalties at this time, Minnesota Power said.

“A reasonable projected starting date for carbon cost assumptions is essential to maintain the integrity of resource planning,” the utility argued. “Unwarranted and potentially grossly incorrect timing for carbon assumptions would skew resource cost calculations and lead to false comparisons of resource choices, masking the facts regarding what are the most economic choices for customers and likely leading to unnecessarily higher rates.”

Using a 2013 start date, as suggested by the MPCA and the department, for a carbon penalty unnecessarily and falsely increases resource cost estimates for the near term, Minnesota Power said. Given the state of play on carbon at the federal level, Minnesota Power suggested in its Baseload Diversification Study that a reasonable date is 2021, based in part on analysis done by Cambridge Energy Research Associates. The carbon penalty assumption was identified as a critical factor that drove resource recommendations in the environmental scenarios of Minnesota Power’s Baseload Diversification Study.

The current policies are clearly propelling a transition in the state’s energy supply to a lower greenhouse gas emission basis, as utilities significantly increase their generation supplies of renewable energy, said the utility. These renewable additions are evidence there is no need for an aggressive date for carbon assumptions to be applied. “Finally, Minnesota Power respectfully requests that the Commission make a determination on CO2 cost application that can be utilized in its next Integrated Resource Plan to be filed by March 1, 2013,” it added. “The assumption around carbon will be an area of emphasis in this resource plan, specifically as the Commission considers decisions on the futures of Laskin Energy Center and Taconite Harbor Unit 3.”

Those are coal-fired facilities that the utility is looking at whether to retrofit or retire due to age and clean-air needs. The utility has told the commission that in CO2 planning scenarios, Laskin and Taconite Harbor 3 are retired in 70% of scenarios under base assumptions (CO2 regulation starting in 2021) and 50% of scenarios under no carbon regulation.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.