Regulated utilities should survive CO2 plan, Bernstein says

Two Environmental Protection Agency (EPA) rules being challenged in the courts pose different degrees of risk to segments of the energy sector, according to recent research on the legal challenges by AllianceBernstein.

The Bernstein affiliate said April 9 that it recently completed a detailed review of court cases challenging both the EPA Clean Power Plan (CPP) to cut carbon emissions as well as the Mercury and Air Toxics Standards (MATS) proposal.

To do this, Bernstein held meetings with senior legal officials form EPA, the Edison Electric Institute (EEI), the Natural Resources Defense Council (NRDC) and the National Association of Clean Air Agencies (NACAA).

In the event that EPA were to suffer defeats in both Murray Energy versus EPA and Michigan versus EPA the setbacks would effectively cripple both the CPP and MATS, and “the regulatory outlook for the industry would be radically changed,” Bernstein said.

“In this scenario, total coal plant retirements could be limited to the 33 GW we estimate would be triggered by [Cross-State Air Pollution Rule] CSAPR’s 2017 emissions caps – well below the 70 GW we estimate would be required by MATS and the ~100 GW NERC estimates would be required by the combination of MATS and the CPP,” Bernstein said.

MATS retirements mostly set in motion

The biggest variable is what happens on CO2 challenges, Bernstein said. The die is already cast on many MATS-related retirements.

“Faced since December 2011 with compliance obligations under MATS that were uneconomic for many of their coal fired plants to meet, utilities have worked with their state regulators to ensure recovery of their remaining investment in these units, and to authorize new investment in replacement generation or transmission capacity,” Bernstein said.

Having reached MATS settlements with their states on coal retirements, most utilities would see “little net advantage” in postponing scheduled retirements, Bernstein said.

The research firm noted that most U.S. electric and gas utilities are not actively challenging the EPA CO2 rule in court. The final version of the rule won’t actually come out until this summer.

“As long as the final version of the CPP address utilities’ concerns as to system reliability and compliance deadlines, many power and gas companies are likely to benefit from the Plan,” Bernstein said.

“By forcing increased investment in gas fired generation and gas transportation and storage capacity, the CPP would drive rate base growth for regulated utilities in an era of stagnant power demand,” Bernstein said. Certain competitive generators with low-emitting fleets stand to benefit from CO2 emission limits, Bernstein said.

But coal producers and states that either mine lots of coal or rely heavily on coal-fired generation are taking the lead in court challenges.

“Specifically, Murray Energy v. EPA and West Virginia v. EPA present compelling arguments that EPA has exceeded its authority by seeking to regulate CO2 under section 111(d) of the Clean Air Act,”

An EPA loss on legality of the Clean Power Plan would leave EPA with no other regulatory authority under the Clean Air Act that would permit effective regulation of CO2 from existing power plants. “CO2 is not toxic, and so cannot be regulated under section 112 of the Act, nor are the tools available to EPA under sections 108 through 110 of the Act (the National Ambient Air Quality Standards) ones that could effectively be used to regulate CO2 emissions from existing plants.

But an adverse decision in Murray Energy, or similar suit challenging EPA authority under 111(d) “would not stop the agency from regulating CO2 emissions from new power plants.” Emissions of new units are regulated under 111(b) rather than 111(d) and would thus remain in place.

Similarly, the U.S. Supreme Court review of Michigan v. EPA could result in the remand of MATS and, potentially, an EPA decision to withdraw the rule.

A Supreme Court decision remanding MATS back to the EPA for a proper assessment of the costs of regulating power plant emissions of hazardous air pollutants could ultimately result in an EPA finding that the cost of MATS exceeded its benefits, forcing the rule to be withdrawn.

That would buy coal interests some time.

“In the medium to long term, however, none of the representatives of the U.S. power industry that we met in Washington felt that the Supreme Court’s decision in Michigan v. EPA would have a material impact on the industry. They point out that even if the industry were to be relieved of the burden of complying with MATS, it would still face the need to comply with the EPA’s Cross-State Air Pollution Rule (CSAPR).”

“To comply with Cross-State’s 2017 emission limits on SO2 and NOx, we calculate that U.S. generators would likely find it cheaper to shut, rather than upgrade, ~33 GW of coal fired capacity. This is equivalent to almost half of the 70 GW of coal fired capacity that we expect to be retired due to MATS,” Bernstein said.

The Bernstein analysis notes that coal retirements from the Clean Power Plan would be far more than retirements expected under MATS.

“The EPA’s own Regulatory Impact Analysis of the CPP estimates that the rule will force a further 49 GW of coal fired capacity to retire by 2020, in addition to the retirements triggered by MATS, if states are to meet EPA-imposed limits on CO2 emissions,” Bernstein said.

The research was led by Bernstein Senior Analyst Hugh Wynne. AllianceBernstein and Bernstein Research are affiliated with Sanford C. Bernstein & Co., LLC.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.