Compliance with the Environmental Protection Agency (EPA) Clean Power Plan (CPP) will be less costly if states utilize a regional approach rather than trying to reduce carbon dioxide (CO2) emissions on a state-by-state basis, according to a PJM Interconnection study released Sept. 1.
Compliance cost, market prices and the impacts on specific groups of resources vary significantly by compliance pathway. However, regional compliance leads to lower costs than individual state compliance under both mass-based and rate-based compliance pathways, PJM said in the report.
The document is titled “EPA’s Final Clean Power Plan: Compliance Pathways Economic and Reliability Analysis.”
Regional compliance results in fewer retirements and less combined cycle gas new entry than individual state compliance due to the greater flexibility and options for emissions reductions offered across the entire PJM region, according to the study.
Levelized compliance costs range from $0.61/MWh for a regional compliance pathway to $1.93/MWh for a state compliance pathway that includes the regulation of both new and existing sources. These costs would be equivalent to 1.1% to 3.3%, respectively, of the average total wholesale cost of electricity, according to the report.
Cheap gas could hit nuclear harder without CPP
The same 100-page-plus also finds there is apt to be fewer nuclear retirements with the Clean Power Plan than without it.
With historically low natural gas prices in place now, nuclear resources are under the most economic stress, said Muhsin Abdurrahman, senior market strategist – Emerging Markets. But these same nuclear units should become more competitive in the 2020s under the EPA plan, he said.
In addition to the Organization of PJM States, Inc (OPSI)-requested sensitivities, PJM examined initial resource retirement decisions based only on a five-year horizon from 2018 through 2022. This model is intended to represent resource owners adopting a view that only the short-term (five-year) outlook prior to CPP compliance matters for these decisions.
Given the retirement decisions from the short-term outlook, the model was run assuming all resources take a longer view over the entire 20-year study period for entry and exit decisions.
Under these decision criteria, PJM could experience 6 GW of nuclear retirements by 2022 (in addition to the previously announced Exelon Oyster Creek Nuclear Station retirement included in the reference scenario) while coal-fired retirements could increase by less than 1 GW.
More nuclear retirements occurred in the five-year analysis than in the 20-year reference model, showing that nuclear resources would become economic in the long run.
“Nuclear retirements in the near term would result in increased CO2 emissions, and an increase in total generation costs, such that overall generation costs would increase by approximately 27¢/MWh under mass-based compliance or 30¢/MWh under rate-based compliance,” according to the PJM report.
The report states that, overall, the carbon dioxide emissions reduction goals of the CPP can be achieved within the PJM footprint under each of the seven compliance pathways studied without compromising the fundamental way in which the PJM market operates. It also states that, regardless of the compliance pathway, including sensitivities that PJM evaluated, resource adequacy can be maintained in the PJM footprint.
“PJM is an important resource that can help the states understand the effects of the Clean Power Plan, whatever their positions on the rule,” said Denise Foster, vice president – State and Member Services. “We provide an independent analysis on the potential economic and reliability impacts of rules and legislation.”
Foster stressed that PJM’s analysis is not a prediction of future market outcomes or of the decisions that resource owners may make.
“We, of course, don’t express a position,” on the CPP, Foster said during a conference call with reporters. “We have shared this report with our states,” Foster said. PJM has an ongoing dialogue with the states.
In its evaluation of the Clean Power Plan, PJM considered a reference scenario (without CPP impacts) and seven possible compliance pathways that state agencies might undertake to achieve the carbon dioxide targets in the final CPP.
The Clean Power Plan limits carbon dioxide emissions from existing power generation resources. The EPA also presented a federal plan, which is a backstop for the states if they do not act that details model rules for regional mass-based and rate-based emissions trading.
Rate-based compliance pathways result in lower wholesale energy but higher capacity market prices across the PJM footprint than the reference case and mass-based compliance pathways because resources with production subsidies submit energy offers below their cost of production.
Rate-based compliance results in higher capacity prices because lower energy market prices drive a greater reliance on the capacity market to provide revenues to generation resources to maintain resource adequacy. This results in increased economic challenges for existing nuclear resources.
Under mass-based compliance, all resources subject to the Clean Power Plan face an additional cost for emissions in the form of allowances, which results in energy market offers at least as great, or greater than, their actual fuel and variable operations and maintenance costs.
In August 2015, EPA issued the Clean Power Plan. In February of this year, the U.S. Supreme Court issued a “stay” of implementation of the rule while judicial proceedings continue. The federal court appeal is ongoing. The decision delays implementation that otherwise would have occurred during the appeals process.