Shaping the Future of Fossil Fuels on the Electric Grid - Energy Institute at Haas

Shaping the Future of Fossil Fuels on the Electric Grid - Energy Institute Blog

Shaping the Future of Fossil Fuels on the Electric Grid

The EPA’s proposed power plant rules include features that deserve more economic analysis.

Last week the EPA published a draft of the next chapter in the federal government’s efforts to reduce greenhouse gas emissions from power plants despite congressional inaction. The EPA’s proposed rule draws from several areas of legal authority and navigates recent court cases to require existing and new fossil fueled power plants to dramatically reduce greenhouse gas emissions.

The EPA is asking for public input on its proposal. While the proposal has only been out for days, I wanted to take the opportunity to highlight several areas where I hope the EPA, economists and other stakeholders will take a close look.
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Much of the immediate political pushback that has appeared in the press has focused on the requirements that coal power plants that do not retire before 2040 must add carbon capture and storage. Proponents of coal say the regulations will force the closure of the remaining plants and harm the economy. But coal is already on the way out. The EPA projects that 80% of current coal power plant capacity will shut down by 2035 even without the new regulations. Yes, the rules could accelerate retirements and raise the costs of plants that remain, but the much bigger impact of the regulations will be on natural gas power plants, the ascendent fossil fueled plants on today’s grid.

In the new proposal, the EPA projects that 309 gigawatts of new natural gas capacity will come on-line by 2050. This represents thousands of new power plants. The regulations will require many of these plants to install carbon capture and storage or burn clean hydrogen. Hundreds of existing plants could face similar requirements. In short, with these new regulations, the future of the natural gas power plant fleet will look very different than the past.

Several parts of the regulations raise questions about their impact on the natural gas fleet.

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Treating the New Differently from the Old

The proposed rules cover existing and new power plants, but the old and new power plants are not all treated the same. New plants would have to achieve lower emissions rates per unit of energy production than older plants. Such “vintage-based” standards are very common in energy and environmental regulation. Fuel economy standards, building codes and appliance standards are examples of regulations that apply to new capital investments, but not past investments. These rules often have an engineering and cost logic that it is cheaper to build efficiency into a new product than to retrofit what came before. However, research has shown these kinds of regulations can have impacts that ripple through the market and provide an incentive to prolong the life of the older, dirtier technology, thus undermining the regulations. The concern here is that the EPA’s stringent requirements on new natural gas power plants lead owners to extend the life of older, dirtier plants that are less regulated. As the EPA evaluates whether and how to harmonize the requirements faced by existing and new power plants, they should carefully consider the degree to which this could occur, the consequences and possible remedies.

Frequent and Infrequent Polluters

The proposed rules categorize each new natural gas power plant based on its annual capacity factor – the percentage of time it operates during a year. Plants with high capacity factors face more stringent emissions requirements than low capacity plants. For example, peakers that operate less than 20% of the time would not be subject to carbon capture or clean hydrogen requirements.

This is another area where the rules could create incentives that undermine their intent. The uneven compliance costs could push investment toward plants that would run less frequently and, therefore, be less regulated. The rules could also impact how plants, once built, would be operated. Today’s natural gas power plant fleet has been extremely flexible in the face of changing market conditions. This flexibility has benefited the climate. As coal power plants have closed, the generation lost has been met partly by increasing production from cleaner natural gas power plants. The role that natural gas plants have played is constantly changing as more wind, solar and battery storage has come onto the grid, and the availability of those resources changes from day-to-day. Introducing regulatory rules that reduce the responsiveness of natural gas plants to grid changes could undermine progress in reducing greenhouse gasses.

The EPA should consider how the regulations can further address these risks, such as by eliminating the sharply defined categories based on capacity factor.

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The Costs of Inflexibility

The cost to decarbonize fossil fueled power plants is highly uncertain. Investments in carbon capture and storage, as well as clean hydrogen, have been limited to date, but much more will be learned over time. The costs will likely also vary considerably from one plant to the next. For carbon capture and storage, suitable geology is needed for carbon storage. For clean hydrogen, proximity to renewable generation and/or hydrogen pipelines will be needed.

The technology uncertainty and variability between plants creates a good setting for applying flexible regulatory approaches. A flexible approach could allow a natural gas plant that can generate low emissions electricity at a low cost to be rewarded for over-complying with the regulation, and this over-compliance can allow a plant without the same low cost opportunity to be developed and operate even if does not quite meet the emissions requirements. In other words, flexible regulations could encourage more rapid investments into the lowest cost solutions and generate the same total climate benefit.

The EPA is not proposing much flexibility at this point. Instead they are hoping that varying the stringency of emissions requirements based on power plant characteristics (new vs. old, high capacity vs. low capacity, big vs. small) will approximate the cost-benefit trade-offs that individual power plant owners and developers would make. I am not confident that the EPA’s crystal ball gets it right. The proposed rule asks for comments on whether or how compliance flexibility can be added to the rules, but suggests this will be difficult given legal constraints.

The coming weeks and months will be a critical period to dig into these issues and develop responses that increase the effectiveness of the EPA’s plan.

Suggested citation: Campbell, Andrew, “Shaping the Future of Fossil Fuels on the Electric Grid”, Energy Institute Blog, UC Berkeley, May 15, 2023, https://energyathaas.wordpress.com/2023/05/15/shaping-the-future-of-fos…

Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.

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Andrew G Campbell View All

Andrew Campbell is the Executive Director of the Energy Institute at Haas. Andy has worked in the energy industry for his entire professional career. Prior to coming to the University of California, Andy worked for energy efficiency and demand response company, Tendril, and grid management technology provider, Sentient Energy. He helped both companies navigate the complex energy regulatory environment and tailor their sales and marketing approaches to meet the utility industry’s needs. Previously, he was Senior Energy Advisor to Commissioner Rachelle Chong and Commissioner Nancy Ryan at the California Public Utilities Commission (CPUC). While at the CPUC Andy was the lead advisor in areas including demand response, rate design, grid modernization, and electric vehicles. Andy led successful efforts to develop and adopt policies on Smart Grid investment and data access, regulatory authority over electric vehicle charging, demand response, dynamic pricing for utilities and natural gas quality standards for liquefied natural gas. Andy has also worked in Citigroup’s Global Energy Group and as a reservoir engineer with ExxonMobil. Andy earned a Master in Public Policy from the Kennedy School of Government at Harvard University and bachelors degrees in chemical engineering and economics from Rice University.