what electric utilities should do to prepare for major ...€¦ · national energy modeling system...

What Electric Utilities Should Do to Prepare for Major Environmental Regulations

David Harrison, Ph.D., Senior Vice President

LSI Electric Utility Rate Cases ConferenceFebruary 3, 2012

1© 2012 National Economic Research Associates, Inc.

Agenda

Background and Motivation

Five Key Questions

Major Environmental Regulations

Modeling National Energy Market Impacts

Utility Decisions on Compliance Plans, Resource Planning and Retirement, and Ratemaking

Concluding Remarks


Background and Motivation

Major air quality and other regulations– Air emissions (CSAPR, Utility MACT, NAAQS for

Ozone, PM/PM2.5, Regional Haze)

– Other (316(b), Ash, potential CO2)

These regulations promise to have major impacts on utility costs—directly from compliance costs/retirements and indirectly through cumulative energy market impacts—and thus on rates

Motivation for talk—utilities should address five key questions


Five Questions Every Electric Utility Should Address

1. What major environmental regulations will be put in place?

2. What are the likely cumulative impacts on national and regional energy markets?

3. What are the technology/compliance options—and the potential costs—for these regulations?

4. How will these potential costs and impacts affect plant retirement decisions and resource planning?

5. How should utility rates be set in light of these decisions and cost impacts?


Four Major Environmental Regulations Affecting Electric Utilities

Cross State Air Pollution Rule (CSAPR)– Requires 27 Eastern states to reduce power plant sulfur

dioxide (SO2) and nitrogen oxides (NOx) emissions

Utility MACT– Requires existing oil- and coal-fired power plants to reduce

emissions of mercury and other hazardous air pollutants

Coal Combustion Residuals (Ash)– Proposed rule to regulate residuals either as “special

waste” (Subtitle C) or non-hazardous waste (Subtitle D)

Cooling Water Intake (316(b))– Proposed rule to reduce impingement and entrainment,

possibly involving retrofit to provide closed-cycle cooling


Integrated Modeling Framework to Model Energy Market Impacts

Energy Market Model(e.g., NEMS, PROMOD)

NERA Generation UnitRetirement Model

NERA ComplianceCost Model


NERA Compliance Cost Model

NERA ComplianceCost Model

Inputs

Environmental regulatory requirements

Current environmental controls at each generation unit

Capital costs of compliance alternatives

O&M costs of compliance alternatives

Power losses during construction for compliance alternatives

Power losses during operation for compliance alternatives

Outputs

Identification of optimal compliance strategy for each unit

Costs of optimal compliance strategy

Power losses for optimal compliance strategy


Coal Natural Gas Coal Natural Gas

Cos

ts (m

illio

n $)

Market Purchases

Fuel

Variable O&M

Fixed O&M

Capital: Controls

Capital: Plant

NERA Generation Unit Retirement Model

The NERA Generation Unit Retirement Model compares expected future costs of a coal-fired generation unit—including future environmental controls—to the expected costs of replacement capacity (typically natural gas combined cycle)

– Incorporates uncertainty in key inputs (e.g., fuel prices, capital costs for controls)

In the example below, the coal unit should retire rather than comply with the environmental regulations because expected future costs are less with new natural gas unit

Reference Case Regulations Case


National Energy Modeling System (NEMS)

NEMS is developed and maintained by the U.S. Energy Information Administration (“EIA”) to provide projections of domestic energy-economy markets in the long term and perform policy analyses requested by decision-makers in the White House, Congress, Department of Energy, and other government agencies. These projections are also used by analysts and planners in other government agencies and outside organizations.

For each fuel and consuming sector, NEMS balances the energy supply and demand, accounting for the economic competition between the various energy fuels and sources.

CONVERSIONSUPPLY DEMAND

NEMS

Integrating

Module

International Energy Module

Macroeconomic Activity ModuleOil & Gas

Supply Module

Gas Transmission &

Distribution Module

Coal Market Module

Renewable Fuels Module Electricity

Market ModulePetroleum

Market Module

Industrial Demand Module

Transportation Demand Module

Commercial Demand Module

Residential Demand Module

CONVERSIONSUPPLY DEMAND

NEMS

Integrating

Module

International Energy Module

Macroeconomic Activity ModuleOil & Gas

Supply Module

Gas Transmission &

Distribution Module

Coal Market Module

Renewable Fuels Module Electricity

Market ModulePetroleum

Market Module

Industrial Demand Module

Transportation Demand Module

Commercial Demand Module

Residential Demand Module

Source: EIA


Potential Electricity Sector Costs ($Billions) of Four Major Environmental Regulations (2012-2020)

Note: Present value (PV) of compliance costs from 2012 through 2020 are discounted to January 1, 2011 using a real annual discount rate of 7 percent.

Source: D. Harrison, A. Foss, J. Johndrow, E. Meehan, B. Reddy and A. Smith, Potential Impacts of EPA Air, Coal Combustion Residuals, and Cooling Water Regulations, prepared for American Coalition for Clean Coal Electricity, September 2011.

Annual Avg PVEnvironmental Controls $15 $89Replacement Capacity $2 $11Fuel $5 $28Total $21 $127


Average Energy Market Impacts of Four Major Environmental Regulations (2012-2020)

Note: Coal retirements are cumulative from 2010 through 2020.Annual average costs are based on the present values and discounting.

Source: D. Harrison, A. Foss, J. Johndrow, E. Meehan, B. Reddy and A. Smith, Potential Impacts of EPA Air, Coal Combustion Residuals, and Cooling Water Regulations, prepared for American Coalition for Clean Coal Electricity, September 2011.

Coal Retirements

Coal-Fired Generation

Coal Price at Minemouth

Gas-Fired Generation

Gas Price at Henry Hub

Avg Retail Elec Price

(GW) (million MWh) (2010$/ton) (million MWh) (2010$/MMBtu) (2010$/MWh)

Reference 3.1 1,911 $33.54 639 $4.48 $86.87CSAPR+MACT+CCR+316(b) 42.2 1,699 $31.61 765 $4.95 $92.52

CSAPR+MACT+CCR+316(b) +39.1 -212 -$1.93 +126 +$0.48 +$5.65

CSAPR+MACT+CCR+316(b) +1241% -11.1% -5.7% +19.7% +10.7% +6.5%

Change from Average of 2012-2020 Reference Projections

% Change from Average of 2012-2020 Reference Projections

Average of 2012-2020 Projections


Four Major Environmental Regulations Would Decrease Coal Prices

-$3.00

-$2.50

-$2.00

-$1.50

-$1.00

-$0.50

$0.00

2010 2012 2014 2016 2018 2020

Pric

e (2

010$

/ton)

-9.0%

-7.5%

-6.0%

-4.5%

-3.0%

-1.5%

0.0%

Perc

enta

ge C

hang

e

Coal Price Change Percentage Change

Estimated Change in U.S. Average Coal Minemouth Price Due to Four Major Environmental Regulations


Four Major Environmental Regulations Would Increase Natural Gas Prices

Estimated Change in Henry Hub Natural Gas PriceDue to Four Major Environmental Regulations

$0.00

$0.20

$0.40

$0.60

$0.80

2010 2012 2014 2016 2018 2020

Pric

e (2

010$

/MM

Btu)

0%

4%

8%

12%

16%

Perc

enta

ge C

hang

e

Gas Price Change Percentage Change


Complexities of Utility Compliance Plans

Compliance plans are complex for several reasons– Individual regulations present complex compliance alternatives– Interactions and cumulative compliance adds complexity– Cumulative regional/national energy price impacts are complex

Example: CSAPR compliance complexities– Many compliance options (install pollution control technologies,

retire older plants, change dispatch, purchase power, purchase/sell allowances)

Legal challenges affect requirements and timing

– Interactions with other regulations (e.g., Utility MACT compliance) and need to assess cumulative impacts

Wisconsin: recent decision to defer CSAPR compliance costs while utility determines details of compliance strategy

– National compliance with CSAPR and other regulations affects regional/national energy prices (coal, natural gas, electricity)


Utility Retirement Decisions and Resource Planning

Retirement coal-unit choice: retrofit or retire?

– Future coal-unit costs (compliance costs, fuel costs, O&M costs) versus future costs of alternative (e.g., new natural gas combined cycle)

– Complicated calculations based upon details of coal unit (capacity, capacity factor, heat rate, O&M costs, coal type, current environmental controls) and potential natural gas unit (see NERA Generation Unit Retirement Model)

Integrated Resource Plan (IRP) can provide information on the cost implications of different retirement and resource scenarios

– Need to incorporate energy market impacts (including impacts of potential future controls on greenhouse gas emissions)


Numerous Challenges to Setting Utility Rates

Utility rate impacts depend upon compliance costs and resource planning implications– Other considerations (e.g., electricity reliability, jobs)

Complex and expensive environmental regulations pose challenges to rate making– Prudence of compliance and resource plans

– Pre-approvals for pollution control expenditures

– Early plant retirement and recovery of unamortized expenses

– Environmental cost recovery mechanisms

– Ratemaking and regulatory lag time


Concluding Remarks

Every company should evaluate how they will be affected by major environmental regulations

Environmental regulations will affect national and regional energy markets, with implications for all U.S. utilities

– National plant retirements

– Fuel (coal, natural gas) prices affected

Ongoing need to evaluate implications for key decisions

– Cumulative compliance plans (not piecemeal)

– Plant retirement timelines and other resource planning

– Electricity rate impacts

18

NERA economists devise practical economic advice related to highly complex business and legal issues arising from:– Competition, regulation, public policy, strategy, finance, and litigation

We create strategies, studies, reports, expert testimony, and policy recommendations that:– Reflect our specialization in industrial and financial economics – Build upon our more than 50 years of practical experience

We are widely recognized for our independence – Our clients come to us expecting integrity and the unvarnished truth – We commit to deliver unbiased findings

About Our Firm

NERA Economic Consulting is an international firm of economists who understand how markets work.

19

Our Global Presence

Our global team of more than 500 professionals operates in more than 25 offices across North America, Europe, and Asia Pacific.

Sydney

Tokyo

Melbourne

Shanghai

Auckland

Wellington

BeijingSan FranciscoChicago

DenverLos Angeles

Boston

New York CityPhiladelphia

Washington, DC

White PlainsIthaca

Toronto

MadridRome

FrankfurtLondon Brussels

Paris Geneva


David Harrison, Jr., Ph.D.

Dr. David Harrison is a Senior Vice President at NERA Economic Consulting.

Dr. Harrison has more than three decades of experience evaluating environmental policies affecting the electric utility sector, including directing a recent major study of the costs, energy and electricity market and jobs impacts of four major national environmental policies. He has evaluated the environmental and economic impacts of utility Integrated Resource Plans and testified before Public Utility Commissions on numerous occasions.

Dr. Harrison has led approximately 50 assessments of the impacts of major economic activities and policies on local, state, regional and national economic metrics, including employment, gross regional product, personal income and tax revenues. Many of these studies have related to the potential economic impacts of energy and environment policies.

Before joining NERA, Dr. Harrison was an Associate Professor at the Kennedy School at Harvard University, where he taught economics, energy and environmental policy, and other courses for more than a decade. He also served as a Senior Staff Economist on the U.S. government’s President’s Council of Economic Advisors, where he had responsibility for environment and energy policy issues. He is the author or co-author of two books on environmental policy and numerous articles on various topics in professional journals.

Dr. Harrison received a Ph.D. in Economics from Harvard University, where he was a Graduate Prize Fellow. He holds a B.A. magna cum laude in Economics from Harvard College, where he was a member of Phi Beta Kappa, and a M.Sc. in Economics from the London School of Economics, where he was the Rees Jeffreys Scholar.

what electric utilities should do to prepare for major ...€¦ · national energy modeling system...

Documents