DOE Staff Finds NSR Contributed to Loss of Baseload Generation

The Department of Energy released a report in August, entitled “Staff Report to the Secretary on Electricity Markets and Reliability” (Staff EM&R Report) in response to Secretary of Energy Perry’s request for a study to examine electricity markets and reliability. Part of the Secretary’s request directed staff to determine “the extent to which continued regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of baseload power plants.”

ANALYSIS

The Staff EM&R Report found that there were multiple causes for the premature retirement of coal-fired baseload units. The Report found that “the evolution of wholesale electricity markets,” influenced by "federal policy interventions and the changing nature of the electricity fuel mix,” was changing the policy assumptions that had led to centrally-organized markets and even to a lesser extent the vertically integrated electric utility model. This evolution, and the “need to accommodate variable renewable energy (VRE)"—solar and wind—required more flexible operation of units and that some baseload units, including nuclear, are not equipped for variable operation. The Staff EM&R Report also concluded that while the market values reliability, it does so only incompletely, and that resiliency is not yet valued by current markets. Coal-fired and nuclear baseload units, with 30-day or more fuel supplies on-site, provide both reliability and resiliency. The current market thus does not adequately value all electricity reliability services (ERS) and this may lead to premature retirement of baseload units needed to supply such ERS.

With respect to retirements, the Staff EM&R Report found that cheap natural gas and construction of highly efficient natural gas combined cycle (NGCC) units was probably the dominant cause of coal unit retirement, followed by low growth in electricity demand, dispatch needs for VRE that are incompatible with baseload unit ramp rates, and finally “investments required for regulatory compliance have also negatively impacted baseload plant economics, and the peak in baseload plant retirements (2015) correlated with deadlines for power plant regulations as well as strong signals of future regulation.”

The individual regulation that the Staff EM&R Report identified as having the greatest impact on coal baseload unit retirement was the Mercury and Air Toxics Standard (MATS), citing a Fitch study that the rule likely increased lifetime costs and reduced cash flow by between $1,700-$1,900 per kilowatt (kW) for a 100 MW plant burning bituminous, and by $1,200-$1,300/kW for a 500 MW plant. In this period, other regulatory costs were also signaled, such as CO2 regulation and regional haze requirements, leading owners and operators of coal-fired baseload units to have to decide whether to retrofit or retire. It is on this point that staff found that the NSR program had a major impact:

The retrofit-or-retire decision for owners is also impacted by EPA's New Source Review (NSR) regulations that can affect owners’ ability to enhance plant efficiency due to the delay, cost, and uncertainty associated with obtaining an NSR permit. The NSR permitting program requires stationary sources of air pollution—including factories, industrial boilers, and power plants—to get permits before construction starts, whether the unit is being newly built or modified.142 This is an important concern for owners considering retrofitting an existing power plant with carbon capture equipment to reduce CO2 emissions, or adding new components to improve operating efficiency. These upgrades could trigger the NSR requirements of the Clean Air Act because they would constitute a “physical change,” or lead to a designation of the change as a “major modification,” subjecting the unit to NSR permitting requirements.

The uncertainty stemming from NSR creates an unnecessary burden that discourages rather than encourages installation of CO2 emission control equipment and investments in efficiency because of the additional expenditures and delays associated with the permitting process. Ironically, the uncertainty surrounding NSR requirements has led to a significant lack of investment in plant and efficiency upgrades, which would otherwise lead to more efficient power generation, benefits to grid management, and reduced environmental impacts. EPA has acknowledged these burdens and has made attempts to reform the rules to improve and streamline NSR:

As applied to existing power plants and refineries, EPA concludes that the NSR program has impeded or resulted in the cancellation of projects which would maintain and improve reliability, efficiency and safety of existing energy capacity. Such discouragement results in lost capacity, as well as lost opportunities to improve energy efficiency and reduce air pollution. [citing EPA, New Source Review: Report to the President (June, 2002)]

The NSR program distinguished between “routine maintenance and repair” of existing facilities—which would be allowed—and more “substantial modification” of existing facilities, which would put the facilities over the threshold and thus require them to meet new emissions standards.

Environmentalists argued that owners of electric generation and industrial plants were building virtually new facilities from the inside out by exploiting the “routine maintenance and repair” exclusion from NSR. EPA changed its interpretation in the 1990s to a more rigorous standard, culminating in numerous enforcement-related lawsuits beginning in the late 1990s.

The Staff EM&R Report concluded:

Ultimately, the continued closure of traditional baseload power plants calls for a comprehensive strategy for long-term reliability and resilience. States and regions are accepting increased risks that could affect the future reliability and resilience of electricity delivery for consumers in their regions. Hydropower, nuclear, coal, and natural gas power plants provide electricity reliability services (ERS) and fuel assurance critical to system resilience. A continual comprehensive regional and national review is needed to determine how a portfolio of domestic energy resources can be developed to ensure grid reliability and resilience.

COMMENTARY

The DOE Staff E&MR Report finds that the current retirement of coal-fired baseload generation is driven primarily by changes in the market resulting from the flood of shale gas and the introduction of significant quantities of VRE. The low and continuing low price of natural gas weakened the competitive position of coal-fired units, pushing them higher up the dispatch curve. Similarly, the almost zero variable cost of VRE results in its rapid dispatch, also forcing coal-fired units higher up the dispatch curve, forcing it to move out of baseload operation into load-following. The change is dispatch results in increased cycling, increased maintenance, and likely turns the economics of many coal-fired baseload plants to the negative.

The primary impact of the NSR program has been to accelerate the rot in the coal-fired baseload fleet by, in EPA’s words, “imped[ing] or [cancelling] projects which would maintain and improve reliability, efficiency and safety of existing energy capacity... [resulting] in lost capacity, as well as lost opportunities to improve energy efficiency and reduce air pollution.” Sapped of ability to improve its efficiency, the coal-fired baseload fleet was not in a position to compete with new market forces when they arrived.

The question is, if this happened in the electric utility sector, traditionally a well-organized and powerful player in the regulatory environment, what has been the impact of NSR on the less well-organized manufacturing and commercial sectors?