Everybody wants the cleanest air possible. But, the EPA seems to have forgotten that the perfect is the enemy of the good in two new rules they are implementing. One rule is in litigation. The other is finalized. When combined, they may destroy the power industry.
It's not clear from these rules that the EPA understands how the power industry works. The wholesale price of power will only remain low if base loaded power plants operate as intended. As more base loaded plants are removed from the fleet, the price of power will increase.
And for years it was federal policy to motivate utilities in the direction of coal as their primary fuel. Domestic natural gas and oil were believed to be near depletion. To save natural gas for higher and better uses, utilities were encouraged to avoid natural gas. Now, with the country flooded in natural gas, the EPA is changing its mind and wants utilities to use more natural gas and much less coal. It appears the EPA is not only setting environmental policy, it is also setting energy policy.
In addition, the EPA is ignoring the serious concerns raised by the U.S. Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC) raised in their report, Potential Impacts of Future Environmental Regulations. NERC's report describes how the EPA's rules will seriously erode the reliability of the nation's grid.
Also, the EPA is violating the protocol of grandfathering existing assets when new rules are promulgated. Power plant owners followed federal rules and regulations and they made long-term investments under federal policies. Because the EPA did not grandfather existing plants, the federal government broke the protocol and caused economic harm to plant owners.
Finally, the EPA is violating long-standing protocol of moderation. The change the EPA is demanding out of the power industry is anything but incremental. Its new rules are astoundingly impactful and costly.
The two new rules are called the Cross State Air Pollution Rule (CSAPR) and the Mercury and Air Toxics Standards (MATS). Both are squarely aimed at power generation. CSAPR requires 28 states to reduce substantially sulfur oxides and nitrous oxide emissions below previously rigorous regulations. It also redefines particulate matter to be sized 75% smaller. MATS reduces allowances further for other emissions such as mercury, arsenic, chromium, nickel, hydrochloric acid and hydrofluoric acid.
These are not small changes. CSAPR and MATS force utilities to bolt on a myriad of additional emission control technologies or abandon their plants. The EPA's new control technologies are costly, inefficient and cause older plants to lose their competitive position.
Less competitive plants earn smaller margins. Margins are needed to pay back the utility's capital investments to satisfy the EPA's new rules. If margins are too small, payback becomes unacceptable. If payback is unacceptable, abandoning marginal plants becomes the only practical choice.
Apparently, many utilities already decided to jettison a lot of power plants. As of today, approximately 30,000 megawatts-worth of plants will retire early.
To provide perspective, removing 30,000 megawatts is the equivalent of removing 30 nuclear power plants from the nation's fleet. This is why FERC, NERC and regional transmission organizations are deeply concerned. Reserve margins are evaporating and some utilities can no longer assure reliability.
The EPA's actions seem heavy handed. Worse, they are engaged in retroactive rulemaking, which causes generating assets to become stranded. Investors need to be compensated.
In the utility world, there has always been a careful balance between safety, economics and reliability. The EPA skewed that balance by seeking perfection for environmental safety and ignoring utility economics and reliability.
