Market Can Be Tool to Implement the EPA’s Clean Power Plan

Executive Column: Andrew Ott, executive vice president Markets

When it comes to determining how the power industry will be impacted by the Environmental Protection Agency’s Clean Power Plan, no one has definitive answers yet. PJM and the industry have been analyzing possible scenarios for compliance. But, until the final rule is issued and states determine their compliance approaches, we can’t say for certain what the impacts will be.

At a regional technical conference on the CPP in Washington, D.C., last week, the Federal Energy Regulatory Commission heard from industry organizations, including PJM, on the potential impacts of the proposed carbon rules and how to prepare for implementation.

Mike Kormos, executive vice president- Operations, and I testified for PJM at the FERC technical conference about the findings and implications of PJM’s recently posted Economic Analysis of the EPA Clean Power Plan Proposal. Among the topics we discussed were coal unit retirements, the reliability safety valve and how a competitive market can serve as a tool for complying with the carbon rule.

PJM’s economic analysis studied a large number of scenarios spanning a range of what could happen. However, some have mischaracterized the study by highlighting the result of a single scenario and representing it as a conclusion, which is not consistent with the intent of the study. Some have cited a scenario that assumes all states meet their renewable portfolio standards and concluded the compliance costs of the clean power plan are very low. This conclusion does not account for the costs of achieving the state RPS and building the necessary transmission to support it. Others have cited worst-case scenario estimates of resources at risk to retire without considering the assumptions on which the scenario was based. The worst-case scenario assumes much lower energy efficiency than the EPA assumptions used in the goal computation, significantly lower renewable resource development than suggested by renewable portfolio standard goals in PJM states, loss of 50 percent of existing PJM nuclear capability, and/or 50 percent higher natural gas prices.

To be clear, the PJM study was intended to provide a range of scenarios due to the uncertain nature of the input assumptions and the fact that the rule is not finalized. Definitive conclusions regarding specific outcomes cannot be drawn from the analysis given these uncertainties.

However, some key trends can be identified. Most scenarios indicate that some amount of generation may be at risk to retire over time due to increasing compliance requirements. Managing potential coal retirements would be aided by a reliability safety valve, a tool that was used in the implementation of the EPA’s Mercury and Air Toxics Standards rule. A reliability safety valve is necessary to provide a mechanism to deal with potential reliability conflicts that may arise due to interaction of state compliance plans.

The competitive energy market itself is an effective tool for adapting to the EPA rule. Whether there is a price for carbon similar to how the Regional Greenhouse Gas Initiative already works in some PJM states or the states place limits on run-times for coal units, it comes down to the price impact on the market. Analysis has indicated in all scenarios that regional compliance approaches are lower cost and provide more alternatives to states.

As a grid operator and administrator of the energy markets, PJM must adapt to whatever rules are implemented while ensuring that reliability is maintained. Our experience has shown that as long as a price can be assigned to a change, the market can accommodate it.

We will know more about the possible impacts of the CPP when our reliability studies of the plan are released later this spring.