Final Thoughts

At last, we come to the end of an era. We thank you for following us.

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The Environmental Protection Agency’s Clean Power Plan was first introduced in June 2014. Our findings indicate that the impacts for coal and natural gas are important especially for Arizona, as the Clean Power Plan would require the state to reduce their carbon emissions (as of 2012 levels) by 52% by 2030 using four ‘building blocks.’ This is one of the most ambitious goals in the nation and can lead to the state suing EPA over perceived unfairness. This blog summarizes the challenges for Arizona to meet EPA’s goal, with a particular focus on potential impacts on the coal and natural gas industry.

There are great implications for the natural gas industry as the building block that offers the largest reduction of carbon emissions in Arizona is shifting generation from coal to natural gas. This option creates a burden on the natural gas industry because at existing locations of coal-fired power plants there is a lack of pipelines for transmission. Additionally, Arizona does not have a storage facility in the state for natural gas. This lack of infrastructure presents a challenge as it may cause reliability issues for consumers.

In addition to the lack of infrastructure, compliance costs are of particular importance due to aging infrastructure. A majority (63%) of coal-fired power plants in the U.S. are over 40 years old, and the average age is 42 years, with many over half a century old. As such, it is safe to assume that there is room for efficiency improvements, among other things.

Of course, lowering carbon emissions is not a recent thing, as “progress” has been in motion for the past few years. Since October 2012, at least five of Arizona’s eight coal-fired power plants have either shut down a unit (or two!) or entirely. These plants are: Abitibi Snowflake Power Plant, Apache Generating Station, Cholla Power Plant, Four Corners Generating Station, and Navajo Generating Station. In the face of changing EPA regulations, it is certain these trends will continue into the future.

On the whole, the EPA’s new regulation projections of economic impacts differ depending on the source. According to the Chamber of Commerce, these regulations could cost businesses around $28 billion per year in compliance costs through 2030, as well as around 450,000 jobs by 2020. Compare this to the EPA’s estimates of annual business costs of $7.3 to $8.8 billion per year in compliance costs through 2030, as well as a loss of up to 78,000 jobs through 2025. The loss, however, is estimated to amount to around $65 per household per year, with the addition of up to 112,000 jobs.

There is also an expected impact on electricity costs. For Arizona (specifically the American Southwest), it is suggested that prices may rise up by 6.5% of current costs. Yet, these estimates should not be used as the end. A study found evidence that the actual costs of all environmental regulations from the 1970s through the early 1990s were below even the low-end estimates. Of course, this is not the only issue, particularly shifting generation from coal to natural gas is a challenge in itself.

Shifting from coal to natural gas is a challenge because of the way Arizona currently uses natural gas. Natural gas is used more in the summer for peak demand for cooling needs, and used less in the winter months. This is cause for concern for the reliability of natural gas-fired power plants to provide continuous power all year long since coal currently provides the base load. Furthermore, alternative, reliable energy sources will be needed to meet the peak demand during the summer if natural gas is used for the base load.

Other challenges are consumption and the existing practice of natural gas-fired plants in Arizona. Natural gas is consumed more than it is produced in Arizona so the state imports a majority of its natural gas. There are two major pipelines that supply natural gas for not only Arizona but California and Nevada as well, whom use natural gas as their primary energy source. If there is a national approach to states using more natural gas, there may be a supply issue in the Southwest. Furthermore, half of all Arizona natural gas generators are not operated to meet load demands. They serve as merchant suppliers selling natural gas to the energy market, and they often have long-term contracts with out-of-state markets.

With these challenges Arizona will face a difficult time shifting from coal to natural gas, yet the greatest hardship is time. EPA expects states to have a state implementation plan by June, 2016. By 2020, Arizona has to meet 77% of the 2030 goal of 702 CO₂ emissions. In the span of six years, Arizona is expected to reduce its emissions drastically with little time to spare.

These challenges are great for the state of Arizona in its compliance with EPA’s Clean Power Plan, and it will be interesting to see the finalized state implementation plan in June 2016.

Closer Look at AZ's NG Potential

According to ADEQ's presentation entitled, State of Arizona's Energy System, natural gas in Arizona experiences peak demands during the summer months while the rest of the year natural gas is used much less. If there is a switch to natural gas, Arizona would have a problem finding another energy source to provide the peak load in the summer months, which greatly increases due to cooling needs from hotter temperatures.

A look at NGCC utilization in the Southwest with AZ represented by the yellow line.

The other problem with fuel switching is increased demand of natural gas. As stated in an earlier post, natural gas is currently imported into Arizona from other states. California and Nevada also import natural gas, and both states use natural gas as their primary energy source. The greater demand of natural gas in the Southwest would create a burden on the natural gas supply as well as on natural gas prices. Additionally, Arizona has no natural gas storage systems and will need to build storage systems to create greater resiliency in the electric system for natural gas use in Arizona.

Additional infrastructure that is needed are transmission lines. At existing coal-fired power plants there are very few natural gas-fired power plants. The needed infrastructure takes time to be built and with a very small timeframe the EPA is offering, construction needs to begin soon.

AZ's three major natural gas pipelines.

Lastly, half of all Arizona natural gas generators are not operated to meet load demands for Arizona. They serve as merchant sellers supplying natural gas to the region's energy market. The long-term contracts these suppliers have with out-of-state consumer markets also pose a problem.

Six merchant natural gas suppliers in AZ.

With these problems Arizona will face a difficult time switching to natural gas, but the greatest challenge is time. The EPA expects states to have a state implementation plan by June, 2016. By 2020, Arizona is expected to meet 77% of the 2030 goal of 702 CO₂ emissions. In the span of six years, Arizona is required to reduce its emissions drastically with little time to spare.

Impacts to APS

The Arizona Public Service released its 2014 Integrated Resource Plan. The APS plan does not take into account the recent EPA Clean Power Plan, so it will be interesting to see how APS' plan may change after compliance.

APS projects the generation mix to change to using more natural gas, renewable energy, and energy efficiency. Coal increases slightly but not significantly.

Source: APS 2014 Integrated Resource Plan

It seems that APS is also going to invest in more transmission and the electricity gird with investments near $500 million for both. Energy investments are nearly $14 billion for the Selected Portfolio.

Source: APS 2014 Integrated Resource Plan

After reviewing the 'Selected Portfolio', APS projects to use the same amount of coal, while modernizing the Ocotillo Power Plant in Temple, AZ. APS will also use more renewable energy with the Selected Portfolio as shown below.

Source: APS 2014 Integrated Resource Plan

Blog Summary

The Environmental Protection Agency’s Clean Power Plan was first introduced in June 2014. Our findings indicate that the impacts for coal and natural gas are important especially for the state of Arizona. For natural gas the impacts will be on infrastructure, transmission and reliability. There are great implications for the natural gas industry, as the option that offers the most reductions of GHG emissions in Arizona is switching from coal to natural gas. This option creates a heavy burden on the natural gas industry because natural gas-fired plants are not located in convenient areas for dispatch while there is also a lack of pipelines for distribution. This lack of infrastructure presents a challenge as it may cause reliability issues for consumers.

In addition to the lack of infrastructure, these compliance costs are of particular importance due to the aging infrastructure. A majority (63%) of coal-fired power plants in the U.S. are over 40 years old, and the average age is 42 years, with many over half a century old. As such, it is safe to assume that there is room for efficiency improvements, among other things.

Of course, this is not a recent thing, as “progress” has been in motion for the past few years. Since October 2012, at least five of Arizona’s eight coal-fired power plants have either shut down a unit (or two!) or entirely. These plants are: Abitibi Snowflake Power Plant, Apache Generating Station, Cholla Power Plant, Four Corners Generating Station, and Navajo Generating Station. In the face of changing EPA regulations, it is certain that these trends will continue into the future.

On the whole, the EPA’s new regulations projections of economic impacts differ depending on the source. According to the Chamber of Commerce, these regulations could cost businesses around $28 billion per year in compliance costs through 2030, as well as around 450,000 jobs by 2020. Compare this to the EPA’s estimates of annual business costs of $7.3 to $8.8 billion per year in compliance costs through 2030, as well as a loss of up to 78,000 jobs through 2025. The loss, however, is estimated to amount to around $65 per household per year, with the addition of up to 112,000 jobs.

There is also an expected impact on electricity costs. For Arizona (specifically the American Southwest), it is suggested that prices may rise up by 6.5% of current costs. Yet, these estimates should not be used as the end. A study has found evidence that the actual costs of all environmental regulations from the 1970s through the early 1990s were below even the low-end estimates. Of course, this is not the only issue, particularly with the switching from coal to natural gas.

A major issue with switching from coal to natural gas is the way Arizona currently uses natural gas. Natural gas is used more in the summer to make up for peak demand for cooling needs, and used less in the winter months causing natural gas-fired plants to become idle. These shifts in demand are cause for concern for the reliability of natural gas-fired plants to provide continuous demand all year long since coal provides the base load. Lastly, natural gas is consumed more than it is produced in Arizona causing Arizona to import most of its natural gas. There are two major pipelines that supply natural gas for not only Arizona but California as well. If there is a national approach to states using more natural gas, then there may be a supply issue. Additionally, Arizona does not have a storage facility in the state for natural gas.

These challenges are great for the state of Arizona in its compliance with EPA’s Clean Power Plan, and it will be interesting to see what the state implementation plan will be in June 2016.

Taking a Walk in History - Historical costs of environmental regulations

Real quick post: Previous posts on costs rely heavily on projections into the future, but how reliable are they?

Back in 1997, there was a study completed on the environmental regulations implemented in the '70s through the early '90s and the economic costs. In particular, they compared the cost projections to the actual costs.

The findings? In every single case, the actual costs were below even the low-end projections.

Why, you might ask hypothetically? Let me answer that with a copy-paste a response from Dean Baker, D.C. economist:

“The reason for that is we have an innovative economy. That’s the reason many of us like a market economy,” he continued. “And [EPA is] making their estimates based on what do we know today, what are the current technologies? But when you create a big incentive to innovate — as you do with these regulations — then you develop new technologies, you push the curve, and you end up with lower costs.”

Leave it to the markets, young grasshopper. Leave it to the markets.

Targeting Coal - Caught in the Costly Crosshairs

I suppose a base question to ask would be "Why does the EPA hate coal?"

According to the EPA, existing power plants account for 38% of existing CO2 emissions. Of these, a majority of the emissions come from coal-fired power plants, specifically AGING coal-fired power plants, at about 30% of existing CO2 emissions.

Furthermore, according to the EPA, the U.S. coal-fired fleet is nearly half a century old, with an average age of 42 years old. According to the Sierra Club, of the 593 coal-fired power plants, 63% are over 40 years old! Based on the idea of increased efficiency over time, this means a majority of coal-based plants are incredibly inefficient.

Yet, is that enough?

According to the US Chamber of Commerce, these regulations could cost businesses $28 billion a year in compliance costs through 2030, and could also cost 450,000 jobs by 2020. Of course, this also was completed under the strictest plan the EPA proposed, not the one currently going into effect. As such, actual numbers are likely lower.

Indeed, the EPA states that costs will be far lower, with businesses paying only $7.3 to 8.8 billion a year in compliance costs through 2030. This goes to $65 per household (per year in costs through 2030). As for jobs, they estimate 72,000 to 78,000 jobs lost through 2025. (Related, they also say that the regulations will provide 76,000 to 112,000 jobs in more environmentally-friendly positions. Even better, research has suggested that "green jobs" are more accessible to those without training or college degrees!)

So that's why coal is being targeted so harshly. It's just a matter of deciding if it's worth it.

Effects on Coal - A Rise in Prices?!

It's a fact that regulations impact prices, for better or worse. So it's only natural that the EPA's new standards will affect coal prices (and therefore electricity prices).

Like Cthulhu, you need to just accept this fact.

After all, the regulations, according to the EPA, are expected to force about 19% of the current coal-fired power plant force to shut down and decrease coal consumption by around 28%. In turn, it's expected that this will rise electricity prices by around 6.5% by 2020.

"Under the provisions of this rule, EPA projects that approximately 46 to 49 GW of additional coal-fired generation (19% of the current capacity, 4.6% of generation capacity in 2020) may be removed from operation by 2020."

Some fear this may lead to a price hike of up to 150% for natural gas.

According to the Department of Energy, there is a distinct possibility that electricity prices could rise by 80%, at least at first. “The precise number will vary, but for first generation we project $70 to $90 per ton [on the wholesale price of electricity],” Julio Friedmann, of the Department of Energy, said. “For second generation, it will be more like a $40 to $50 per ton price. Second generation of demonstrations will begin in a few years, but won’t be until middle of the next decade that we will have lessons learned and cost savings.”

So will these new regulations put electricity in a sleeper hold and force you to dole out more dough for the basics? Well... like all things, it depends. For some regions, there little use of coal, so the effects will be far less. It also depends greatly on the economy's whims, such as with other energy sources, such as natural gas. That said, the EPA has stated that the worst hit area will likely be the Midwest.

But what about Arizona prices? Well, depending on the source, it could be as much as a price raise of up to 31%. Is that true? Honestly, it's hard to be positive until we actually take action. But hey, it's not like the reason why coal's price is so low because of government subsidies. But that's enough for one post. We'll go deeper into jobs and subsidies later!