As roller coasters go, the manifestations of the U.S. EPA’s emissions transport rules have been a particularly wild ride. The latest turn came when the U.S. Supreme Court issued a ruling April 29, reversing a lower court’s vacatur of the Cross-State Air Pollution Rule, or CSAPR, in the form of a 6-2 decision supporting the EPA rule to limit emissions that affect air quality in downwind states.
With CSAPR now back in play, albeit under an uncertain timeline for implementation, SNL Energy’s research and advisory services team examined potential impacts from reintroduction of CSAPR using dispatch simulation tools to project emissions in 2016 against previously finalized 2014 CSAPR budgets.
Results from the study largely echo industry sentiment, which indicates limited impact on generators from CSAPR. This is attributable to a combination of compliance investments for the 2015 Mercury and Air Toxics Standards, or MATS, and dispatch competition from natural gas, which has already substantially reduced emissions from upwind states. But while states seem well positioned to meet SO2 emissions limits from CSAPR, balances for seasonal and annual NOx emissions look to be considerably tighter with some states projected to be above 2014 budgeted levels.
Background
Since its proposal in 2010, CSAPR has faced a number of challenges driving multiple revisions to the rule as well as a last-minute stay on Dec. 30, 2011, two days before CSAPR was to take effect. The rule was later struck downby the U.S. Court of Appeals for the District of Columbia in August 2012 leaving the predecessor Clean Air Interstate Rule, or CAIR, in its place.
CSAPR establishes four new emissions trading groups including annual NOx, seasonal NOx, SO2 group 1, or states that require stringent reductions in annual SO2 emissions, and SO2 group 2, or states that require moderate reductions in annual SO2 emissions. States would only be able to trade SO2 allowances with states in the same group, while for the annual NOx and seasonal NOx programs, there would be no limitations on interstate trading.
he rule assigns individual states emissions budgets as well as an annual variability limit, which is essentially a buffer above budgeted levels. The annual budget plus variability limit comprises the state assurance level, which is designed to limit emissions in individual states by imposing a penalty of two additional required allowances for each ton of pollutant emitted above the annual assurance level.
Initial concerns about the impacts of CSAPR largely surrounded the timing of implementation, which was originally scheduled for January 2012. This would have put compliance in place several years ahead of MATS, which places strict limitations on emissions of a variety of heavy metals and acid gases requiring many generators to install a suite of environmental controls. More coal plants than originally expected have retired due to MATS, bolstered by slower-than-expected recovery in electric demand and lower natural gas prices that placed considerable economic strain on coal generators.
Worry about the ability of states to meet both CSAPR emissions budgets in advance of retirements and retrofits for MATS compliance was reflected in pre-compliance trading of CSAPR allowances in 2011. Market indicatives for the week ending Sept. 16, 2011, were $1,800 and $2,000 for SO2 group 1 and 2 states, respectively, while both annual and seasonal NOx allowances were seen at $3,750, according to SNL Energy data, albeit on thin trading volumes. Prices dropped steadily throughout the fall and winter months before crashing after the rule was stayed.
Prices for allowances under CAIR have been severely depressed amid healthy oversupply and uncertainty about cap-and-trade programs for SO2 and NOx given the court outcomes. The chart below shows recent prices for CAIR allowances, with prices for CAIR annual NOx averaging $48.96 since March and prices for seasonal NOx averaging $21.87. Annual CAIR SO2 allowances have been steady at 76 cents over the past couple of months. For reference, for a typical coal plant, these SO2 prices would translate into less than 1 cent per MWh in additional variable costs while the annual and seasonal NOx combined would tack on roughly 7 cents per MWh at current prices.
Emissions forecasts: CSAPR vs. CAIR
The SNL Energy study examined projected emissions versus budget for CSAPR compared to emissions balances if CAIR was left in place as currently designed. Though it is unclear when CSAPR may be reintroduced, SNL Energy assumed implementation in 2016 with emissions budgets based on the 2014 budgets previously finalized by the EPA. Importantly, the program start was assumed to be after implementation of MATS is scheduled to take effect in 2015.
With the CSAPR timeline coming after MATS, SNL Energy estimates that most of the emissions reductions required by CSAPR will have already occurred. SNL Energy previously estimated coal plant retrofits and retirements as a result of MATS compliance in a December 2013 SNL Energy study. As MATS directly regulates emissions of acid gases, SO2 emissions reductions are substantial, particularly compared to CSAPR budgets. The chart below shows projected 2016 and 2020 emissions for each CSAPR trading group versus 2014 budget levels.
The data shows a projected healthy oversupply of SO2 allowances with projected SO2 emissions in 2016 for group 2 states falling 83% below budgeted levels while group 1 states were estimated at 65% below budget. NOx balances were found to be materially tighter, perhaps not surprisingly as MATS does not directly regulate NOx emissions. Emissions of NOx in the NOx annual group were found to be 16% below allocated amounts with seasonal NOx slightly tighter at 15% below budget in 2016. Against the same 2014 allocations, emissions balances in 2020 were found to be materially similar to those in 2016.
When compared against projected supply-demand balances under CAIR in 2016, little evidence was found to support substantially higher prices for CSAPR allowances versus those under CAIR. Annual SO2 markets under CAIR were projected to be similarly well oversupplied with SO2 emissions falling 68% under budget in 2016, 3 percentage points higher than that for the CSAPR SO2 group 1 and less oversupplied than the CSAPR SO2 group 2 states.
NOx markets under CSAPR were projected to be slightly tighter than under CAIR with CAIR annual NOx emissions found to be 22% under allocated levels for 2016 with seasonal NOx at 18% under budget.
State-level impacts
While the 2014 CSAPR program-level budgets do not appear to be constrained for SO2 or NOx in 2016, there may be individual states whose emissions are at or above budget levels for annual and seasonal NOx in 2016 based upon SNL Energy’s modeling. The CSAPR program includes variability provisions that allow states flexibility to emit SO2 or NOx above budget levels, thus providing individual year flexibility for abnormally high demand and other issues such as maintenance scheduling. Comparisons made here are not relative to assurance levels which include those variability limits, but rather to the state-level budgets.
Looking at annual NOx emissions, SNL Energy projects that eight of the 23 states participating may be above program budget levels in 2016, with two states more than 10% over budget. Of the 15 states below their annual NOx budget, eight are projected to be more than 25% below budget levels, contributing heavily to the overall program surplus. The states well below budget levels are largely those with significant coal retirements.
Illinois and Tennessee are projected to exceed their budgets in 2016 by more than 10%. It should be noted that SNL Energy expects Tennessee to fall back below its program budget level in 2017, following further coal retirements in the state. Illinois by contrast, is projected to remain above its program allocations absent further investment in NOx reductions or additional coal retirements. Iowa, Kansas, New Jersey and Texas all fall within a 5% to 10% range of their state budgets in 2016, with New Jersey expected to fall back below its budget level in 2017. Missouri and North Carolina are projected to be slightly, but not materially above program budgets in 2016. Indiana, Minnesota and Nebraska are the states closest to, but not expected to exceed allocated levels.
With respect to seasonal NOx, nine of the 25 participating states were found to exceed program budgets in 2016, with four exceeding by more than 10%. Ten participating states are projected to be more than 25% below budget, again largely owing to material amounts of coal-fired retirements and producing an overall emission allowance surplus.
SNL Energy projects Arkansas, Illinois, Oklahoma and Tennessee to be more than 10% over their program budgets for seasonal NOx in 2016. Iowa, Missouri, New Jersey, North Carolina and Texas all are expected to exceed their seasonal NOx budgets by less than 10% in 2016, with New Jersey and North Carolina falling back below budget after 2016. Two states, Florida and Indiana, are projected to be within 10% of their seasonal NOx budgets in 2016, indicating possible market tightness.
Each state participating in the annual program is projected to be significantly under budget for SO2 in 2016, with most states under budget by more than 50%.
Why the expected oversupply?
SNL Energy’s forecast of CSAPR program allowance needs indicates an aggregate oversupply of both SO2 and NOx allowances in 2016. A number of factors play a role in this result. Of primary importance in creating this oversupply situation is coal retirements and conversions driven by MATS and weak power market conditions. SNL Energy’s analysis of future emissions includes the impacts of 49,000 MW of both firm announced coal plant closures in CSAPR states as well as projected coal retirements and conversions between 2012 and 2016. As shown in the chart below, coal plants expected to retire or convert emitted more than 1.2 million tons of SO2 in 2011, more than 50% of the 2014 budget, while the group emitted about 286,000 and 137,000 tons of NOx emissions and seasonal NOx emissions, respectively, in 2011, or more than 20% of the 2014 budget. These units accounted for about 174,000 GWh of generation in 2011, which if replaced entirely by natural gas combined-cycle generation would virtually eliminate the SO2 emissions, and cut the NOx emissions by 95%.
Also contributing to the projected oversupply situation is the reduction in emissions resulting from emissions controls installed on remaining units for compliance with rules such as MATS. Other factors contributing to reduced emissions have emerged since 2011, including weak demand growth, energy efficiency gains and the influx of renewable capacity which has worked to displace fossil-fired generation.
Further considerations
A number of factors could influence realized impacts from CSAPR including actual coal retirements that fall materially below SNL Energy projections. It is also unclear whether the EPA may now take steps to alter CSAPR including tightening emissions budgets by basing requirements on more recent National Ambient Air Quality Standards, or NAAQS, instead of the 1997 and 2006 standards currently used. The EPA has since established the more stringent 2008 NAAQS but this winter made a preliminary determination that the 2008 standards are not sufficient to protect public health and need to be tightened. Any such move to alter CSAPR to reflect updated NAAQS would potentially tighten future emissions balances though this would likely result in delayed implementation of the rule. However, in its current form, SNL Energy does not expect CSAPR to drive significant incremental compliance costs for generators nor spur material coal retirements beyond those expected for MATS compliance. In upwind states, though, where NOx budgets appear tighter, impacts from CSAPR could have some influence on the margin.
Methodology
Emissions in 2016 were projected by SNL Energy’s research and advisory services team using market simulations from the AURORAxmp platform. AURORAxmp is a power market simulation tool based on an hourly dispatch engine that simulates the dispatch of power plants in a chronological, multizone, transmission-constrained system and is widely used for electric market price forecasting.
Model inputs include a North American database of electric generating units and associated operating characteristics. This includes estimates of historical emissions rates, as well as future emissions rates resulting from planned emissions control projects as tracked by SNL Energy. SO2 emissions rates of coal units for 2016 and beyond reflect likely controls needed to be installed for MATS compliance, so fleet average SO2 rates are materially lower than implied by recent history. Furthermore, additional impacts of MATS are reflected in modeling results including projections of likely retirements of coal units due to the rules.
Emissions for units participating in the relevant CSAPR and CAIR programs were compared to published budgets by the EPA. For CAIR this pertains to the 2015 and beyond budgets while for CSAPR the published budgets for 2014 were used as represented in the previous final rulemaking. Reimplementation of CSAPR was modeled for Jan. 1, 2016, with MATS compliance assumed for April 1, 2015.
By Andy Gelbaugh and Jesse Gilbert