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Key Takeaways: Achieving Low-Cost Decarbonization Through Power Markets, Infrastructure and Grid Operations

McDermott hosted Rob Gramlich, Founder and President of Grid Strategies, LLC, on July 16 for a discussion of low-cost decarbonization strategies for the electricity sector. We framed the discussion around 2020 US Presidential Candidate Joe Biden’s recently announced goal of getting to zero carbon emissions from the electricity grid by 2035.

Here are three takeaways from our conversation:

1. Three Areas of Change. Rob highlighted three areas where improvements can be made to substantially increase the deployment of wind and solar resources: Power markets, grid infrastructure and grid operations. With respect to power markets, Rob emphasized that regional transmission organizations (RTOs) can play a bigger role in achieving very fast dispatch over large geographic areas. With respect to infrastructure, he emphasized that new transmission lines will be required to reach the best wind and solar resources, but also that many of those new lines can be built on existing rights-of-way. And with respect to grid operations, he emphasized that there are technologies and operating practices that can help us improve the efficiency of the grid.

2. Flexible FERC. Rob suggested that under a new Democratic administration, FERC would likely prioritize flexibility in pricing design and in FERC’s interactions with states. He emphasized the importance of a flexible design for the pricing of “capacity” services and suggested that a Biden administration would likely be supportive of state level efforts to promote renewable energy.

3. Transmission Costs vs. Electricity Costs. Rob suggested that over the next ten years transmission costs will become a greater share of the overall cost of electricity, but that building out transmission would help bring that overall cost down.

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New York’s New Renewable Energy Standard

Last week’s article discussed New York’s Zero-Emissions Credit (ZEC) for nuclear power. The ZEC is one component of New York’s Clean Energy Standard (CES). The other major component of the CES is the new Renewable Energy Standard (RES). In the RES, the New York Public Service Commission (PSC) formally adopted the goal set by Governor Cuomo in December 2015: 50 percent of all electricity used in New York by 2030 should be generated from renewable resources. This goal builds on the State’s previous goal of achieving total renewable generation of 30 percent by 2015.

The RES consists of a Tier 1 obligation on load-serving entities (LSE) to support new renewable generation resources through the purchase of renewable energy credits (REC), a Tier 2 program to support existing at-risk generation resources through maintenance contracts, and a program to maximize the potential of new offshore wind resources.

The goal of the RES is to reduce carbon emissions and ensure a diverse generation mix in New York. The state’s existing nuclear facilities, supported by the ZEC program, will close in 2030 (absent a renewal of their licenses) and the RES aims to ensure that the electricity provided by those units is replaced with new renewable resources.


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Appeals Court Forcefully Validates EPA’s Emerging Program for Controlling Emissions of Greenhouse Gases

by Jeffrey D. Watkiss

A unanimous panel of the U.S. Court of Appeals for the D.C. Circuit in Coalition for Responsible Regulation, Inc. v. EPA decisively affirmed against industry and state challenges EPA’s developing programs for regulating emissions of greenhouse gases. Those programs respond to the U.S. Supreme Court ruling in Massachusetts v. EPA, 549 U.S. 497 (2007) that greenhouse gases are an air pollutant subject to regulation under the U.S. Clean Air Act (CAA). As EPA moves ahead to implement the new programs, natural gas-fired and renewable generation will increasingly if not completely, displace new investment in coal-fired generation.


In direct response to the Massachusetts decision, EPA issued an Endangerment Finding for a single air pollutant defined as comprising an aggregate group of six long-lived and directly emitted greenhouse gases that are “well mixed” in the atmosphere and cause global climate change: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydroflourocarbons (HFC), perflourocarbons (PFC), and sulfur hexafluoride (SF6). Affirming EPA,the panel explained that the CAA requires EPA to answer only two questions in connection with endangerment: whether greenhouse gas may reasonably be anticipated to endanger the public health and welfare and whether motor-vehicle emissions cause or contribute to that endangerment. These are scientific determinations, the court explained, that are not informed by “performing cost-benefit analyses, gauging the effectiveness of whatever emission standards EPA would enact, [or] predicting society’s adaptive response to the dangers or harms caused by climate change.”

The panel dismissed as “little more than a semantic trick” the petitioners’ complaint that EPA improperly “delegated” its scientific determinations to the Intergovernmental Panel on Climate Change (IPCC), the U.S. Global Climate Research Program and the National Research Council by relying on the research compiled and synthesized by those research bodies. The panel ruled that EPA “reviewed existing scientific evidence” that included syntheses of individual studies and research,” including 18,000 peer-reviewed scientific studies in the case of the IPCC. The panel rejected the petitioners’ argument that EPA itself was required to perform those studies:   “EPA is not required to re-prove the existence of the atom every time it approaches a scientific question.” As to Texas’ complaint that EPA did not identify the atmospheric concentration that endanger public health or welfare, the panel held that such a threshold is not required by the CAA. The opposite is what is required: a case-by-case “sliding scale” that sounds the alarm as danger is approached. 


Challenges to the Tailpipe Rule and the panel’s discussion of those challenges were brief, but consequential. The petitioners did not challenge the substance of the Tailpipe Rule, but instead argued that EPA arbitrarily and capriciously ignored the automatic consequence of setting this standard for new motor vehicle emissions of greenhouse gases: Once a standard is set for regulating the emissions of greenhouse gases from new motor vehicles, then EPA becomes obligated to also set a New Source Review performance standard and operating permits for major stationary sources of greenhouse gas emissions. EPA consideration of collateral costs associated with triggering standards for major stationary sources is not permitted, the [...]

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EPA Proposes to Require Carbon Capture and Sequestration; Creates Uncertainty for the Future of Coal

by Ari Peskoe

The U.S. Environmental Protection Agency (EPA) proposed the first ever CO2 emissions limits for newly constructed power plants last month. Under the proposal, power plants that have already acquired a preconstruction permit from the EPA and commence construction by March 27, 2013 do not need to comply with the rule.

The emissions limit, set at 1,000 pounds per megawatt-hour, would effectively require all new coal-fired plants to cut CO2 emissions in half from current rates. The only plausible technology for enabling such drastic cuts is carbon capture and sequestration (CCS). EPA’s proposed rule allows a new plant to implement CCS ten years after beginning operations, so long as its emissions after CCS are below 600 lb/MWh. That gives the coal industry some extra time to work through the many legal and regulatory issues currently facing the technology. 

Like any large-scale energy development, a sequestration project would trigger state and Federal environmental reviews. While there is extensive experience around the country reviewing and approving projects that involve injecting substances into the ground, no other project is designed to store vast quantities of gas underground for hundreds of years. It’s not clear how legislators, environmental agencies and the public will evaluate this risk.

Long-term liabilities relating to leaks are another legal hurdle. According to a Federal interagency task force report published in 2010, some businesses are uncomfortable with the risk but also unsure of how to quantify it. Insurers, and particularly investors, are fixed on short-term thinking, and 10 or 20 years is considered “long-term” in business decision making.  But sequestered carbon must stay underground for centuries.  There is no agreement on how to account for this time horizon.

A 2010 paper by a Harvard Law School professor and student researchers proposed a range of regulatory incentives to spur development of large scale test projects. The suggestions included establishing a trust fund paid for by industry to cover liabilities, developing sites on Federal land to streamline the approval process, imposing caps on liability and preempting nuisance and trespass claims. Regardless of the specifics, instituting any new regulatory system takes time.  Fracing is a multi-billion dollar business in the U.S., and yet after a decade of widespread use its legal framework is not yet firmly established. As has been documenting, legal norms are still developing, and all three branches of government are issuing new rules and decisions that have major impacts on the industry.

Without an impetus to do so, governments will probably ignore CCS, and the lack of legal certainty will hinder development.  Perhaps EPA’s rule, if implemented, will motivate action. Until then, rather than urging governments to enact rules that create legal certainty for CCS, the coal industry is likely to fight tooth and nail to kill yet another attempt by Washington to regulate CO2 emissions from the power sector. 

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Regulated Bidding for Emissions Allowances Under Phase Three of the EU Emissions Trading Scheme

by Prajakt Samant and Simone Goligorsky

The UK’s Financial Services Authority (FSA) published a Consultation Paper (Consultation) on March 15, 2012 detailing its proposals for authorization and supervision of firms intending to bid for emission allowances under Phase Three of the European Union Emissions Trading Scheme (EU ETS).  Phase Three covers the period of 2013-2020 and marks the final phase of the EU’s strategic commitment to a 20 percent reduction in carbon emissions from the levels in the 1990s.

The purpose of the Consultation is to set out the circumstances in which bidding for emissions allowances becomes subject to FSA regulation following amendments to current regulations.  It offers a preliminary guide for firms looking to bid for emissions allowances with a view to allowing as much time as possible for applications for permission to be processed.  The first auctions are not expected until autumn 2012, however the European Commission (EC) may choose to commence auctions on its central platform as early as June 2012.

The UK (alongside Germany and Poland) has opted to host a national platform for EU ETS auctions.  This right is enabled under the Regulated Auction Platform Regulations 2011, which creates in the national platform a Regulated Auction Platform and in turn, a new body subject to FSA supervision.  Bidders will have the choice of two types of emission product available for auction: a two-day spot and a five-day future.  The choice of emission product will play a role in determining whether or not a firm will be subject to FSA regulation.  Amongst others, investment firms and credit institutions are most likely to require FSA authorization to undertake auctioning activities.

Changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 will establish bidding as a new regulated activity, therefore, firms will still be required to make a further application to the FSA even if they currently have permission to carry out existing FSA regulated activities.  It is not, however, anticipated that any variation of a firm’s existing permissions would be unduly complex.  This would be the case unless the FSA considers that the proposed bidding activities will pose any material risk to the firm’s business, since the FSA is of the view that the newly created bidding activity is similar to certain existing regulated activities.

The FSA invites comments by April 19, 2012 with the intention to finalize the proposals set out in the Consultation through rules which are due to be published in late May 2012.  A policy statement and feedback on any responses will be published shortly thereafter.

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Senator Bingaman Introduces Clean Electricity Standard

by Ari Peskoe

Senator Jeff Bingaman of New Mexico, Chairman of the Energy and Natural Resource Committee, introduced the Clean Energy Standard Act of 2012 on March 1.  If passed by Congress, the legislation would require electric utilities to procure an escalating percentage of the electricity that they sell to consumers from “clean energy” sources beginning with24 percent in 2015 and rising to 84 percent by 2035.  The legislation would also establish a national trading program for clean energy credits that could be used by utilities to demonstrate compliance.

Clean energy, as defined by the Act, can come from a range of sources.  Clean energy includes electricity generated by a source placed in service after December 31, 1991, that uses natural gas, hydro, nuclear, qualified waste-to-energy, qualified biomass or renewables (solar, wind, geothermal, current, wave, tidal or ocean).  Clean energy also includes any generation source placed in service after the enactment of the Act whose carbon intensity is less than .82 metric tons of CO2 equivalent per megawatt-hour, or that is qualified combined heat and power.  Nearly all currently operating nuclear plants would not generate clean energy under the Act because they were placed in service prior to 1992.

A generation source with zero carbon emissions would earn one credit for each megawatt-hour generated.  A generation source with a carbon intensity greater than zero but less than .82 would earn credits at a rate proportional to its intensity divided by .82.  Electricity generated by nuclear or hydro sources put in service prior to 1992 is not included in the quantity to which the percentage requirement applies.  As an example, if an electric utility sells 10 million megawatt-hours of electricity in 2015, 4 million of which is generated by nuclear reactors placed in service prior to 1992, that utility would be required to hold 1.44 million clean energy credits (6 million x .24).

Bingaman’s previous national energy standard legislation introduced in 2010 focused exclusively on renewables and would have required all utilities to procure 11 percent of their electricity from renewable sources.  Bingaman’s 2012 legislation tracks a proposal President Obama made in his 2011 State of the Union address when he said, “[b]y 2035, 80 percent of America’s electricity will come from clean energy sources. Some folks want wind and solar.  Others want nuclear, clean coal and natural gas. To meet this goal, we will need them all…”  Although neither the President nor Senator Bingaman said so explicitly, both proposals effectively mandate a reduction in coal-fired generation.  Nearly all non-coal generation sources qualify as “clean” with the caveats that under Bingaman’s 2012 proposal a source qualifies as clean only if it was placed in service after 1991, and Obama did not define whether “clean coal” requires carbon capture technology, which does not currently exist commercially in the U.S.

Applying the legislation’s requirements to current state-by-state data on electricity generation shows that 19 states would currently fall short of the 24 percent requirement.  It is likely that many utilities in [...]

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