Grid Parity For Solar Likely As The EPA Drives Coal Into The Sunset


The Environmental Protection Agency's (EPA) sweeping proposal to limit carbon dioxide (CO2) emissions from existing power plants under Section 111 (d) under the Clean Air Act will invariably mean less coal, which should open up a big opportunity for renewable energy, particularly solar and wind power.

The EPA's Clean Power Plan seeks to cut carbon emissions from the power sector by 30% below 2005 levels, likely raising electricity rates. Just the same, this would bring wind and solar generation closer to grid parity – an opportunity not lost on wind and solar developers.

‘We know from firsthand experience that building more wind and solar power facilities [has] proven to be the fastest, cleanest and cheapest way to replace dirty power plants and combat climate change,’ says Paul Gaynor, CEO of Boston-based wind and solar developer First Wind. ‘We hope that these new EPA rules underscore that we have a chance right now to make long-term decisions to lock in affordable power with clean, renewable energy for decades to come.’

There's little doubt that EPA emissions guidelines will positively impact overall solar demand and push solar closer to combustion-fuel electricity prices, says Dan Bedell, executive vice president of strategic and corporate development at Principal Solar Inc., Texas-based owner-operator of solar generation assets. The question is how rapidly this will happen.

‘Some states and utilities will immediately move to reduce or offset power plant pollution with renewable sources,’ Bedell says, adding that the more innovative, change-embracing entities – such as Duke and NRG Energy – are wisely planning and already acting to incorporate the inevitable transformation that is well under way toward distributed, clean energy generation, whether it's solar or wind.

‘Those with more to lose or those with less agility and less foresight will instead turn to the courts for protection or, at least, delay,’ he says. ‘Unfortunately, the ratepayers in those territories will wind up bearing the most financial burden because they'll have to pay for new generation sources in addition to litigation expenses.’

Under the current proposals – which must undergo months of public comment and are thus subject to change – states are supposed to begin submitting their carbon reduction plans just as the investment tax credit for solar projects heads into the sunset at the end of 2016.

Dirt in the details
According to the EPA, its Clean Power Plan will be implemented through a state-federal partnership under which states will identify a path forward using either current or new electricity production and pollution control policies. As opposed to shutting down the power plants immediately, the EPA plan allows states to tailor a method to comply over a specified period of time. States can choose a mix of energy efficiency, demand-side management and state/regional policies to meet the program's goals.

Tom Wood, a partner at Stoel Rives LLP, points out that the states have a tremendous range of options for responding to the plan.

‘The program is based on four strategies: improved power plant operation, increased use of lower emitting generation resources, increased use of non-emitting generation resources and increased end-user efficiency,’ Wood says. ‘States must submit CO2 reduction plans to the EPA that make use of the four strategies. These plans can be single state or multi-state.’

States are required to reduce CO2 emissions from power generation on either a mass basis or an output (lb/MWh) basis. The reductions occur in two stages, with the first limit to be reached by 2020 and the second by 2030. States preparing single state plans can get an extension to June 2017; states submitting multi-state plans can get an extension to June 2018.

State-specific emission rate-based limits are given in the rule. For example, by 2020, Idaho must decrease CO2 emissions from its affected facilities to 244 lbs/MWh while Montana must reduce its CO2 emissions from covered units to 1,882 lbs/MWh. The EPA's interactive map showing each state's obligations under the proposed Clean Power Plan reveals some of the considerations behind the seemingly byzantine arrangement. Legal challenges and political wrangling will hang on the formulas by which given states were assigned their contributions to the national carbon reduction goal.

‘It is not too bold a statement to say that the rule is going to be litigated once it is finalized,’ says Steve Fine, vice president of ICF International, a Virginia-based consulting firm. ‘You have always had competing visions of how the EPA should interpret a best system of emissions reduction (BSER) standard. It's the classic"inside the fence' verses the 'beyond the fence' issue.’

For each state, the EPA used 2012 generation data to calculate an average fossil emission rate that served as the starting point and then made adjustments downward on a state-by-state basis to end up with a BSER standard. Fine says in developing its emissions rules, the EPA started with inside-the-fence improved efficiency requirements for coal-fired plants and then moved outside the fence to encompass combined-cycle plant operations, renewable energy and energy efficiency, among other factors.

Interestingly, the EPA has declined to suggest a model rule to go along with the BSER.

‘The EPA has said to the states, 'You have lots of flexibility, and we're not even going to suggest a model rule,'’ Fine says. ‘They are very much enabling an organic, bottom-up approach. But it raises large questions about what individual states will do.’

While the notion of ratcheting up emission standards at U.S. power plants is not new – nine Northeast and Mid-Atlantic states comprise the Regional Greenhouse Gas Initiative (RGGI), the U.S.' first market-based regulatory program to reduce carbon dioxide – critics contend that such a mandate to limit carbon reductions is complex and arbitrary.

‘Some have suggested that the 30 percent target is more reasonable than anticipated,’ says Scot Segal, executive director at the Electric Reliability Coordinating Council, a coalition of power companies working on clean air issues. ‘But the truth is that the most cost-effective reductions since 2005 – perhaps the first 10 percent – have already been undertaken. What is left on the road to 2030 are increasingly more expensive and less-tested alternatives.’

Segal also cautions that if the economy grows, so too will energy demand, ‘which will complicate the glide path the EPA anticipates.’

Just the same, RGGI maintains that the program is working. According to an RGGI spokesperson, the program has helped participating states reduce carbon dioxide emissions by approximately 40% since 2005, in conjunction with market responses and other state clean energy polices. RGGI says the program is based on emission allowances that are distributed, providing certainty that the projected emission reductions will be achieved, including reductions attributable to energy efficiency and renewable energy, such as wind and solar.

Individual states are already working to determine their level of exposure created by the EPA's draft legislation, according to Tom Vinson, the American Wind Energy Association's (AWEA) vice president for federal regulatory affairs. In fact, he says, some forward-looking states are looking to New York, a RGGI member, for information on how to comply.

The EPA plan will also likely have a profound effect for the 29 states plus the District of Columbia that feature a renewable portfolio standard (RPS), says Stoel Rives' Wood. He says the EPA plan will likely stimulate ‘regulatory and market-based actions’ to acquire additional wind and solar generation. Conversely, Wood says non-RPS states have already indicated that they consider any ‘outside the fence line’ options to be illegal and subject to extensive legal and legislative challenges.

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