By Bruce McLaughlin, Braun & Blaising, P.C.
A new legal paradigm exists in the United States that will affect every generating plant in one way or another. The era of regulating greenhouse gases (GHG) has arrived and federal action is reasonably certain. It appears the impending federal regulation will be a source-based regime patterned after the Acid-Rain program in Title IV of the Clean Air Act. If so, the GHG rules will set an emissions cap. Entities selected as the points of regulation will trade allowances or use other compliance options to reach the cap in the most cost-effective manner.
In 2006, California passed legislation (AB 32) requiring the California Air Resources Board to develop rules for a statewide GHG emissions target and the emission reduction measures for achieving the target by 2020. California also passed legislation instituting a GHG emission performance standard (EPS) for baseload generation. Suffice it to say that the law now bars any retail electricity provider from entering long-term financial commitments for baseload generation unless that resource complies with the EPS. California retail providers may not enter a “new ownership investment” or a power procurement contract of five or more years with a power plant having an annualized capacity factor of 60 percent or more that has an emission rate greater than 1,100 pounds of CO2 per MWh. Most troubling is the “new ownership investment” language which includes “any investment” intended to extend the life of one or more units of an existing baseload power plant for five years or more, or results in a net increase in that plant’s existing rated capacity.
Unfortunately, for utilities that currently have high-emission resources in their portfolios, the EPS flies in the face of efforts to cost-effectively achieve the mandatory AB 32 target. To begin with, the life extension criterion follows an anachronistic measure of plant maintenance. Today’s maintenance programs aim to increase existing power plants’ availability, efficiency and reliability and ensure their continued safe and cost effective operation. California’s two-pronged approach to GHG regulation raises many questions for operations and maintenance personnel. Here are a few of the more insidious.
Question: Will the EPS constrain necessary and beneficial maintenance actions? As declared by the Legislature, the EPS is intended to reduce the potential financial risk to California consumers for future pollution-control costs and reliability problems. Yet, the EPS regulations inhibit utilities from making these decisions based on their own experience and analysis. Neither the regulations nor the administrative record provide useful guidance for defining “life extension.” Is the determination based on some amorphous calculation of useful life, the plant’s initial construction date, economic viability, mechanical condition or possibly the effective date of an unrelated regulatory edict requiring new environmental technologies?
Question: Will the EPS inhibit a utility’s phased and orderly transition to attaining the AB 32 target? For example, the most cost-effective means to achieve substantial emission reductions may be by investing in progressive environmental improvements to higher emitting plants. Yet, the EPS regulations establish a go or no-go determination prohibiting any investment unless the plant complies with the EPS. Taken literally, this means converting an existing coal-fired plant to integrated gasification combined cycle (IGCC) is prohibited and nothing short of carbon capture and sequestration is authorized.
Question: Will the EPS prohibit investments aimed at preventing, reducing or eliminating non-GHG emissions, pollution or nuisances from power plants? For example, much generation on California’s coastline and estuaries uses once-through cooling technology. If Clean Water Act requirements are implemented through a California policy requiring power plants to minimize impacts on marine life, would regulators deem an investment incorporating new cooling technology action a “life extension” since the plant could not legally operate past the new rule’s effective date unless it complied?
Question: Will the EPS bar investments that are part of a strategic and comprehensive business plan intended to achieve the greatest lifetime effectiveness, utilization and return from physical assets? For example, will the EPS prohibit any investment to replace older components with more efficient technologies that reduce heat rate, fuel usage and total annual emissions but simultaneously increase capacity?
Real and permanent GHG emission reductions are the end game for this new paradigm. Yet, what now is a proper risk management policy as utilities encounter these questions and ambiguities of the EPS? In terms of plant management, maintenance strategies will play a big part in achieving reductions. Too, the EPS may add a new incentive for implementing a reliability-centered maintenance (RCM) program. California’s EPS regulations exempt routine maintenance from the “life extension” and “increased capacity” criteria. Little guidance is provided to define “routine maintenance,” yet that may benefit utilities that implement a broad RCM program. RCM typically incorporates tasks to maintain plant assets’ functional capabilities as well as tasks to detect potential failures. RCM identifies the effects of failure modes and performs repair or restorative activities that are condition-directed.
In any regulatory regime requiring real, verifiable, and quantifiable reductions of GHG emissions, a utility should implement and make routine a comprehensive reliability-centered maintenance program that is also real, verifiable and quantifiable. Then, the utility may reasonably argue that the EPS should not prohibit its RCM-directed investments that are designed and intended to achieve the most cost-effective GHG emission reductions.