Air Pollution Control Equipment Services, Coal

Capitalizing on Coal

Issue 8 and Volume 109.

Coal plants will play a big part in ensuring affordable and reliable power. The Edison Electric Institute is working to create an environment that is attractive to potential coal plant investors and builders.

The power industry’s coal plants – the large (typically 500 MW and above) plants that run continuously to meet a market’s minimum or “baseload” demand for power – generate about 51 percent of the country’s electricity. Drawing on America’s coal reserves, estimated to be one-quarter of the world’s known supplies, these baseload plants ensure that the country enjoys affordable and reliable power.

Importantly, the nation’s coal plants hold good news for the environment as well. Their air emissions have dropped over the past 25 years and will continue to fall. Also, innovative “clean coal” technologies are now on the horizon, promising even greater environmental improvements.

The Energy Information Administration (EIA) predicts that another 87 GW, equivalent to approximately 44 baseload coal plants, will be needed to keep pace with electricity demand through 2025. Because of the relatively high fixed costs of baseload plants, potential builders are looking for greater certainty on a number of energy, environmental and regulatory issues before they invest. The Edison Electric Institute (EEI) is advocating solutions to create this certainty.

Energy Legislation

A key component for improving investment certainty within the industry is comprehensive, national energy legislation. Among the essential elements, EEI is supporting legislation to strengthen the nation’s transmission system. This is vital both for accommodating the new baseload plants, which can be located far from population centers, and for enabling the country’s developing wholesale electricity markets to move large blocks of power between regions of the country.

Shareholder-owned utilities are beginning to step up their transmission investments. Between 1999 and 2003, for example, the industry’s transmission investments grew 12 percent annually, for a total of $17 billion. Looking ahead through 2008, preliminary data indicate that utilities have invested, or plan to invest, $28 billion more – a 60 percent increase over the previous five years.

A strengthened transmission system is vital both for accommodating the new baseload plants, which can be located far from population centers, and for enabling the country�s developing wholesale electricity markets to move large blocks of power between regions of the country. Photo courtesy of Siemens AG.
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More investment, however, will be needed. To stimulate this investment, EEI is asking Congress to put transmission assets on par with other major assets and reduce their depreciable lives from 20 years to 15 years. In addition, EEI is encouraging Congress to give FERC the authority to provide transmission investment incentives and to assist with cost recovery of reliability investments.

EEI is also calling for legislation to repeal the Public Utility Holding Company Act (PUHCA). PUHCA is an outdated statute that limits investment in the regulated energy industry. As a result, billions of dollars of new capital that could help the industry grow is unable to go to work.

Environmental Issues

Another issue that looms large in any discussion about adding baseload coal plants is the impact they will have on the environment. The nation’s power companies know that coal’s substantial energy and economic advantages must be balanced by substantial environmental protection measures. The good news is that work is well underway toward achieving this balance.

The industry is using 75 percent more coal to generate electricity today than it did in 1980. However, emissions of sulfur dioxides (SO2), nitrogen oxides (NOx) and particulate matter are 40 percent lower now than they were in 1980. In addition, mercury emissions are down 40 percent. The projected increase in coal use will be accompanied by further emission reductions.

Importantly, power sector carbon intensity (measured as the ratio of carbon dioxide (CO2) emissions per kWh generated) has also been cut since 1980, declining by about 10 percent. Carbon intensity in electric generation is expected to decrease by another 3 percent to 5 percent by 2012 under the Department of Energy’s voluntary Power Partners program.

Innovative clean-coal technologies promise to reduce air emissions even further. Integrated gasification combined-cycle (IGCC) technology, for example, could be commercially constructed in quantities in the near future. IGCC is projected to be able to remove more than 99 percent of SO2, NOx and particulate matter, and 95 percent of mercury. It can also capture CO2 more economically than conventional coal technology, and the technology’s higher operating efficiencies can lower CO2 emissions even further.

Emissions from the nation�s coal plants have dropped over the past 25 years and will continue to fall. Photo courtesy of Siemens AG.
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Sensible multi-emission legislation will help reduce power plant air emissions further and improve investor certainty. Coal-based power plants in particular face emission control requirements that are duplicative, contradictory, costly and complex, creating enormous doubt for future investment. EEI is advocating federal environmental legislation similar to the President’s Clear Skies Act of 2005, which would lower emissions faster, with greater certainty, and with greater cost savings than current programs.

With multi-emission legislation now on hold in Congress, the U.S. Environmental Protection Agency has issued its Clean Air Interstate and Mercury Rules. These rules largely mirror the proposed legislation, although there are some major differences. They will add another layer on top of the existing maze of regulations. The rules will do nothing to eliminate the time-consuming litigation, nor get rid of the state-to-state differences in implementation. While the industry earnestly works with the EPA on implementing these new rules, EEI continues its efforts to develop support in Congress for sensible, multi-emission legislation.

Assuring Cost Recovery

Because baseload coal plants are more capital intensive and have a higher initial cost than natural gas-fueled “peaker” plants, before breaking ground, builders will require assurances that they will be able to recover their investment. With the electric power industry continuing in a hybrid model of competition and regulation, this certainty must be found in competitive wholesale markets, regulated retail markets, and in markets that are a mix of both.

To create these markets, EEI is encouraging FERC, which regulates the interstate sale and transmission of electricity, and the states, which govern resource procurement decisions at the local level, to work together to develop compatible resource procurement policies that recognize both groups’ authority.

In the past few years, plans by vertically-integrated utilities to build new power plants or acquire existing plants from an affiliate have caused tension between FERC and states. States are looking for the least-cost option for their retail customers, while taking into account other concerns, such as economic development. State regulators typically have been in favor of these utility actions and have approved them. Because FERC has been concerned that utility actions to build or buy generation might hamper competition in the nation’s emerging wholesale markets, it has rejected the actions or approved them with great limitations.

FERC must give great weight to state regulators’ views on the best ways to serve regulated customers, including building baseload plants. More options for utilities and states are in the best interests of customers, because they lead to more affordable and reliable power. More options, rather than fewer, are in the best interests of the evolving wholesale markets as well.

Another necessary step involves regional transmission organizations (RTOs). In their role as energy market manager, RTOs need to create more accurate long-term signals, or market mechanisms to indicate when new baseload plants should be built. Today, these rules are in a state of flux, plus they fluctuate widely between regions. Many also believe the current three-year and even five-year capacity auctions within the RTOs will not promote investment in major baseload plants. EEI is urging FERC and the states to devote more attention to making this critical aspect of the competitive market work.

Finally, electric utilities and state regulators need to update their regulatory philosophy to recognize the blend of competition and regulation that now exists. A number of states and utilities are working together to develop guidelines for electricity procurement. These combine FERC’s goals for competitive wholesale markets with the states’ needs for an affordable power supply for their retail customers.

America has an ocean of coal beneath its feet; and with it, the long-term potential for a reliable and affordable energy future. EEI and its members will continue working toward turning that potential into a reality that benefits all stakeholders – customers, regulators, investors, utilities and the environment. p


Richard F. McMahon, Jr. is the Executive Director of Alliance of Energy Suppliers, a division of Edison Electric Institute (EEI) dedicated to serving the electric generation industry. As new market rules are being defined, the Alliance works to ensure that all power suppliers have access to a competitive market place and have the ability to operate a profitable business. The Alliance is an important division of EEI.