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What impact will the U.S. EPA’s Rule 111(d) on carbon dioxide emissions have on power generation? Seemingly a lot. Coal fired generating units – both existing and any possible new units – are under incredible financial pressure. Costs of required upgrades at coal facilities, if not already in place, will run into the tens of billions of dollars. Requirements to meet carbon output limits on any new coal plant mandate limits on CO2 emissions most likely by using carbon capture and sequestration (CCS) technologies. This option makes construction and operational costs prohibitive barring a significant technological breakthrough. In short, new coal fired generation is over in the United States. So how do we ensure the lights stay on? By using natural gas.

Beside renewables, natural gas looks to be a winner under the Clean Power Plan, but the jury is still out. Certainly in Ohio, with its abundant supply of natural gas from shale, combined cycle gas turbines are the preferred generation source for new baseload power generation facilities.

OHIO IS A CASE STUDY IN "MARKETS IN TRANSITION"

Historically a state primarily dependent on coal for its generation, Ohio is in the early stages of what appears to be massive natural gas development in the Utica shale. With approximately 1,500 wells drilled and supply at an all time high, prices are projected to remain low for quite some time. When combined with the Marcellus shale being developed primarily, but not exclusively, in Pennsylvania, the price of Appalachian Basin natural gas is trading at a significant discount to Henry Hub and NYMEX prices.

When calculating the carbon offsets between the retiring coal plants and the new natural gas fired plants, the reduction in carbon emissions is approximately 50 percent. What is crucial to remember and often overlooked in cursory observations is that the retiring coal plants typically did not run significant amounts (i.e. low capacity factors). The expectation under 111(d), however, is that the natural gas plants will run at 70 percent capacity, more or less. The changes in dispatch of power plants then will require that baseload coal plants run less and natural gas plants run more in order to offset the carbon emissions. Regional transmission organizations, or independent system operators, or load balancing authorities will then bear the burden of altering the dispatch schedule to achieve the “right” carbon emissions target. A concern raised during the rule making was changing from economic dispatch (i.e. lowest cost units dispatched first) to environmental dispatch (i.e. lowest emitting units dispatched first). What this could mean in the way of costs to ratepayers as well as utilities with higher operations and maintenance costs remains to be seen. U.S. EPA projects that rates will rise less than 3.0 percent for the first few years and then drop approximately 2.5 percent per year for the rest of the compliance period. Utilities and regulators who have performed similar calculations arrive at strikingly different outcomes, but that is beyond the scope of this piece.

WHAT IS HAPPENING IN OHIO?

As a restructured state, Ohio’s generating assets are no longer “utility” assets, but are outside of the regulatory reach of the PUCO and operate in a competitive environment. Transmission and distribution systems (the “wires” side of the business) remains a regulated monopoly. Since Senate Bill 3 was passed in 2000, 5,675 MW of new generation has been certificated, sited, and constructed in Ohio. More recently, as a result of the Mercury and Air Toxics Standard rule from the U.S. EPA (“MATS”), thousands of megawatts of older, dirtier, and less economic generating plants – almost exclusively coal fired – have retired. The Ohio Power Siting Board, who has jurisdiction over the approval of new generation facilities in Ohio, has approved or is reviewing for certification more than 4,000 MW of new gas fired generation.

WHY THE INTEREST IN OHIO?

Aside from the competitive market dynamics, the availability of cheap natural gas, established infrastructure to deliver the low priced gas, and significant retirements of existing generation have created a unique opportunity to develop new generation in Ohio. And this outcome is not unique to Ohio, but is certainly more pronounced in the areas where shale gas development is underway. Pennsylvania, with its significant Marcellus resources, is also experiencing an uptick in natural gas fired generation to replace the retiring coal units.

At the same time, not all the news is good for natural gas in the Clean Power Plan world. Some environmental groups oppose the development of shales through the use of fracking, oppose injection wells for waste disposal, and/or are actively opposing pipeline projects that will move the gas from the well pad to the major pipelines and to market at the state and federal levels. These challenges to the development, use, and deployment of natural gas have the ability to set back the full use of natural gas in the world of energy generation. Given the technological limitations not yet resolved on the issue of intermittency, the need for stable, constant baseload power remains a critical need for managing the power grid. As set out under the Clean Power Plan, natural gas is the preferred alternative.

WHAT CAN BE MADE OF ALL THESE DATA POINTS?

First, natural gas prices are driving the investment in new gas fired generation, and new generation is being constructed in Ohio and elsewhere. Current market prices and natural gas price forecasts indicate steady, low prices for the short- and medium- term. The Clean Power Plan’s clear preference for lower (and zero) emitting generation also provides support for the continued development of natural gas fired units.

Second, renewables are a preferred source of generation under the Clean Power Plan. Because wind and solar continue to wrestle with the issue of intermittency and storage solutions have not yet been developed to levelize supply and demand, natural gas fired units will continue to fill that role – natural gas units have the ability to quickly ramp up and down to balance supply to load demands thereby maintaining grid stability.

Finally, development of shale plays and the immense supply of natural gas that continues to come on line are the means natural gas generation will be available and cost effective to support the integration of renewables into the grid.

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