August, the Month of Energy Sector Discontent

August, the Month of Energy Sector Discontent

August 28, 2015

The eighth month of the year has historically been very special for the US energy sector. The Northeast Blackout of 2003, the Energy Policy Act (EPAct) of 2005, and the Clean Power Plan and Methane Emission Reduction Policy proposal of 2015 each had immense impacts on the industry and originated in August. Whether their birthdays are coincidental or not, logically they are connected with one another in a very curious manner.

In August of 2003, a massive blackout left 50 million electricity users in Northeast Canada and the United States in darkness for several days. Even though that disturbance was nowhere near the expanse of the 2012 blackout in India with 620 million left without electricity, the US regulatory impact from this event was disproportionately enormous. The reaction from the government authorities to the Indian blackout was a three-person committee investigation that issued a report with series of recommendations. North Americans had a bit more thorough take. A joint US-Canadian government federal taskforce investigation concluded that the cause of such disaster was absence of mandatory reliability standards. Two years later, in August 2005, the Energy Policy Act (EPAct) was signed into law by US President George W. Bush. This legislature set up the framework for mandatory requirements for reliability of services provided by operators of bulk electric systems. By the way, it was the second time lawmakers got very serious about reliability. An earlier joint US-Canadian blackout in 1965 set the foundation for creation of NERC itself; forty years later, EPAct made these reliability standards developed by NERC mandatory, and NERC was given the authority to enforce compliance with these standards.

On August 7, 2015, Midwest Reliability Organization (MRO), one of the NERC’s subsidiaries, released a “Happy Birthday” wish to EPAct. A classy congratulatory press release contained a reminder about the mandate of the industry to “provide a critical public service . . . one that needs to be protected” in ensuring a highly reliable regional bulk power system. I dare to speculate that probably this so unconventionally delivered message about “where the MRO’s heart is” has something to do with the EPA’s progressive march towards cleaner power generation. Several days prior to this message, on August 3, 2015, EPA introduced a revised version of the Clean Power Plan, which, according to EPA, offers more flexibility to the states in meeting compliance with reducing CO2 emissions. Maybe there was some flexibility added; however, the target compliance year has been moved up by two years, making this plan more ambitious. This historic document mandates the electric sector to reduce CO2 emissions by 32% below the 2005 level by 2030. Each state was given an individual target by EPA calculated on the basis of weighted average of 2012 fossil fueled-fired electrical generation introduced to reflect each state’s unique power supply mix. The selected algorithm created very interesting outcomes. Just look at how some of the 2012 emissions versus reduction targets for 2030, both in lbs/Net MWh, and percentage of such reduction targets are distributed:

  • Mississippi 1185 => 945; 20%
  • Louisiana 1618 => 1121; 31%
  • Alabama 1518 => 1018; 33%
  • New Mexico 1798 => 1146; 36%
  • Arkansas 1779 => 1130; 37%
  • West Virginia 2064 => 1305; 37%

According to Forbes, the states above are some of the poorest states, with the lowest income. The poorest states will have to cut emissions at very high rate, up to 37%. Switching to intermittent renewables requiring more investments in system upgrades, storage, and ancillary services is unlikely to be that magic wand that will transform economies of those states from ashes to riches. The opposite outcome is more likely.

Even higher emission reduction rates are set for the state of Minnesota (40%) and North Dakota (45%), the MRO subjects. With such high targets in sight, it is no surprise MRO released that “happy anniversary to our reliability mandate” message. EPA, FERC, and DOE announced that these three agencies will coordinate their efforts in ensuring reliable power supply during the Clean Power Plan implementation. EPA emphasizes that targets can be met through various measures, and states are not limited only to renewables; they can also do so by increasing efficiency and/or introducing carbon trading systems. Besides, multiple states can combine efforts in order to meet goals as part of the grid. However, being part of the grid as a solution raises few question:

  • How the jurisdictional authority will be decided on since the Clean Power Plan is developed for specific states while a grid is usually managed by independent entities, such as ISOs and RTOs, which spread over multiple regions but do not necessarily cover complete states geographically? Will states have the authority over system operators to dictate dispatch rules?
  • Will FERC have to develop regulations for energy dispatch to meet EPA’s requirements? Does that mean that FERC will have to follow the EPA’s directives?
  • Will the market-based economic energy dispatch become obsolete?

Questions go on and on. Strange thing: despite the grievance given to fossil-fueled generators, many environmentalists are not happy either. “Too little, too late” and “only negative emissions can save us” is their common rhetoric even though EPA did not concentrate their efforts on power sector only. On August 18, 2015, EPA released a proposal on reducing methane emissions from oil and natural gas production – the first-time ever federal attempt to establish standards for new and modified sources. The industries did not take the announced proposal warmheartedly stating that the methane emissions have been falling consistently in the last years and the new standards will be just an additional bureaucratic burden on the system. And hear what the environmentalists are saying: “not enough, they should put standards on abandoned and existing sources as well.”

In August 2015, the energy industry did not see many happy campers. Oh, wait, litigators might not be too sad – it is highly doubtful that entities subject to those strict restrictions will jump to developing compliance plans without trying to bring EPA to court.

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