Study: New Environmental Initiatives Threaten to Undermine Electricity Deregulation

Published June 1, 1998

Hopes that deregulation of the electric utility industry will lead to lower costs for consumers may never be realized, according to a study released May 27 by the Washington-based Edison Electric Institute (EEI). The report faults new air quality rules pushed by EPA and the requirements of the as-yet unratified the Kyoto Protocol.

“Each EPA rule under the Clean Air Act (CAA) would result in additional costs for electric utilities and, consequently, for consumers These costs would have a profound collective impact on the price of electricity,” the report says. The nation’s lowest-cost, coal-fired generators will be the segment of the electric power industry hardest hit by EPA’s planned regulatory initiatives.

Moreover, warns the report, “[t]he effects of the Kyoto Protocol would . . . dwarf EPA’s air initiatives, not only spurring dramatic electricity price increases, but also radically altering the very make-up of the power generating sector.” “The result would be a dramatic shift away from the historic national energy policy that has resulted in a fuel mix including coal, natural gas, oil, nuclear and hydropower. This shift could have broad and sweeping ramifications for the economy.”

The report, “At What Cost? Federal Environmental Regulations in a Competitive Electricity Marketplace: The Cumulative Impacts of Federal Environmental Activism on the Electricity Supply,” was prepared for EEI by Resource Data International Inc. (RDI), a Colorado-based consulting firm.

EPA Proposals Counterproductive

Even though electricity generation in the U.S. has more than doubled since 1970, the study points out, emissions and atmospheric concentrations of sulfur dioxide (SO2) and nitrogen oxide (NOx) have declined. Further SO2 and NOx reductions can be expected as a consequence of the Title IV acid rain provisions of the 1990 CAA amendments and from EPA’s plans to force additional cuts in emissions from utilities.

Recent EPA regulatory actions and proposals–specifically, new standards for particulate matter (PM) and ground-level ozone, as well as efforts aimed at ozone transport and regional haze–are expected to lead to higher electricity costs. RDI estimates those rules alone would require capital infusions totaling $21.8 billion (in 1997 dollars) for retrofitting pollution-control technologies at existing power plants over the next 10 to 15 years.

About two-thirds of that investment would be required for SO2 removal technologies, including SO2/NOx hybrid reduction systems where possible. Another 32 percent of the total cost is due to NOx removal technologies. Only 1 percent of the cost is projected for gas reburn (a method of removing NOx) or gas switching technologies.

Retrofitting power plants with these new technologies will reduce their thermal efficiencies and increase operating and maintenance costs, the RDI study says. As a result, higher operating costs at many coal-fired plants would shift a significant amount of power generation to natural gas-fired units. “Increased reliance on natural gas-fired generation would require significant pipeline construction over a relatively short period,” the report notes.

“This increased demand on gas supply would raise gas prices for electric generation customers nationwide by 15 percent by 2010. Higher gas prices may also boost costs for residential gas customers as well as increasing operating costs for a variety of businesses, adding to and widening the economic impacts resulting from the new emissions. In total, expenses for natural gas are predicted to increase by $9 billion (in 1997 dollars) annually throughout the U.S. economy,” the study observes.

The study predicts that higher costs for natural gas will raise average wholesale electricity prices by 11 percent, or $15.7 billion a year, by 2010. The crunch will come when cost pressures imposed by electricity deregulation force some less profitable plants–those not deemed worth retrofitting–to close. RDI estimates that 61 plants–58 of them in the already power-hungry East–are at risk of being closed.

Kyoto Treaty Makes Things Worse

The nation’s energy picture becomes even more clouded when the Kyoto global warming treaty is considered. Living up to the commitments made in Kyoto last December will require drastic reductions in America’s output of man-made greenhouse gases. The utility industry is one of the chief targets of the administration’s global warming agenda.

Coal-fired electricity-generating plants account for 82 percent of the utility industry’s carbon dioxide (CO2) emissions. RDI estimates that, in order to meet Kyoto commitments, 36 percent of U.S. coal-fired electricity generation will be shut down and replaced with other power sources.

How will those replacement sources fare? The outlook is anything but rosy, RDI concludes. Hydropower and nuclear power, both frowned upon by environmentalists and environmental regulators, would face certain and prolonged litigation. Many older nuclear power plants will be retired without being replaced by more modern nuclear facilities.

That leaves renewables and natural gas, and they are not likely to close the electricity gap. “Even if wind and solar generation increase by 500 percent and natural gas generation increases by 170 percent from 1997 levels,” the study points out, “the nation still would be faced with a 19 percent gap in available generation to meet the electricity supply in 2010 without the Kyoto Protocol.”