NEW ANALYSIS: EPA PERFORMANCE STANDARDS UNLIKELY TO YIELD NEW CCS PROJECTS

Tamar Hallerman
GHG Monitor
05/11/12

Performance standards for new fossil fuel-fired power plants recently introduced by the Environmental Protection Agency will likely not yield new carbon capture and storage projects, a recently released Bloomberg Government report concludes. The analysis says that although the rulemaking advocates for the development of CCS on new fossil fuel generation, little movement is likely to occur in the coal sector unless Congress passes legislation to subsidize or incentivize the technology. Author Rob Barnett adds that cheap natural gas prices currently deem CCS unattractive to most project developers due to its relatively high technology costs. “Essentially, a natural gas plant can comply with the EPA’s proposed standard at a much lower cost, which begs the question of why investors would choose to build coal with CCS,” the report says.

The Bloomberg analysis comes more than a month after EPA proposed its New Source Performance Standards (NSPS) for new fossil fuel-powered generation. If finalized in its current form, facilities larger than 25 MW must adhere to an emissions limit of 1,000 pounds of CO2 per megawatt-hour, slightly above the emissions rate of an unmitigated natural gas combined cycle unit. The proposal was agreed to as part of a settlement agreement with a coalition of states and environmental groups that previously sued the agency for failing to regulate greenhouse gas emissions under the Clean Air Act.

EPA Calls NSPS a ‘Clear Pathway’ for Coal

When the draft rule was released in March, EPA Administrator Lisa Jackson lauded NSPS as a policy that could further kick-start CCS investment, calling the rulemaking a “clear pathway for new coal.” “EPA intends this rule to send a clear signal about the future of CCS technology that, in conjunction with other policies such as Department of Energy financial assistance, the agency estimates will support development and demonstration of CCS technology from coal-fired plants at commercial scale, if that financial assistance is made available and under the appropriate market conditions,” EPA’s rulemaking states. The agency also touted the flexibility built into the proposed rule for potential CCS project developers. In its current form, the draft would allow unit operators to average their emissions rate over 30 years in order to meet the standard, potentially allowing utilities to run a fossil-fired unit unmitigated for 10 years if they later upgrade with CCS technology and capture most emissions for the next 20 years.

But despite the incentives, the Bloomberg Government analysis concludes that the current economics of CCS will likely stymie any widespread investment in the near term. It cites Energy Information Administration figures that compare the cost of coal with CCS, unmitigated coal and natural gas technologies. While taking into consideration expenses such as fuel, variable and fixed operations and maintenance and levelized capital costs, EIA finds that coal with CCS sits at a price range of roughly $137 per MWh, compared to conventional unmitigated coal at approximately $95/MWh and natural gas at $65/MWh.

Barnett says that without additional incentives passed by Congress—on par with some of the provisions offered in the Waxman-Markey version of cap-and-trade legislation that passed the House in 2009—little CCS deployment is likely. “From a regulatory perspective, while the EPA may be able to block new coal plants without CCS, there’s little the agency can do to offer financial support to new technologies such as CCS. New legislation and incentives would be required to support the development and deployment of CCS,” the report says, adding, “It’s doubtful that Congress would tackle the narrow topic of carbon capture and storage incentives without addressing energy issues or the Clean Air Act more broadly.”

NSPS Will Likely Fail to Alter Current Business Patterns, Analysis Says

Instead, the report estimates that the rulemaking will likely fail to alter current investment patterns in the power sector, where natural-gas fired power generation has a “compelling” price advantage over coal. Recent discoveries in the Marcellus formation and developments in shale gas extraction techniques have paved the way for a cheap price for gas, currently hovering around $2 per mmBtu, and causing utilities to invest more in the technology. The report finds that gas will likely continue to gain market share in the power sector, estimating that coal will likely not be competitive until gas prices increase to at least $10 per mmBtu.

Barnett’s analysis agrees with previous projections that the rule “effectively bans” new conventional coal plants, cementing a market trend that has occurred over the last several decades. Since 1990, only 6 percent of new additions to the electricity sector have been from coal-fired generation, according to EIA, with the lion’s share of new capacity, roughly 77 percent, coming from gas. However, Barnett acknowledges that the NSPS could have a larger effect on coal down the line if it once again becomes an attractive option for power generation. “Banning the construction of new coal-fired power plants isn’t really a departure from business as usual,” the report says. “It’s akin to banning cars that fly: While there may be a market for flying cars in the future, there won’t be one anytime soon. The same goes for coal power: Things may change in the future, but based on current fuel prices, there are few companies seriously mulling the construction of new coal-fired power plants in the U.S.,” the report says.