Power Industry Weighs Realities of President's Climate Action Plan

---

Written by Brock Ramey, North American Power Manager for Industrial Info Resources (Sugar Land, Texas)--On Tuesday, President Obama announced what has become known as the "Kitchen Sink Plan," because it basically covers everything, including the sink, when dealing with the topic of climate change. But in truth, what was actually released is nothing more but repackaged plans that the President and his administration have not yet been able to pass. Let's take a look at some of the key points from the address on Tuesday, and at the possible effects of the plan.

Click on the image at right for a graph showing states with natural gas-fired capacity under development for 2013-2016.

First, the call for CO2 emissions limits at new and existing fossil-fired power plants. Based on my understanding, the U.S. Environmental Protection Agency (EPA) has already passed the first part of this regulation through the Greenhouse Gas Regulation. The portion covering existing fossil facilities gave power producers a set amount of time to become carbon-capture ready, which, with the existing economics, would be around 2035. In addition, the EPA has yet to fully propose or pass a standard for new assets. Natural gas-fired power plants are the only fossil-fuelled plants that could meet the 1,000-ton-per-year level.

There is no coal facility in this country that could meet those limits without a carbon capture and sequestration (CCS) system. This technology is so cost-prohibitive (approximately $3 million to $4 million dollars per megawatt sequestered) that even the EPA has stated that we are years away from making this a viable requirement. A prime example was American Electric Power Company's (NYSE:AEP) Mountaineer Pilot project, which cost more than $75 million to construct and only slipstreams about 30 MW or less of generation. The full-phase project was projected to cost approximately $600 million to $800 million for a 250- to 300-MW slipstream capture. Plus, a lot of these facilities do not have the real estate available to build such a system, and the parasitic load on the asset would be such that approximately 10% to 15% of generation would be consumed just to power the carbon capture facility. Some things that have not been discussed concerning retrofitting a pulverized coal-fired boiler with CCS include major modifications to equipment; outage times for retrofit tie-ins; and possible new source review for all the modifications to facility.

This is not to say that there are not advances in CCS being made every year. The universities of Purdue and Texas, as well as the Electric Power Research Institute, are among several institutions that have shown that using solid sorbents would reduce the parasitic load by as much as 30%. There are several other technologies, such as membrane systems, that will address both post- and pre-combustion implementation to combat CO2 emissions. But these are at least five to 15 years away from being fully commercial viable, and with continuous budget cuts to the U.S. Department of Energy's Clean Coal Programs, these timeframes will probably be pushed out even further.

A second topic was the awarding of 10 gigawatts of renewable generation development on federal lands. The Bureau of Land Management has been making these awards for the last year, but the challenges still facing a lot of these projects include financing, competition of natural gas assets in the area, power purchase agreements, and the knowledge that wind energy support programs are coming to a rapid end. The Obama administration can push out memoranda all it wants, support credit programs and open lands up for development, but until certain technologies are economically viable and can stand on their own, this development is going to be very slow. In order for renewables to be cost-competitive with natural gas, the price would have to be about $6 to $8 regionally. The current gas price is still some way from reaching those highs. In addition, there is limited or no infrastructure on a lot of federal lands, and bringing transmission and distribution assets to these areas could take years.

Third, the notion that the Department of Energy has a lot of money to loan out for the development of clean coal or fossil fuel development is quite peculiar, given the budget cuts that energy research and development, nuclear development and several other programs are likely to take in the 2014 budget.

Fourth, the President stressed natural gas development. He said that the price and abundance of natural gas will reduce our dependence on coal and will help shore up our renewable energy assets in the market place. But just a couple of days ago, we saw the announcement of reductions of 60% to 70% discovered in the Marcellus shale formation from the 2011 estimates. This has a huge impact on the shale inventory in the United States. Also, the current federal regulations for the natural gas industry will do nothing but drive the price of natural gas production up. Regulations such as 40 CFR 60, Subpart KKKK, Subpart OOOO and others will continue to challenge some aspects of natural gas development. But even with all this, the U.S. is still going to see approximately 10 gigawatts of generation construction over the next four to five years.

The reality of the President's climate action plan is that it is yet another rehashing of very vague promises, with no real implementation dates in sight. The EPA has yet to put together a single regulation that has not gone through a series of challenges requiring either a partial or complete rewrite of the regulation in about five to six years or more. Are we going to see a large amount of changes in today's market in the next 12 to 24 months because of this plan? Only time can tell, but it is going to be slow-going over the next 12 months, with all the proposed regulatory changes.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.