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Coal-bound utilities predict blackouts after climate pact

Chief executives of the biggest coal-burning utilities in the U.S. predict blackouts and rising power bills if they’re not given more time to achieve greenhouse-gas emission cuts that underpin the government’s climate pact with China.

“I don’t think we have the ability to maintain a reliable system” by doing what the government proposes, Southern Co. (SO) Chief Executive Officer Thomas Fanning said in an interview yesterday.

The Environmental Protection Agency’s proposed timeline for cutting pollution from power plants threatens to shutter coal-fired plants before enough new generation can be built to replace lost supplies, said Fanning and Nick Akins, CEO of American Electric Power Co. (AEP), on the sidelines of the Edison Electric Institute’s Financial Conference in Dallas.

“It really is wishful thinking,” AEP’s Akins said about the timeline for the cuts.

The EPA’s Clean Air Act proposal to reduce carbon dioxide emissions from power plants by 30 percent below 2005 levels within the next 15 years is a key component of President Barack Obama’s plan to combat global warming. As part of an agreement with China announced Nov. 11, which for the first time would set a target for capping carbon, the U.S. agreed to reduce the nation’s overall emissions at least 26 percent below 2005 levels by 2025.

“There have been no instances in which the Clean Air Act standards have caused the lights to go out,” EPA press secretary Liz Purchia said in e-mailed comments today. The agency’s proposals take power reliability into consideration, and have built in “an extended compliance period.”
‘Major Milestone’

The U.S.-China pact “is a crucial part of the Administration’s steady efforts to reduce emissions, which will deliver ever-larger carbon pollution reductions, public health improvements and consumer savings over time,” Purchia said. “It’s also a major milestone in U.S.-China relations.”

The power industry will submit its response to the EPA’s proposed rules by Dec. 1, said Ted Craver, chairman of the Edison Electric Institute and CEO of Rosemead, Calif.-based utility Edison International.

The EPA rules fall unevenly across the industry, largely depending on how much coal falls into a company’s fuel mix. Edison relies mainly on gas-fired power, as well as hydropower, wind and solar.

“EEI, as the trade organization of utilities, has been really working on this a lot, holding meetings with our members,” Craver said. “The industry has worked hard at coming to a common understanding, and that will be reflected in those comments.”
Industry Challenges

The face-off between clean air and cheap and abundant power is a matter for the entire U.S. economy, affecting manufacturers, small businesses and homeowners -- a theme that has been prominent at the industry’s EEI conference this week.

The challenges for the power industry go beyond the cost and time it would take to build new plants to replace coal units forced into retirement. There’s not enough pipeline capacity to carry the natural gas that would be needed by all the newly built gas-fired power plants spawned by the EPA proposal, Akins and Fanning said. Adding pipelines can be tricky because pipeline operators require long-term commitments to receive gas before they will build the lines.

“We don’t have the infrastructure available in the Southeast in terms of pipeline capacity to do what EPA suggests we do,” Fanning said.

The North American Electric Reliability Corp., a not for profit that assures adequate power reserves to keep the electric grid functioning, urged the EPA earlier this month to consider delaying the first deadline of its plan, echoing AEP’s and Southern’s concerns about reliability.
Plant Shutdowns

EPA’s own analysis of the proposed carbon rule predicts that 46,000 to 49,000 megawatts of coal-fueled generation may be shut down no later than 2020.

“That midterm target is a real issue for the industry and ultimately the country,” Akins said.

Internal analysis done by AEP, the largest transmission operator in the U.S., shows the suggested federal pace of carbon cuts could risk “cascading blackouts,” Akins said.

Southern would have to retire more than 9,000 megawatts of coal-fueled generators and add about 5,400 megawatts of natural-gas plants by 2020 under plans envisioned by EPA, Fanning said.
Higher Rates

There are also customers to consider. The loss of cheap coal-fired power will boost power prices by as much as 25 percent on grids that serve about a third of the nation’s population, according to the Brattle Group, a Cambridge, Massachusetts-based consulting company. The biggest impact may be in the Midwest and Northeast, where demand for natural gas for heating jumps during the cold-weather months.

EPA’s Purchia said “any small price increase -- think about the price of a gallon of milk a month -- is dwarfed by huge benefits” to public health and “a better future for our kids.”

Exelon Corp. (EXC) Chief Executive Officer Chris Crane said in an interview today that the carbon-emission rules could be a boost for the Chicago-based utility, which is the largest operator of nuclear reactors in the U.S. At the same time, he said the government should be mindful of reliability and the impact of the rules on consumers.

The U.S.-China accord announced this week may make it more difficult to win concessions on the new rules.

“I don’t see anything that makes the bargaining position of the industry better,” Fitch Ratings senior director of global power, Philip Smyth, said in an interview today. “The election didn’t go the president’s way, but he is still going full bore ahead on carbon reduction.”
Reduced Emissions

Southern has already reduced its carbon emissions by 26 percent since 2005 by switching from coal to cleaner-burning fuels such as natural gas, Fanning said. AEP has reduced its emissions by 21 percent, Akins said.

Akins said the targets proposed by Obama in the China accord would be “headed in the right direction” if it resulted in a “relaxation” of the timeline for cuts proposed by the EPA.

“We can achieve the targets if given time and reasonableness associated with achieving those targets, but that’s where the rub comes in,” Akins said.

That seems unlikely under the current administration, as the agreement with China may actually “stiffen the resolve of the EPA to regulate carbon emissions,” Shalini Mahajan, senior director at Fitch Ratings, said in an interview.

Source: Bloomberg