On October 26, 2010, the North American Electric Reliability Corporation (“NERC”) released a Special Assessment, “Potential Resource Adequacy Impacts of U.S. Environmental Regulations” (the “Assessment”), which examines the impact of four potential Environmental Protection Agency (“EPA”) rules and proposed rules which could result in generating unit retirements or forced retrofits between 2013 and 2018.  The four potential EPA rules are: (1) Clean Water Act- Section 316(b), Cooling Water Intake Structures (“Water Rule”); (2) Title I of the Clean Air Act-National Emission Standards for Hazardous Air Pollutants for the electric power industry, or (“MACT standard”); (3) Clean Air Transport Rule (“CATR”); and (4) Coal Combustion Residuals (“CCR”) Disposal Regulations.  NERC determined that the Water Rule had the “greatest potential impact” on Planning Reserve Margins, or the amount of generation capacity available to meet expected demand plus a reserve margin in the planning horizon in the various reliability regions of the country.

NERC used two scenario cases to perform the Assessment, one “Moderate” and one “Strict,” with the Strict case using more rigid rule assumptions and higher compliance costs.  NERC determined that without additional power production or demand-side resources above those in the current regional plans, the four potential EPA rules and their combined effect are shown to significantly affect Planning Reserve Margins, and in most regions/sub regions, more resources would be needed to maintain NERC Reference Margin Levels.  Additionally, compliance costs could render 40 to 69 GW of existing capacity “economically vulnerable” for accelerated retirement, based on a calculation of required compliance costs and operation and maintenance costs in relationship to replacement costs; according to the report.

Overall, the Assessment stated that there could be a reduction of up to 78 GW of coal, oil, and gas-fired generating capacity due to retirement during the ten year period of the scenario in the Assessment.  Applying the Strict Case, this reduction occurs by 2015, while using the Moderate case, this reduction occurs by 2018.  EPA is expected to finalize the remaining air and solid waste regulations by the end of 2011 with compliance required by 2015-2016 and water regulations by the July 2012.

In its Assessment, NERC also examined the four potential EPA rules individually.  NERC found that the Water Rule has the “greatest potential impact” on Planning Reserve margins.  This is due to the fact that of the 252 GW of coal, oil steam, and gas steam generating units, along with 60 GW of nuclear capacity that will be subject to the implementation of this rule, 33-36 GW may be “economically vulnerable to retirement” if the EPA rule requires power suppliers to convert to re-circulating cooling water systems in order to continue operating.  Requiring new “closed-loop” cooling systems for steam units could cause accelerated unit retirements or derate unit’s net output capacity, according to the Assessment.

NERC also found that the EPA’s remaining three proposed rules will also have an impact on retirement and derating of units.  First, EPA is likely to set MACT standards for mercury, acid gases, heavy metals, and organics for coal and oil fired power plants, which could require additional emissions control equipment beyond mercury-only regulations.  Second, the CATR could result in 3-7 GW of potential retirements and derated capacity, mostly in the SERC Reliability Corporation region.  Finally, the CCR rule could cause retirement of up to 12 coal units, according to NERC.

In its Assessment, NERC found that “industry coordination will be vital to ensure retrofits are completed in a way that does not diminish reliability” and that “statutory and regulatory safeguards also allow the EPA, the President of the United States, and the Department of Energy to extend or waive compliance under certain circumstances.”   NERC recommended that the “pace and aggressiveness of these environmental regulations should be adjusted to reflect and consider the overall risk to the bulk power system.”

A copy of NERC’s Assessment is available here