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Flawed electricity markets and limited EPA authority will make CO2 reductions difficult, report says


From the May 20, 2014 issue of Public Power Daily

Originally published May 20, 2014

By Robert Varela
Editorial Director
Two major market impediments—flawed electricity markets and the Environmental Protection Agency's limited authority—mean that reductions in utilities’ carbon dioxide (CO2) emissions "will be more difficult, more costly, and likely have unintended long-term consequences that are not reflected in optimistic assessments based on assumptions of perfect market efficiencies," says a new paper commissioned by APPA. States "will need flexibility in terms of approaches, goals and timing as they face the realities of achieving CO2 emission reductions in a problematic marketplace," said the paper, Markets Matter: Expect a Bumpy Ride on the Road to Reduced CO2 Emissions, by Cliff Hamal, managing director of Navigant Economics. 

Economic efficiency is essential to maximizing CO2 emission reductions over the long term, the paper said. "The magnitude of the desired changes to existing patterns of electricity generation and use is so large that the ability to achieve reductions will ultimately be limited by the political will to impose costly reductions."

One impediment to efficient reduction of CO2 emissions is that some electricity markets, notably the capacity markets run by the Eastern regional transmission organizations, "operate with significant limitations that will impede the ability of the EPA to address CO2 emission reductions," the paper said. In restructured regions, there is a disconnect, APPA President and CEO Sue Kelly told reporters at a May 19 briefing on the paper. "There’s nobody to order merchant generators to take specific actions and they’ll do what’s in their interest."

The mandatory capacity market auctions not only "have proven to be problematic, costly and uncertain in meeting reliability goals," but they also have already run into direct conflicts with states’ reliability and environmental goals. The mandatory capacity markets "will be severely stressed by the added complexity of maintaining reliability while shifting to a lower CO2 emission portfolio," the report said. In that case, the Federal Energy Regulatory Commission "will remain a battleground, with intense pressure from merchant generation owners seeking to maintain high capacity payments at odds with state-backed policies to achieve emission reductions and minimize customer costs," said Hamal and Joe Nipper, APPA senior vice president-regulatory affairs and communications, in a joint blog post.  

A major flaw of the Natural Resources Defense Council’s proposed system-based approach for reducing utility emissions of CO2 is that it "rests on an assumption of perfect efficiency in the marketplace that is neither justified nor reasonable," the paper said. NRDC assumed that RTOs with mandatory capacity markets will respond in the same manner as regions with vertically integrated utilities, which have the ability to consider broad portfolio-based approaches to meeting long-term objectives. The council's analysis also did not present some real-world costs, Hamal said. The paper cautioned that, "if promises of substantial, low-cost CO2 emission reductions prove to be unobtainable in this iteration, the political will to attempt a more aggressive approach in the future will likely be diminished."

The other major impediment to efficient reduction of CO2 emissions is the expected lack of a nationwide program in EPA’s upcoming rule setting greenhouse gas reduction guidelines for existing generators, the paper said. Limitations on the agency’s authority prevent EPA from considering options that economists view as the most efficient, such as a carbon tax or nationwide cap-and-trade system, Hamal noted. 

Both the blog post summarizing the paper and the full text of the paper are available on APPA’s website, www.PublicPower.org.
 

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Vice President, Integrated Media and Communications
Meena Dayak
202/467-2948
MDayak@publicpower.org

Editorial Director
Robert Varela
202/467-2947
RVarela@publicpower.org

Editor, Public Power Daily
Jeannine Anderson
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JAnderson@publicpower.org

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Fallon W. Forbush
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David L. Blaylock
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Integrated Media Editor 
Laura D’Alessandro 
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