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Peter Spinney
Bob Williams, director of research for PennWell Publishing's Oil & Gas Journal Research Center Peter Spinney is Director of Market and Technology Assessment at NeuCo, Inc., the leading provider of optimization technology solutions within the electric power industry. His background combines electric power generation, economics consulting and government agency experience. Click here for a detailed bio.


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CSAPR Update: The Kinder, Friendlier Ghost
October 14th, 2011
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The close of the time period for petitioning the US EPA’s Cross-State Air Pollution Reduction (CSAPR) rule was accompanied by an EPA announcement with proposed changes to the rule, and 8 states  filing petitions contesting it (in addition to Texas which had already filed a petition).   These changes have the effect of making the rule less onerous than the original, which was issued last July to take effect on January 1, 2012.  The start time for the state budgets and maximum assurance levels and allowance trading remains in place for January 2012, despite a 30-day comment period on the proposed changes.

Some small adjustments were made affecting a number of state-level CSAPR budgets and unit allocations, in effect relaxing the required reductions between 1-4%.  The basis of these changes included erroneous assumptions in the original modeling regarding SCRs in-place and also states where it became clear that the original budgets would have caused “non-economic operations of several units, (aka de-rates) for large units with relatively low variable costs.

The biggest change, however, is delaying the onerous “two-for-one” allowance forfeiture and financial penalties when maximum assurance limits are exceeded until Phase 2 of the rule, which takes effect January 2014.  This change is described in the Fact Sheet accompany the proposed changes as follows:

“EPA is amending the assurance penalty provisions of the Transport Rule to make them effective January 1, 2014. This change takes account of the fact that the revisions described above are being proposed, and any information described above concerning requested additional revisions may be submitted, close to the commencement of the Transport Rule programs. The proposed amendment to the assurance provisions is intended to promote the development of allowance market liquidity as these revisions are finalized, thereby smoothing the transition from the Clean Air Interstate Rule (CAIR) programs to the Transport Rule programs in 2012.”

I believe that both the relaxed budgets and assurance limits (based on a percentage beyond the budgets designed to account for “natural” year-to-year variability in emissions output for any given generating unit) and deferral of the forfeiture and financial penalty provisions will make boiler optimization all the more attractive as a primary compliance method for CSAPR. The smaller required percentage reductions will further increase the likelihood that the 10-15% average NOx reductions typically provided through boiler optimization will be sufficient to achieve compliance.

The two-year deferral of penalties and trading restrictions will make for a more robust and liquid trading market during the first phase of CSAPR. The increased liquidity and less restrictive trading provisions will provide every generating unit included in CSAPR a direct financial incentive to minimize the allowances needed to purchase or maximize the surplus allowances available to sell or bank for future compliance needs.

On the topic of banking, my sense is that there is a strong incentive to maximize the allowances available to a bank for post-2014 usage due to a combination of the ratcheting down of the state budget levels, uncertainty on how economic conditions will affect generation demand and dispatch patterns,   the draconian nature of the “two-for-one” forfeiture and $37k per ton-day financial penalties that will take effect in January 2014. Simple logic suggests that no generator would want to forgo any action that cost-effectively minimizes allowances used during these first two years of CSAPR, particularly if that action, such as the adoption of boiler optimization technology, pays for itself in fuel savings and improved commercial availability (such as reduced boiler tube leaks from less soot blowing or fewer de-rates from slagging or fouling).

Then, there’s the issue of how and when the petitions that have been filed might affect the implementation of CSAPR. I am not a lawyer, but my understanding is that the rule will be implemented as proposed until if and when such time the US Circuit Court modifies or overturns it, unless the court grants a stay, as requested by several of the petitioners. While it is possible such a stay could be granted, I believe (as do most of the petitioners) that this would be unlikely given the experience with CAIR, the delay between the overturning of CAIR and the January 2012 CSAPR deadline, , and the court’s recognition of the urgency with which the legal requirements associated with the Clean Air Act of 1970 (CAA) and CAA Amendments of 1990 must be addressed.

My read on the CAA and CAAA is that one could not imagine any rule “kinder or gentler” to the affected generators than CSAPR which would be considered consistent with the legal obligations of these landmark pieces of legislation. Remember, CAIR was tossed out because it was “not stringent enough” to ensure against upwind states interfering with the ability of down-wind states to comply with NAAQS. As one attorney specializing in air emissions law remarked, CSAPR “reads like a 100-page legal response to the Circuit Court’s ruling on CAIR.”

This logic here is all the more compelling given the significant concessions the EPA has made in response to generator concerns about how CSAPR would affect their operations and associated costs to electricity consumers. In fact, it will beinteresting to see if some states withdraw their petitions in response to these concessions, since they were announced on the same day that the 8 out of 9 petitions were filed.

What I can imagine is that the court — in ruling on the petitions — sets a deadline for finalizing the new NAAQS ground-level ozone limits. What CSAPR needs to do for NOx reduction in Phase 2 and beyond to provide compliance with CAA and its amendments depends entirely on whether that NAAQS limit is set at 70 or 65 ppm.  And the regulatory uncertainty associated with the difference between a $13 billion and $90 billion compliance tab is crippling to the industry and the economy as-a-whole.

That being said, what is legal or rational, or good for the power industry and the economy as-a-whole may or may not have anything to do with one another. I do, however, believe it very unlikely that anything less stringent than CSAPR as most recently modified will pass muster with the Circuit Court given their ruling on CAIR, and also unlikely that the same court would further delay CAIR’s replacement given the urgency in its own ruling that CAIR’s shortcomings be addressed.

*WEBCAST ALERT: We are hosting a LIVE Webcast on Nov. 3rd, 2011 at 11:30AM/EST to discuss CSAPR’s implication on the power industry, what it means for your plant and how it’s different from past emissions regulations.  We’ll also highlight how BoilerOpt® can improve overall unit performance, reduce NOx, and increase boiler reliability which results in fewer adverse consequences associated with low-NOx operations, including less slagging, water wall corrosion, ammonia slip and air heater fouling. To register visit: http://www.brighttalk.com/channel/5672

www.neuco.net

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