CEO Note - Be aware of potential impacts of proposed environmental regulations

WSJ article details threat to electric reliability

This month I want to talk a little about an article that appeared in The Wall Street Journal on Dec. 6, 2011, and tell you what happened soon after the article was published.

Entitled “Regulators are Letting EPA Compromise U.S. Electric Reli­ability,” the article concerns one of the biggest threats to the reliability of our national electric system. It is important to be aware of the potential impacts of the plans regulators are advocating. The ramifications of these rules could have a substantial impact on all of us very soon.

Rules could force closure of coal-fired power plants

In summary, the article reported on a recent Federal Energy Regulatory Commis­sion (FERC) conference which addressed new Environmental Protection Agency (EPA) rules. The rules were created to force the closure of dozens of coal-fired power plants. “The meeting barely fulfilled the commission’s legal obligations, but despite warnings from expert after expert, including some of its own, the FERC commissioners refuse to do anything about this looming threat to electric reliabil­ity,” the article stated.

NERC report pinpoints EPA proposal as number one risk to power reliability

The North American Electric Reliability Corporation (NERC) released its annual 10- year projections on Nov. 29. NERC’s thor­ough forecasts are considered to be the gold standard for the U.S. power system and are noted for their detailed data from individual plants. The report explained, “Environmental regulations are shown to be the number one risk to reliability over the next one to five years.” NERC warns the EPA is proposing what it calls “an unprecedented resource-mix change,” with utilities switching to natural gas from coal. “On top of the 38 gigawatts of coal-fired generation that is already being run below normal levels or slated for early retirement, NERC predicts another 36 to 59 gigawatts will come offline by 2018, depend­ing on the ‘scope and timing’ of EPA demands,” The Wall Street Journal reported. That translates to almost one-fourth of all coal-fired capacity.

New power plants needed to cover losses

The report noted, “the nation’s power grid will be stressed in ways never before experienced” and that to ensure reliability, new power plants must be built to cover the losses. The article went on to explain replacing power is not like replacing a lost cellphone. In order to build a new power plant, an extensive pro­cess of permitting, engineering, and financing must first be undertaken and through that time-consuming period, bottlenecks are to be expected. (This is even before construction begins on the plant and it is tied to the electricity network.)

Compliance timeline puts reliability at risk

The electric industry would have three years to comply with the EPA requirements, which target mercury emissions. Over this three-year period, NERC says between 576 and 677 plants will need to be temporarily shut down so retrofits like scrubbers or bag houses can be installed. The article stated, “in its draft utility rule, the EPA itself warned that ‘sources integral to reliable operation’ may be forced to shut down, before it sanitized these conces­sions from the final proposal.” Twenty-seven states have said their regional reliability is at risk. Furthermore, FERC’s own Office of Elec­tric Reliability produced an alarming study, before Chairman Jon Wellinghoff negated the findings.

Power rationing needed to meet timeline

Atlanta-based Southern Company, a large utility that serves 4.4 million customers in states from Mississippi to Georgia, believes the EPA’s timeline cannot possibly be met and that in its region “reliability cannot be maintained without load shedding.” In other words, power would need to be rationed to large indus­trial consumers. American Electric Power, which operates in 11 Midwest states including Indiana, agrees. “This is the kind of political overhang that harms economic growth,” The Wall Street Journal noted.

Suppliers in Indiana could struggle to comply

Subsequent to this article, the EPA signed the MATS (Mercury and Air Toxic Standards) rule on Dec. 16, 2011. It is designed to reduce emissions of toxic air pollutants from power plants to a specified level within three years. Obviously, many people have opinions on the matters imbedded in the overarching issues expressed in this article and the EPA rule. Those opinions are based on platforms rooted in political beliefs, environmental beliefs, special interest, financial impacts, and the list goes on. I certainly don’t provide this information to alarm anyone. I do think it is important for you, as a consumer, to understand this issue as it pertains to the electric supply picture, cost to comply, and the reliability of your electric service in the future. Three years is simply not enough time for all generating facilities to comply with these standards in a cost effective manner. Some simply won’t have the financial means to comply and will be shut down. Suppliers in Indiana, largely dependent on coal-fired electric generation, could struggle to comply. This may force them to go to the market to purchase high cost replacement power from newer generating facilities designed in a manner they conform or to those fortunate enough to have the means to meet the timeline for conforming. Ultimately, these costs will be shouldered by each of us, the consumer.

Understanding the issue may lead to a balanced solution

Whatever your view or opinion on the matter there is one certainty. We must come together as a society to find a balanced solution to clean up our emissions with a reasonable timeline for implementation or we will all be impacted in a multitude of ways. As the article points out, replacing this much electrical generation is not like replacing a cell phone. It is a proposition that could take over a decade at best.