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By Leonard S. Hyman, an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and is author, co-author or editor of six books including America’s Electric Utilities: Past, Present and Future and Energy Risk Management: A Primer for the Utility Industry, and William I. Tilles is a senior industry advisor and speaker on energy and finance. Originally published at OilPrice
It isn’t easy to diet and it may be even harder to reduce the nation’s greenhouse gas emissions (GHGs). A new study from Lawrence Berkeley Labs, published in Nature Climate Change, makes that abundantly clear. It argues that after implementing the administration’s current and proposed policies, the U.S. greenhouse gas emissions will miss the 2025 goal by 20 percent.
Roughly, the USA now emits 7 billion metric tons of greenhouse gases per year. The plan is to get the num-ber down to about 5 billion metric tons in 2025.
The Environmental Protection Agency’s Clean Power Plant initiative could reduce emissions by a substan-tial 240 million metric tons if it’s not overturned by the courts. This constitutes a big piece of the package.
The Berkeley researchers then looked for additional reductions in GHGs. They identified 121 million metric tons fewer of GHG emissions by restricting methane emissions (which are greater than previously thought), 67 million from changes in refrigerator chemicals and 29 million from efficiency measures. That still does not get us even close to attaining the 2 billion metric tons of GHG reductions targeted by our government. Even a more coal-restrictive stance by the EPA might “only” reduce GHGs by an estimated 407 million tons. That still leaves a big gap.
Electricity production in the U.S. accounts for roughly 30 percent of the nation’s annual greenhouse gas emission “budget”, about 2.1 billion tons. Existing and enhanced EPA restrictions would reduce that num-ber to about 1.5 billion tons.
Imagine the discussion in the White House. “We have to adhere to the Paris standards for emissions but we are way short of cuts. As ‘Feds’, we can really influence two sectors, transportation and energy. It’s an election year. No way we tell Americas to give up SUVs and drive tiny cars. Too Jimmy Carter-ish. But elec-tric companies could “decarbonize” more if somebody gave them a push. Besides, who understands their electric bill?”
Assuming the new data is correct, electric power generators may see increasing pressures for emissions reductions. The industry is just too big a piece of the nation’s carbon footprint. To us, the implications are an accelerated capital replacement cycle, more efforts at carbon capture and sequestration and higher electricity prices.
These pressures are likely to occur as sales growth in much of the electric utility industry has been flattish in recent years. An added push for more renewables, due to a perceived shortfall in efforts to reduce greenhouse gas emissions, could “crowd out” existing fossil fueled generation. This is already happening in Texas where a temporary abundance of wind power displaces fossil and nuclear in the electric grid. Their solution? Build more transmission and move power from West Texas to cities like Dallas further east. In California, solar power can displace considerable fossil resources until demand peaks every evening.
It’s not that electric companies can’t adjust to this. But the systems were never built to compete on a price basis. They were strictly a cost plus operation and fully regulated to boot. Now they are forced to compete in wholesale power markets against sellers with zero fuel costs. They can’t.
Years ago California pioneered a technique (helped by Enron) to bankrupt utilities in short order. Restrain retail prices while effectively forcing utilities to purchase power in unregulated wholesale markets. We doubt we’ll see a return to the “bad old days” but it does point to the need for addressing how to reconfig-ure the grid, its changing operations and the challenges of running this hybrid system of fossil and renewa-bles. The compensation schemes for all base load and intermediate forms of generation, especially fossil and nuclear, will ultimately have to be addressed. Most power generation assets are base load resources in a world that increasingly values “cycling”.
Regulated utilities at least still have relatively “captive” customers to absorb higher costs of environmental compliance and the lost revenues from renewable displacement. But wholesale power producers get no revenue guarantees apart from contractual arrangements. For them, environmental improvement can produce an economic cost as well as benefit.
In short, the latest environmental research seems to tell us that electric companies have a rough road ahead. The electric generating industry may have to bear an even greater burden than presently anticipat-ed. Depending on our nation’s resolve to go “zero carbon”, even plentiful natural gas may not transition us smoothly to a non-carbon future unless it reduces emissions too.