The EPA’s Affordable Clean Energy (ACE) Rule: Putting Money on ACE Is a Bad Bet — Part I

By Joseph Tomain, Center for Progressive Reform

On August 21, the Environmental Protection Agency (EPA) proposed the Affordable Clean Energy (ACE) rule as a substitute for the Obama administration’s Clean Power Plan (CPP). The CPP had been stayed from going into effect by the U.S. Supreme Court, and the purpose of the substitute rule is to establish greenhouse gas emissions guidelines for states and existing coal-fired power plants. The comment period closes on October 31, and the final rule can be expected as early as February 2019.

It’s neither a secret nor a surprise that the rule will be harmful to human health and the environment. According to the EPA’s own analysis, ACE could contribute up to 1,400 additional premature annual deaths[1] by 2030, as well as of 120,000 new cases of exacerbated asthma. Additionally, EPA estimates that ACE will cause more hospital admissions for respiratory problems, more emergency room visits for asthma, and more “minor-restricted activity days” than no rule at all.[2] All these consequences involve considerable costs, including the costs of billions of dollars of forgone benefits that will be borne by the public.[3]

Rather than putting the nation on a path to sustainable energy production, the proposed rule serves, as Kate Konschnik of Duke’s Nicholas Institute for Policy Solutions puts it, as a “power plant life-extension rule masquerading as a climate rule.”[4]

Consider Gerald Gentleman Station, the largest power generating plant in Nebraska. As of 2017, the plant’s two coal-fired generating units emitted more than 21,000 tons of sulfur dioxide per year because it lacked both scrubbers for sulfur dioxide and clean air technologies for nitrogen oxides. Rather than spend an estimated $1.5 billion to install the modern pollution control equipment that President Obama’s Clean Power Plan would have required, the utility intends to keep the plant operating with minor upgrades to its electricity generating equipment.[5] If adopted, ACE could allow that to happen, saving that plant significant expenses in the short term. The mid- and long-term consequences of relying on ACE, however, should make not just utility managers, but everyone else wary.

To the extent that EPA is charged by law with protecting our health and the environment, ACE fails on both accounts. There is, however, another objection to the proposal. Quite simply, the rule goes against energy projections, current market indicators, and industrial trends, all of which support and advance, rather than impede, the transition to a clean energy future.

Looking to the mid- and long-term effects of ACE, let’s assess the rule from the perspective of a CEO or a member of the Board of Directors of an investor-owned utility. From that perspective, when reviewing current and prospective investments and a utility’s strategic plan, what implications may ACE hold?

Energy Projections

In addition to being critical of all things Obama, one plank in Donald Trump’s campaign for the presidency was a high degree of climate skepticism. Indeed, at one point, he called climate change a Chinese hoax.[6] Consequently, it is unsurprising that the administration has moved to scrap the CPP regardless of overwhelming evidence of climate change, persistent market and technological advances in clean energy, and expanding domestic and international investments in that sector.

The government’s own estimates indicate that the clean energy transition is well underway. According to the U.S. Energy Information Administration, four trends are noteworthy. First, energy demand is expected to be flat at 0.4 percent annually and, at that rate, will surpass the nation’s highest 2007 consumption peak in 2033.[7] Similarly, although electricity demand growth was negative in 2017, it is projected to rise slowly through 2050.[8] With flat or marginally increasing demand, traditional utilities have less incentive to invest in more generation, let alone more coal plants.

Second, the greatest growth in energy consumption is natural gas (not coal), and the greatest percentage gains in consumption are made in the non-hydroelectric renewable sector – solar and wind, for example.[9] In other words, continued investment in coal and other fossil fuels is simply not attractive. Indeed, energy analysts note that the business case for using more renewable resources is becoming “more compelling.”[10]

Third, without ACE or the CPP, carbon dioxide emissions from power plants would stay relatively flat through 2050. Again without ACE or CPP, carbon dioxide emissions from natural gas would grow at an estimated annual rate of 0.8 percent as petroleum and coal emissions decline at annual rate of 0.3 percent and 0.2 percent, respectively.[11] With ACE, by 2030, carbon dioxide could be reduced by at most 1.5 percent from 2005 levels, but with the CPP, the greenhouse gas would be reduced by 19 percent.[12] Consequently, ACE realizes only minor gains in emission reductions compared with significant reductions under the CPP.

Finally, additional projections indicate that the amount of energy used per unit of economic growth (energy intensity) will continue to improve over time, as it has for many years, because of increased efficiency improvements across all energy systems.[13] In other words, a consumer’s dollar will continue to purchase more energy in years to come.[14]

From the private sector, Bloomberg New Energy Finance projects that by 2050, wind and solar technologies will provide 50 percent of the total electricity globally, and when other renewables, hydropower, and nuclear are taken into account, non-fossil fuels will produce up to 71 percent of all electricity. By mid-century, coal will account for just 11 percent of global electricity generation, down from 38 percent currently. Overall, only an estimated 29 percent of electricity worldwide will be generated from fossil fuels by 2050, down from 63 percent today.

These changes are being driven by the decreasing costs of solar, wind, and battery technologies.[15] Additionally, Bloomberg analysts found that the declining levelized cost of electricity from non-fossil fuel resources is dropping to such an extent that the “economic case for building new coal and gas capacity is crumbling, as batteries start to encroach on the flexibility and peaking revenues enjoyed by fossil fuel plants.”[16]

Market Indicators

In addition to confirming government projections, Bloomberg shows that markets are moving in the same direction as the trends indicate. Given the trillions of dollars of sunk costs in the electric industry, the reluctance of utilities to move in that direction is understandable. But it is also financially misguided and must be overcome.

Bloomberg notices a curious anomaly in the utility business, which highlights the reluctance of utilities to abandon their old ways of doing business and the financial risks of failing to do so. In a recent post, analysts recognized that regulated utilities invested $73.5 billion in property, plant, and equipment in 2016, which is more than twice as much as they had spent since the early 2000s. That total investment exceeded 10 percent of the utilities’ asset value, up from 6 percent a decade ago. The predicament should be obvious – sales are not keeping pace with capital investments. From the perspective of a regulated utility, the path-dependent utility is simplistically relying on a regulatory environment in which regulators protect such investments through cost-of-service ratemaking.

It is an open question as to whether regulators will continue to rely on cost-of-service ratemaking, especially if costs rise for those consumers who remain tethered to a utility’s grid in light of grid defection by other customers. Indeed, even for those customers remaining on the grid, self-generation, energy efficiency measures, and other choices will have the direct effect of reducing demand for the utility’s product and, therefore, will reduce revenue. This capital investment gamble may present too much of a risk because at some point, regulators will see that imposing excess costs on remaining customers is a losing proposition.[17]

Global interest in clean energy is robust. Consider, for example, a report from Ren21, a collaboration of more than 900 experts from government, NGOs, industry, science, and the academy:

“The year 2017 was another record-breaking one for renewable energy, characterized by the largest ever increase in renewable power capacity, falling costs, increases in investment and advances in enabling technologies.”[18]

Consistently, Bloomberg reports that global investment in clean energy reached $333.5 billion in 2017, up 3 percent from the previous year[19] and the third-highest record of U.S. clean energy investment since 2004.[20] Clean energy investments are increasingly attractive because cost signals are positive, which means that clean energy markets are expanding. By way of example, the unit cost of solar declined 15 percent while investment in the sector rose to record levels.[21]

Global investment in all energy sources is consistent with the clean energy trend. In 2017, for example, such investment amounted to $1.8 trillion, which is a 2 percent decline from 2016, with the decrease due to fewer investments in coal, nuclear, and hydropower.[22] Although there has been a slight increase in investment for upstream oil and gas production, investments also increased for electric vehicles, energy efficiency, and renewable power.[23]

Finally, a recent survey of investors in domestic renewable energy, including banking institutions, asset managers, private equity firms, and others, confirms the investment trends just noted. The survey concludes that there is a “resilient and healthy market with significant potential for continuing, and even accelerating, the recent trend of dramatic renewable sector growth.”[24] The report monetizes that enthusiasm by noting that the sector could attract $1 trillion by 2030, with investments split between renewable energy and technologies that help modernize the grid.[25]

Regardless of how optimistic the $1 trillion figure might be, it is consistent with the investment climate just covered and with the industry trends that I’ll discuss in my next post this afternoon.