Paying Through the Nose to Breathe Easy: How EPA Changes Will Affect the Texas Electricity Market

September 27, 2011

A good friend of mine does a lot of traveling to China for buisness. While he enjoys visiting the country, the one thing that dismays him is the air quality. “Most Chinese cities,” he said, “are covered in smog. You can’t see the horizon. It’s all just shrouded in a gray haze.”

Of course, right now China is making money hand-over-fist. The downside for them is decreasing crop yields from acid rain and mushrooming health costs for asthma, bronchitis, and other lung illnesses for the next three generations due to air-bourne pollutants alone. Meanwhile, in Texas, our air may be a LOT cleaner but our economic growth has been slow to modest at best. This summer’s late July and August heat waves and ongoing drought haven’t turned things into a picnic, either. The triple digit temps and cooling costs are roasting everyone who pays an electric bill.

So, on July 6, 2011, when the US Environmental Protection Agency announced that it’s new Cross-State Air Pollution Rule would take effect January 1, 2012, a howl of dismay and anguish arose from around the state. Texas electricity generators, Luminant for one (the old TXU generating company), petitioned EPA on August 5 for a “Partial Reconsideration and Stay” of the rule. The reason? Last July, EPA announced the Transport Rule to reduce the amount of air pollution blown from one state to another. The agency at that time concluded that Texas SO2 emissions had no significant downwind effects.

But out of a clear blue sky this year on July 6, EPA changed the rules in its new policy without informing Texas. Sulfur Dioxide (SO2) output from Texas was based on modeling data at an air quality one monitor 500 miles away in Madison County, Illinois. Part of the problem there is that Granite City, IL, is where iron and steel making are the principle industries.

Consequently, Texas would bear 25 percent of the overall SO2 reduction burden imposed under this rule. Even though Houston has one the heaviest concentrations of ozone and smog in the country, this is more than twice the state’s contribution to the total SO2 emissions of all states included in the rule.

The typically staid Electricity Reliability Commission of Texas (ERCOT), which runs the electrical grid and administers the electricity market in Texas publically grumbled that the rules would adversely impact electricity reliability in the state. Even the Texas Commission on Environmental Quality has joined with the state’s Public Utility Commission to condemn the rule, claiming it will result in a “significant” increase in electricity rates as well as potentially shutting down coal-fired plants that cannot afford installing pollution-control equipment.

The controversy has also migrated into the political arena just in time for football season. U.S. Sen. John Cornyn, R-Texas, entered the fray blaming the regs change on the Obama administration. Additionally, 31 of 32 Texas members of the U.S. House of Representatives and both U.S. Senators have signed letters expressing serious concern about the final Cross-State Air Pollution Rule and its impact on Texas jobs and the electricity market’s reliability.

Truth be told, EPA’s plan is expensive and it may go a long way to reducing illness and improve the quality of life the 27 states. If you want to get a sense of what this entails, try going to a chili cook-off in a church basement where no one wil be allowed to leave for 48 hours and you’ll get the point. There’s a lot of resentment downwind.

But both sides of the debate are resorting to media smoke screens to win Texas energy consumers. The EPA is arguing its plan will save lives, the Texas Commission on Environmental Quality asserts Texans “face increased incidences of heat stress, heat stroke and death”.

While it looks like EPA capriciously changed the rules, they are definitely not the only ones adding to the stink.

Luminant, PUC, and ERCOT could smell a clean-air plan-change coming ever since 2008 when North Carolina sued theEPA over the Clean Air Interstate Rule (CAIR). The issue was that the EPA could not guarantee each state would reduce its emissions sufficiently to prevent interference with air quality downwind. Given that the CAIR goals were to drop pollutant levels, they should have been anticipating that EPA’s next plan would contain similar reductions and adapt their existing plan accordingly. Even ERCOT’s June 21, 2011 published study, Review of the Potential Impacts of Proposed Environmental Regulations on the ERCOT System Revision 1, that was released nearly 2 weeks in advance of EPA’s new rules, said at the top of page 15:

The hazardous air pollutant regulations, as published, also present an amount of uncertainty. The mercury limit for lignite-fired units is a “Beyond the Floor” limit, indicating that it is more severe than most or all of the emissions rates at existing lignite-fired plants. It is not known at this time whether the environmental retrofits specified in this study (wet limestone scrubbers, baghouse with activated carbon injection, and selective non-catalytic reduction) will allow lignite-fired plants to meet these standards.

Yes, everyone knew there was a 5,280 megawatt elephant at the church chili cook off.

Luminant operates three coal-fired power plants plants in east Texas that put out 5,280 megawatts of electricity and all built in the 1970’s: Big Brown near Fairfield in Freestone County (1,150 MW Year began operation; Unit 1 started in 1971; Unit 2 started 1972), Monticello near Mount Pleasant in Titus County (1,880 MW; Unit 1 started in 1974, Unit 2 started 1975, Unit 3 started 1978), and Martin Lake plant near Henderson in Rusk County (2,250 MW, Unit 1 started in 1977, Unit 2 started 1978, Unit 3 started in 1979). The Big Brown plant, for example, has not be retrofitted since its construction with pollution scrubbers, making it one of the biggest NOX and ozone polluters in the state. Retrofitting it for compliance with EPA rules would require installing scrubbers as well as switching from burning Texas lignite coal to bituminous coal from the Powder River Basin in Wyoming or even natural gas. None of these options are cheap quick-fixes. About 600 jobs would be lost from shutting down the plant (and mines). Tom Smith of Public Citizen said industry sources show it would take $3.6 billion to upgrade the three lignite plants that are vulnerable under the EPA rules. Gina McCarthy, an assistant administrator for the EPA, said almost half the soot-forming SO2emissions covered by the new rule are produced by these plants. “Texas power plants will be able to cut their pollution without jeopardizing reliable electricity service for Texans.”

But turning off 5,280 mW of generating capacity is not an option that radiates reliability in the halls of ERCOT. ERCOThad forecasted in its June 9 revised edition of Report on the Capacity, Demand, and Reserves in the ERCOT Region that it was prepared for a peak summer demand of 63,898 and reserves of 73,175 mW (17.5%). In its June 21 study, it anticipated retiring some natural gas and coal plants by 2016 but retaining enough capacity to get by with reserves targeted to 13.75%. Of course, all bets were off after August 3 when Texas burned up 68,294 MW of electricity to keep cool, pushing the spot market price to $3,000 mWh. ERCOT spent the remainder of the month issuing warnings to conserve Texas electricity to stave off rolling backouts.

Like any late summer Hollywood blockbuster, it’s always darkest before things go completely pitch black. On September 12, after weeks of negotitating with EPA regulators, Luminant announced it was shutting down two generators at its Monticello plant and close its three lignite mines (at a loss of 500 jobs) rather than install scrubbers. The third unit will be switched to the lower sulfur Powder River coal but in the end Texas will lose 1300 mW of electricity. Furthermore, Luminant is suing EPA over the lack of proper notice of its rule change. Just how the case rolls out is anyone’s guess but other Texas electric generator comapnies have said they intend to make improvements to comply with the new EPAregulations.

Meanwhile, the one important detail none of the players in this drama has really addressed is just how the state’s energy needs will cope with the Texas weather.

Current long term weather forecasts from the National Oceanic and Atmosphere Agency aren’t inspiring optism. They predict good chances for “below-median rainfall across the southern Plains states” and higher chances of above-normal temperatures. Plus, the expected development of a La Niña developing later this fall suggests that “subnormal precipitation for the Southwest and western and central Gulf Coasts, with a slight hint of wetness in the southern High Plains.”

So far, next summer is looking to be hot and dry, too.

What does all this mean for Texas electricity consumers? Rates will likely increase sooner than later because the EPArules are mandating environmental improvements to generators that are, frankly, about as much fossils themselves as the fuel they burn. However, these units were expected to be replaced, anyway — just not when EPA says so. Remember, though, Texas does not have it as bad as some of the other 26 states affected by the rule-change where most of the electricity is coal-fired generation. Wisconsin consumers can expect a $2-$4 increase on a consumer’s monthly bill. EPA rules aside, the factor most likely to increase prices will be the weather. As we have all seen both this past winter and summer, since weather affects all us it effects our demand for electricity and therefore electricity’s price —and it can do it in just a few hours.

When it comes to weather, the best way to be prepared is to stay informed. The Bounce Energy Blog routinely provides breakdowns of seasonal weather forecasts and how the weather affects your energy usage. It also has useful articles on weather-proofing your home and how you can cut your energy useage without surrendering convenience. You can also stay informed of weather-issues through social media. Follow Oncor on Facebook or on Twitter. You can also get information from Bounce Energy on our Facebook page or on our Twitter feed. Information is also available from ERCOT and the PUCT which posts information about its weather alerts in the lower right corner of its homepage.

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