Kentucky utility officials – and customers – are assessing the impact of power-plant carbon-emission limits expected to begin in the a few years and setting strategies to remain competitive and control energy costs they expect to rise by double-digit percentages.
The commonwealth’s reliance on its own carbon-dense coal for power generation has meant cheap electricity, but environmental concerns and the economics of newly plentiful shale gas both are jolting the status quo. How the state’s power generation feedstock mix will shift within the next 10 year and what the cost per kilowatt hour will be are matters of intense and multimillion-dollar speculation. Everyone is sure only that their energy-use line item is going up.
A month after President Barack Obama released his proposed regulations limiting carbon emissions from electric power plants, the future of electricity production in Kentucky still remains more ifs, ands, buts and maybes than when, where and how. But as one utility executive said: “It is not time to jump off any cliffs yet.”
Carbon emission regulations will come a few years from now at the soonest – after evaluation, public comment, possibly revisions and adjustments, perhaps even legal challenges that could delay implementation beyond what the process now foresees.
The proposed regulations, called the Clean Power Plan, are the U.S. Environmental Protection Agency’s effort to slash carbon dioxide (CO2) emissions from existing coal-fired and new power plants using fossil fuels by 30 percent below 2005 levels. It’s up to the utilities how they meet that goal, but there is big cost involved whether they change fuel or capture the carbon dioxide created by power generation before it can be released into the air.
Power plants account for roughly one-third of U.S. domestic “greenhouse gas” emissions, which form a heat-trapping layer in the atmosphere scientists explain is causing a global increase in temperatures. Beginning in the 1970s, health concerns spurred enactment of regulatory limits for the amounts of arsenic, mercury, sulfur dioxide, nitrogen oxides and particle pollution that power plants can emit. There are currently no national limits on CO2 levels.
The multiyear EPA plan to cut carbon has two major components as well.
Part one, the proposed rules for carbon emissions from new power plants, was announced early this year. It generated tremendous speculation and trepidation in the business community, particularly among utilities, about the second component – proposed limits for CO2 emissions from existing power plants.
The second component was released in a 650-page document in early June and published in the Federal Register in mid-June, officially signaling the start of the public comment period.
The EPA plan requires most states to control carbon emissions from their biggest sources of electricity – the plants generating electric power. Each state has a different CO2 emissions reduction goal based on its present CO2 emissions rate, the renewable energy the state produces and consumes, and the efficiency of both the state’s power plants and electric consumers. Most of the regulations must be met by 2030.
Kentucky might have a head start. While figures from the state and the EPA show commonwealth CO2 emissions rising and falling from year to year, the levels reported in 2013 were 8 percent less than the 2005 benchmark year.
No surprises in long-expected proposal
None of the state’s principal players had time to review the massive document in depth before commenting for this article, but all had overall impressions.
“We are appreciative of the fact that the EPA looked at each state differently as opposed to one-size-fits-all,” said Dr. Len Peters, secretary of Kentucky’s Energy and Environment Cabinet. “Whether that gives us the flexibility we need won’t be known until we have time to fully review the document. But overall we are pleased.”
“We are not surprised at the direction he is going,” said Greg Pauley, CEO of Kentucky Power, which covers approximately 175,000 customers in all or part of 20 Eastern Kentucky counties. Headquartered in Frankfort, Kentucky Power is part of the American Electric Power system, one of the largest U.S. electric utilities with 5 million-plus customers in 11 states. AEP is one of the largest users of coal in the nation.
“Most of us in the utility industry have recognized for some time that the administration was moving to limit the emissions generated by coal,” Pauley said. “The impact it will have on the nation is the use of less coal and more natural gas. … It will have more extreme impacts on some states than others, but the cost of electricity will go up everywhere.”
Eric King, director of governmental affairs and community for the Kentucky Association of Electric Cooperatives (KAEC), echoed Pauley’s observations about electricity costs. So did Chris Whelan, spokesperson and vice president of communications for LG&E and Kentucky Utilities.
KAEC has 24 distribution cooperatives – and two generation co-ops – that deliver electricity to 1.7 million Kentuckians in rural portions of the commonwealth. LG&E and Kentucky Utilities focus on the metro areas. LG&E serves 321,000 natural gas and 397,000 electric customers in Louisville and 16 surrounding counties. KU serves 543,000 customers in 77 Kentucky counties and five counties in Virginia.
“We believe these proposed regulations will have a significant impact on Kentucky,” said Chris Whelan, spokesperson and vice president of communications for LG&E and Kentucky Utilities, the state’s largest utility. “Kentucky gets 93 percent of its power from coal, which is well above the national average, so reducing greenhouse gas emissions by 18 percent will be a challenge. No matter how the final rule turns out, you can expect there will be an increase in the cost of electricity to customers; however, the full impact of the rule on LG&E and KU’s operations cannot be known until state regulators develop specific plans and guidelines for complying with the rule.”
KAEC’s King said one thing is certain:
“This will have little positive effect on climate change and will increase electricity costs for the people we serve,” he said. “Our 1.7 million families and businesses who rely on cooperatives for affordable, reliable electricity will be disproportionally hurt. We need a flexible, balanced, all-of-the-above approach. The administration has an all-but-one (coal) approach.”
Final rule’s impact unknown until 2017 at least
The final rules will not come out until 2017 – after a year of discussions, negotiations and perhaps litigation concerning their exact wording, and a year for states to submit their state implementation plans (SIP). The coming year may very well be the most perplexing as states scramble to determine precisely how to meet the regulations.
“All the states will be working with energy regulators and energy cabinets and agencies to determine what is best,” says Kentucky Power’s Pauley. “The industry can’t decide what to do until the state decides what to do. Secretary Peters will have to work with a number of agencies to decide what impact it will have.”
In fact, that process has already begun. In mid-June Peters held meetings with stakeholders to determine how to proceed. As far back as 2008, Peters and Gov. Steve Beshear already realized that new greenhouse regulations were looming and developed Kentucky’s first comprehensive energy plan, which Beshear issued in 2008.
“We were saying at that time that we needed to diversify our energy portfolio,” Peters said. “Our utilities need the flexibility to shift to what is most efficient.
“Part of that is we still need to look at nuclear power (prohibited by state law until a permanent waste storage facility exists). We continue to say we need to look at the base load because Kentuckians want electricity 24/7, Christmas day included. They need a reliable base load. We can’t build a nuclear plant in this state now, but we should consider nuclear.”
In the meanwhile, KAEC is mounting what King calls “an aggressive campaign” to challenge the carbon-emission proposal and tell Washington it is unhappy with the regulations and the way in which they were developed.
“The process has circumvented Congress,” King said. “These regulations will increase costs and could result in significant job losses. The process has compounded this issue because Congress was not included. We want our members to come together and tell Washington what they think. The business community should also look at the rules themselves so they are able to inform their employees about the consequences. The more proactive business is, the better.”
With long timelines, utilities are already acting
LG&E and KU are not waiting, either.
“We are building Cane Run 7, a 640-megawatt natural gas combined-cycle combustion turbine at our Cane Run facility in Jefferson County,” Whelan said. “The $560 million project will be the first of its kind in Kentucky and is the least-cost way to replace part of our retired generation and to safely and reliably meet continued growing energy demand.”
Whelan points out that LG&E and KU have reduced emissions even though customers continue to use more energy. (See chart below.)
“From 1997 to 2018, our sulfur dioxide emission levels will have dropped by 88 percent,” she said, “and nitrogen oxide emission rates will have dropped by 83 percent while our customers’ energy needs have risen by more than 16 percent.”
Since 2006, the two utilities have been involved in research on carbon capture with the University of Kentucky’s Center for Applied Energy Research.
From his Frankfort office, Kentucky Power’s Pauley points out that utilities cannot make decisions based on a five-year plan.
“We make decisions based on 20- and 30-year outlooks,” the utility executive said. “The costs associated with addressing environmental concerns are decisions that are long lasting. It would drive most companies crazy to think that utilities might be changing rates every two years. We look out 25 years so businesses can have some continuity in what the electricity will cost that they use to produce their products. That continuity is important in the long run, and it is an important message that utilities need to help their business customers do this. It’s also important for consumers who have a utility bill to pay each month.”
To help meet the coming new emission targets, Pauley said, Kentucky and its utilities also must delve into the need for renewable energy sources – those nature provides on an ongoing basis: solar, wind, hydro and geothermal.
“The state will have to decide how much to jump into renewable (power) generation,” he said, “but if you don’t have the money to invest in renewables, you may not have the ability to take advantage of that approach.”
Existing coal plants hitting retirement age
The age of Kentucky’s current facilities will also play a key role, according to Secretary Peters.
“Between now and 2030 we will retire 30 percent of our existing coal (power plant) fleet, and by 2040 we will retire 57 percent,” he said. “Those projections are based on the typical age of retirement. The decisions utilities make on what to replace those facilities with will determine what the state’s electricity portfolio looks like in 2040.”
At present, natural gas seems to be the answer, but Peters and other utility and energy experts express serious concerns about that being the only answer.
“That is the great ‘what if,’” Peters said. “What if natural gas prices show the volatility of the last decade? If our only move is toward natural gas, then we are moving from one fossil fuel to another, and we do not have the diversification I think is needed.”
Whalen agreed.
“It is now cheaper to build a natural gas plant,” she said, “and we are in the middle of doing that. But that is largely because you cannot (obtain a) permit (for) a coal-fired plant because it cannot meet the regulations. What to build will really be determined by how the final rules come out.”
These decisions will particularly affect the manufacturing sector, and again that puts Kentucky at a disadvantage just as the shift away from coal is especially difficult in our coal-rich state.
“If the rate for electricity increased 25 percent, that could mean a loss of 30,000 jobs in the state,” Peters said. Most of those will be in the manufacturing sector. We have a robust manufacturing base now. But all this depends on trying to project the cost of natural gas. Trying to do that is 95 percent luck and 5 percent intelligence.”
Whatever the outcome, utility executives seem to agree that there are a few positives. One is that there is time to engage and perhaps shape the ultimate regulations. Another is that each state can chart its own course. And finally, the utility leaders find that Kentucky’s leadership puts the state in good hands.
“My history with Secretary Peters is that he is open-minded to thoughts and suggestions and ideas and open in his approach. He engages all those at the table. I think that is a key driver that will help us decide as a state what is best. There is a lot of work to be done between now and June of 2015 when states must submit their plans. But there’s no reason to jump off any cliffs yet.”
Debra Gibson Isaacs is a correspondent for The Lane Report. She can be reached at [email protected].
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