Some coal-fired generation resources are no longer economic to run because of a combination of low prices for natural gas and looming new environmental regulations. While these resources would normally be retired, some may need to continue to run — or at least be available to run — to ensure the reliability of the nation’s bulk power grid. The federal government, acting through the US Department of Energy (DOE) and/or the Federal Energy Regulatory Commission (FERC), may order such resources to run on an emergency basis even if they are in conflict with one or more environmental performance requirements.

What are some of the unresolved legal issues facing operators of otherwise uneconomic coal-fired generation resources?

Gergen: The unresolved issue is that if you are going to retire a coal-fired generation resource but you are compelled by a federal regulatory body like DOE or FERC to run the resource to ensure reliability — what is your potential liability under environmental laws because you may be in violation of them?

There is no question that the federal government, through the DOE and FERC, has the emergency authority under the Federal Power Act (FPA) to order generation resources to run to ensure reliability. So really the question is, if they do — what are the consequences of obeying the order?

And what’s unclear is if a court had to decide as between the two, which would prevail? What do they do if they get to the point that they have to continue to run a generation resource, but they are not supposed to be running the resource because they’ve run up against an environmental rule?

How much coal-fired generation capacity is expected to be retired during the next 10 years?

Gergen: The estimate is anywhere from at least 30,000 megawatts (MW) to as much as 85,000 MW. At the maximum, that’s about one third of all the coal-fired generation capacity in the United States (approximately 317,000 MW). As of July 2012, generators had announced the retirement of roughly 30,000 MW of coal-fired generation capacity by 2016.

How costly is it for an existing coal-fired generation resource to comply with recent environmental regulations?

O’Brien: There are four major environmental regulations that have the potential to impose enormous costs on coal-fired generators. 

Under the Clean Air Act (CAA), the Mercury and Air Toxics Standards (MATS) rule will require upgrades to the particulate matter controls, scrubbers in a lot of cases or dry sorbent injection and potentially activated carbon for mercury control. The combination is likely to be quite expensive.

The Cooling Water Intake Structures rule has the potential for significant capital costs — and the potential for ash from coal-fired power plants to be regulated as hazardous waste under the Resource Recovery and Conservation Act (RCRA) could similarly be very costly.

Lastly, the Cross-State Air Pollution Rule (CSAPR) would have required the installation of scrubbers and selective catalytic reduction control technologies — both of which are extremely capital intensive — under very tight deadlines. It was recently invalidated, so the predecessor rule remains in effect — with additional reductions required in 2015.

How would you characterize the deadlines for environmental compliance under the CAA?

O’Brien: The deadlines are very tight — especially the MATS. It’s a three-year statutory deadline with the opportunity for a one-year extension if necessary to install controls. With some of the necessary controls, you are looking at a minimum of three to five years to get them installed because they are very large pieces of equipment. But you only have a three-year deadline.

The CSAPR also has extremely tight deadlines. It was supposed to go into effect in January 1, 2012, but it was stayed by the DC Circuit, which has since vacated the rule. Although EPA has appealed, we do not anticipate a reversal of the ruling —leaving the predecessor rule (CAIR) in effect. CAIR also ratchets down emissions in 2015 and could potentially require additional scrubbers of selective catalytic reduction control technologies.

So you are looking at a perfect storm of very high costs and very tight deadlines for compliance.

What types of coal-fired generation resources are most likely to face this environmental compliance dilemma?

O’Brien: You are primarily looking at the older smaller resources that were built in the 1950s and 1960s — the ones that are 100 to 200 MW or potentially even smaller. Publicly-owned electric utilities, such as municipal utilities, with existing coal-fired generation resources have been hit particularly hard by this because their generation resources tend to be older, smaller and located in urban areas where they don’t necessarily have the space to install these large control systems.

How can conflicts arising under the CAA and FPA be addressed in the near term by the Environmental Protection Agency (EPA), DOE and FERC?

O’Brien: It’s a really tricky situation. Looking at the MATS rule in particular, you have a statutory deadline and EPA doesn’t have a whole lot of flexibility by executive fiat to change that deadline. At the same time, there are some significant reliability concerns, especially in areas that must rely on local coal-fired generation resources because of transmission constraints, associated with a wide swath of our coal-fired power fleet shutting down during the next three years.

One of the things that we’ve been exploring is the creative use of consent decrees under the CAA as a way to either give plants more time to install controls — or more time to allow new generation resources and/or transmission upgrades to come online so they can retire in due course without imposing reliability concerns. At the moment, we think that’s the most viable option.

Gergen: One way is to have a court decide as between the authority the DOE and FERC have under the FPA versus the authority the states and EPA have under the CAA — who wins if we get into one of these conflicts. 

Another way is to actually change the law to deal with these conflicts. It has been proposed to amend Section 202(c) of the FPA to say that that if you are operating pursuant to an order by DOE using its emergency authority under the FPA— that you can’t be found to be in violation of an environmental law. There is actually bi-partisan support for this as evidenced by the bi-partisan sponsorship and passage in the full House of H.R. 4273 (Resolving Environmental and Grid Reliability Conflicts Act of 2012). But it is unclear at this point what will happen when this legislation goes to the Senate (though it does appear to have bi-partisan support there as well).