Renewable portfolio standards and other green energy rules put a price on environmental benefits. Calculating this price can help clarify the social value of GHG reductions.
Up in Smoke
In May, PJM Interconnection conducted its annual auctions to secure electric capacity three years from now. As expected by most analysts, the base residual auction (BRA) for delivery year 2014/15 electric capacity cleared with lower volumes versus the prior year, due to lower demand. Prices were lower in the typically constrained eastern Mid Atlantic Area Council (MAAC) region, and higher in the rest of the regional transmission organization (RTO). Directionally, these intra-PJM price variations were anticipated due to the construction of west-to-east transmission facilities, the impact of the economic downturn on demand in the constrained eastern region and the effect of recent EPA rulings on generator retirements.
However, there was a surprise in the way these effects interplayed, as well as in the contribution of demand response into the dynamics of the market. Prior to the auction, analysts expected some amount of old or otherwise dirty coal fired generation to exit the market altogether, and for others to bid high prices to recover environmental capital expenditures required to comply with EPA requirements under the Clean Air Transport (CATR) rule of June 2010 and the National Emissions Standards for Hazardous Air Pollution (NESHAP MACT) rule of March 2011.
Both of these expectations came to fruition. Compared to the prior auction, 1,850 MW of coal fired generation, enough to power more than 600,000 homes, was withdrawn from the market. And it didn’t stop there. By the time the auction was over, 6,900 MW of coal fired generation from the prior year -- or enough coal capacity to power more than 2.2 million homes -- was out of the market because prices at which they bid -- as a result of environmental capital expenditure requirements -- were higher than where the market cleared.
While the removal of these coal plants undoubtedly resulted in higher capacity prices than if the plants were in, it led to significant environmental benefits.
PJM reported that demand response contributed 30 percent to the price reductions in the constrained region.
If these plants share the same characteristics of a typical PJM region coal plant, according to EPA’s eGrid database they would have operated 59 percent of the time in the delivery year, and produced approximately 36 million tons of carbon dioxide equivalents (CO2e). In global warming terms, eliminating this amount of greenhouse gas emissions is equal to removing about 7 million passenger vehicles from the U.S. vehicle fleet. In addition, the plants would have produced 228,000 tons of sulfur dioxide and 59,000 tons of nitrogen oxides -- precursors to acid rain and contributors to a host of pulmonary and other health problems.
Using the market mechanism to generate the replacement sources for the coal capacity resulted in significant economic benefits, measuring from a baseline of the cost to retrofit the coal plants. As coal plants’ costs rose due to EPA-mandated retrofits, the new resources replacing them -- including other traditional generation, wind and solar, and most significantly, demand response -- held market prices in check. Demand response contributed an additional 4,800 MW of cleared capacity above the prior auction