Will President Obama's Clean Power Plan Fly?

President Obama’s Clean Power Plan won’t exactly move at the speed of light. But it may jumpstart demand for more alternative fuels that are more ecologically beneficial than the older coal-fired technologies.

While the very concept of what is “clean energy” may have been muddied by the ongoing political machinations in Washington, it has definitely earned bipartisan constituencies at both the state and federal levels. As such, the unyielding move to develop not just more wind and solar resources but also additional natural gas and nuclear energies should continue. Coal, on the other hand, is destined to take the brunt of the new federal regulatory initiatives, although by any standard, its prominence within the American electric energy portfolio will remain.

“Everything will be incremental, as opposed to big changes because of the Clean Air Act proposals,” says Rob Barnett, analyst with Bloomberg Government. “Natural gas is the big winner but it is not a slam dunk. Renewables benefit in a marginal way. But coal is definitely the loser. It is increasingly difficult to operate coal-fired power plants in the U.S. and this rule reinforces this. To the extent that coal is less of a force, it is death by a thousand cuts.”

Clearly, natural gas has been winning market share in electric generation, namely because of the inexpensive and abundant supply of unconventional shale gas -- an economic driver that will not let up for the foreseeable future. And that fuel’s gains are coming mostly at the expense of coal, which has steadily been losing market share within the electric power sector.

Indeed, the U.S. Energy Information Administration said in a 2014 annual report that coal’s share of the electric generation portfolio was 37 percent in 2012 but by 2035, it will be 34 percent and by 2040, it will be 32 percent. Natural gas-fired generation, by comparison, will surpass coal by 2035 and by 2040, it will be equal to 35 percent of the power market.

The U.S. Environmental Protection Agency got the ball rolling. Some history: In April 2012, the agency first issued its notice of proposed rule-making on carbon pollution for new power plants.

But that proposal was taken off the table after 2 million comments came in  — a move that President Obama endorsed in the summer of 2013 — with the administration’s policy issuance in June 2013. While EPA had missed the September 2013 deadline that the president had set, it did issue new proposed guidelines in January 2014.

That 2014 proposal says that any — new — coal-burning facility would have to emit 43 percent less carbon than current coal units. That means that they would have to be as clean as today’s natural gas plants — a move that effectively bans any future coal plant that does not have carbon capture and sequestration.

In presenting his draft of the Clean Power Plan in June 2014 that examines  — existing  — power plants, Republicans felt that President Obama was taking it upon himself to re-write the Clean Air Act and to increase EPA’s influence.

While this plan will no doubt get litigated, Obama will certainly look to the Northeast and to California. The former has established the so-called Regional Greenhouse Gas Initiative that says its participants have reduced their heat-trapping emissions by 40 percent between 2005 and 2012. How? By requiring renewable portfolio standards, by switching to cleaner burning fuels and by implementing a cap-and-trade system.

To that end, the EPA would give the states a lot of latitude when it comes to deciding how they would comply. The range of their options is vast and include the trading of credits not just with other plants that are across state lines but also other industries such as cement and agriculture. The states have until 2016 to formalize their plans and until 2020 to enact their versions of the Clean Power Plan. 

“In our view, it is unlikely that the 2020 deadline will be met,” says Olof Bystrom, leader of DNV GL’s wholesale energy markets practice. “It will take time to sort through the public commenting and the litigation. The final rule will be contested by utilities or the states, or both. We expect implementation in the 2023-2025 time period. Assuming the rule sees the light of day, it will be moderated and diluted.”

Consider the states that rely on coal to provide electricity or those that produce the fuel for other regions: They have long argued that such major policy decisions are the domain of Congress -- not ones to be implemented by executive fiat, namely through executive orders. Ditto for the utilities that operate in those places. Nevertheless, those entities must still do a lot of soul searching because if they don’t work together, they will operate under the watchful eye of the federal government and its potentially tougher guidelines.

Kentucky, for example, is implementing a law that would essentially exempt itself from following any federal environmental mandates. Others, such as Georgia, Ohio, Kansas, Louisiana, Missouri and West Virginia, would limit emissions from certain facilities but would not impose strict state-wide ceilings.

Meantime, the major coal-burning utilities such as American Electric Power, Duke Energy, FirstEnergy Corp., PPL Corp., and Southern Company all have close working relationships with their state regulators. They prefer to maintain that route and avoid federal involvement in their energy choices.

“If a state’s plants have all the latest emissions control technologies, then they will have plenty of compliance options,” says Bystrom. “If you have ‘unscrubbed’ coal plants that have been unchanged since before the Clean Air of 1972, then the rule will have higher costs. That’s where you will see fighting.”

He points to Texas, where nearly all of its coal facilities are equipped with the tools to capture mercury, sulfur dioxide and nitrogen dioxide. At the same time, it is a leading producer of wind power. Taken together, the state should work within the confines of the proposed federal rules to execute a clean power plan.

Under any set of conditions, the DNV GL consultant does not expect the eventual new rules to be so onerous that it upsets the order of electric markets. Utilities, which have cost-sensitive operations and which need time to adapt to market rules, will have plenty of options open to them: The potential to trade credits across state line with other power plants as well as their industrial counterparts.

“There will be plenty of potential to provide carbon reduction at a relatively inexpensive price: $10 a ton, as opposed to $30 a ton,” says Bystrom. “This is not a technology issue but it is one that simply gives utilities the ability buy carbon credits from someone else.”

He is referring to a cap-and-trade market, which is a free market approach that allows those industrial entities that are able to meet or exceed certain emissions thresholds the right to sell their “credits” to those that cannot do so. As the ceilings are gradually lowered, the rate of emissions would fall. Witness the Regional Greenhouse Gas Initiative in the Northeast.

The end result, Bystrom concludes, is that the likelihood of new coal plant construction is tiny, although changes to the Clean Air Act by no means spell the death of all the existing coal plants. In fact, he says that if utilities have done everything they can to comply with the regulations tied to sulfur dioxide, nitrogen dioxide and mercury, then it is unlikely that President Obama’s clean power plan proposals would be a nail in the coffin of coal-fired electricity. “We do not expect to see significant coal retirements as a result of this proposal.”

And if one considers the possibility of new technologies that are on the horizon, the odds of coal’s survival — even its resurrection — increases, adds Bob Bellemare, chief operating officer of Mykrobel, a utility consulting firm in New Mexico. Specifically, he points to carbon capture and sequestration that is able to collect the heat-trapping emissions before they leave the smokestack and then to bury those releases in deep geological formations.

Here, Southern Co. has a $3 billion coal gasification effort in Mississippi that will take carbon and pump it underground so as to enhance oil recovery. Meanwhile, FutureGen is a $1.1 billion government-led effort that is expected to result in a near zero-emissions coal facility in Illinois.

“I would not entirely dismiss coal,” says Bellemare. “Many people are working on carbon capture. Could it be commercially available? I would have to say it is possible.”

Nevertheless, Bellemare acknowledges that the momentum is on the side of those fuels that are cleaner than coal. He maintains that utilities will keep a diverse portfolio, although certain regions will continue to rely on their indigenous energy sources: Hydro will be a big part of the Northwest while solar will grow in the desert Southwest and coal will continue its prominence in Appalachia.

Bloomberg’s Barnett and DNV GL’s Bystrom agree that coal’s influence in the United States is waning, all conveyed by the U.S. Energy Information Administration’s 2014 analysis. The reasons: Tougher regulations as well as comparatively cheap and abundant shale gas.

At the same time, the energy experts have varying views on what Obama’s clean air executive order all means for renewable and nuclear energies. Mykrobel’s Bellemare says that from a technical perspective, nuclear energy would be an ideal replacement for coal — except that there are only a few places in the United States where such plants could get permitted.

Bloomberg’s Barnett counters that “nuclear will be lucky to keep its existing plants operational” while any advantage given to renewables will be limited — ideas countered by Bystrom, who says that nuclear now has a “chance to get back in the game,” adding that it is possible that new construction could begin in the United States as a result, although at a smaller scale than today’s base-load plants.

Renewables, meantime, will be an “incremental contributor” that is driven by not just the clean power plan but also by portfolio standards and falling costs, notes Bystrom. “The cost declines are astonishing.”

Changes to the Clean Air Act will be evolutionary, giving time for utilities to adjust. Those alterations will not, however, be the electric marketplace’s primary determinant. That would be pure economics where investments in natural gas generation are coming at the expense of coal, and others. Even then, utilities will hedge their bets and keep a portfolio of fuel options.

Ken Silverstein covers energy for Forbes and the CSMonitor.