While we are all squawking about high gasoline prices, there is an energy misdirection going on.
Sabre rattling by Iran has security specialists sitting on the edge of their seats and speculators seeing the resulting reduced-fuel future. Short of a quick military strike that would squelch Iran’s threats, there is little that America can do to stem the rise of the global commodity costs—though history tells us an announcement of increased drilling in the US would have a positive impact.
While we are all looking at gas prices, there is another dramatic energy price increase going on that is totally optional; one that is within the President’s power to completely reverse.
Coal-fueled electricity generation is the lowest cost. Yet, due to cost-increasing regulations, coal-fueled power plants are being shut down at an alarming rate—killing jobs, raising rates, and putting the reliability of the electrical grid at risk.
Environmental groups are cheering, while local governments are left to grapple with the lost tax revenue. On February 29, Michael Brune, executive director of the Sierra Club, penned a post celebrating the 100th closure of a coal-fueled power plant: Chicago’s Crawford plant. He also boasts that the group’s efforts have prevented 166 new coal-fueled power plants.
The closure of two units at the Salem Harbor Station in Massachusetts could halve the plant’s workforce. Salem Harbor Station is also the city’s biggest taxpayer. Mayor Kim Driscoll addressed the problem of the loss of the $4.75 million tax bill: “It's a big chunk of change when you're looking at we still have the same number of kids in school, we still have the same number of calls for police and fire, we have the same number of parks and resources that need to be maintained and kept up.”
In Chamois, Mo., jobs at the power plant are “the best thing going.” Mayor Jim Wright doesn’t want to see the Central Electric Power Plant shut down. He says: “Coal’s coal. If you are going to dig it up and ship it to China, you might as well burn it right here.”
Power plants throughout the country are being closed because of onerous regulations being mandated by the EPA. The North American Electric Reliability Corporation and power plant operators are pressing the Obama administration to give companies more time to comply with the rules to avoid shutting down too many power plants at one time. The regulations and the timeline to meet them make it uneconomic to upgrade the older units.
In response to EPA regulations proposed in October, Arizona Public Service Company announced in November that it would close three of the five units at the Four Corners Generating Station in Farmington, NM. Mark Schiavoni, senior vice president of Fossil Generation, said: “These rules would present a major economic challenge for continued operation.”
Across the highway is the San Juan Generating Station where the EPA’s plans to reduce emissions and increase visibility is threatening more closures. Not only are the EPA regulations aggressive, they are also invasive. The New Mexico Environment Department has a plan that will meet the EPA requirements of the Clean Air Act at a cost of $77 million. But the EPA wants a specific technology that will cost the ratepayers ten times more! The EPA’s plan will likely force the closure of the two older units at the San Juan Generating Station.
The Public Utility Company of New Mexico (PNM) is part owner of the San Juan plant. PNM and the State of New Mexico are appealing the EPA’s decision. They contend that the EPA did not properly consider the state plan proposing the alternative technology that would cost less but achieve similar improvements. They’ve asked the EPA to put a hold on the decision, and they’ve filed a stay that would delay implementation of the regulations while the court considers the appeals. PNM could have to spend millions on planning and design when the more-costly regulation could be ruled against in favor of the lower-cost option.
On March 2, the 10th Circuit Court of Appeals in Denver denied the request to put the new regulations on hold while the appeal is being considered. The EPA could have granted the stay, but they are not interested in cooperation. The San Juan plant will likely go the way of the Four Corners plant across the highway. Unit closures at both plants will cut more than half of the current generation and hundreds of jobs. The rate payers will shoulder the costs. Environmental groups are pleased with the court’s decision.
The units that could be retired early, due to the regulations, have not yet been fully depreciated. I picture negotiations taking place between the key players—the Public Regulatory Commission, the environmentalists, and PNM—in a smoke-filled room (note: the ratepayers will not have a seat at the table). PNM could agree to bulldoze the units—which the environmentalist want—but it will cost. PNM will need to offset the cost of early retirement through rate increases.
Environmental groups say that cost claims are “hype”—though they admit that the retrofits required by the EPA will result in rate increases. They believe the consumers have been “getting a free ride because the cost of electricity from these plants is artificially low.” Additionally they believe that costs will be less than predicted. Not likely. How often do government projects come in under budget?
As the President did with the ozone rules in September, he could instruct EPA Administrator Lisa Jackson to allow more time or to approve the state’s plan. He could delay the implementation of all of the aggressive regulations for a few years—at least until the economy improves. Many of the coal-fueled units in question are fifty-plus years old. They’ve already had scrubbers and other pollution reduction retrofits. They are running far cleaner than the original designs. Allowing them to operate for another few years—or for the rest of their useful lives—will not greatly impact long-term emission reductions, but it could provide significant benefits to the economy.
With the Administration’s permission, the environmentalists have a stranglehold on American energy policy. They are not apt to delay implementation. The EPA is pushing these regulations now because if President Obama does not get reelected, the Republican president will delay indefinitely or repeal the regulations altogether. This is their moment.
Unlike oil, electricity is not a global commodity. It is used close to the generation source. Electricity is as essential to a robust American economy as is oil/gasoline. Yet, while we are in the midst of the worst economic crisis of our lifetime, the Administration has made choices that will have an immediate impact on electricity prices. The one, two punch of high gas prices and increasing electricity costs are likely to knock out the struggling economy.