Using the Tools We Have: CO2 Reductions from the Power Sector under Section 111(d)

1. Using the Tools We Have: CO2 Reductions from the Power Sector under Section 111(d) Briefing for North America 2050 Conrad Schneider Advocacy Director April 9, 2013

2. EPA’s Duties Under 111(d) • To prescribe regulations establishing a procedure for State plan submittals, • To establish guidelines describing the Best System of Emission Reduction (BSER) for existing sources in the industrial category, • To evaluate State plan submittals to determine that they are “satisfactory”; and, • If State plans are not satisfactory, to establish Federal plans in which BSER is implemented.

3. Next Steps for EPA: GHG 111(d) Emission Guidelines • Engage stakeholders; • Define BSER for existing sources (EPA can begin this process immediately, there is no need to finalize 111(b) first); • Issue guidelines for States to define BSER for the covered sources and establish deadlines for plan submittal and EPA action if the plans are not satisfactory.

4. Some Design Issues • Form of standard (emissions rate e.g., lbs/MWh, other?) e.g., 111(b) proposal expressed as lbs/MWh • Covered source categories? Blended fossil standard, like proposed 111(b)? Subcategories by fuel type? (e.g., coal, gas, and oil) or boiler type? • Should EPA set national standard? Set individual state standards? Unit-based? State average? Other? • Base year? Base year emissions? Generation? Rate? • Compliance and flexibility: Unit-specific? Averaging? Trading? Off-system? Offsets? • How should EPA recognize state programs e.g., RGGI? CA? NA2050? RPS? IRPs? Through SIPs? • How will EPA determine “equivalency” with federal guideline?

5. Formula for Success • Build on state experience: • “Cap and trade” • RPS • IRPs • Compliance could be achieved through a wide range of options: • Coal unit heat rate improvements • Reduced generation from high emission rate coal units • Displacement by under-utilized natural gas generation • Displacement by renewable or nuclear generation and/or energy efficiency programs (in regional markets where coal is on the margin) • Fuel-switching or co-firing • Retirement • Carbon capture retrofits. • While a successful approach will allow states discretion and flexibility to achieve the standards, we expect least-cost compliance would be achieved: • Primarily by displacing inefficient coal with under-utilized gas, and • To a lesser extent, unit heat rate improvements. 4

6. An Opportunity for Meaningful Reductions at Reasonable Cost • CATF wanted to address perception that a Section 111(d) rule for existing power plants would mean either: (a) trivial CO2 reductions (e.g., through requiring minor unit heat rate improvements); or (b) “exhorbitantly” expensive measures. For example, AEP’s CEO, Nick Akins was recently quoted in WSJ saying a 111(d) rule would be “devastating”. Is this necessarily true? • There is a large amount of underutilized natural gas capacity in the U.S. and CATF wanted to determine whether EPA could “tap” that potential through a 111(d) rule and achieve meaningful CO2 reductions at reasonable cost by rebalancing the dispatch of the system to make greater use of that lower-emitting capacity. • CATF engaged the NorthBridge Group to analyze potential benefits and impacts of such an approach. • We specified three target levels of stringency (28%, 24%, and 20% below 2005 levels by 2020) for analysis. The analysis assumed the availability of emissions credit trading (through a voluntary mechanism).

7. NGCC Build Out • . 6

8. Low Capacity-Factor NGCC Capacity • . Source: Energy Velocity 7

9. Comparison to Other Estimates of Natural Gas Capacity • Our estimates are consistent with other studies looking at the potential to displace coal generation with gas generation from existing under-utilized NGCC capacity. • They are also directionally consistent with several “no offset” sensitivity cases analyzed in response to national cap and trade proposals several years ago and, more recently, with a Resources for the Future analysis (Burtraw, Paul and Woerman, July 2011).

10. Results of NorthBridge Group Analysis

11. “Strawman” Proposal: Other Benefits and Impacts • On a lower 48 state basis, by 2020, the “Strawman” proposal is expected to: • Reduce CO2 emissions by 305MMT from forecast 2020 levels. • Result in ~500,000 tons per year reduction in SO2 and NOx emissions, respectively, from forecast 2020 emissions levels. • Reduce coal generation by 24% with only 7 GWs of retirements (all from relatively high heat rate / high emission rate units) • Increase the demand for natural gas by 12% or 3 TCF • Increase wholesale electric prices by 10% or $6/MWh (and retail prices by about 6%), phased in over a five year period between 2016 and 2020 i.e. ~1 percent/year. • At a compliance cost roughly 70% of the MATS rule in 2020. 10

12. Impacts: Demand, Prices & Costs . 20% CO2 24% CO2 28% CO2 20% CO2 24% CO2 28% CO2 20% CO2 24% CO2 28% CO2 20% CO2 24% CO2 28% CO2 Note: The 20, 24 & 28% CO2 labels refer to tonnage reductions relative to the 2005 reference case. 11

13. Thank You! Conrad Schneider 207/721-8676 cschneider@catf.us www.catf.us