The United States Environmental Protection Agency, pursuant to the Clean Power Plan, is currently developing a rule that would require each state to reduce carbon emissions from existing fossil-fueled power plants to a state-specific rate that will be established in the final rule. EPA’s stated intent is to give states great flexibility in how they achieve these carbon emissions reduction.
This paper explores some key issues that the State of Michigan will need to address in developing its compliance with the Clean Power Plan. Using a tool designed at The University of Michigan to find the least-cost power system that complies with a carbon emissions target, this report summarizes the nature of the least-cost plan under two scenarios about future fuel prices.
In 2013, Michigan generated 56.2 TWh electricity from coal. Assuming that natural gas remains as inexpensive as it was in 2014, the least-cost plan is to reduce electricity generated from coal to 32.3 TWh by implementing all cost-effective energy efficiency and building new natural gas combined cycle plants. Assuming that natural gas prices follow the Energy Information Administration long-term reference case, the least-cost plan is to reduce electricity generated from coal to 44.4 TWh by implementing all cost-effective energy efficiency and building new renewable generation resources.
Implementing all cost-effective energy efficiency corresponds to a utility energy efficiency resource standard (called the Energy Optimization Standard under Michigan law) of about 1.5% per year. Implementing sufficient renewable generation to comply with EPA’s draft rule for the Clean Power Plan corresponds to a Renewable Portfolio Standard of approximately 28% by 2030 as well as aggressive improvements in the heat rates of the remaining coal plants.
Choosing between these compliance strategies requires careful consideration of risk. The natural gas price above, which the least-cost plan is to focus on replacing coal generation with renewables is about $4.90 per MMBtu. According to the Energy Information Administration’s 2014 reference case, this price is reached by about 2019. If we choose the renewables path and natural gas prices remain low, we may regret that we are not using cheap natural gas. If we choose the natural gas path and natural gas prices rise, we may regret that we are stuck using expensive natural gas when we could have had free wind or solar “fuel”.
Complying with the Clean Power Plan by replacing coal generation with natural gas leads to the retirement of far more coal generation than does replacing coal generation with renewable generation. This also means that in the near term, choosing the natural gas path reduces criteria pollutants and airborne toxics more than the renewables path. We can no longer just compare direct cost of energy from renewables to direct cost of energy from natural gas, nor are the pollution implications of these choices straightforward. We need to approach this choice with a more sophisticated approach to uncertainty and risk than has been past practice.
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