November 16, 2016

Including New Gas-Fired Combined Cycle Plants in State Clean Power Plan Compliance Could Lower System Costs of Achieving Carbon Reduction Goals, According to Brattle Economists

A report issued by consultants at The Brattle Group examines the potential implications for competitive wholesale electricity markets if new gas-fired combined cycle (CC) plants are not covered under the Clean Power Plan’s (CPP) mass-based state implementation plans (SIPs). The authors find that if state implementation plans exclude new gas CC plants, the electric sector could fall short of the carbon dioxide (CO2) reduction goals set by the CPP, while incurring higher system costs per ton of CO2 avoided. The report focuses on the consequences of not covering new gas-fired CCs in regions with organized wholesale electricity markets, but explains that the same cost and emissions outcomes would be expected in traditionally regulated regions.

The report, “Covering New Gas-Fired Combined Cycle Plants under the Clean Power Plan,” is prepared for the Natural Resources Defense Council (NRDC) and authored by Brattle Principals Judy Chang, Kathleen Spees, and Metin Celebi, and Research Analyst Tony Lee. The report is available for download using the link below.

“Organized wholesale electricity markets were founded on a basic economic principle that resource-neutral approaches allowing competition will minimize system costs,” noted Ms. Chang. “A mass-based cap that covers the CO2 emissions of all existing and new fossil plants would be a technology-neutral approach to control CO2 emissions cost-effectively and preserve market competition among gas plants.”

Under the CPP, a mass-based emissions cap covering the CO2 emissions from all existing and new fossil plants (commencing construction after January 8, 2014) would require all fossil generators to surrender one CO2 allowance for each ton emitted. The report finds that if only existing plants were covered, the emissions from new plants would increase even while emissions from existing plants would decrease under increasingly stringent caps.

With respect to wholesale electricity markets, the authors find that excluding new gas CCs from the emissions cap would introduce a discrepancy in the economics facing new and existing gas CCs that are identical in all respects other than their in-service dates. New CCs would earn greater profits in the energy market because they would be compensated as if they were entirely non-emitting plants. In simulations performed by Brattle for this study, these inflated economic incentives induced overinvestment in new gas-fired CCs, displaced investments in new non-emitting resources, and contributed to retirement pressures for existing non-emitting resources.

Additionally, the report points out that the EPA’s proposed set-aside approach would only partly mitigate emissions “leakage” since the new CCs would continue to emit CO2 at no cost. The authors explain that the proposed set-aside is not large enough to provide equivalent incentives to existing gas CCs, new renewables, or other non-emitting resources to level the playing field, while also noting that the EPA is expected to revise this proposal based on public comment in its finalized federal implementation plan.

The report concludes that a new gas CC would generate more power, emit more CO2, and earn a greater profit compared to an identical gas CC classified as “existing.” Further, those that over-invest in new gas CCs based on the inefficiently inflated economic incentives face the regulatory risk that future policies may impose emissions reductions on the relatively recent investments.

“This paper is an important resource for state policymakers contemplating mass-based trading systems. Covering new gas plants under one emission limit will help achieve emission reduction goals cost-effectively,” stated Starla Yeh, Senior Policy Analyst at the NRDC.