What’s the True Cost of Clean Power Plan Compliance?

February 2016

We previously wrote about a November study conducted by the National Economic Research Associates (NERA)1, which found that compliance with the Clean Power Plan (CPP) under optimized least-cost scenarios2 will result in average energy sector expenditure increases between $29 and $39 billion per year relative to projected baseline conditions (i.e., without the CPP). The effect, in turn, is a reported average annual increase in electricity rates of 11%–14%.

This is a controversial report and continues to be debated. To contrast the NERA study, Morgan Stanley Research (MSR) published an independent report in August, which found that under separate regional trading programs, the cost of CPP compliance will be approximately $11 billion annually. The effect is a reported average annual increase in electricity rates of 5% in the Southeast, 4.5% in the MISO region, and 0.5% in Illinois, with business-as-usual rates in all other regions.

The primary differences in the two reports can be reduced to the assumed costs of energy efficiency, clean energy, and allowances, as well as the makeup of the regional trading programs.

Key Assumptions

  • Cost of energy efficiency
    • NERA assumed a flat cost of energy efficiency of $1,100/MWh (2011$)3
    • MSR excluded the cost of energy efficiency in its compliance estimates and assumed average load reductions of 0.5% per year due to energy efficiency in its reference case
  • Cost of clean energy
    • NERA used the capital and operating costs for new renewables and new nuclear estimated by EIA for its Annual Energy Outlook 2015 (AEO) forecasts4
    • MSR estimated capital and operating costs for wind and solar would be ~35% less than AEO’s forecasts by 2020
  • Cost of allowances
    • NERA included allowance costs in its calculations of additional resource costs needed for compliance
    • MSR identified allowance costs as transfer payments that do not add to net energy sector expenditures
  • Regional trading programs
    • NERA used six regional trading blocs based on inter-state trading regions used by EPA in its Proposed CPP RIA: West, North Central, South Central, Southeast, East Central, and Northeast
    • MSR used six regional trading blocs based on existing geographic and political similarities: Southeast, West, RGGI, SPP, MISO, and Other (viz. CO, IL, SD, TX, WY)

Implications

The “flexibility” afforded to states by the EPA in the final version of the CPP increases the range of potential financial impacts (both positive and negative) that can result from choosing a compliance strategy. Thus, the choice is not straightforward, and any decision must be weighed against the modeling assumptions used and the variables considered. Key data points shared by both studies include:

  • Number and capacity of coal retirements
  • Anticipated regional load growth
  • Cost and effects of energy efficiency
  • Expected cost and growth of clean energy (including nuclear)
  • Existing state policies (e.g., Renewable Portfolio Standards)
  • Current or future involvement in carbon based trading programs other than CPP (e.g., RGGI)

More Information

NERA: Energy and Consumer Impacts of EPA’s Clean Power Plan

NERA Testimony: Summary of Key Points at a Hearing on EPA’s Final Clean Power Plan Rule

SNL: Morgan Stanley sees power, utility names benefiting from Clean Power Plan

NRDC: New Study, Same Old…Tricks: Coal Industry Uses Bogus Accounting to Exaggerate Clean Power Plan Costs

Center for Climate and Energy Solutions: Modeling EPA’s Clean Power Plan: Insights for Cost-Effective Implementation

This report is part of the Fossil Minute series. To view all featured Minutes, please click here.

Contributing Author: Chris Becker

view more

Contributing Authors

Welcome to ScottMadden!

Sussex Economic Advisors is now part of ScottMadden. We invite you to learn more about our expanded firm. Please use the Contact Us form to request additional information.