Fitch: EPA's CPP Holds Mixed Impact for the US Power Sector
05 August 2015 - 1:40AM
Business Wire
The final Clean Power Plan (CPP) unveiled Monday by the
Environment Protection Agency (EPA) appears less onerous for the
U.S. power sector versus the draft rule released in 2014, according
to Fitch Ratings. The final rule offers some concessions to states
to meet the updated carbon emission goals, but it will nonetheless
be a challenge for the U.S. power sector.
The final rule provides states more time than initially proposed
to comply, which should somewhat assuage a key concern voiced by
utility managements. States now have until 2018 to submit their
compliance plans to the EPA and until 2022 (rather than 2020)
before they have to start meeting the interim emission goals.
Nevertheless, compliance with the CPP will require significant
infrastructure investment in building out renewable power
generation and associated transmission networks as well as
investments in natural gas pipeline infrastructure to facilitate
coal to gas switching. Given the long lead times required to plan
and build these assets, we believe compliance by 2022 could still
be a challenge for some states.
The final rule makes key changes to the options available to the
states to cut carbon emissions or the four "building blocks"
identified in the draft rule. Some of the refinements to the
building blocks in the final rule are positive for the industry.
The removal of energy efficiency as a building block, a lower
projected improvement in efficiency of existing coal plants (range
of 2.1%-4.3% versus 6% in the draft rule), and exclusion of
existing nuclear or under-construction nuclear or existing
utility-scale renewable energy generation should appeal to the
states and ease the path to compliance.
Alternatively, building block 2 assumes that natural gas plants
can run up to 75% of the net summer capacity versus 70% of the
nameplate capacity in the draft rule forcing less reliance on
coal-to-gas switching during the initial years to drive emission
reductions. Furthermore, building block 3 anticipates more use of
renewable energy, and the EPA is targeting share of renewable
generation to increase to 21% in 2030, which appears
aggressive.
The final CPP includes provisions for reliability assurance to
address the pushback received from the industry that excessive
shutdowns of coal capacity have the potential to impede grid
reliability. It requires the states to incorporate the reliability
impact of their implementation plans, allows the states to seek
revisions to their implementation plans if unanticipated or
significant reliability issues arise, and provides for a
"reliability safety valve" to keep reliability critical generation
online outside the constraints of carbon emissions. The EPA
acknowledges that the Department of Energy and the Federal Energy
Regulatory Commission will have to monitor the implementation of
the final CPP and assess its impact on reliability.
The final rule mandates a 32% cut in carbon emissions by 2030
from 2005 levels, which is a more aggressive target than the 30%
cut proposed in the draft rule. Similar to the draft rule, the
final CPP mandates a different emission reduction target for each
state. However, the EPA has refined its approach by first applying
the building blocks to the three established regional
interconnects. The EPA advocates a multistate, market-based
approach, such as emissions trading, as a cost effective way to
achieve compliance.
We believe the final CPP rule will be litigated. The judicial
review process, along with the shifts in the political landscape
(given the state implementation plans will be finalized under the
next administration), could drive the timing and severity of the
CPP implementation.
The CPP has far-reaching implications in terms of how
electricity is produced and consumed and is likely to result in
upward pressure on capital expenditures plans, O&M expense and
electricity rates. The cost of compliance will be materially
influenced by the states' decision to go alone or deploy multistate
approaches to reduce carbon emissions.
Within the regulated universe, the utilities with coal dominant
portfolios could see the most adverse impact, since increased cost
of compliance would ultimately flow through to consumers as higher
rates for electricity. However, those utilities with constructive
regulatory regimes, ability to recover federally mandated
environmental costs either through riders or pre-approval of
environmental capex, and a manageable glide path for rate increases
could ultimately benefit through higher rate based growth, in
Fitch's view. Among the non-regulated power generators, Fitch
expects companies with cleaner portfolios, such as Exelon, Nextera
Energy Inc., and Calpine, to be beneficiaries of the CPP.
Additional information is available on www.fitchratings.com.
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of Fitch Ratings.
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Fitch RatingsShalini Mahajan, CFAU.S. Corporates - Utilities,
Gas and PowerFitch Ratings+1 212-908-035133 Whitehall StreetNew
York, NYorKellie Geressy-NilsenSenior DirectorFitch Wire+1
212-908-9123orMedia RelationsSandro Scenga, New York, +1
212-908-0278sandro.scenga@fitchratings.com