ERCOT’s Analyses of Haze Pollution and Clean Power Plan Safeguards More Like Academic Exercises Than Likely Outcomes

By Cyrus Reed

In a packed meeting last week at the Electric Reliability Council of Texas (ERCOT), regional planning staff presented analyses of the effect of two new environmental regulations on the ERCOT grid and Texas power plants -- the new limits on regional haze pollution and the Clean Power Plan to reduce carbon pollution. While it’s important for ERCOT to analyze the result of complying with EPA safeguards in advance, the reports would be more useful if they made assumptions that better reflect reality. The reports completely ignore new technologies and resources, such as energy storage, demand response, and distributed solar energy, that could help transition away from fossil fuels with minimal problems and maximum benefits. In addition, in the case of the haze pollution analysis, the report assumes a worst-case scenario where existing generation retires in one area, and no generation is added in that same area, leading to reliability concerns that are extremely unlikely.

Still, despite these flaws, the reports did suggest that the likely effects of these rules are less severe than the assessment released in December 2014 -- when ERCOT predicted up to 7,800 MW of coal and natural gas power plant retirement. Two critical assumptions in this improved result were lower capital costs and more rapid deployment of renewable energy.  

Regional Haze Pollution

In assessing the potential effects of the EPA’s proposed safeguards to protect the Big Bend National Park and other federal lands from coal plant pollution, ERCOT made an arbitrary “worst-case” assumption that every coal plant within one geographic area included in EPA’s proposed rule would retire. Indeed, ERCOT staff admitted as much during questioning.

The EPA is expected to issue the final regional haze plan for Texas in December. As proposed, EPA’s plan will result in the reduction of 225,000 tons of sulfur dioxide from Texas sources each year. Specifically, the plan’s reduction goals could be met if seven coal plant units totaling some 3,000 MW of power in Texas installed new flue gas desulphurization technology, also known as “scrubbers.” Seven coal plant units would need to refurbish their existing, inefficient scrubbers. Twelve of those units are in ERCOT territory,  but the other two are in the Panhandle in another electric grid, the Southwest Power Pool (see Table).

Under the proposed rule, coal plants with existing scrubbers would have three years to retrofit, and plants that have no pollution controls for sulfur dioxide would have five years to add scrubbers.

Table 1: ERCOT Coal Units Subject to EPA Regulations under proposed Federal Haze Rule

Capacity source: ERCOT, Report on the Capacity, Demand, and Reserves in the ERCOT Region, 2015-2024, May 2015.

Unfortunately, rather than providing a realistic picture of transmission costs associated with meeting the plan’s goals, ERCOT’s regional haze analysis relied on several arbitrary assumptions about new generation and retirements that skew the analysis.

First, in a move that was criticized by many stakeholders, they divided the state not into the traditional “load” zones, but into “weather or climate zones” and then placed each of the coal plants into one of those zones. They then made assumptions that, given the short time frame for complying with the expected federal rule and the high cost of adding or refurbishing scrubbers, certain coal plants would retire rather than comply with the new regulations. Thus, ERCOT laid out six scenarios where either some or all coal plants in certain weather zones retired. None of these retirement scenarios were supported by the kind of economic dispatch modeling that is standard in the industry for predicting retirements.

Second, ERCOT then made an assumption that no major additions of generation would be built in those arbitrary “weather zones,” and instead evaluated only new generation in other zones. Essentially, ERCOT assumed that coal plants in one area would retire, and little or no generation would be added within that area, even as other areas added generation.

Applying these arbitrary assumptions yielded arbitrary and unrealistic scenarios. For example, in the scenario that caused them the greatest concern -- the “North-North Central” scenario -- ERCOT speculated what would happen if six of the largest and oldest coal units (approximately 5,300 MW) would be retired within five years. As noted, ERCOT assumed no additional generation in the geographic area where the coal plants would be retired. The unsurprising result? Hundreds of miles of transmission lines overloaded and major transformers with big problems. Yep, ERCOT is correct: if you eliminate generation in an area but still have big electric demand, you can overload transformers and transmission lines.

These assumptions were widely criticized by market participants who argued that it was unlikely that all of the coal plants in one area would retire at once, and if they did, that no generation would be added locally. As the Sierra Club pointed out, state regulators and utilities in Oklahoma worked with EPA and other stakeholders to allow one of their coal plants to stay open without adding major pollution controls while another was retired and replaced by cleaner resources.

NRG pointed out during the meeting, if some of the plants were to retire because of the high costs of compliance and the current low energy prices, the most likely scenario would be for either the existing generator or a competitor to add generation in the immediate vicinity of the plant being retired, because the transmission infrastructure, energy demand, and brownfield sites are already there.

Nevertheless, ERCOT stuck to its flawed assumptions and asserted that the purpose of its study was to assess what would happen should multiple coal plants in the same area decide to retire at the same time. That is not a true transmission reliability study to inform policy choices, but an academic exercise designed to reinforce ERCOT’s long-standing and pre-determined policy position.

Despite the unlikelihood of its scenarios, ERCOT’s analysis does demonstrate a major problem with the Texas grid. Despite having a modern, high-tech economy and rapidly-growing cities, the Texas power grid continues to rely on 40-year-old coal plants that lack modern controls to reduce air pollution in areas of Texas with high electricity demand. The fact that there are numerous plants in Texas that lack scrubbers and are creating haze at Big Bend National Park and other federal lands is not the fault of EPA regulations, but rather a symptom of the industry-friendly attitude toward pollution that has existed in Texas for generations.

In addition, the ERCOT analysis suffers from the fundamentally-flawed assumption that coal plant retirements are the only path to complying with the haze pollution rule. EPA's proposed plan to address haze in the region's national parks and wilderness areas, including Big Bend, requires that some of the oldest, dirtiest plants in Texas (and indeed the nation) finally add modern pollution controls to protect our air. ERCOT’s extreme assumptions unfortunately tell us very little about what transmission upgrades would be needed as a result of this clean up. ERCOT assumes that all plants within each of its proposed weather zones affected by the rule will retire at the same time, but provides no analysis whatsoever that that scenario is realistic. This results in what is likely a vast overstatement of transmission problems and costs. In other states facing similar requirements, some sources of haze pollution added modern controls and others shifted to cleaner sources of energy. It is important to anticipate changes to the Texas grid that may be needed to protect public health and our beloved parks, but ERCOT's report is not that helpful.

If the out-of-state companies that own these polluting power plants decide to retire them instead of clean them up, that’s a business decision made by corporations, not a federal requirement.

Finally, although it is outside of ERCOT’s purview, it is essential to to acknowledge that  haze pollution also blows into neighboring states like Oklahoma and Arkansas and creates haze across state lines. In fact, the Oklahoma Department of Environmental Quality, supports the EPA effort to roll back Texas power plant pollution. The pollution from the coal plants also violates public health standards for sulfur dioxide in the areas around many of the coal plants, a condition that can lead to respiratory problems in the communities surrounding the coal plants.

The Clean Power Plan

At the same meeting, ERCOT also presented its report on the potential results of the finalized  Clean Power Plan (CPP),  the first national safeguards to control carbon pollution.

As with the Regional Haze Rule, the ERCOT report claims that compliance with the Clean Power Plan could contribute to grid problems in Texas should some of the largest and dirtiest coal plants retire in a short timeframe, and expresses concern about the rapid integration of renewables that would likely increase under the CPP.

Under the EPA’s final rule, Texas would need to cut carbon dioxide pollution from our existing coal and natural gas power plants by approximately 33 percent by 2030, with work toward that goal beginning in 2022.

In December 2014, ERCOT had released an early iteration of the report based on the proposed Clean Power Plan suggesting that compliance with the rule could put some 7,800  MW of coal and older natural gas units in jeopardy of early retirement, increase transmission costs, and generally force energy prices significantly higher than otherwise would occur without the new rule.

The more recent assessment, based on the final rule, indicates a smaller effect and, essentially, an easier compliance route for Texas. However, rather than present one scenario of expected impacts, the ERCOT Clean Power Plan study looks at four scenarios (Table 2):

1. Baseline

2. CO2 limits

3. CO2 limits through a carbon price

4. CO2 limits through a carbon price with full implementation of the aze pollution rule.

An additional scenario discussed in the ERCOT presentation is the role that energy efficiency could play in meeting the requirements of the CPP, and ERCOT did develop a scenario that assumed much more robust investments in energy efficiency measures of approximately seven percent of total load over a 10-year period.

What is interesting is that in all four basic scenarios, ERCOT assumes some older natural gas steam units and coal plants will retire within ERCOT and much greater levels of wind and solar will also be integrated into ERCOT’s grid. All of the scenarios also assume some new natural gas plants will be built, although the pace of investments in solar and wind in ERCOT’s analysis is much greater than the expected investment in new natural gas resources. However, the pace of older coal and natural gas retirements, and the pace of new additions – whether from natural gas, wind, or solar – does change in the different scenarios.

Thus, in a scenario in which Texas meets the exact CO2 limits required in the CPP (scenario 2 above), ERCOT expects Texas would still only retire about 1,500 MW of coal and some older natural gas units, while adding only 700 MW of new natural gas, and 18,000 MW of wind and solar. However, with a more precise price signal – that is an actual carbon price adder in our energy-only market (scenario 3 above) – ERCOT would expect a number of the coal plants would become uneconomic and be replaced with more wind, solar, and natural  gas peaking units.

ERCOT suggests its fourth scenario – which adds the new haze pollution limits to the analysis – would lead to the most retirements of coal plants – 6,200 MW in all – and the largest build-out of wind and solar. ERCOT expressed the most concern about this scenario because of the timing of haze pollution compliance. Essentially, they argue that if older coal plants could no longer economically compete if they were to add pollution control equipment, they might come offline sooner rather than later, and the pace of investments in new generation and transmission infrastructure might be challenging to the system operator.

Table 2. Expected Retirements and Expected Additions by 2030 Based Upon ERCOT’s Four Scenarios

Second Verse, Same As the First

While ERCOT’s analysis is a useful addition to the discussion about how Texas can meet its obligations under the Clean Power Plan, it continues to rely on several problematic assumptions.

Increase in Renewables

While acknowledging that Texas has plenty of new resources that can effectively meet demand by growing our solar and wind resources from roughly 10 percent today to about 27 percent by 2030 under their most aggressive scenario (wind just set a new record last week,  supplying 37 percent of all power in ERCOT at one particular five-minute period), the report actually undercounts the rapid growth in renewable energy. Tens of thousands of megawatts of wind and solar have already gone up in Texas and the report confirms that more are on the way. In fact, we believe, given the rapid pace at which new solar and wind development is occurring, ERCOT undercounts the ability of renewables to maintain reliability. In addition, its report only considers large-scale renewable resources, even though many areas in Texas already have many megawatts of rooftop solar.

There is an ongoing discussion at ERCOT on how rules could be changed to allow these distributed resources to actually compete and provide competitive power into the ERCOT real-time market. Given these realities, ERCOT’s analysis is too limited.

Neglected Resources

ERCOT also acknowledges in the report it does not fully address the role energy efficiency could play in reducing load growth in Texas and lowering total energy costs to consumers, and the role of new technologies play in reducing rates and providing grid support. While the report does discuss one potential scenario that increases investments in energy efficiency by utilities, the report ignores other energy efficiency policy tools that could more cost-effectively reduce demand and provide power when needed, including the role played by non-investor owned utilities, retail electric provider programs, and newer building energy codes.

It All Adds Up

The ERCOT report also ignores new market changes already being discussed in Texas which will improve the integration of the energy market and so-called ancillary services, which should lead to faster-acting resources like energy storage and demand response to deal with any variable renewable resources.

To its credit, ERCOT has already helped integrate more than 15,000 MW of wind with minimal issues by varying and changing the way we acquire ancillary services. However, the report completely ignores demand response and energy storage as potential generation and transmission solutions. Both of these fast-acting flexible resources can help create new tools to deal with the real problem of large retirements of coal in a relatively short time-frame and balance energy supply and demand. Stakeholders at ERCOT are already involved in discussions on how to grow our energy markets to incorporate these new technologies.

The Take-Away: With proper planning, compliance with the Clean Power Plan (and haze pollution limits) can be achieved with little financial harm

Notably, the ERCOT report itself shows that meeting the safeguards of the Clean Power Plan and the Regional Haze Rule will have minimal financial impacts. In fact, even with ERCOT’s many problematic assumptions, compliance with the full suite of federal air rules will have less than a 1 percent effect on the electric bills that families pay every month from now through at least 2022. Even in their worst-case scenarios, ERCOT estimates electric rate increases wouldn’t be significant -- about a 20 percent impact -- by 2030. But even those predicted costs are unlikely to occur. As several industry stakeholders pointed out in response to ERCOT’s report, the market can and will respond if prices rose and build out even more of our world-class and inexpensive solar and wind power to keep electric rates low, while adding other resources to balance our grid’s supply and demand.

Perhaps the other big take-home message from the report is that while ERCOT must address reliability issues that may result from compliance with new rules to protect our air and water, it also needs to modernize in order for Texas to have a 21st century electric grid. Rather than trying to fight against the pollution limits themselves, ERCOT, the Public Utility Commission, and our state leaders should make plans on how to cost-effectively achieve them in a timely manner.

ERCOT and the PUC also need to update their own rules and protocols. ERCOT only requires electric generators in Texas to provide it with 90 days notice if they plan to retire old power plants. ERCOT and the PUC should consider changing their rules to require generators to provide ERCOT with a longer notice of planned retirements so that transmission and reliability issues can be properly addressed. In addition, Texas should be looking at other alternatives to large transmission projects such as energy storage, capacitors, and local demand response to keep the grid balanced. Current efforts at ERCOT like Loads in SCED, Future Ancillary Services, and the Distributed Energy Resource and Advanced Metering (aka DREAM) Task Force are all laudable efforts which will help pave the way to make this transition to a cleaner grid.

Policy makers and analysts should not be confused by ERCOT’s analysis which ignores these positive developments that could make the transition much easier than assuming the energy market of 2022, or 2030, will look exactly like today’s market.

Texas should and must open up space for new resources like large-scale solar, distributed energy resources, demand response, and energy storage. ERCOT has chosen to ignore the fact that some of these resources can meet the challenge with proper planning and input, and ultimately save consumers money while cleaning the air.

Cyrus Reed is Conservation Director of the Sierra Club's Lone Star Chapter.