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ERCOT: Enviro Rules May Retire Some Gas Generation

Energy infrastructure dominoes that may fall in Texas in the wake of a series of stiffer environmental rules could start with the demise of old natural gas-fired generation plants, according to an ERCOT report released Wednesday. The study concluded that coal-fired generation in the state is likely to see few, if any, plant retirements from stiffer federal water, air and coal regulations.

Requested late last year by the chairman at the Texas Public Utility Commission, the Electric Reliability Council of Texas (ERCOT) was asked to examine the impact on the state's 76,700 MW power generation capacity from proposed changes in the federal Clean Air and Water Acts, Clean Air Transport Rule, and coal combustion residuals disposal, applying various scenario analysis and conclusions, one of which is that coal generation will "maintain sufficient market value to justify investment in additional environmental control technologies."

A prominent concern substantiated by the ERCOT study is that the new rules would lead to generating plant retirements and that could in turn cause some reliability problems before the right market signals are available to incentivise enough investment in new generation. In addition, ERCOT said the loss of gas-fired peaking generation would likely have impacts on transmission reliability, centered on the Houston and Dallas/Fort Worth metropolitan areas.

The projection for natural gas-fired generating plants, which represent more than half (42,000 MW) of the state's installed capacity, however, turned up different outcomes. And the prospects for new gas-fired generation will depend on the market forces behind new capacity in ERCOT, the report said.

In addition to reviewing the proposed environmental rule changes and several published studies of projected nationwide impacts from the stiffer regulations, ERCOT took other analytical steps:

While noting that there is still substantial uncertainty about pending environmental regulations, the ERCOT system planning unit that did the study used recently published proposals for the Hazardous Air Pollutants rule and a cooling water intake structures rule to evaluate the impact on generating units in four potential future scenarios.

One conclusion is that "it is unlikely that a significant amount of coal-fired generation will be retired, unless a combination of low natural gas prices and carbon emission fees significantly reduce the economic viability of these generation units," ERCOT's report said. "Older gas steam units [often used for peaking] that are subject to retrofit requirements are more likely to be retired."

The report cited the example of the imposition of a closed-loop cooling tower requirement, concluding that it would likely result in the retirement of more than 8,000 MW of gas-fired generation in ERCOT, roughly 20% of the current installed gas-fired capacity. Without replacement generation, reserve margins would dip below 2% by 2015, the report said.

ERCOT determined that most of the older gas-fired generation identified as being at risk from the more stringent environmental regulations has "limited market value," returning little more than payment of fixed costs. "In many cases, this generation is less efficient than new quick-start generation and less flexible," ERCOT's report concluded.

The report said current market conditions are causing older gas-fired units to lose favor because of their inability to start and stop quickly. Thus, there is more integration of variable generation that has quick-start capability.

Ultimately, the replacement of gas-fired generation will have to be peaking units, and the financial incentive for private investment to build these units may need more hours of scarcity pricing on the regional grid to attract that investment, ERCOT said.

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