Possible Approaches to Encourage Efficiency
Improvement
As previously mentioned, EPA has been directed by the President to propose guidelines for GHG emissions reduction from existing coal-fired power plants. The general assumption is that EPA will establish some target for emissions on a state or plant-by-plant basis, with companies free to decide how they will achieve the reduction (i.e., with efficiency, fuel switching, retirement of older units, priority dispatch for cleaner units, etc.), and with emissions averaging, banking, and trading of emissions credits playing a role. Within such a system, efficiency improvements can be an important contributor.
While the details of the proposal are unknown at this time, the proposal may take into account a number of factors (such as the remaining useful life of the existing source), and could be less stringent than the proposal for new sources of power plants emissions of GHGs.
Power plant efficiency may be another factor which EPA may potentially consider in its guidelines for existing sources. NETL observed in its 2010 report that based on a scenario where CFPP generation was constant at the 2008 level, increasing the average efficiency from
32.5% to 36% could reduce U.S. GHG emissions by 175 MMmt per year or 2.5% of total U.S. emissions in 2008. NETL conceded that barriers existed to achieving a higher average fleet efficiency level, citing the power generation industry’s focus on availability (focused on the profitability of coal-fired generating units), inconsistent cost pass through possibilities (some deregulated areas have cost pass through clauses, and zero or negative incentives in many areas
for reduced fuel use), fear of triggering New Source Review, and uncertainty about GHG
regulations (which could lead to very short payback periods for improvements).
If power plant efficiency is an option EPA proposes for state consideration, the question then may be asked how a fleet-wide improvement program could be achieved in United States. One
possible approach might be to follow NETL’s suggestion of using the top decile of CFPP efficiency as a benchmark for U.S. fleet efficiency, used with an efficiency frontier. Using statistical methods, benchmarks could be used to improve efficiency of the CFPP fleet. NETL observes that while some improvements could be “relatively inexpensive” (for example,
improved O&M, more frequent or pro-active maintenance), other improvements could be “very expensive” (for example, improvements bundled with a new SO2 scrubber, or turbine overhauls or heat exchanger replacement). But NETL notes that “if each plant achieved their maximum efficiency each year, 5% reduction in CFPP carbon dioxide emissions” could result.
According to NETL’s analysis, retirements of lower efficiency units combined with increased generation from higher efficiency refurbished units, and advanced refurbishments with improved operation and maintenance, would be the key to increasing average fleet efficiency.
Efficiency improvements could be incentivized using an efficiency frontier. The selection of appropriate incentives would then encourage CFPP owners to undertake improvements or retire lower efficiency units. Such incentives could include possible tax rate reductions for CFPP owners matched in some manner to the cost of the improvements, or accelerated book depreciation rates for cost recovery. Penalties could perhaps be used to encourage prompt retirement of the lowest efficiency units.
The incentives could be in place over a defined period of years, with incentives reduced during the period to encourage action sooner rather than later. The effective period of incentives would have to be sufficiently long enough to allow equipment orders to be satisfied, and simultaneous work to progress at multiple CFPP sites across the country which might seek to make
improvements considering equipment lead times and workforce availability. The benchmark could be revised periodically. This could allow newer power plants to live out a service life matched to the most efficient operation achievable for a particular type of CFPP, based on industry statistics. This could allow companies that have made substantial investments in pollution controls an opportunity to recover these investments.
However, EPA’s expected proposal on standards for GHG emissions from existing coal-fired power plants will be a primary factor in determining whether efficiency improvements will be cost effective in the near term.
Conclusions and Policy Options
The efficiency of coal-fired power plants decreases over time as components and systems degrade with age and use. Good O&M practices can slow down the loss of efficiency, but older power plants will not be as efficient as newer plants with more technologically advanced and newer systems. But simply replacing old power plants with newer plants is rarely cost effective as the relative increase in power output seldom justifies the cost. CFPPs that are more efficient emit less CO2 per unit of electricity produced because they use less coal. Making improvements to increase the efficiency of CFPPs (while producing the same electrical output) could result in a significant reduction in CO2 emissions. According to several of the studies summarized in this report, the major improvements in GHG emissions would likely result from major retrofits in technology, or conversions to natural gas (or possibly biomass) as a fuel.
Detailed information on the actual cost of efficiency-enhancing improvements is not readily available, as concerns over confidentiality and competitiveness with regard to actual projects has largely prevented the sharing of such information. The studies referenced in this report largely show relative information on cost (i.e., high, medium, low), estimate the cost effectiveness of improvements, or mention general cost levels. The case studies have reported costs of efficiency improvements and actual increases in efficiency for specific power plant. But these are considered as useful for estimating a range of costs for improvements rather than actual guides for costs, since each power plant has its own design characteristics and maintenance history. Actual cost information would require a technical evaluation, and a cost vs. benefit analysis to
obtain reliable cost estimates for the options under consideration, taking into account site-specific conditions.
Other potential roles exist for Congress. For example, legislation could use tax incentives to encourage energy efficient upgrades for CFPPs which were placed in-service after a certain date. This would allow newer units with environmental controls to recover the cost of scrubbers and other systems, and allow “newer” units to continue operations over a “reasonable” service life, and recover the cost of environmental improvements.
Another approach might be to use a federal energy efficiency standard to accomplish a similar goal as an efficiency frontier, but allow the states to design the program based on local fuel resources, the age of power plants under their jurisdiction, and other criteria defined in legislation. The efficiency standards could increase over time, and require CFPPs not meeting these standards to retire.
Deference to state authorities and regional compliance strategies have been suggested by
observers with regard to EPA’s deliberations over GHG reduction for existing CFPPs. State public utilities commissions (or similar entities) often require utilities to conduct book depreciation
studies (either in connection with rate cases or independent of rate cases). Such studies commonly
examine the physical condition of power plants, and the utility’s recovery of its investment in electric plant. Federal legislation could tie incentives for efficiency improvements to such studies and direct states to meet individual or regional goals for GHG reduction.