By Rich Heidorn Jr.

ST. LOUIS — Cap-and-trade, a pollution-control concept rejected by Congress five years ago, appears to be coming back to life in the Midwest.

Stakeholders from MISO and SPP said Tuesday they are developing the framework for an interstate trading platform to comply with the Environmental Protection Agency’s pending limits on power sector carbon emissions.

The comments came in the Federal Energy Regulatory Commission’s fourth and final technical conference on the reliability and market implications of EPA’s Clean Power Plan, which seeks to reduce carbon emissions from existing generators by 30% from 2005 levels.

More than 100 regulators, utility officials and other stakeholders from MISO, SPP and ERCOT attended the conference at a hotel on Lambert-St. Louis International Airport. The session featured a repeat of the near-universal complaints about EPA’s interim 2020 goals and EPA’s Janet McCabe, who promised the agency was “looking very, very closely” at the issue.

Virtually absent, however, was any talk of fighting the EPA rule, which is due to be finalized this summer.

Instead, speakers said they were seeking ways to meet EPA’s ultimate 2030 goals through a mechanism that would allow utilities to trade emission allowances within and across state lines. It would effectively set a price on carbon, similar to the cap-and-trade program credited with reducing the cost of complying with acid rain regulations in the 1990s.

Even a representative from coal giant Peabody Energy conceded: “There is going to be a value on carbon.”

MSEER

On Monday in St. Louis, the Midcontinent States Environmental and Energy Regulators (MSEER) held their fifth meeting to continue their work on a regional solution. Fourteen states, including most of those in MISO and SPP, are participating.

“I think there is broad recognition that a regional response will most likely be more cost-effective and operationally beneficial,” said Minnesota Public Utilities Commissioner Nancy Lange, one of those who attended.

The plans are also taking shape in a larger group, the Midwest Power Sector Collaborative, which also includes utilities and environmental organizations.

Former Illinois Commerce Commissioner Doug Scott, now vice president for strategic initiatives at the Great Plains Institute, said he was encouraged by states’ efforts to find regional solutions. The Minneapolis-based institute and the Washington-based Bipartisan Policy Center are providing staffing support to MSEER and the Collaborative.

“By our estimation, 41 of the 50 states are currently taking part in some discussion or another with other states trying to figure out the potential for multistate collaboration,” Scott said. His count is in contrast with that of EPA critics such as Sen. Jim Inhofe (R-Okla.), who opened a committee hearing last month by displaying a map identifying 32 states he said are opposing the EPA plan. (See Inhofe Decries EPA ‘Power Grab’.)

Rate- vs. Mass-Based Standards

EPA’s initial proposal last June set rate-based goals for each state, measured in pounds of CO₂ per megawatt-hour. In response to state requests, EPA in November released a technical support document explaining how to translate rate-based goals to mass-based equivalents, measuring total CO₂ emissions in metric tons.

The platform being discussed by MSEER would differ from the Regional Greenhouse Gas Initiative, in which nine Mid-Atlantic and Northeastern states set an overall cap on power sector carbon emissions (91 million short tons for 2014, declining by 2.5% annually from 2015 to 2020).

Instead, states would submit for EPA approval implementation plans using their individual mass-based targets. Once the plans are approved, the states would use trading to reduce the cost of meeting their goals.

“That would be a form of regional coordination that doesn’t require the grand bargain of … all the states trying to” reallocate emissions using the rate-based approach, said Michael Schnitzer, director of the Northbridge Group, and a consultant to Entergy.

RGGI’s approach, “nine states agreeing on a target and what their respective responsibilities are — I think that one is much less likely to come to fruition than this other approach,” Schnitzer added.

McCabe, EPA’s acting assistant administrator for the Office of Air and Radiation, said agency officials have a similar perception of how a regional compliance plan could emerge. “We’ve … heard from many states that they would very much like the final plan to allow for interstate or regional arrangements that are less formal, perhaps, than some of the ones that already exist,” she said.

Winners and Losers

EPA’s proposed rate-based approach resulted in dramatically different emission rates from one state to another, which state and utility officials said would be an impediment to regional cooperation.

North Dakota, for example, has the nation’s highest target rate at 1,783 lbs/MWh, more than double South Dakota’s 741 lbs/MWh. EPA said the discrepancies reflected its attempt to determine what was “practical and affordable” for individual states, taking into account factors such as their current generation mixes and the availability of natural gas. (See Carbon Rule Falls Unevenly on PJM States.)

Creating a “blended” regional rate could result in some states with low rates having to reduce their emissions more than if they went it alone.

“There’s no question that the rule as proposed creates winners and losers. But the mass-based approach … can provide every state an opportunity to do better through trading,” Schnitzer said. “If it makes sense for [Iowa] to over-comply to reduce their tons even further so that they can sell them to Minnesota, which is cheaper for Minnesota than doing the next most onerous thing … that’s how it’s going to work. It’s self-interest for both states.”

Trading Between Rate- and Mass-Based States

The MSEER group hasn’t been able to find a way to accommodate trading between states using the rate-based standard and others using the mass-based limits, said Thomas Easterly, commissioner of the Indiana Department of Environmental Management.

While the mass-based approach would ease trading, it “sets a cap that basically limits growth over time forever,” Easterly said. “The rate-based plan allows you to have really unlimited growth if you can do it in a clean way. That’s why some different states have different views — one of the reasons not the only reason. That’s what making it so difficult to come to a common understanding.”

Mike Peters, CEO of Wisconsin Public Power, said his company did an analysis assuming trading between mass- and rate-based states.

“If you take a state that has a rate-based approach and another state that has a mass-based approach, identical generating units in both states, [with an] identical cost of fuel, you could have a $20[/MWH]-plus differential in the adders on those plants, and that’s going to result in shifting generation in ways that we can’t even anticipate right now,” he said.

Preserving Economic Dispatch

Richard Doying, MISO’s executive vice president of operations, said a “transparent, liquid market” is essential to ensuring MISO doesn’t lose the $1.5 billion in annual savings resulting from the RTO’s least-cost generation dispatch. “How do you avoid that? It’s really pretty simple: You monetize the cost of compliance [through tradeable allowances].  Those tradeable allowances are easily reflected in generation offers, they’re reflected then in the dispatch of that energy, the clearing of the market and they’re reflected in prices. … It allows you to trade those allowances based on market-derived value across the seam just as you would with energy.”

MISO MVP Example Cited

Former Wisconsin Public Service Commissioner Lauren Azar said MISO’s states demonstrated their ability to collaborate through their development of the Multi-Value Project, a transmission concept designed to help them meet individual renewable portfolio standards.

Azar said state officials met every other week for 18 months to develop the MVP plan. The entire stakeholder process, including drafting tariff changes and cost allocation formulas, took about six years, said Clair Moeller, MISO executive vice president of transmission and technology.

“Transmission owners coalesced around the product because the state commissions were leading the process. So they had some certainty with respect to whether their costs were going to be approved later on,” Azar said.

Referring to MSEER’s five meetings since EPA released its carbon proposal last summer, Azar said: “Let me tell you guys, you’re going to have to meet a heck of a lot more, and I recommend you begin as soon as possible.”

Lone Star State

A measure of how far discussions have progressed is the position of Entergy.

“Entergy does not support the proposed rule,” Schnitzer noted. “But the company recognized that if the rule does go forward, it should be designed to be efficient and to minimize reliability impacts. And the mass-based compliance recommendations we offer are to further that objective.”

But while most of the speakers Tuesday indicated a willingness to embrace trading, Donna Nelson, chairman of the Public Utility Commission of Texas, said her state — which is split between MISO, SPP, ERCOT and the Western Electric Coordinating Council — is unlikely to be among them.

“We’re probably … not going to roll over on the issue of a carbon tax,” she said.