GPACE analysis of the provisions of the Governor’s coal plant agreement

The provisions reviewed here are to be signed into law this week in return for the allowance of one immediate air-quality permit for an 895MW coal plant to be built by Sunflower Electric, Co., and another permit in two years.

It’s important to keep in mind when reviewing the content of the proposed energy plan that no state has perfect energy policy. Kansas is confronting the real need for comprehensive energy policy for the first time in nearly forty years. GPACE believes there are certain components of this policy proposal that Kansans should feel proud to know we’ll finally have – even if they are less ambitious than our resources allow or not competitive with surrounding states.

Renewable Energy Standard (RES/RPS)

Utilities will have to produce 10% energy from renewable resources by 2010

15% by 2016

20% by 2020

This is a major component of renewable energy policy. While our ideal RES for Kansas would be based upon actual renewable energy output – rather than just capacity – setting an RES at the state level not only requires utilities to integrate wind, solar, and biomass into production portfolios, but sends a clear message to renewable energy manufacturers, developers, and lenders that Kansas is officially “open for business” and committed to diverse energy markets.

Other states (Minnesota, Illinois, Colorado) have set more aggressive standards even though they possess less wind and solar potential.  If Kansas is to become a national leader in renewable energy production (emphasizing our vast wind energy potential) the standard agreed upon in the Governor’s compromise should be seen as a starting block, not the finish line. In the coming months, as directed by the Obama administration, renewable energy production will play an increased role in our nation’s energy mix. In fact, a vote is expected soon in Washington that could establish a national RPS. As the national market trends towards renewable energy, those states that aggressively develop renewable production will be best positioned to service a growing national market.

Net Metering

1:1 bidirectional net metering for investor-owned utilities

Each home or business producing renewable energy will receive the value of energy produced and will be credited the total value of energy rate for any production that is greater than monthly demand

A real net metering policy on the books is a major victory for renewable energy advocates. However, the Governor’s compromise falls short of delivering this desired policy piece to all Kansans. The energy package that the Governor put forward in return for granting the coal plant permits requires only the investor-owned utilities of Kansas to honor real net metering. Those Kansans who live in a district that is serviced by a municipal utility or a rural electric cooperative (and that is most of the windiest and sunniest regions of the state) are excluded from this agreement. There was staunch opposition to real net metering by electric cooperatives in Kansas throughout this legislative session, and they have some legitimate concerns here. However, bipartisan polling done by GPACE in February of 2009 showed overwhelming consumer support for real net metering statewide – especially strong in those parts of the state which under the Governor’s compromise do not qualify for net metering.

Energy Efficiency Standards

• All newly constructed state buildings, and where possible, renovations must meet ASHRAE/IECC standards
• Energy Audits required for all state leased buildings
• State agencies to purchase Energy Star rated products
• KCC to improve participation of schools and local governments in facilities conservation improvements program

The cheapest source of energy we can get is that which we don’t have to use. Efficiency standards should be the cornerstone of any 21^st century energy policy or plan. When compared with efficiency policies in place around the country – these provisions don’t meet the test. Kansas needs an aggressive efficiency policy that works to include not only state buildings (How many new state buildings are planned for construction?) more efficient, but commercial and residential buildings as well. We could significantly extend existing energy production with practical, cost-saving efficiency measures that will ultimately protect electric ratepayers from volatile spikes tied to fuel sources.

Health and Environment Powers: Modified from H.B. 2014

• Federal Clean Air Act standards will be the guidance for KDHE regulations
• Emergency Powers may still be exercised where danger to public health or welfare, or to the environment, but order is temporary in nature unless agency seeks injunction from court

This provision limits the scope and authority of the KDHE when regulating air quality and health impacts in Kansas. Under this provision, the KDHE can set no limit or regulation stricter than what is enumerated in the Federal Clean Air Act. It was the ability to interpret federal law and state assessment of health and environment implications that led the Secretary of KDHE, Rod Bremby, to make his initial ruling in October of 2007.   This provision could also adversely impact local governments who are faced with isolated but extraordinary pollution concerns not covered by the federal guidelines or regulations.

Cooperative Opt-Out

• Increases size of cooperative utilities that can vote to opt-out of KCC oversight

As states around the country (including Colorado which is exploring the possibility of greater oversight of Tri State Electric – the principle investor in the Sunflower project) examine the need for greater oversight of rural electric cooperatives this provision would in effect reverse any effort to do so. This impacts the utility’s decisions involving rate changes, and long-term planning, and could jeopardize coop rate-payers and potentially all state rate-payers if – as has been the case in Kansas – a coop is mismanaged or confronted with changes in regulatory policy or fuel costs that exceed its planned expenditures and capital capacity.

Fuel Economy Standards

• Increases fuel economy standards for state vehicles

A good but marginal step in the right direction.

The 895MW gorilla in the room

As GPACE has stated since the decision to deny Sunflower Electric’s original application for two 700MW plants in October of 2007, it’s a bad time to build a coal plant in the United States. The nation and the world are currently in a state of regulatory uncertainty regarding CO2 emissions. As directed by the U.S. Supreme Court, the EPA under the Obama administration has released an endangerment finding focused on the risks to our health and environment posed by carbon dioxide emissions (of which coal plants are the largest emitter in the U.S.).

An endangerment finding is the first, critical step along the path to federal regulation. This followed the 2007 Supreme Court ruling that stated the EPA had legal authority to include CO2 on its list of criteria pollutants under the U.S. Clean Air Act. The final step – if taken by the EPA – will be to regulate and mitigate the impacts of CO2. Congress does not view this as ideal, and so the federal government is currently weighing options that could move the U.S. towards reducing carbon dioxide emissions through either a “cap and trade” system, or a “carbon tax”.

Regardless of the outcome at the federal level, either system will result in the valuation of carbon dioxide emissions as a financial liability. This exposes those entities across the nation looking to emit CO2 to significant and precipitous financial risks. It is unclear in what form a federal regulatory scheme will add cost to energy production (reflected in rates?), but it can be safely assumed that in the coming months the cost of carbon will become a factor in the way we produce energy in the U.S.

Regulation is not the only reason building a coal plant in Kansas right now is a bad idea. Bottom line: it’s fiscally imprudent. The coal that will be burned in the 895MW plant will come from the Powder River Basin in Wyoming. The cost of that coal has risen (as reported by Peabody Coal, the mine’s owner) 139% in the last year and a half. That’s a staggering number, and that increasing cost will ultimately be reflected in Kansan’s electric bills.

What’s more, the coal mined in the PRB is increasingly being sold to countries around the globe that wish to build coal plants to power a growing global middle class. As this continues, Kansas will be in direct competition for coal resources with countries around the world. To be sure, the PRB has great supply, but a growing market for a finite resource will lead to increasing and volatile fuel costs. The last time the United States went into competition for a finite fuel source with developing countries around the world was in 1960, when the Organization of Petroleum Exporting Countries (OPEC) formed. This is a lesson we should heed when planning long -term energy production and use.

The agreement struck for the 895MW plant will also put in place some provisions that will be difficult to measure or account for. Sunflower is required to pursue carbon mitigation technology that is neither tested at utility-scale, nor proven to work over time.   Mitigations or offsets are good fallback policy if nothing else can be pursued – but they do not reduce the amount of carbon dioxide the plants will emit.

*Debate over the policy package and agreement proposed is currently taking place in the legislature. Because of this, the package is subject to change. We will inform you of any changes or additional agreements. Check in with GPACE.org for updates throughout the course of the legislative debate.

Below is GPACE analysis of the agreement made between Sunflower Electric Cooperative and Governor Mark Parkinson. Terms of the content outlined below were contingent upon passage of the “comprehensive energy package” already detailed on this site. The energy package passed both chambers of the Kansas Legislature May 8^th and will be signed into law by the Governor.

Upon passage of that legislation, Sunflower Electric will meet these guidelines and terms:

Build two transmission lines to move energy out of state and offer greater opportunity to distribute wind and other renewable energy sources

Transmission is undoubtedly a critical component of energy production, meeting future demand, and allowing for a great diversity within our state and nation’s energy portfolio. As well, much was made during the year long debate in Kansas over the fact that construction of coal plants at Holcomb, KS create an opportunity for the development of much needed improvements to the electric grid in our state and region. However, this agreement fails to outline the specifics of transmission construction, only stating that two lines are to be built.

Our state, and for that matter the nation, is in serious need of transmission and grid improvements. Currently, federal transmission regulators and regional power pools across the U.S. are examining the best ways in which to do so. What most have found, including the American Council on Renewable Energy (ACORE), is that an increased demand for renewable energy nationwide will make carrying energy from renewable-rich areas (like the great plains) to regions with lesser renewable resources (like the Southeast) a critical part of transmission development. ACORE’s recently released report of renewable potential in Kansas illustrates the need for transmission that feeds these regional markets as the nation begins demanding greater production of renewable resources. As these markets open up, those states in the Midwest that have aggressively developed transmission will be better prepared to capitalize on their renewable energy potential and export capabilities.

If the agreement made moves Kansas closer to that ability, it will be a great asset. What is unclear in this agreement is whether the lines to be built will eventually move energy east and southeast to those areas that will be in high demand, or whether the lines will be built headed west and southwest. States such as Colorado, Arizona, and Texas which have vast renewable resources of their own, are not expected to be in high demand for imported renewable energy from other states. Building lines that seek to serve these markets in the future could position Kansas poorly in coming years.

Take measures to “offset” carbon emissions from the new plant

l  Shut down and decommission two existing oil-fired plants at Garden City

l  10% of the fuel burned at both the new plant, and the existing coal plant at Holcomb must come in the form of biomass

l  Sunflower Electric must pursue development and use of experimental algae reactor technology intended to use algae ponds as a carbon emission mitigation tactic

Taking outdated existing plants offline is essential as we move towards a more efficient and cleaner energy future. The existing plants at Garden City are oil-fired plants, which are heavy polluters. However, neither plant has been operational for close to 20 years. In that case, it is difficult to consider this component of the agreement a “mitigation tactic” for offsetting future emissions from a new plant.

Achieving the goal of 10% biomass in each plant at Holcomb can be a useful device in lessening the utility’s demand for coal as prices continue to rise and emissions from coal power face looming regulation at the federal level. However, it is difficult to measure directly the way in which this provision can lead to offsetting CO2 emissions from the new plant. The problem lies in calculating life cycle carbon dioxide emissions, as well as the details of the agreement.

Sunflower Electric is required to use 10% biomass, as long as the market cost of biomass is less than 200% the avoided cost of the current fuel source, coal. Currently, biomass that can be used in electric generation is roughly 200% more expensive than coal – if it were to begin today, it would be questionable as to whether or not Sunflower Electric would have to honor this agreement. In this case, it is difficult to consider this portion of the agreement a mitigation tactic, as it can not be determined whether it will play a long term role in reducing the plant’s use of coal.

There is also some question about the energy (and thereby CO2 emissions) needing in producing biomass. For example, burning biomass in power plants often requires pelletizing the material being burned (i.e. wood, switchgrass, manure). The energy needed to pelletize any of these would in effect, offset some of the emission mitigation occurring as a result of burning the biomass.

It is also GPACE’s understanding that Governor’s agreement considers in its calculation of carbon emission mitigation, the reduction of the proposed 1400 MW plants to the agreed upon 895 MW.

Further provisions contained in the agreement

l  Sunflower Electric must immediately begin construction on a wind farm equalling no less than 20% (179 MW) the capacity of the 895 MW coal plant to be permitted.

l  Sunflower Electric must also meet its Renewable Energy Standard requirement of 20% renewable production five years early, by 2016 instead of 2021.

l  The agreement also settles any court proceedings in any of the district courts of Kansas, Kansas Supreme Court, or a court of federal jurisdiction.