- Industry: Energy & Utilities
by Matt Daly
In 2001 the Bush Administration decided to repudiate the Kyoto Protocol (signed by the Clinton Administration but never ratified by the Senate). This effectively stopped any real progress to reduce emissions of greenhouse gases (GHGs). There was little incentive for other nations to do so without the leadership of one of the world’s largest emitters. When the US Supreme Court ruled in a 5-4 decision on February 9th to stay any implementation of the EPA’s Clean Power Plan (CPP) pending resolution of legal challenges, it seemed that a similar fate awaited the Paris Agreement via the Judicial Branch, since the United States’ Intended Nationally Determined Contributions (INDCs) for GHG reductions rely heavily on the CPP. The sudden death of Associate Justice Antonin Scalia, one of the five Justices to vote in favor of the stay, just four days later has added further uncertainty. While the greenhouse gas reductions mandated in the CPP are in fact a key part of the US commitments under the Paris Agreement, much has changed in the 15 years since Kyoto was abandoned. With or without the CPP, the momentum towards carbon reduction in energy production is compelling utilities to reevaluate their business models and operations and think about the utility of the future.
To understand how this might impact the Paris Agreement and market forces more generally it is necessary to ask two main questions. First, will the CPP survive the legal challenges against it? Second, even if it does not, what would that mean for the Paris Agreement and the move toward low carbon energy production around the world?
Will the CPP Survive?
In a rather macabre article in the MIT Technology Review entitled “Scalia’s Death Boosts Chances for Obama’s Clean Power Plan,” Senior Editor Richard Martin addresses the first question. The author correctly assumes that the D.C. Circuit will ultimately uphold the Clean Power Plan as it has already done in previous rulings. The Petitioners in the D.C. Circuit case, West Virginia et al., will then almost certainly petition the Supreme Court for a Writ of Certiorari. While perhaps an oversimplification, Martin does succinctly outline the possibilities:
- The President successfully nominates a new Justice, who will most likely vote in favor of upholding the Clean Power Plan, resulting in a 5-4 decision in favor.
- The Senate successfully blocks any nomination, and the case comes before 8 Justices. Assuming that each Justice votes as they did for the stay, this will result in a tie, and the D.C. Circuit decision to uphold the CPP would remain in place.
The next two options assume that the D.C. Circuit proceedings and the Petition for Certiorari take long enough that the Presidential election has taken place, and a new President has been inaugurated and had time to nominate a new Justice. Given that the D.C. Circuit case is currently scheduled to conclude in April 2016 this seems unlikely, but in the glacial pace of legal procedure it is quite possible.
- A Democrat wins the presidency and nominates the next Justice, who will most likely vote in favor of upholding the Clean Power Plan, resulting in a 5-4 decision in favor.
- A Republican wins the presidency and nominates the next Justice, who will most likely vote against the CPP, resulting in a 5-4 decision against it.
Three of these four possibilities result favorably for the CPP. Assuming that one assigns equal probability to these four outcomes, Martin concludes the regulations stand a very good chance of surviving. Given the likelihood that the legal process will be delayed beyond the next election, however, it seems rational to discard options 1 and 2, which means that the outcome is entirely contingent on the results of the Presidential election and there is a roughly 50-50 chance that the CPP will survive.
Is US Compliance with INDC Commitments and the Paris Agreement Contingent on the CPP? Does it matter?
The future of the CPP is still uncertain. Even if it survives the courts, Governors of coal-dependent states, such as Indiana’s Mike Pence, have vowed not to comply (“Pence to defy coal plant rules” The Indianapolis Star). Indeed, it is the very states that have the highest emissions reduction requirements under the CPP that tend to be the most opposed to implementing it, threatening to undermine US commitments under the Paris Agreement. But that is not universally true. Illinois, for example, has one of the biggest hurdles to compliance from a rate based perspective – with a requirement to reduce their CO2 emissions rate 42% from 2,149 lbs/MWh (2012 baseline emissions) to 1,245 lbs/MWh by 2030, but the state supports the CPP and is continuing plans for implementation in the face of the Supreme Court’s stay. Other states, such as New York and California, are already undertaking ambitious reforms such as REV and SB 350 that will significantly increase renewable energy use and reduce consumption, lowering emissions well beyond the goals specified in the CPP. These will not be sufficient to unilaterally meet the reduction goals of the CPP and thus the INDC, but the work that these states are doing is being observed internationally. At the Energy to Lead: REV4NY Exchange conference in September, there were several attendees representing foreign businesses and government offices. The United States is thus already providing leadership and guidance in this area. Moreover, China, the world’s biggest emitter of GHGs, has stepped into a bigger leadership roles since Kyoto, making reduction commitments far larger than the US in addition to other mitigation pledges in their INDC.
What Does This Mean for Utilities?
The question that each utility, power producer, and other player in the utility value chain must ask is whether they want to be ossified and reactive, waiting for regulatory mandates before making changes? Or is it better to be proactive, diversifying business models and the fuel mix to hedge against the short-term vicissitudes of fuel markets and the long-term uncertainties of market forces and government regulation.
Even if the CPP is overturned, utilities in much of the US and the rest of the world will continue the move toward renewable energy and a lower carbon footprint. Without regulatory requirements, many markets are already heading in that direction. Indeed, the U.S. Energy Information Administration (EIA) highlighted this in their most recent Energy in Brief, explaining how the energy mix has already shifted away from coal significantly in the last twenty to thirty years and predicting that this trend will continue with electricity from natural gas and renewable sources, such as wind and solar, growing through 2040, and fuels like coal shrinking further. As these new technologies become more widespread, they become cheaper – a trend easily observed in the rapid decrease in cost per kWh for solar and wind generated electricity over the last decade. These will be increasingly cost competitive with traditional energy sources, and this shift will accelerate, driven by natural market forces (and technology to address challenges of intermittency and grid connection). Those that remain behind will become encyclopedia salesmen in a Wikipedia world, selling a product that nobody wants or needs any longer.