EPA RICE NESHAP - EPA Made the Right Call

As many of you know, EPA issued a ruling on the National Emissions Standard for Hazardous Air Pollutants (NESHAP) for Reciprocating Internal Combustion Engines (RICE) on January 14th, 2013. This rule is important because it lays out the environmental permitting regime for diesel back up generators (BUGs) participating in Demand Response (DR) markets. In the lobbying to influence the final rules, unusual alliances emerged with DR providers and the American Public Power Association (APPA) on one side and environmentalists and merchant generators aligned on the other side.  

The final EPA ruling was incredibly balanced and included the following key provisions for diesel BUGs: up to 100 annual hours of run time to support emergency DR; annual reporting obligations for run hours beginning in 2015; and limited provisions for 50 annual hours of non-emergency peak shaving (APPA wanted this). The 1/14/2013 EPA ruling was a huge win for consumers because: DR lowers costs to consumers; DR enhances public safety (b/c people die during blackouts); DR improves the environment (raw sewage often is released during blackouts); and DR saves businesses money by preventing business losses associated with blackouts. The PJM independent market monitor estimates that DR and DSM programs saved PJM consumers $11.8B in 2011 which comes out to $200 per person in the PJM region. 

Today, ETE management was aghast as they read in the trade press that several groups have filed petitions to review the RICE NESHAP in the U.S. Court of Appeals for the DC Circuit. The petitioners include environmentalists and merchant generators who are using flawed logic and disingenuous logic, respectively, as the basis for their petitions.

The environmentalists believe that the RICE NESHAP will result in a marked increase in the use of diesel BUGs for power generation. This is completely untrue because turning on a BUG is often a major inconvenience for facility managers. In addition, the economics of running a diesel BUG are horrendous. If off-road diesel costs $3.50 a gallon delivered and the BUG runs at about 18% efficiency, then the cost to produce 1 kWh of electricity is approximately $0.47/kWh [this presumes 140,000 BTUs/gal and 18% efficiency presumes the BUG is reasonably loaded (often not the case)]. This $0.47/kWh does not include the opportunity cost of distracted facility personnel who need to transfer the load and start-up the BUG. The point here is that the EPA RICE NESHAP will not involve BUGs being used to displace power from the grid in non-emergency situations. Additionally, BUGs need to be load tested monthly and good facility operators integrate emergency DR into their BUG load-testing program so the RICE NESHAP probably won't result in any additional BUG run hours beyond what currently happens today.

The merchant generators are the disingenuous party in that they want to kill DR through the NESHAP regulations under the guise of environmental protection. They stand apart from the following entities that support the EPA ruling: Edison Electric Institute; National Rural Electric Cooperative Association; Midwest ISO; Progress Energy; Duke Energy; Florida Power & Light; and Southern Company who see the value offered by emergency DR from BUGs. DR has put pressure on capacity prices in PJM, NYISO, and ISO-NE. Merchant generators were caught off-guard by the reduction in capacity prices due to the elimination of load growth in many markets caused by surging customer participation in DR programs. Companies like EnerNOC, CPower, and Comverge led this revolution and unlocked demand elasticity through customer participation in energy markets. The result was a halt in peak load growth. When load isn't growing and capacity prices paid to generators are reduced, merchant generators make less money and consumers win. This is the essence of dereguation and DR has been a pro-consumer, pro-environment result of deregualted markets. The merchant generators feel that if they can exclude diesel BUGs from DR markets, peak demand will rise, capacity prices will rise, consumers will have to pay more, and they will get to build more peaking power plants that otherwise would not be needed in the presence of DR.

Its rare that ETE stakes out a position in direct opposition to merchant generators, but the EPA RICE NESHAP regulations are very good as written and the petition by the merchant generators (abetted by environmentalists) are nothing more than a bald faced attempt to eliminate a source of competition in the marketplace. ETE believes that a win for DR is a win for consumers and lets hope the current NEHSAPs stand as written.