Assessing the Final Clean Power Plan: Energy Market Impacts
In the third and final note in our series on the Clean Power Plan, we explore the energy market outcomes of the rule under two scenarios and discuss what factors could change the magnitude of these impacts.
The U.S. electricity sector is undergoing a period of rapid change. The U.S. Environmental Protection Agency’s Clean Power Plan (CPP), regulating carbon dioxide (CO2) from existing power plants, is a significant—but by no means the only—catalyst for the transitions underway in the sector. In the third and final note in our series on the CPP, we explore the energy market outcomes of the rule under two scenarios and discuss what factors could change the magnitude of these impacts. As we have previously noted and explain in more detail below, projecting actual energy market outcomes is made challenging by the flexibility states have in implementing the rule, by the uncertainty facing the CPP as a result of the legal process now underway, and by the nonregulatory factors also influencing energy markets.
Key messages from our work include:
• The CPP, enhanced by the tax extenders passed in December 2015, will drive a shift in the U.S. generation mix away from coal and toward renewables.3 The magnitude of the shift depends on a variety of factors, but the decisions state regulators take will exert significant influence on the future energy mix.
• The two most consequential decisions state regulators take in this regard are 1) the choice of a rate- or mass-based implementation plan; and 2) additional decisions under a mass-based plan, including how to distribute allowance value and whether (and how) to cover new power plants. These decisions will impact the incentives generators face and will influence new capacity additions, dispatch shifts, and ratepayer impacts. Regardless of plan type, however, emissions outcomes would be roughly the same.
• Natural gas prices and production are largely unmoved by the CPP, although high renewables deployment could put slight downward pressure on prices. More aggressive assumptions about cost declines for natural gas or renewables could result in higher deployment of these fuels.
• Electricity bills rise in both scenarios we modeled, but rise higher under a mass-based scenario. Under a mass-based plan, the impact of electricity bill increases could be mitigated or offset by directing allowance value to consumer rate relief.