Fall 2024
Impacts and Unintended Consequences of the Clean Energy Transition
By: John Dulude, PE, MBA | Senior VP, Energy & Environmental Advisory | J.S. Held LLC
Introduction: Hidden Challenges of Energy Transition
The energy transition in the United States has traditionally been driven by advances in new technology, fuel availability and pricing, and societal benefits.[i] [ii]Today, these factors have culminated in the US attempting to convert most of its electrical energy resources from carbon-based fuels to non-carbon sources, primarily solar and wind. This conversion of electrical energy resources requires both construction of new infrastructure and retirement of coal-fired generation facilities. With this transition, “unintended consequences,” or unforeseen effects of planned actions, have emerged. Namely, unexpected costs of retiring carbon-based energy sources, including “early” retirement of functional, dispatchable baseload electrical generation capacity.
The impetus of this widespread conversion to non-carbon energy sources originated primarily with government regulation; however, it has since evolved to also include stakeholder and shareholder commitments. The increasing pressure to convert these resources creates a significant cost for owners, shareholders, and, ultimately, customers of carbon-based facilities. These owners incur expenses to develop alternative forms of generation to replace carbon-based resources and the additional costs of closure of the existing facilities, especially significant environmental clean-up outlays.
A recent article prepared by Sustainable Fitch highlighted the current challenge:
Accelerated decommissioning polices pose financial risks to utility companies by bringing forward their asset retirement obligations (AROs)—the financial liabilities associated with the dismantling of plants. According to a recent World Bank study, decommissioning costs can range from an average of USD58,000/megawatt (MW) in India to USD117,000/MW in the US [emphasis added], implying multi-billion-dollar liabilities falling due in the coming years. In addition to plant closures, utility companies face costs associated with removal of hazardous waste and environmental remediation. Management of coal ash—the material left over from the burning of thermal coal—presents particular difficulties, typically involving complex and costly clean-up operations, and in cases of inadequate remediation, exposing companies to further risks to their financial profiles including fines, reputational damage, and litigation. The scale of investment required to meet emissions reduction targets is focusing attention on potential financing solutions.[iii]
In many cases, the asset retirement obligations (ARO) for a fossil fuel generation facility is inadequate to cover the significant environmental clean-up costs associated with the decommissioning of a facility. Assuming the estimated cleanup cost value provided in the Fitch example, above, a 1,000 MW coal-fired generation facility should anticipate decommissioning an environmental clean-up costs of conservatively $117 million; however, the estimate of potential environmental clean-up costs provided in the Fitch example is most likely inadequate.
The rate at which decommissioning costs outpace ARO has driven facility owners to explore other potential avenues to contribute to funding for clean-up costs. These efforts have resulted in the unintended consequence of the increase in claims on historic liability insurance policies, as facility owners try to bridge the financial gap created by mandated retirement of carbon-based generation facilities and AROs that did not anticipate the significant increase in environmental clean-up expenditures. For example, pollution liability policies in many cases were written on an "occurrence" basis, covering losses that occur during the policy term, regardless of when a claim is filed. That policy structure is designed to provide coverage against long-tail events—incidents that could cause injury or damage years after they occur.[iv] It also means that even though a policy period has expired, there may be legacy coverage under those policies for a recent claim if the triggering event occurred during the policy period.[v]
The intended consequence of a significant and accelerated conversion from carbon-based generation to non-carbon-based is to reduce carbon dioxide (CO2) emissions. An unintended consequences of the renewable energy transition is the increase in claims on historic insurance coverages, as facility owners try to bridge the financial cost gap created by mandated retirements of carbon-based generation facilities. AROs did not anticipate the significant increase in environmental clean-up expenditures associated with this transition.
Depending on the age of a facility, and when a particular event occurred over the life of that facility, certain exclusions may apply. For example, insurance policies predating the establishment of the US Environmental Protection Agency (EPA) generally did not have pollution exclusion clauses. Beginning around 1973, pollution exclusion clauses began to appear in policy language, and, starting in the 1980s, more restrictive exclusion clauses were increasingly incorporated into policies.[vi]
Accelerated Reduction of the Coal-Fired Power Generation
Over the last 15 years, closure and retirement of the US coal-fired generation fleet has outpaced original estimates. From 2005 to 2022, the fleet capacity dropped from 321 gigawatts (GW) to 219 GW, with an additional 68 GW scheduled for retirement by the end of the decade. Moreover, the reduction in coal-fired generation has been steeper than estimated; in 2012, it was projected that the coal-fired generation capacity to be retired between 2013 and 2022 would be approximately 33 GW; however, actual retirements during that period totaled approximately 100 GW.[vii]
Coal-fired generation energy output has decreased at an even faster rate than coal-fired generating units; between 2005 and 2022, annual energy output from the remaining US coal-fired plants declined nearly 65% to 665 terawatt-hours (TWh), while the number of coal-fired generating units declined by 29%. This pattern indicates that remaining coal-fired generating plants are used less frequently. Over the same period of time, the fleet-wide coal-fired capacity factor (a measure of how often generating plants operate at full capacity), decreased from 67% to 35%.[viii] Historical trends indicate that announced coal plant retirements likely underestimate actual energy output reductions.[ix]
Shifting to Non-Carbon Energy Sources
While the energy transition is not a new undertaking, the rapidly accelerated conversion from carbon-based fuels to non-carbon-based forms of energy generation is unique . Decarbonizing the grid—generating energy from renewable sources instead of fossil fuels—was central to the prior administration’s climate goals, embodied in pledges to reduce 2005 US emission levels by half no later than 2030 and to achieve a carbon-free power sector by 2035.[x]
The current nationwide, integrated grid has evolved over the course of more than 140 years, originating in 1882 at Thomas Edison’s Pearl Street Station in New York City, the first permanent central power station for supplying incandescent lighting, driven by reciprocating steam engines supplied by four coal-fired boilers.[xi] Despite this rather long and gradual period of bulk power grid development, current policies require that the US be completely carbon-free (in terms of its electrical generation mix) in the next 11 years.
A July 2020 Washington Post article describes the proposed transition schedule for the US, as laid out by the prior administration.[xii]
Based on the prior administration’s goals, this analysis suggests approximately 60% of the US total electrical energy output will need to be converted to some form of non-carbon-based generation in the next 11 years. Potential non-carbon generation alternatives include nuclear, hydrogen, wind, and solar.
· Nuclear - On average, it takes more than a decade to license a new nuclear plant or to expand an existing one. The current conversion schedule is not conducive to taking advantage of new nuclear generation.[xiii] Moreover, given recent struggles and cost overruns at Plant Vogtle, as well as the cancellation of additional units at Summer Nuclear Plant, developers and financial markets seem to have little appetite to undertake new nuclear facilities.
· Hydrogen - While hydrogen is an intriguing opportunity, grid-scale, green hydrogen plants are still in the pilot stage of development and thus widespread implementation during the next 11 years is unlikely.
· Wind and Solar – Inverter-based resources (IBR), namely wind and solar, have experienced phenomenal growth in the past 15 years, largely spurred by substantial subsidies. Despite this growth, wind only represents 10.2% (425 billion kilowatt-hours (kWhs)) of the total electrical energy produced in the US, while solar represents just 3.9% (165 billion kWhs).[xiv] The Energy Information Administration indicates there is an additional 73.62 billion kWhs of “small” solar (defined as facilities of less than 1 MW not connected to the grid).
Because 60% of US electricity continues to be generated by fossil fuels, other technologies are needed to meet policy goals. For example, existing and/or new fossil fuel facilities could be decarbonized with geologic carbon capture, sequestration, and storage (CCS). CCS is a method of permanently securing CO2 in deep geologic formations to prevent its release into the atmosphere and contribution to global warming as a greenhouse gas.[xv]
Achieving a complete decarbonization of the US electric grid by 2050 is projected to reduce CO2 concentrations by 3.3 ppm, meaning a change in the “business as usual” level of 480.3 ppm to an improved level of 477 ppm,[xvi] an almost unnoticeable reduction.
New EPA Emissions Standards & Their Implications
On May 11, 2023, the EPA proposed Clean Air Act emission limits and guidelines for CO2 from fossil fuel-fired power plants based on cost-effective and available control technologies. The proposals set limits for new gas-fired combustion turbines, existing coal, oil, and gas-fired steam generating units, and certain existing gas-fired combustion turbines.[xvii] The basis for the proposed rule (Rule) is Sections 111(b) and (d) of the Clean Air Act. Under Section 111(b) of the Clean Air Act, the EPA sets New Source Performance Standards (NSPS) for greenhouse gas (GHG) emissions from new, modified, and reconstructed fossil fuel-fired power plants.[xviii] Under section 111(d) of the Clean Air Act, states must submit plans to the EPA that provide for the establishment, implementation, and enforcement of standards of performance for existing sources.[xix]
The proposed standards are based on technologies such as CCS, low-GHG hydrogen co-firing, and natural gas co-firing, which can be applied directly to fossil fuel-based power plants. Notably, the proposed rule would exempt peaking power plants (so-called “peakers”), which consist of combustion turbines with an imposed limited capacity factor of 20% or less and that only run for short periods of high demand each year.[xx]
· CCS is a promising technology for GHG management but is limited by location and geology. A notable challenge for CCS is the development of pipeline infrastructure to manage potential transportation of CO2 to appropriate underground storage locations. Near-term deployment of CCS to satisfy the regulatory dates currently proposed in the Rule and the schedule for a carbon-free generation system in the US may be constrained by the need for continued technological and infrastructural development.
· Co-firing of low-GHG hydrogen is a priority technological development. Similar to CCS, the ability to deploy “green hydrogen” at scale is limited by infrastructure development, as well as significant costs associated with making green hydrogen.[xxi] Green hydrogen is created when renewable energy (e.g., wind, hydro, or solar) is used to power electrolysis of water. In contrast, “blue hydrogen” is produced from natural gas through a process of steam methane reforming, wherein natural gas is mixed with steam and a catalyst to produce hydrogen. Steam reforming represents more than 95% of the hydrogen produced in the world today.[xxii]
Because of the aforementioned challenges associated with replacing more than half of U.S. electricity generation in a roughly decade-long timeframe, utilities, developers, and system operators may need to resort to limited capacity, natural gas fueled combustion turbines to satisfy demand. While this approach will meet the regulatory requirements, it will not satisfy the administration’s desire for a carbon-free electrical generation fleet. It will also require significant investment in natural gas pipeline infrastructure, greater capital outlay compared to more efficient forms of natural gas generation technology, and, most likely produce more CO2 emissions.
The Future of Closures & How It Impacts Insurance Coverages
While the debate over non-carbon versus natural gas options will continue, so too will retirements and closures of existing coal-fired facilities. Meanwhile, owners of the remaining coal fleet in the US recognize that, despite legitimate concerns over the impact on reliability associated with these accelerated closures, their facilities will most likely need to be decommissioned earlier than originally intended. .
System operators such as the Midcontinent Independent System Operator (MISO) and the Pennsylvania-New Jersey-Maryland (PJM) also express compelling concerns about potential shortages of capacity and energy during extreme weather events, as evidenced by the 2021 winter storm in Texas.
The reliability of electrical service in the US is at an inflection point. Beyond the technology, infrastructure, and cost limitations, practically, an electrical grid that increasingly relies on non-dispatchable, intermittent capacity, and weather-dependent generation is vulnerable to strain in certain situations. Moreover, as discussed above, contravening regulations, such as Sections 111(b) and (d) of the Clean Air Act, do not align with national policy edicts for an eventual carbon-free electrical generation fleet.
Conclusion
Based on the current trajectory of energy transition, it is likely that most coal-fired generation facilities in the US will be closed within the next decade incurring significant decommissioning and environmental cleanup costs. The owners of these facilities face difficult decisions when selecting the appropriate technology to replace the coal-fired generation facilities – a difficulty compounded by an inconsistent legal and regulatory framework.
[i] https://www.hitachienergy.com/us/en/news-and-events/blogs/2024/06/history-of-the-electrical-grid-powering-the-energy-transition-with-high-voltage-technology
[ii] https://cpower.com/2022/07/29/the-benefits-of-centralized-power-distribution-in-your-data-center/#:~:text=Centralized%20power%20distribution%20has%20several,quantities%20at%20a%20central%20location.
[iii] Sustainable Fitch. Coal Power Phase-Out Will Front-Load Credit Impact of Asset Retirement Obligations. 6/27/22 (https://www.sustainablefitch.com/corporate-finance/coal-power-phase-out-will-front-load-credit-impact-of-asset-retirement-obligations-27-06-2022)
[iv] Insureon. Occurrence-based insurance policy (https://www.insureon.com/insurance-glossary/occurrence-based-policy)
[v] Yetka, C. Old Insurance Policies Could be Worth Their Weight in Gold, Part 1. Fortnightly Magazine, September 2021 (https://www.fortnightly.com/fortnightly/2021/09/old-insurance-policies-could-be-worth-their-weight-gold-part-1)
[vi] Yetka, C. Old Insurance Policies Could be Worth Their Weight in Gold, Part 1. Fortnightly Magazine, September 2021 (https://www.fortnightly.com/fortnightly/2021/09/old-insurance-policies-could-be-worth-their-weight-gold-part-1)
[vii] Celebi, M, et al., A Review of Coal-Fired Electricity Generation in the U.S. The Brattle Group/Prepared for The Center for Applied Environmental Law and Policy). 4/27/23, P.6. (https://www.brattle.com/wp-content/uploads/2023/04/A-Review-of-Coal-Fired-Electricity-Generation-in-the-U.S..pdf)
[viii] Celebi, M, et al., A Review of Coal-Fired Electricity Generation in the U.S. The Brattle Group/Prepared for The Center for Applied Environmental Law and Policy). 4/27/23, P.4. (https://www.brattle.com/wp-content/uploads/2023/04/A-Review-of-Coal-Fired-Electricity-Generation-in-the-U.S..pdf)
[ix] Celebi, M, et al., A Review of Coal-Fired Electricity Generation in the U.S. The Brattle Group/Prepared for The Center for Applied Environmental Law and Policy). 4/27/23, P.6. (https://www.brattle.com/wp-content/uploads/2023/04/A-Review-of-Coal-Fired-Electricity-Generation-in-the-U.S..pdf)
[x] McBride, J. et al. How Does the U.S. Power Grid Work? Council on Foreign Relations. 7/5/22 (https://www.cfr.org/backgrounder/how-does-us-power-grid-work).
[xi] ETHW. Milestones: Pearl Street Station, 1882. Engineering and Technology History Wiki. 6/14/22. (https://ethw.org/Milestones:Pearl_Street_Station,_1882)
[xii] Muyskens, J and Eilperin J. Biden calls for 100 percent clean electricity by 2035. Here’s how far we have to go. Washington Post. 7/30/20 (https://www.washingtonpost.com/climate-environment/2020/07/30/biden-calls-100-percent-clean-electricity-by-2035-heres-how-far-we-have-go/)
[xiii] Duke Energy. NRC New Nuclear Licensing Process. Duke Energy. 1/17/12 (https://nuclear.duke-energy.com/2012/01/17/nrc-new-nuclear-licensing-process)
[xiv] Energy Information Administration. What is U.S. electricity generation by energy source? (U.S. utility-scale electricity generation by source, amount, and share of total in 2023) U.S. Energy Information Administration. 2/2024 (https://www.eia.gov/tools/faqs/faq.php?id=427)
[xv] USGS. The Concept of Geologic Carbon Sequestration, March 2011 (https://www.usgs.gov/media/images/concept-geologic-carbon-sequestration)
[xvi] Nasi, M (Jackson Walker, LLP). True Costs of Financing Decarbonization. PowerGen International, 5/24/22, Slide 15.
[xvii] US EPA. Risk and Technology Review of the National Emissions Standards for Hazardous Air Pollutants. 4/11/24. (https://www.epa.gov/stationary-sources-air-pollution/risk-and-technology-review-national-emissions-standards-hazardous)
[xviii] US EPA. NSPS for GHG Emissions from New, Modified, and Reconstructed Electric Utility Generating Units. 4/25/24. (https://www.epa.gov/stationary-sources-air-pollution/nsps-ghg-emissions-new-modified-and-reconstructed-electric-utility)
[xix] US EPA. Greenhouse Gas Standards and Guidelines for Fossil Fuel-Fired Power Plants. Fact Sheet: Carbon Pollution Standards for Fossil Fuel-Fired Power Plants Final Rule. State Plans. (https://www.epa.gov/stationary-sources-air-pollution/greenhouse-gas-standards-and-guidelines-fossil-fuel-fired-power); CLEAN AIR ACT SECTION 111 REGULATION OF GREENHOUSE GAS EMISSIONS FROM FOSSIL FUEL-FIRED ELECTRIC GENERATING UNITS, EPA Presentation.
[xx] Kirkland & Ellis. EPA’s Proposed New Emission Limits are Latest Development in Conflicting Visions to Regulate Power Plants. Kirkland Alert. 5/17/23 (https://www.kirkland.com/publications/kirkland-alert/2023/05/epas-proposed-new-emission-limits-to-regulate-power-plants)
[xxi] IEA. The Future of Hydrogen. International Energy Agency. 6/2019 (https://www.iea.org/reports/the-future-of-hydrogen)
[xxii] Ahmed, U, Zahid, U. Techno-economic assessment of future generation IGCC processes with control on greenhouse gas emissions. Computer Aided Chemical Engineering, 2019, 46:529-534.