I described the overall Cross-State Air Pollution Rule (CSAPR) in my previous post and thought it might be worth delving a bit deeper into the mechanics and implications of the rule as it affects NOx. We are taking proactive steps to work with generators affected by CSAPR, but not included in CAIR (Nebraska, Kansas, and Oklahoma) and those states where the incremental reductions required by CSAPR are most substantial (such as Missouri and Texas), in addition to many of our existing customers that are expanding on or accelerating their adoption decisions for our optimization technology to address the near-term compliance challenges created by the new rule.
In this post, I do not distinguish between CSAPR itself and the supplemental rulemaking issue at the same time and intended to be implemented in parallel to it. Based on the additional analysis of air quality information performed in finalizing CSAPR, the EPA is requiring sources in Iowa, Kansas, Michigan, Missouri, Oklahoma and Wisconsin to reduce NOX emissions during the summertime ozone season, which has increased the total number of states covered by the rule from 27 to 28 and adds summer ozone season limits to the annual limits under CSAPR for five of these six states. The aggregate incremental NOx reductions required by the first phase of the rule (January 1, 2012) are relatively modest in large part, due to the substantial emissions reductions associated with investments made in anticipation of the earlier EPA CAIR rule; which was struck down by the DC Circuit Court in August 2008. The short implementation time-frame , combined with the fact that most units in the affected 28 states already have low-NOx burners and over-fire air have created urgent needs for action for many generators in these states.
To understand the urgency, it might help to understand the mechanisms by which allowances are allocated and the state-specific NOx limits which will be enforced. Every affected unit will be allocated a number of allowances equal to its historical emissions minus the reduction required to meet the new state limit, (which is allocated to each unit based on its heat input relative to the total heat input for all affected units.)
The average reduction for Phase 1 is 15% for both the 5-month Ozone Season and the Annual Market, but varies across states based on the EPA's models of each state's impact on the ability of down-wind states to comply with the ground-level ozone and PM 2.5 requirements of the Clean Air Act and its amendments.
In order to comply with CSAPR, units must hold an allowance for each ton of either SO2 or NOX emitted. If units have excess allowances, they may bank the units for compliance in future years. However, if units have a shortage of allowances, they are subject to an automatic penalty as a result of their inability to comply with the rule. Companies must provide one allowance as an offset and two allowances as a penalty for each ton of emissions in excess of the amount of allowances held. The surrendered allowances must be submitted for the control period in the year immediately following the year when the excess emissions occurred.
So if each unit is under its limit it surrenders one allowance for every ton emitted. If the generator cannot make its allocated contribution to the newly required state NOx limit, it then must surrender not only one allowance for every ton over the limit, but two more as a penalty. And if that generator cannot buy enough allowances to cover the offset plus the penalty allowances, a fine will beimposed by the EPA of $37,000 per ton/per day.
So, for example, a 600 MW unit which is 10% over its limit for one month and can't cover it with allowances, would be fined more than two million dollars just for that one month!
Within the last few weeks, several generators I've talked to are 1) frantically looking for ways to comply with the rule and 2) believe that the only near-term way to comply with the 2012 CSAPR requirements will be de-rating their units (and many of these units are low-cost base load units, which will have the effect of increasing wholesale power prices.) While units lucky enough to avoid de-rates may benefits from this, those who do require de-rates will be foregoing even more revenue. In this scenario, every pound of NOx reduction equates to increases MWh available for selling, and as noted, quite possibly selling at higher than historical prices.
However, it is not merely units facing de-rates where CSAPR has upped the ante for the NOX reductions associated with NOx reduction. Hopefully most of you remember back in the 2003-2004SIP Call era when $1500/per ton NOx allowance prices created a strong business case for combustion optimization and in fact, put NeuCo on the optimization map.
But those $1500/ton allowance prices applied to the 5-month Ozone Season only, which on an annualized basis was $625 per ton. Current EPA estimates for 2012 of $1300/ton for the Ozone Season and $600 per ton for the Annual NOx Market create an annualized value of $1042 per ton, a 62% increase! And the per-ton value really only applies for those generators that are fortunate enough to be able to over-comply. The value of allowances surrendered for non-compliance will be three times as high, assuming that sufficient allowances are available for purchase. If they aren’t, then even the more draconian $37,000 per ton per day penalty comes into play.
The short compliance time-frame for CSAPR, coupled with the lack of available alternatives for reducing NOx with traditional hardware retrofits and the harsh consequences of non-compliance is having an unprecedented effect on NeuCo's business. Customers who currently have BoilerOpt™ installed on some units are accelerating what were 2012 plans for additional units are moving forward in 2011 with additional units.
Similarly, existing CombustionOpt®customers who had planned to add SootOpt® next year or who have been trying to get boiler cleanliness- related performance improvements through traditional "intelligent sootblowing" (ISB) systems are moving forward with adding SootOpt ahead of schedule. They recognize the immediate benefit with regards to integrated optimization of combustion and heat transfer processes which will result inNOx reductions and fewer adverse consequences associated with low-NOx operations. And as I mentioned earlier, their is a large amount of market activity around new optimization initiatives in the states not included in CAIR but affected by CSAPR.
While all of this new business is keeping us very busy, I do have concerns about the medium- and long-term implications for the US power generation industry. If you look at the aggregate NOx reductions needed for the January 2012 deadline, combined with the second round of increases that goes into effect in 2014, even the application of BoilerOpt to every single operating unit is not going to be sufficient and substantial. Additional combustion and post-combustion modifications are most likely going to be required.
The supply chain for such modifications is already beginning to be stretched and will be stretched further even for the 2012 requirements, let alone those in 2014. And the outages required for such modifications at minimum are going to result in higher wholesale power prices, and possibly even grid reliability concerns which already have been emerging for the first time in several years with this summer's sustained heat and humidity throughout much of the country.
But our fossil generation industry has consistently proven to be resilient in the face of adversity, and I am confident it will find a way through the next wave of challenges. And the one thing NeuCo has proven overwhelmingly throughout its history: that integrated optimization not only helps boilers operate more cleanly and efficiently, it also minimizes the adverse consequences of the hardware modifications needed to meet ever more stringent emissions regulations.