1. Environmental Issues in System Planning Jim Platts – ISO New England NARUC Summer Meeting – New York City July 15, 2007

2. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 2 Presentation Objectives Summarize key environmental regulations and policies affecting electric generating plants in the Northeastern U.S. –Air emissions –Thermal discharges Discuss their potential significance on system planning and reliability

3. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 3 Principal Regulated Power Plant Air Emissions and Water Discharges Air –SO 2 –NO X (ozone) –Particulates –Mercury –CO 2 Water –Plant water intake and thermal discharge

4. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 4 Air Regulations – Federal 1990 Clean Air Act Amendments (CAAA) –Set U.S. SO 2 Caps for 1995 and 2000 (9 million tons) –NO X Reasonable Available Control Technology (RACT) –Established Ozone Transport Region Clean Air Interstate Rule (CAIR) EPA 2005 –Affects Eastern U.S. –Sets lower regional SO 2 Caps 2010, 2015 –Sets lower regional NO X Caps 2009, 2015 –Particulates Clean Air Mercury Rule (CAMR) EPA 2005 –Sets caps in 2010 and 2018 for all coal plants

5. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 5 EPA Clean Air Interstate Rule (CAIR) Covers 28 eastern states plus Washington DC Health benefits estimated by EPA by 2015 at $85 to 100 billion and prevention of 17,000 premature deaths SO 2 –By 2010: reduce 28 state total to 3.6 million tons –By 2015: reduce by another 1.1 million tons to 2.5 million tons –Reduces total power plant SO 2 emissions by 77% from 1990 to 2015: from 15.7 million tons to 3.5 million tons NO X –By 2009: reduce 1.5 million tons –By 2015: reduce another 0.4 million tons to 1.3 million tons –Reduces total power plant emissions 67% from 1990 to 2015: 6.7 million tons to 2.2 million tons Establishes federal cap-and-trade framework and states can choose their own cap and trade system

6. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 6 Source: http://www.dnr.mo.gov/env/apcp/cair_camr/8-17-05mtg/epa_mdnr_cair_camr_ii.pdf CAIR Affected Region and Emission Caps

7. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 7 National NO X and SO 2 Power Plant Emissions: Historic and Projected with CAIR

8. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 8 EPA Clean Air Mercury Rule (CAMR) Applies “standards of performance” for mercury emissions from all existing and new coal plants Creates a market based cap-and-trade program to reduce mercury emissions in two steps –By 2010 reduce total U.S. emissions from 48 to 38 tons. Will be achieved by the “co-benefits” of CAIR’s SO 2 and NO X reductions –By 2018 reduce to 15 tons –New coal plants (starting construction after 1/30/04) will have stringent new mercury emission standards in addition to cap –States allowed flexibility on how to implement rule U.S. coal plants currently contribute about 1% to worldwide mercury emissions (Source: EPA)

9. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 9 Regional Greenhouse Gas Initiative (RGGI) caps CO 2 emissions from electric generators 10 Northeastern states voluntarily established a CO 2 cap and trade program starting in 2009 for electric generators RGGI Region CO 2 Cap – 188 million tons Allowances are allocated among 10 states New York, Maryland and Massachusetts to receive about 68% of Cap allowances First 3-year compliance period ends 12/31/11 Compliance means: a generator must hold sufficient allowances plus offsets to cover its CO 2 emissions for each compliance period Cap is reduced 10% from 2015 to 2018: 169 million tons

10. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 10 RGGI (Continued) States are setting up regulations or passing legislation to implement RGGI guided by a Model Rule CO 2 Allowances –Minimum auction amount is 25% of states allocation. Remaining amount would be allocated free to generators within a state –Most states are planning to auction 100% of state’s allocation Offsets can be used for of compliance needs Use of offsets tied to higher CO 2 allowance prices –If less than $7/ton, maximum use is 3% of compliance needs –If between $7 and $10/ton, maximum use is 5% –If over $10/ton, maximum use is 10%

11. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 11 RGGI (Continued) Offset projects can be created as follows –Reduce methane from landfill gas –Reduce SF 6 leaks on T&D systems –Reduce CO 2 from improved gas and propane end use efficiency –Take up CO 2 through afforestation –Reduce methane from agricultural wastes RGGI can add to these types of offset options

12. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 12 Fossil Generator Emission Cost Adders with RGGI: SO 2, NO X and CO 2 Typical Plant Fuel Cost $/MBtu Fuel $/MWh SO 2 $/MWh NO X $/MWh CO 2 $/MWh Total $/MWh Coal base load steam plant2.25204.74.4 34 Gas combined cycle74900.12.151 Oil peaking steam plant773.511.54.45.495 CO 2 allowance cost does not appear to change relative dispatch order of fossil plants For illustrative purposes only Allowance Prices ($/ton): SO 2 – 1,085; NO X – 2,800; CO 2 – 5

13. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 13 RGGI Implications for Generators and Market RGGI plants will have an additional dispatch cost adder starting in 2009 Coal and oil plants will have higher CO 2 adders than gas plants due to their higher CO 2 emission rates (lbs/MWh) Higher emission costs will tend to increase operation of non or low CO 2 emitting plants, e.g. hydro, nuclear, wind, gas fired combined-cycle May increase imports from non-RGGI regions (leakage) Costs of CO 2 allowances will have to be recovered in the wholesale power markets similar to SO 2 and NO X allowances today

14. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 14 A long range view of New England’s possible generation system’s CO 2 emissions ISO New England conducted a Scenario Analysis (SA) of 7 different resource expansions to meet a 35,000 MW load (ISO’s 2006 peak was 27,130 MW) Performed a one-year system simulation for 35,000 MW of each scenario and for many sensitivity cases All information and results at http://www.iso- ne.com/committees/comm_wkgrps/othr/sas/index.htmlhttp://www.iso- ne.com/committees/comm_wkgrps/othr/sas/index.html SA was an open stakeholder process to provide region’s policy makers with impacts of alternatives ways to meet region’s projected needs, not suggest any one path Final report due around August 1

15. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 15 New England Scenario Analysis Seven future resource scenarios Each models 8,000-MW system expansion based on: –A representative mix of the resources currently being proposed, plus –A large concentration of a certain technology / resource option Measure and compare reliability, economic, and environmental performance of each scenario Results can be used to begin discussions of policy choices and implications 8,000 39,000

16. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 16 Many Routes to Meet Future Electricity Needs Region most likely to choose a combination of these options EXIT 1 QUEUE MIX EXIT 3 NUCLEAR EXIT 2 DEMAND RESOURCES EXIT 5 NATURAL GAS EXIT 4 COAL EXIT 6 RENEWABLES EXIT 7 IMPORTS Seven Scenarios Identified DPW

17. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 17 New England’s Simulated Generation System’s CO 2 emissions for Scenario Analysis: 35,000 MW load

18. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 18 Water Regulations Clean Water Act Section 316b –Requires EPA to insure Best Available Control Technology (BACT) for cooling intake structures –3 Phase implementation Phase I applies to new facilities Phase II applies to large existing plants > 50 Million gallons per day (MGD) (equivalent to about 60 MW) Phase III applies power plants < 50 MGD and other facilities –Site by site determination of Phases I and II –Implication is cooling towers may need to be installed on existing plants In New York some merchant plants have dry cooling

19. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 19 Environmental Issues: What do they mean for System Planning?

20. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 20 Impacts of environmental regulations on power plants Will increase the costs of fossil power plants Fossil generating plants will have increased emission constraints from new air regulations. This translates to: –More complex plant operation Can affect startup/shutdown Compliance strategy could limit energy from plants Economic bidding must recognize costs of new emission allowances –Higher costs for emissions compliance Regulations will have little or no impact on costs of non- and low-emitting power plants e.g. nuclear, hydro, wind and fuel cells

21. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 21 Impacts of environmental regulations on power plants (continued) Coal plants are more vulnerable than gas/oil-fired units: –Higher CO 2 emissions rate –Mercury emissions –Gas/oil price differential with coal may still give coal an economic advantage even with added CO 2 costs –Potential for added costs for cooling towers May cause earlier plant retirements due to changing economics or inability to comply –ISO’s concern for generating unit attrition when outlook shows need for more capacity with the 5-10 year planning horizon Overlapping maintenance or refurbishing scheduling for compliance

22. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 22 Impacts on System Planning Meeting resource adequacy requirements may encourage shift to low or non-CO 2 emitting generating and demand side resources –An example is Ontario’s plan for replacement of it coal-fired units –RGGI’s regional economic expansion modeling yielded Mostly wind and new combined cycle additions with low natural gas prices Mostly clean coal, more wind and some combined cycle with high natural gas prices –Potentially can change transmission flow patterns and this may require additional system improvements –ISO’s modeling of CO 2 emissions shows need for new zero or low emitting resources to meet RGGI CO 2 cap

23. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 23 Impacts on System Planning (continued Requirements and incentives for clean resources can continue shift to natural gas plants and increase fuel diversity and price issues Gas combined cycle plants are –Easy to site –Have low capital cost –Produce lowest fossil plant emissions –Increase regional dependence on natural gas supply i.e. LNG facilities, a possible reliability issue in the winter –Create more demand can increase price volatility

24. Environmental Issues in System Planning NARUC Summer Committee Meeting July 15, 2007 © 2007 ISO New England Inc. 24 Summary Key environmental issues are ozone attainment, global warming, mercury reductions and water discharges Addressing these issues can lead to complex policy and planning evaluations and decisions In response to these regulations, generation costs for generators will likely increase and therefore energy costs will likely increase A region’s response to these issues needs to be flexible to not impair electric system reliability and meet increased environmental constraints Zero or low emitting resources are most likely needed for meeting environmental constraints in the future