N ERC | Potential Reliability Considerations from EPA ’s Proposed Clean Power Plan | October 2014 I 

# Potential Reliability Impacts of EPA’s Proposed Clean Power Plan

Initial Reliability Review November 2014N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 i 

## Table of Contents

Preface

................................ ................................ ................................ ................................ ................................ ................ ii Executive Summary

................................ ................................ ................................ ................................ ............................. 1 Summary of t he Proposed Clean Power Plan

................................ ................................ ................................ ....................... 5 Clean Power Plan Building Blocks

................................ ................................ ................................ ................................ ............ 6
Clean Power Plan

– Assumption Review

................................ ................................ ................................ .............................. 8 Building Block 1

– Coal Unit Heat Rate Improvement

................................ ................................ ................................ ............. 8 Building Block 2

– Gas Unit Re

- Dispatching

................................ ................................ ................................ ............................. 9 Building Block 3

– Clean Energy

................................ ................................ ................................ ................................ ............. 11 Building Block 4

– Energy Efficiency

................................ ................................ ................................ ................................ ....... 14 Reliability Impacts Potentially Resulting from the CPP

................................ ................................ ................................ ...... 17 Direct Impacts to Resource Adequacy and Electric Infrastructure

................................ ................................ .................... 17 Impacts Resulting from the Changing Resource Mix

................................ ................................ ................................ ......... 24
Conclusions

................................ ................................ ................................ ................................ ................................ ....... 27N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 ii 

## Preface

The North American Electric Reliabili ty Corporation (NERC) has prepared the following assessment in accordance with the Energy Policy Act of 2005, in which the United States Congress directed NERC to conduct periodic assessments of the reliability and adequacy of the bulk power system (BPS) i n North America. 1 NERC operates under similar obligations in many Canadian provinces, as well as a portion of Baja California Norte, Mexico. NERC is an international regulatory authority established to evaluate and improve the reliability of the BPS in North America. NERC develops and enforces Reliability Standards; annually assesses seasonal and long

- term (10

- year) reliability; monitors the BPS through system awareness; and educates, trains, and certifies industry personnel. NERC is the electric reliabi lity organization (ERO) for North America, subject to oversight by the U.S. Federal Energy Regulatory Commission (FERC) and governmental authorities in Canada. 2 NERC Regions and Assessment Areas

T he North American Electric Reliability Corporation Atlanta 3353 Peachtree Road NE, Suite 600

– North Tower Atlanta, GA 30326 404

- 446

- 2560 Washington, D.C

. 1325 G Street NW, Suite 600 Washington, DC 20005 202

‐ 400

‐ 3000

1 H.R. 6 as approved by of the One Hundred Ninth Congress of the United States, the Energy Policy Act of 2005 . The NERC Rules of Procedure, Section 800, further detail the Objectives, Scope, Data and Information requirements, and Reliability Assessment Proc ess requiring annual seasonal and long

- term reliability assessments.

2 As of June 18, 2007, FERC granted NERC the legal authority to enforce Reliability Standards with all U.S. users, owners, and operators of the BPS and made compliance with those standards mandatory and enforceable. Equivalent relationships have been sought and for the most part realized in Canada and Mexico. Prior to adoption of §215 in the United States, the provinces of Ontario (2002) and New Brunswick (2004 ) adopted all Reliability Standards that were approved by the NERC Board as mandatory and enforceabl e within their respective jurisdictions through market rules. Reliability legislation is in place or NERC has memoranda of understanding with provincial authorities in Ontario, New Brunswick, Nova Scotia, Québec, Manitoba, Saskatchewan, British Columbia, a nd Alberta, and with the National Energy Board of Canada (NEB). NERC standards are mandatory and enforceable in Ontario and New Brunswick as a matter of provincial law. Manitoba has adopted legislation, a nd standards are mandatory there. In addition, NERC has been designated as the “electric reliability organization” under Alberta’s Transportation Regulation, and certain Reliability Standards have been approved in that jurisdiction; others are pending. NERC standards are now mandatory i n British Columbia

an d Nova Scotia. NERC and the Northeast Power Coordinating Council (NPCC) have been recognized as standards

- setting bodies by the Régie de l’énergie of Québec, and Québec has the framework in place for Reliability Standards to become mandatory. NEB has made Reliability Standards mandatory for international power lines. In Mexico, the Comisión Federal de Electricidad (CFE) has signed WECC’s reliability management system agreement, which only applies to Baja California Norte. FRCC Florida Reliability Coordinating Council MRO Midwest Reliability Organization NPCC Northeast Power Coordinating Council RF ReliabilityFirst SERC SERC Reliability Corporation SPP

- RE Southwest Power Pool Regional Entity TRE Texas Reliability Entity WECC Western Electricity Coordinating CouncilN ERC | Potential Reliability Impacts from EPA ’s Proposed Clean Power Plan | November 2014 1 

## Executive Summary

The Environmental Protection Agency ( EPA ) , on June 2, 2014, issued its proposed Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, commonly referred to as the proposed Clean Power Plan (CPP) , under Sec tion 111(d) of the Clean Air Act, which introduces CO 2 emission limits for existing electric generation facilities. On August 14, 2014, the NERC Board of Trustees directed NERC to develop a series of special reliability assessments to examine the proposed CPP

. This report is NERC’s i nitial r eliability r eview of the potential risks to reliability, based on the assumptions contained in the proposed CPP. NERC maintains a reliability

- centered focus on the potential implications of environmental regulations and other shifts in policies that can impact the reliability of the bulk power system ( BPS )

. Reliability assessments conducted while the EPA is finalizing the CPP can inform regulators, state officials, public utility commissioners, utilities, and other impac ted stakeholders of potential resource adequacy concerns, impacts to system characteristics ( such as essential reliability services (ERSs) ), and, to some degree, areas that are more likely to require power

- flow

- related transmission enhancements to comply w ith NERC Reliability Standards. The goals of this review are listed in more detail below:

 Provide an evaluation and comparison of the assumptions supporting the CO 2 reduction objectives in the proposed CPP against other reported projections available within NERC assessment reports

.

 Provide insight into planned generation retirements, load growth, renewable resource development, and energy efficiency measures that might impact CO 2 emissions and the EPA’s tar get

- driven assumptions

.

 Provide insight into the potential reliability consequences of either the target

- driven emission assumptions or the NERC projection

- based assumptions and , in particular , the potential reliability implications if the EPA assumptions cannot be realized

.

 Identify potential reliability impacts resulting from the expected resource mix changes, such as coal resource displacement or retirements, the impacts on regional planning reserve margins, the shifts in resource mix and ERS characteris tics, the increase in variable resources, the concentration of resources by fuel source (especially natural gas), transmission and large power transfers, and other reliability characteristics , including regional differences

.

 Support the electric power indu stry and NERC stakeholders by providing an independent assessment of reliability while serving as a platform to inform policy discussions on BPS reliability and emerging issues. This report and its findings are not intended to: ( 1) advocate a policy position in regard to the environmental objectives of the proposed CPP ; ( 2) promote any specific compliance approach ; ( 3) advocate any policy position for a utility, generation facility owner , or other organization to adopt as part of com pliance, reliability , or planning responsibilities ; ( 4) support the policy goals of any particular stakeholder or interests of any particular organization; or ( 5) represent a final and conclusive reliability assessment. The objective of this review is to identify the reliability implications and potential consequences from the implementation of the proposed CPP and its underlying assumptions. The preliminary review of the proposed rule, assumptions, and transition identified that detailed and thorou gh analysis will be required to demonstrate that the proposed rule and assumptions are feasible and can be resolved consistent with the requirements of BPS reliability. This assessment provides the foundation for the range of reliability analyses and evalu ations that are required by the ERO, RTOs, utilities, and federal and state policy makers to understand the extent of the potential impact. Together, industry stakeholders and regulators will need to develop an approach that accommodates the time required for infrastructure deployments , market enhancements, and reliability needs if the environmental objectives of the proposed rule are to be achieved.
Herein, NERC examine s the assum ptions made in the EPA ’s four Building B lo cks : 3
Building Block 1: Heat rate improvements Building Block 2: Dispatch changes among affected electric generating units ( EGUs ) Building Block 3: U sing an e xpanded amount of less

- carbon

- intensive generating capacity

3 Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units

.Executive Summary

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 2 Building Block 4: Demand

- side energy efficiency

NERC identified the fol lowing factors as requir ing additional reliability consideration : Implementation of the CPP reduce s fossil

- fired generation : The proposed CPP aims to cut CO 2 emissions from existing power plants to 30 percent below 2005 levels by 2030. Under the EPA proposal, s ubstantial CO 2 reducti ons are required under the State Implementation P lans ( SIPs ) as early as 2020. According to the EPA’s Regulatory Impact Assessment , generation capacity would be reduced by between 108 and 134 GW by 2020 (depending on state or regional implementations of Option 1 or 2)

. 4 The number of estimated retirements identified in the EPA’s proposed rule may be conservative if the assumptions prove to be unachievable. Developing suitable replacement generation resources to main tain adequate reserve margin levels may represent a significant reliability challenge, given the constrained time period for implementation. Assumed heat rate improvements for existing generation may be difficult to achieve : NERC is concerned that the assumed improvements may not be realized across the entire generation fleet since many plant efficiencies have already been realized and economic heat rate improvement s have been achieved . Multiple incentives are in place to oper ate units at peak efficiency , and periodic turbine overhauls are already a best practice. Site

- specific engineering analyses would be required to determine any remaining opportunities for economic heat rate improvement measures.

Greater reliance on variabl e res ources and gas

- fired generation is expected : The CPP will accelerate the ongoing shift toward greater use of natural

- gas

- fired generation and variable energy resources (VERs) (renewable genera tion). Increased dependence on renewable energy generation will re quire additional transmission to access areas that hav e higher

- grade wind and solar resources (gener ally located in remote areas). Increased natural gas use will require pipeline expansion to maintain a reliable source of fuel, particularly during t he peak winter heating season

. Pipeline constraints and growing gas and electric interdependency challenges impede the electric industry’s ability to obtain needed natural gas services , especially during high

- use horizons

. R apid expansion of energy efficie ncy displaces electri city demand growth through 2030 : I n its rate calculation for best practices by state , t he EPA assumes up to a 1.5 percent annual retail goal for incremental growth in efficiency savings

. The EPA assumes that the states and industry would rapidly expand energy efficiency savings programs from 22 TWh/year in 2012, to 108 TWh/year in 2020, and reach 380 TWh/year by 2029. With such aggressive energy efficiency expansion, the EPA assumes that energy efficiency will grow faster than electricity demand, with total electricity demand shrinking after 2020. The implications of this assumption are complex. If the EPA

- assumed energy efficiency growth rates cannot be attained, additional carbon reducti on measures would be required, primarily through reduced fossil

- fired generation.

Essential Relia bility Services may be strained by the proposed CPP : The anticipated changes in the resource mix and new dispatching protocols will require comprehensive relia bility assessment s to identify changes in power flows and ERSs

. ERS s

are the key services and characteristic s that comprise the following basic reliability services needed to maintain BPS reliability : (1) load and resource balance; (2) voltage support; and (3) frequency support

. New reliability challenges may arise with the integration of generation resources that have different ERS characteristics than the units that are projected to retire

. The changing resource mix introduces changes to operations and ex pected behaviors of the system; therefore, more transmission and new operating procedures may be needed to maintain reliability.

More time for CPP implementation may be needed to accommodate r eliability enhancements : State and regional plans must be approv ed by the EPA, which is anticipated to require up to one year , leaving as little as six months to two years to implement the approved plan

. Areas that experience a large shift in their resource mix are expected to require transmission enhancements to maintain reliability. Constructing the resource additions , as well as the expected transmission enhancements , may represent a si gnificant reliability challenge given the constrained time period for implementation. While

4 Regional implementation of Option 2 assumes 108 GW of retirements (includes CC, Coal, CT, Nuclear, O/G, and IGCC) by 2020. St ate implementation of Option 1 assumes 134 GW of retirements (includes CC, Coal, CT, Nuclear, O/G, and IGCC) by 2020. For addi tional information, see: Regulatory Impacts Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standard s for Modified and Reconstructed Power Plants (June 2014) and supporting IPM Model documentation and data.Executive Summary

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 3 the EPA provides flexibility for mee ting compliance requirements within the proposed time frame, there appears to be less flexibility in providing reliability assurance beyond the compliance period. A summary of NERC’s i nitial r eliability r eview recommendations is provided below:

General Recommendations

1. NERC should continue to assess the reliability implications of the proposed CPP and provide independent evaluations to stakeholders and policy makers. 2. Coordinated regional and multi

- regional industry planning and analysis groups should immediately begin detailed system evaluations to identify areas of concern and work in partnership with policy makers to ensure there is clear understanding of the complex interdependencies resulting from the rule’s implementation. 3. If the environmental goals are to be achieved, policy makers and the EPA should consider a more timely approach that addresses BPS reliability concerns and infrastructure deployments.

Recommen dations to Address Direct Impacts to Resource Adequacy and Electric Infrastructure Fossil

- Fired Retirements and Accelerated Declines in Reserve Margins The Regions, ISO/RTOs, and states should perform further analyses to examine potential resource adequacy concerns. Transmission Planning and Timing Constraints The EPA and states, along with industry, should consider the time required to integrate potential transmission enhancements and additions necessary to address impacts to reliability from the proposed CPP. The EPA and policy makers should recognize the complexity of the reliability challenges posed by the rule and ensure the rule provides sufficient time for the industry to take the steps needed to significantly change the country’s resource mix and ope rations without negatively affecting BPS reliability. Regional Reliability Assessment of the Proposed CPP Other ISO/RTOs, states, and Regions should prepare for the potential impacts to grid reliability, taking into consideration the time required to plan and build transmission infrastructure. Reliability Assurance The EPA, FERC, the DOE, and state utility regulators should employ the array of tools and their regulatory authority to develop a reliability assurance mechanism, such as a “reliability back

- stop .” These mechanisms include timing adjustments and granting extensions where there is a demonstrated reliability need.

Recommendations to Address Impacts Resulting from the Changing Resource Mix Coal Retirements and the Increased Reliance on Natural Gas for Electric Power Further coordinated planning between the electric and gas sectors will be needed to ensure a strong and integrated system of fuel delivery and generation adequacy. Coordinated planning processes should include considerations for pipeline expansion to meet the increased reliance on natural gas for electric generation, especially during extreme weather events (e.g., polar vortex). The Changing Resource Mix and Maintaining Essential Reliability Services ISO/RTOs, utilities, and Regions (with NERC oversight) should analyze the impacts to ERSs in order to maintain reliability. Additionally, system operators and ISO/RTOs need to develop appropriate processes, tools, and operating practices to adequately address operational changes on the system. NERC should perform grid

- level performance expectations developed from a technology

- neutral perspective to ensure ERS targets are met. The development of technologies (such as electricity storage) help support the reliability objectives of the BPS , and th ese technologies should be expedited to support the additional variability and uncertainty on the BPS.
Increased Penetration of Distributed Energy Resources (DERs) ISO/RTOs and system planners and operators should consider the increasing penetration of DE Rs and potential reliability impacts due to the limited visibility and controllability of these resources.Executive Summary

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 4 Plan for NERC Reliability Assessments After the proposed CPP is finalized, specific transmission and resource adequacy assessments

— including resulting reliability impacts

— will be essential for support ing the development of SIPs that are aligned with system reliability needs. NERC’s plan for reviewing and assessing the reliability impacts of the EPA proposal is included in Figure 1. This r eview includes a preliminary review of the assumptions and potential reliability impacts resulting from the implementation of the EPA’s proposed CPP. As the EPA is scheduled to finalize its rule by June 2015, NERC will develop a specific reliability assessment i n early 2015 that will focus on evaluating generation and transmission adequacy and reliability impacts. After the EPA rule is finalized, the states, either individually or in multi

- state groups, are required to develop their SIPs by 2016 and 2018, respect ively. NERC plans to provide a more specific and comprehensive reliability assessment before SIPs are submitted to the EPA. Additionally, a Phase III approach is tentatively planned for December 2016, which will examine finalized SIPs.

Figure 1 . NERC’s Assessment Actions and Schedule TimelineSummary of the Proposed Clean Power Plan

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 5 

## Summary of the Proposed Clean Power Plan
The proposed CPP aims to cut CO 2 emission from existing power plants to 30 percent below 2005 levels by 2030. Substantial CO 2 reductions are required under State Implementation P lans. Under the EPA proposal, CO 2 reductions are required as early as 2020. According to the EPA’s reliability assessment included in the proposed rule, these existing generation rules would result in between 108 and 134 GW of generation retirements by 2020 (depending on state or regional implementations of Option 1 or 2)

. 5
The CPP proposal would apply to fossil

- fi red generating units that meet four combined qualification criteria: (1) units that commenced construction prior to January 8, 2014; 6 (2) units with design heat input of more than 250 MMBtu/hour (approximately a 25 MW unit) ; (3) units that supply over one

- third of their potential output to the power grid ; and (4) units that supply more than 219,000 MWh/year on a three

- year rolling average to the power grid

. 7 Given these criteria, the EPA estimates that approximately 3, 0 0 0 U

. S

. fossil

- fired electric generation units representing over 70 0 , 000 MW of existing nameplate generating capacity will be subject to the rule limitations. 8 NERC estimates that t his magnitude represents approximately 65 percent of the total existing nameplate capacity in the United States.

The EPA

- proposed draft regulations would , for the first time , limit CO 2 from existing power plants , thus address ing risks to health and the economy posed by climate change. These proposed regulations are intended to provide i mplementation flexibility and maintain an affordable, reliable energy system while cutting CO 2 and protecting public health and the environment. 9
The EPA regulations propose implementation through a state

- federal partnership under which states identify plans to meet the emission reduction goals. The EPA provides guidelines for states to develop implementation plans to meet state

- specific CO 2 reducti on goals and provides states the flexibility to design requirements suited to their unique situation s . These plans may include generation mix changes using diverse fuels, energy efficiency , and demand

- side management, and they allow
states to work individu ally or to develop multi

- state plans. The primary driver for realizing the EPA’s 111(d) objectives is that SIPs need to produce significant CO 2 reduct ions starting as early as 2020. As currently proposed, s tates have a flexible timeline for submitting plans to the EPA

. Within one year of finalizing the rule

— expected in June 2015

— state environmental agencies must submit implementation plans to the EPA for approval. Submitted
state

- specific plans, due in June 2016, must outline requirements and enforceabl e limitations for affected generating units to meet the rule’s average CO 2 emission rate goal for each state within two compliance periods: (1) an initial 10

- year average interim emission rate limit for the period 2020

– 2029, and (2) a final annual emission rate limit starting in 2030. The EPA provides states with an option to convert CO 2 emission rate limitation into an annual mass

- based limitation. It is likely that most states will pursue this option due to the challenges state permitting agencies have in developing unit

- specific emission rate limitations. The simpler mass

- based CO 2 emission cap program also negates the need for state legislative action to authorize agencies to limit plant output and enact an enforceable program for compliance with average emission rates. The EPA’s proposed Clean Power Plan timeline is outlined in Figure 2.

5 State implementation of Option 1 assumes 134 GW of retirements (includes CC, Coal, CT, Nuclear, O/G, and IGCC) by 2020. For a dditional information, see: Regulatory Impacts Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants (June 2014) and supporting IPM Model documentation and data. Regional implementation of Option 2 assumes 108 GW of retirements (includes CC, Coal, CT, Nuclear, O/G, and IGCC) by 2020.

6 All sources starting construction after January 8, 2014, would be subject to new source perfo rmance standards and exempt from the EPA Clean Power Plan requirements.

7 79 FR 34854 https://www.federalregister.gov/articles/2014/06/18/2014

- 13726/carbon

- pollution

- emission

- guidelines

- for

- existing

- stationary

sources

- electric

- utility

- generating page 34854

. 8 EPA CPP TSD

– 2012 Unit

- Level Data Using EGrid

– Methodology, June 2014. Generation, Emissions, Capacity data used in EPA’s State Goal Computation TSD.
9 EPA Fact Sheet: Clean Power Plan

– Why we Need A Cleaner, More Efficient Power Sector “ The proposed Clean Power Plan will cut hundreds of millions of tons of carbon pollution and hundreds of thousands of tons of harmful particle pollution, sulfur dioxide and nitr ogen oxides. Together these reductions will provide important health protections to the most vulnerable, such as children and older Americans

. ” http://www2.epa.gov/sites/production/files/2014

- 05/documents/20140602fs

- benefits.pdf

.Summary of the Proposed Clean Power Plan

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 6 Figure 2

. EPA Proposed Clean Power Plan Timeline
The EPA would hav e one year to review and approve implem entation plans for each state by June 2017. Under this schedule, impacted generating units would have two and a half years to develop respective compliance strategies and potentially permit, finance, and build needed replacement capacity and transmission. In its current form, this implementation schedule would be a challenge for states to implement and for affected sources to comply with, especially given the expected legal challenges to both the EPA and state rules. I n recognition of these challenges, the EPA would provide states with a one

- year extension to June 2017 to submit a SIP if justification is provided , and a two

- year extension (June 2018) for states that elect to develop multi

- state (regional) programs (e.g. , Regional Greenhouse Gas Initiative (RGGI)). While the EPA extensions apply to state plan submissions, the January 1, 2020, program start date for affected sources would not be extended under the proposed CPP . Therefore, the impacted fossil

- fired units ma y be left with as little as six months to develop and implement compliance plans. Considering the number and variety of outcomes for each of the proposed scenarios, the states and industry should initiate planning immediately upon finalization of the CPP

. T he proposed Clean Power Plan , which is b ased on EPA analysis of historical data about emissions and the power
sector , is intended to create a consistent national formula for reductions that reflect s their B uilding B lock assumptions. The formula applies the four B uilding B locks to each state’s specific information, yielding a carbon intensity rate for each state. 10 T he re is a wide range of potential proposals, including individual state and multi

- state grouping s, each with diff erent implementation schedules. T he range of potential submitted SIP s and changes to the proposed timeline create significant uncertainties for industry and resource planners. 

### Clean Power Plan Building Blocks According to the proposed plan, t his can be achieved through the development of state

- specific emission rate s to limit CO 2 by applying four different BSER B uilding B locks

. 11 Each B uilding B lock represents a different approach for achieving the proposed targets. According to the EPA, the propos ed plan considers impacts to system reliability and electricity prices

. The BSER is not intended to impact resource plan ning and does not dictate retirements, additions, or operating practices for individual units

. Instead, i t would provide state emission rate limits that would shape the future resource mix through state and market processes in subsequent years as SIPs and multi

- state plans are developed and implemented

.

10 EPA Fact Sheet: Clean Power Plan

- National Framework for States

. 11 EPA Clean Air Act: Section 111(d) authorizes EPA to apply “best system of emission reduction” to t his section’s affected sources. EPA’s Proposed Clean Power Plan: Options
The EPA is proposing a Best System of Emission Reduction (BSER) goal, referred to as Option 1, and is taking comment on a second approach, referred to as Option 2. Option 1 : Involves higher deployment of emission reduction but allows a longer time frame (2030). Option 2 : Has a lower deployment of emiss ion reductions over a shorter time frame (2025) by each state. Proposed guidelines allow states to collaborate and demonstrate emission performance on a multi

- state basis, in recognition that electricity is transmitted across state lines.Summary of the Proposed Clean Power Plan

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 7 

### The EPA’s Proposed Clean Power Plan: Four Building Blocks

Make fossil fuel power plants more efficient by implementing a 6 percent (on average) unit heat rate improvement for all affected coal

- fired units. The EPA suggests that some plants could further improve process efficiency by 4 percent through the adoption of best operational practices, and an addit ional 2 percent through capital upgrade investments.

Use low

- emitting power sources more by redispatching existing natural gas combined

- cycle (NGCC) units before the coal and older oil

- gas steam units. EPA draft rate limitations include CO 2 reduction ass umptions from the ongoing increases in the use of NGCC capacity (with up to a 70 percent capacity factor). This additional NGCC capacity (440 TWh/year) displaces coal (376 TWh/year) and oil

- gas steam generation (64 TWh/year) by 2020, compared to 2012 level s.

Use more zero

- and low

- emitting power sources through building capacity by adding both non

- hydro renewable generation and five planned nuclear units. EPA calculations assume qualifying non

- hydro renewable generation can grow rapidly from 218 TWh/year i n 2012, to 281 TWh/year by 2020, to reach 523 TWh/year by 2030.

Use electricity more efficiently by significantly expanding state

- driven energy efficiency programs to improve annual electricity savings by up to 1.5 percent of retail sales per year. The ca lculation assumes the states and industry can rapidly expand energy efficiency programs to increase savings from 22 TWh/year in 2012, to 108 TWh/year in 2020, and to 380 TWh/year by 2029. Ultimately, EPA energy efficiency assumptions suggest that electric power savings will outpace electricity demand growth, resulting in negative electricity usage from 2020 through 2030.Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 8 

## Clean Power Plan
– Assumption Review

This section provides a critical review of the EPA’s assumptions for state

- specific CO 2 emission rates and presents possible reliability challenges that need to be considered. 

### Building Block 1
– Coal Unit Heat R ate Improvement

The EPA’s heat rate assessment analyzed gross data for 884 coal

- fired electric generating units ( EGUs ) during a 10

- year period

. 12 The regression analysis examined the effects of the capacity factor and the ambient temperature on the gross heat rate e fficiencies of coal

- fired EGUs. T he EPA’s assessment concluded that in

state coal units can achieve up to a 4 percent rate of improvement through the use of best operational practices. An additional 2 percent of efficiency improvements would be achieved through capital upgrade investments. Review of EPA Assumptions and Potential Reliability Impacts The EPA calculated unit

- specific heat rates using gross generation data from the Continuous Emission Monitoring Systems ( CEMS s )

. With this approach, the EPA exclud ed generation

- reducing effects from post

- combustion environmental controls , such as selective catalytic reductio n and flue

- gas desulfurization controls

. The EPA then used net generation data, without consideration for these retrofits, for coal

- fired EGUs when calculating the state CO 2 emiss ion rate goals. These retrofits will reduce the net output of these units, as well as their associated net heat rate efficiency. Not considering these reductions creates an inconsistent approach, especially considering that most coal

- fired EGUs will require control retrofits to comply with environmental regulations, such as the Mer cury Air Toxic Standards ( MATS ) and Section 316(b) of the Clean Water Act.

T he EPA’s regression analysis does not adjust for the following factors that have profound effects on the process efficiency of a coal

- fired EGU: 13 (1) s ubcritical versus supercritical boiler designs ; (2) f luidized bed combustion, i ntegrated gasification combined

- cycle (IGCC) , and pulverized coal; (3) unit size and age; and (4) c oal quality variations in moisture and ash ( i .e. , every 5 percent change in coal moisture result s in a 1 percent change in boiler heat rate efficiency )

. Impacts on Coal

- Fired Unit Efficiency Rates Lower

- capacity factors will cause an increase in heat r ates, particularly if the lower

- capacity factors are due to the cycling of the coal units. As a resu lt of Building Block 2, coal units will cycle more often ; therefore, assumed heat rate improvements across the entire coal fleet are unlikely. While recognizing capacity effects in the regression analysis, the EPA did not evaluate the effects of lower

- capa city factors resulting from the dispatching of natural gas generation before coal generation.

Periodic Turbine Overhauls Turbine overhaul s are referenced as a maj or heat rate improvement method in an EPA Clean Power Plan t echnical s upport d ocument

. 14 R egular t urbine overhaul s are generally not practical or economic al, because these procedures require the unit to be out of service for an extended period of time. As well, t he power industry already has multiple incentives to operate units at peak efficien cy ( i.e. , profit maximization and competitive advantage )

. Overall, improving the existing U.S. coal fleet ’ s average heat rate by 6 percent may be difficult to achieve . Possible options and considerations for attain ing a portion of this target may include t he following:

 Site

- specific engineering analyses are required to determine if there are remaining opportunities for heat rate improvement measures through implementation of operational best practices or capital investments.

 If the U.S. coal fleet does not achieve target heat rates , more CO 2 reductions would be required from other CPP B uilding B lock measures.

 This can result i n some coal

- fired power plants retiring earlier than anticipated, which creates additional uncertainty in future generation resources.

12 GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) pg. 2

- 18.
13 These differences are illustrated in Figure 2

- 2 of GHG Abatement Measures (EPA June 2014).

14 Coal

- Fired Power Plant Heat Rate Reductions (January 2009).Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 9 

### Building Block 2
– Gas Unit Re
- Dispatching

The EPA assumes that reductions in CO 2 emissions from existing power pl ants can be achieved by dispatch ing existing NGCC units ahead of coal units. In particular, the EPA assumes existing NGCC units can achieve a 70 percent utilization rate with avoided incremental costs of less than $33/metric ton CO 2 . 15 In its state

- specific goal computation, the EPA calculated that 440 TW h /year of additional NGCC generation could potentially displace 376 TWh /year of c oal and 64 TWh /year of o il

- gas steam units of 2012 generation. 16 Review of EPA Assumptions and Potential Reliability Impacts Upon review ing the EPA’s Building Block 2 assumptions, NERC found a number of reliability concerns regarding increased reliance on natural

- gas

- fired generation that should be evaluated

. Historically, the primary function of the NGCC unit is to follow the load of energy thr oughout the day (i.e., the intermediate, or midrange, part of the load duration curve). While some NGCC units are capable of operating at a high capacity factor , the vast majority of this type of generation is used for load following. Due to lower gas pric es, NGCC units are currently being dispatched as a baseload resource , displacing baseload coal

- fired EGUs. Unlike baseload coal

- fired generation, NGCC units

are better suited to follow load. As mentioned earlier, cycling coal

- fired EGUs reduces heat rate e fficiencies, causing their CO 2 emission rate s (lbs/MWh) to deteriorate, and further offsetting the Building Block 1 assumptions

. Generally, the power industry relies upon diversification of fuel sources as a mechanism to offset unforeseen events ( e.g., abnormal weather, regional transfers, labor strikes, unplanned outages) ; ensure reliability ; and minimize cost impacts. Fuel diversification is also a component of an “ all

- hazards ” approach to system planning, which inherently provides resilience to the B PS. The EPA estimates that an additional 49 GW of nameplate coal capacity will retire by 2020 due to the impacts of the proposed CPP. 17 When including the 54 GW of nameplate coal capacity already announced to retire by 2020 18 (mostly due to MATS), the power industry will need to replace a total of 103 GW of retired coal resources by 2020 , largely anticipated to be natural

- gas

- fired NGCC and CTs. Considering the current and ongoing shift in the resource mix, the EPA proposes to further accelerate the shift , le ssening the industry’s diversification of fuel sources

. As observed during the 2014 polar vortex , 19 the relationship between gas

- fired generation availability and low temperatures challenges the industry ’ s ability to manage extreme weather conditions

— particularly when conditions affect a wide area and less support is available from the interconnection. The polar vortex served as an example of how extended periods of cold temperatures had direct impacts on fuel availability, especially for natural

- gas

- fired capacity. Higher

- than

- expected forced outages were observed during the polar vortex , particularly for natural

- gas

- fired generators , as a result of fuel delivery issues and low temperatures. Overall, extre me weather conditions have the potential to strain BPS reliability and expose risks related to natural

- gas

- fired generation availability (Figure 3). With greater reliance on natural

- gas

- fired generation, the resiliency and fuel diversification that is curr ently built into the system may be degraded , which NERC has highlighted in
recent gas

- electric interdependency assessment s

.

15 GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) pg. 3

- 26.
16 Clean Power Plan Proposed Rule: Goal Computation

– Technical Support Document http://www2.epa.gov/carbon

- pollution

- standards/clean

power

- plan

- proposed

- rule

- goal

- computation

. 17 Regulatory Impact Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants (EPA June 2014 pg. 3

- 32).
18 Energy Ventures Analysis maintains a complete list of announced power plant retirements in the contiguous United States, retirements as of 10/02/2014.

19 NERC 2014 Polar Vortex Review: http://www.nerc.com/pa/rrm/January%202014%20Polar%20Vortex %20Review/Polar_Vortex_Review_29_Sept_2014_Final.pdfClean Power Plan

– Ass umption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 10 Figure 3

. Causes for Generator Outages O bserved during the 2014 Polar Vortex

Pipeline Capacity Constraints During its assessment of B uilding B lock 2, the EPA concludes that the power industry in aggregate can support higher gas consumption without the need for any major investments in pipeline infrastructure. However, there are a few critical areas that likely will need additional capital invest ments. As an example, c urrent and planned pipeline infrastructures in Arizona and Nevada are inadequate for handling increased natural gas demand due to the CPP. Pipeline capacity in New England is currently constrained , and more pipeline capacity addition s will be needed as more baseload coal units retire

— this is generally occurring as projected and i ndependent of the CPP. Timing of these investments is also critical as it take three to five years to plan, permit, sign contract capacity, finance, and build additional pipeline capacity , in addition to plac ing replacement capacity (e.g., NGCC/CT units) in service

. The proposed CPP timelines would provide little time to add required pipeline or related resource capacity by 2020.

D ue to abundant availability of natural gas, the power industry is generally able to accommodate increased demand from NGCC plants that ope rat e as baseload capacity

. This higher dependence on natural gas can expose additional reliability risks, including pipeline transport ation con strain t s that could result as more gas

- fired generation is built

. Overall, the increase in natural gas use and ca pacity expansion increases gas

- electric interdependency issues and raises the following concerns :

 NGCC units could displace coal

- fired generating units as baseload units, forcing less

- efficient coal units out of service, further increasing demand for natural gas

.

 Adequate timing is required to add new pipeline and generation resource capacity where it is needed to offset coal plant retirements and supply natural gas to new generation.

 As gas

- electric dependency significantly increases, u nforeseen events like the 2014 polar vortex could disrupt natural gas supply and delivery for the power sector in high

- congestion regions, increasing the risk for potential blackouts

. 

### Fuel Supply and Delivery

• Natural gas interruptions

• supply injection

• compressor outages

• one pipeline explosion

• Oil delivery problems

• Inability to procure gas

• Fuel oil gelling 

### Extended Low Temperatures

• Low temperature limits for wind turbines

• Icing on hydro units

• Failed auxiliary equipment

• Stress of extended run times

• Frozen instrumentation (drum level sensors, control valves, and flow and pressure sensors)Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 11 

### Building Block 3
– Clean Energy

Buildin g B lock 3 describes the EPA’s method to reduce CO 2 emissions by investing in zero

- CO 2 - emitting energy

sources ( i.e. , nuclear and non

- hydro renewable generation )

.
Review of EPA Assumptions and Potential Reliability Impacts Building Block 3 includes the assumption about the preservation of nuclear generating units that are currently at risk of being retired within the next two decades due to (1) age, (2) an increase in fixed operation and maintenance costs, (3) relatively low wholesale electricity prices, and (4) additional capital investment associated with ensuring plant security and emergency preparedness. The EPA assumes that 5.7 percent of each state’s nuclear generating capacity is at risk of retirement

. However, the EPA included this generation as w ell as the five new nuclear units currently under construction (Watts Bar Unit 2 (TN), Summer Units 2

- 3 (SC), and Vogtle Units 3

- 4 (GA)) in its state

- by

- state CO 2 emission rate goal calculations. 20 The nuclear retirement assumptions add pressure to states that will need to retire nuclear units. For these states, more CO 2 reductions from other measures than originally estimated by the EPA may be required.
Under its draft CPP, the EPA also proposes significant expansion of non

- hydro renewa ble generation as part of its BSER determination. The EPA adopted a methodology to estimate non

- hydro renewable generation by state and year and applied these estimates in their calculation of individual state emission rate limitations. T he greater the EPA ’s assumed non

- hydro renewable generation in a given state, the lower the state’s calculated CO 2 emission rate limit.

The EPA assumes that qualifying non

- hydro renewable generation will grow from 213 TWh /year in 2012 , to 281 TWh/year by 2020, reaching 523 TWh/year by 2030. These projections exceed the Energy Information Administration (EIA) non

- hydro renewable generation forecast in their Annual Energy Outlook 2013 (AEO 2013) that grows from 202 TWh/year in 2012 , to 275 TWh/year by 2020, to reach 317 TWh/year by 2030 for all sectors. 21 The EPA

- assumed rapid growth in non

- hydro renewable generation exceeds its own forecast in the EPA’s R eg ulatory I mpact s A ssessment (356 TWh/year by 2030)

. 22
To calculate the state target levels of renewable energy perform ance, the EPA examined mandatory state Renewable Portfolio Standard ( RPS ) requirements from the Database for State Incentives for Renewables and Efficiency (DSIRE). 23 RPS requirements vary widely by state; many states include resource

- specific percentage re quirements (i.e. , set

- asides) that promote development of certain resources in addition to their general requirements. The database distinguishes the complex web of state policies by applying them to a standardized tier system which , according to DSIRE , helps “to compare RPS policies on equal footing.” 24 To determine the state effective levels in 2020, the EPA added each state’s tiers together and excluded secondary and tertiary tiers that include energy efficiency or qualified fossil fuels (waste coal, c arbon capture sequestration, etc.). The only RPS “type” considered was the primary type, referring to requirements for investor

- owned utilities (IOUs). Significant regional differences exist in the availability of renewable resources and their power produc tion costs across the United States. In order to quantify these regional differences , the EPA divided the lower 48 states into six regions, based on designations by NERC R egions and ISO/ RTOs. After the regions were assigned, the EPA averaged the 2020 effec tive levels for
states that have mandatory RPS percentage standards. By applying the average regional renewable energy ( RE ) percentages to each region’s aggregate 2012 generation, the EPA derived a new RE target generation level for 2030. The EPA note s tha t Alaska and Hawaii were assigned RE generation target percentages equal to the lowest value of the six regions, equivalent to the Southeast’s target. The EPA assumes that RE generation will begin increasing in 2017 and continue through 2029. Moreover, they assume no growth occurs in between 2012 and 2016. The E PA derived the annual growth factor by determining “the amount of additional renewable generation (in megawatt

- hours) that would be required beyond each

20 GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) pg. 4

- 33.
21 Annual Energy Outlook 2013 (EIA April 2013) reference case data.

22 Regulatory Impact Analysis for the Proposed Carbon Pollutio n Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants (EPA June 2014) Table 3

- 11 pg. 3

- 27.
23 http://www.dsireusa.org/.

24 DSIRE. DSIRE RPS Field Definitions. April 2011. http://www.dsireusa.org/rpsdata/RPSFieldDefinitionsApril2011.pdf p.1.Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 12 region’s historic (2012) generation to reac h that region’s RE target” 25 by 2030. This constant growth rate is then applied to each state to obtain annual state RE target levels. The EPA’s reliance on state RPS standards to compute the regional performance targets poses a variety of issues. States’

m ain

- tier RPS qualifications vary significantly and , in addition to in

- state non

- hydro renewable generation , also often include: hydroelectric generation, municipal solid waste (MSW), combined heat and power (CHP), clean coal, carbon capture and sequestrati on, and energy efficiency measures

. As an example, New York has an RPS percentage of 30 percent

. 26 According to the New York Renewable Portfolio Standard Cost Study Report produced by the New York State Department of Public Service , hydroelectricity contrib utes 18.25 percent of total generation and is included under baseline renewables. 27 New York’s RPS percentages , therefore , include the state’s hydroelectric generation as qualifying renewable resources, which is different from what the EPA assumed in its methodology. In addition to hydroelectric power, energy efficiency plays an important role in various states’ RPS s

. North Carolina’s RPS includes a provision that allows up to 25 percent of its target to be met by energy efficiency gain s. This provision, if it were properly excluded by the EPA, would reduce North Carolina’s RPS target to 7.5 percent from 10 percent , thereby lowering targets for the entire S outheast region, Alaska , and Hawaii. W hen establishing 2012 non

- hydro renewable ge neration performance levels, the EPA exclude d all hydroelectric generation and energy efficiency programs used in the state CO 2 emission rate calculation s . The adjusted state RPS targets , as well as 2012 non

- hydro RE performance levels , are used to determi ne the regional RE targets and regional annual growth rates.

NERC notes several other concerns with the CPP ’ s assumption for Building Block 3, such as:

 M ultipliers given to select resources ’ options (e.g. , in

- state, wind, solar, etc.). Six states (CO, DE, MI, NV, OR, and WA) give extra credit (up to 3.5 renewable energy credits per 1 MWh of energy produced) for using these

resources. 28 Excluding the multiplier suggests a target that is ultimately higher than what may actually be attainable.

 The use of qualif ying out

- of

- state renewable generation resources in effective RPS target calculations. Most RPS programs allow out

- of

- state qualifying renewable resources toward RPS compliance. For example, several Indiana wind projects account for nearly 50 percent of th e Ohio RPS requirement. This issue is important since states realize that much of the lower

- cost renewable resources may come from outside the state in locations more suitable for VERs

. The underlying assumption

— that the state RPS reflects in

- state renewab le capability that can be matched by the other states in their census region

— appears incorrect and could only be dealt with via a regional state approach similar to a regional greenhouse gas initiative

. In order to properly account for regional renewable resource potential, the EPA should consider including only in

- state renewable resource portions of the state RPS s

.

 T he EPA me thod of assigning renewable regions is questionable . Of the six renewable regi ons created in the lower 48 states, targets for two regions (South Central and Southeast) were set based upon a single

- state RPS. For example, the South Central state region (AR, KS, LA, NE, OK and TX) was set based upon only the Kansas RPS. Kansas account s for only 6 percent of this region’s retail power sales and has the third

- best wind resources in the country. Given the combination of a low population, large land area , and very high wind resource availability, Kansas has relatively low costs to meet its RPS. However, Louisiana (ranked #48 in wind resources and double the retail sales ) is assigned the

same non

- hydro renewable target. To put these two states in the same region sets unattainable targets for Louisiana.

 T he EPA’s determination of state goals for renewable generation does not fully reflect the economic aspects of renewable resources. Resource limitations exist due to permitting, market saturation, transmission access , and project financing issues. Many prim e wind locations have difficulty obtaining the necessary permits and are often objected to at the local level. Many high

- grade wind sites are also located in remote areas. Energy generated from

25 GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) pg. 4

- 18

. 26 http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code= NY03R&re=0&ee=0

. 27 http://www.dps.ny.gov/rps/Appendix

- B

- 2

- 19

- 04.pdf

. 28 DSIRE http://www.dsireusa.org/

.Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 13 these locations require s large capital investments to build tr ansmission infrastructure to interconnect to the BPS. L ocation matters , and sites with high capacity factors are limited.

 The expiration of the production tax credits (PTCs) and potential reduction of the investment tax credits (ITCs) for RE resources in t he coming years will impact investment decisions and the economics of new resources. As a result, the marginal cost of new RE generation increase s , which could impact the long

- term development of RE resources. There is also the implicit need to increase an cillary services as a result of the increased variable resource output. Moreover, there are higher production costs associated with more non

- hydro renewable generation due to a combination of increased capital costs and low

- capacity operating factors. Over all, significant cost uncertainties will directly impact the electric industry ’ s plan to quickly adapt to the CPP requirements. Finally, grid reliability issues associated with increased variable resources are not directly addressed in the EPA ’ s proposed Building Blocks . Conventional generation (e.g., steam and hydro), with large rotating mass, has inherent operating characteristics, or ERS s , 29 needed to reliably operate the BPS. These services include providing frequency and voltage support, operating rese rves, ramping capability, and disturbance performance. Conventional generators are able to respond automatically to frequency changes and historically have provided most of the power system ’s essential support services. As variable resources increase, syst em planners must ensure the future generation and transmission system can maintain essential services that are needed for reliability.

A l arge penetration of VERs will also require maintaining a sufficient amount of reactive support and ramping capability. More frequent ramping needed to provide this capability could increase cycling on conventional generation. This could contribute to increased maintenance hours or higher forced outage rates, potentially increasing operating reserve requirements. While
sto rage technologies may help support ramping needs, successful large

- scale storage solutions have not yet been commercialized. Nevertheless, storage technologies support the reliability challenges that may be experienced when there is a large penetration of VERs , and their development should be expedited. Based on industry studies and prior NERC assessments, 30 as the penetration of variable generation increases, maintaining system reli ability can become more challenging. Additional assessments, including inte rconnection

- wide studies, will be needed as the resource plans unfold to better understand the impacts. If the states fall short of meeting the renewable energy targets established by the EPA, more CO 2 reductions from other measures may be required than we re estimated by the EPA . These measures include more coal unit retirements, expanded natural gas

- fired generation plants, or energy efficiency deployment.

T he CPP proposes reductions in CO 2 emissions by investing in zero

- CO 2 - emitting energy sources (i.e., nuclear and non

- hydro renewable generation). However, increased reliance on VERs create s reliability challenges that take considerable time to implement and require substantial changes in BPS planning and operations. Most notably, the challenges with this B uilding B lock are:

 The CPP analysis relies on resource projections that may overestimate reasonably achievable expansion levels and exceed NERC and industry plans and do not fully reflect the reliability consequences of renewable resources.

 Increased reli ance on VERs can significantly impact reliability operations and requires more transmission and adequate ERSs to maintain reliability

.

 W ith a greater reliance on VERs, transmission and related infrastructure expansion lead times may not align with the CPP implementation timeline.

29 See NERC’s Essential Reliability Services Task Force website for more information: http://www.nerc.com/comm/Other/Pages/Essential

- Reliability

- Services

- Task

- Force

- (ERSTF).aspx

. 30 NERC

- CAISO Joint Report: Maintaining Bulk Power System Reliability While Integrating Variable Energy Resources

– CAISO Approach ; other industry r eports include those developed by the Integration of Variable Generation Task Force (IVGTF) ; Integrating Variable Renewable Energy in Electric Power Markets: Best Practices from International Experience (Appendix D)

.Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 14 

### Building Block 4
– Energy Efficiency

Electricity savings from enhanced e nergy e fficiency measures are assumed as a major reduction in U

. S

. power generation requirements and thereby lower U

. S

. power industry CO 2 emissions. In calc ulating individual state CO 2 emission rate limits, the EPA assumes that existing state energy efficiency programs can be significantly expanded to achieve 108 TWh in cumulative savings in 2020, continue to grow to 283 TWh by 2025 , and reach 380 TWh by 2030. 31 The EPA’s estimated future energy efficiency program performance will have significant effects on state compliance measures and costs. Review of EPA Assumptions and Potential Reliability Impacts I n its Regulatory Impact Assessment , the EPA assumes that energy efficiency will grow faster than electricity demand, with total electricity demand shrinking beyond 2020. The implications of this assumption are complex. If such energy efficiency growth cannot be attained, more carbon reduction measures would be required , primarily from reduced coal generation in most states. More low

- emitting or new NGCC/CT generating capacity (not regulated under the CPP ) would need to be built. Construction of new replacement capacity , as well as related infrastructure , would take time to plan, permit, finance , and build. If these needs are not identified at an early enough stage, either grid reliability or state CO 2 emission goals could be compromised.

The EPA relie d on 12 state studies to set its expanded annual program target savings improvement rate at 1.5 percent per year

. However, the EPA appears to overestimate most state s’ energy efficiency savings potential versus prior energy efficiency projections , resulting in setting performance targets too high for individual states

. 32 Savings potentials are highly state specific in their consumer mix, credit for measures already taken, and levels of subsidies provided. The EPA applies one national energy efficiency growth factor to all state situ ations and does not consider energy efficiency program performance or cost. The discrepancies are subsequently compounded by extrapolating these annual energy efficiency performance targets as incremental improvements that can be sustained through 2030

— bey ond the 12 stud ies evaluated. Out of 12 studies, 11 contain multiple scenarios with different sets of assumptions to demonstrate wide ranges of what is achievable under alternative financial, technological, and behavioral environments. There is no documen tation on how each study’s respective average annual improvement rate was calculated, which was used as the foundation to calculate the incremental performance improvement target of 1.5 percent per year

. The assumed base year is of critical importance whe n comparing multiple studies’ achievable potential for energy efficiency. When drawing comparisons between percentages, the baseline level of electricity demand must be the same; otherwise, the total amount of energy avoided due to energy efficiency measur es would be different. Under the CPP, all energy efficiency savings are applied to Business As Usual ( BAU ) sales forecasts generated from EIA

- 861 data. 33 Base years used in the 12 studies range from as early as 2007 to as recent ly as 2013 and are not consistent throughout the sample. 34 Comparing achievable energy efficiency potential percentages is therefore difficult , since BAU electricity demand levels are incon sistent between the studies. Study length is another important assumpt ion regarding the sustainability of achievable savings. It is uncertain whether the level of annual energy efficiency savings could be sustained after the expiration of the program , as the most cost

- effective and impactful measures would have been utilized already

— leaving only increasingly expensive incremental energy efficiency

measures. The cited studies vary significantly in length : from as few as four years, to as many as 21 years.
The CPP assumes that dividing cumulative potential by the study length provides an adequate estimation for an average annual achievable potential that is sustainable over a much longer ( 13

- year ) period (2017

– 2030)

. However, there is a discrepancy in the longitudi nal application of cross

- sectional studies.

31 EE savings estimates calculated using EPA’s methodology, EE savings %, BAU sales estimates. Source: GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) Chapt er 5.
32 Electric Power Research Institute (EPRI) and EIA.
33 Annual Electric Power Industry Report (EIA 2012) (EIA 861 Data).
34 GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) pg. 5

- 65.Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 15 The CPP assumes an average life of 10 years for energy efficiency measures. This average does not fully capture the unique distribution of the length of measure s when analyzing regionally available energy efficiency measures. Key assumptions when determining energy efficiency potential are “ breadth of sectors and end uses considered, study period, discount rate, pattern of technology penetration, whether economically justified early replacement of technolog ies is allowed for, whether continued improvement in efficiency technology is provided for , ” 35 yet the EPA applies a broad average rather than determining individual measure life curves. Most of the source studies perform bottom

- up approaches and evaluate
t housands of permutations of measures, building types, climate zones, market penetration factors , and measure lives to determine which energy efficiency technologies to include and exclude. By approximating thousands of measure lives using one average, the CPP does not capture measure life disparities and possibly underestimat e s the amount of energy efficiency savings that expir e throughout the compliance period. While the studies on energy efficiency consider different potentials for the three main sectors (residential, commercial, and industrial), the CPP uses one number across all sectors in its emission rate calculation. Industrial processes are designed to use as little energy as possible in order to maximize profits of daily operations and may have alr eady invested in energy efficiency programs , leaving minimal and costly opportunities remaining for incremental improvement. Applying the same energy efficiency potential percentage for all three sectors indirectly provides incentives for industrial utilit y customers to reduce their energy load proportional to residential customers, but by a much greater magnitude per capita. The underlying state and regional studies used as the base for calculati ng the 1.5 percent potential include the full range of finan cial incentives from 25 to 100 percent, when considering base, low, and high cases. Since the EPA uses an averaging method in translating from the observed studies’ sector and scenario findings to the final average annual projected potential , it is difficu lt to evaluate the financial incentives that are assumed in both the B uilding B lock calculations and study results.

The EPA used the EIA’s AEO 2013 baseline forecast to estimate its BAU electricity sales forecast. Growth rates calculated by the National Energy Modeling System (NEMS) region were applied to state

- level 2012 retail sales from the EIA

- 861 survey to arrive at an annual BAU sales forecast. These growth figures include the net effect of implicit forms of energy efficiency, as that info rmation is not explicitly presented in AEO 2013 reference case. Because the EIA does not explicitly model energy efficiency as a forecast line item, the retail sales growth is skewed for the purposes of calculating the energy efficiency B uilding B lock

. Th e EIA present s some metrics to gauge energy efficiency in the AEO 2013 model results. Energy intensity, defined as energy use per dollar of GDP, represents the aggregate effects of energy consumption trends and a rising national output. Electricity
energy intensity, in particular, has been on a steady decline in both consumption per dollar of GDP and consumption per capita. This is due in large part to energy efficiency, but its contribution is difficult to isolate. The EIA’s AEO 2013 energy load growth pro jections include implicit forms of energy efficiency measures , and the proposed CPP does not appear to account for these savings. This effectively double counts the savings of some energy efficiency measures and results in state

- specific energy efficiency targets that are too high to be considered reasonably achievable. With potentially overstated expectations for energy efficiency savings , the EPA’s demand forecast results in a decline in electricity use between 2020 and 2030. While other major power mark et forecasters’ electricity sales compounded annual growth rates (CAGR s ) for the period between 2020 and 2030 are strictly positive (AEO 2013: 0.7 percent , EPRI: (achievable
p otential) 0.4 percent , NERC average of assessment studies: 1.5 percent), the EPA assumes a CAGR of

- 0.2 percent for the same time period. Between 2020 and 2030, the EPA assumes incremental year

- over

- year reductions from energy efficiency to be almost 41 TWh nationally on average, outpacing year

- over

- year national electricity sales grow th of 31.6 TWh, on
average

. The main reason for this result is the EPA’s assumption of states being able to sustain an annual incremental growth rate in energy efficiency savings of 1.5 percent once achieved. As mentioned above, this sustainability is not supported by any peer

reviewed or technical studies of energy efficiency potential.

35 GHG Abatement Measures (EPA June 2014) (EPA

- HQ

- OAR

- 2013

- 0602) pg. 5

- 22.Clean Power Plan

– Assumption Review

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 16 By overestimating efficiency savings resulting in declining electricity retail sales, the results of the EPA’s entire R egulatory I mpact A ssessment are concerning from a rel iability perspective and have implications to electric transmission and generation infrastructure. Underlying electricity demand forecasts directly influence the required level of generation

— and hence, CO 2 emissions

— from existing and affected generating units under the CPP

. They also affect the required new construction of generating units that are needed to meet expected electricity demand , which is projected to increase during the next 10
years. 36

The EPA projection for energy efficiency growth at a 1.5 percent annual increase is substantially greater compared to what NERC examined in its current and prior long

- term reliability assessments (LTRAs)

. NERC collects energy efficiency program data that is embedded in the load forecast for each LTRA assessment area

. Projected annual energy efficiency growth as a portion of Total Internal Demand since 2011 has ranged from only 0.12 to 0.15 percent, as shown in the table below.

Table 1 . 2011

– 2014 LTRA Energy Efficiency Growth

LTRA 10

- Year Growth of EE (%) Portion of Total Internal Demand (%) Annual Growth in Relation to Total Internal Demand (%) Year 1 Year 10 2011 10.7 0.59 1.63 0.12 2012 12.2 0.72 1.88 0.13 2013 11.6 0.92 2.02 0.12 2014 13.4 0.87 2.25 0.15 In summary , the CPP assumes energy efficiency gains outpace electricity demand growth through the compliance period. However, this assumption does not reasonably reflect energy efficiency achievability and is a departure from normalized forecasts. If states are unable to achieve the EPA target savings, additional CO 2 reduction measures beyond BSER measures would be needed to meet the proposed rate limits

— primarily through further reductions in existing generation or expansion of natural g as and VERs

. The energy efficiency assumptions underpin the CPP proposal and present the following reliability issues:

 The EPA appears to overestimate the amount of energy efficiency expected to reduce elect ricity demand over the compliance time frame. The results of overestimation have implications to electric transmission and generation infrastructure needs.

 Substantial increases in energy efficiency programs exceed recent trends and projections. Several s ources, including but not limited to NERC, EIA, EPRI, and various utilities, have published reports, analysis, and forecasts for energy efficiency that do not align with the CPP ’ s assumed declining demand trend.

 The CPP assumption appears to underestimate costs and may underestimate the capital investments that would be required by utilities to sustain energy efficiency p erformance through 2030.



###  The offsetting requirements in more coal retirements , along with expansions in natural gas and VERs , in a constrained time period could potentially result in reliability or ERS constraints.

36 NERC 2014 Long

- Term Reliability Assessment

.Reliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 17 

## Reliability Impacts Potentially Resulting from the CPP

To meet the proposed C PP emission reduction levels, the states are expected to select the mass

- based limitation approach over the emission rate approach due to its greater flexibility , as well as ease to enforce and implement. T he power industry has been successful in complying with prior mass

- based emission cap and trade programs (e.g. , Acid Rain program, Clean Air Interstate Rule, and RGGI) without creating reliability impacts . T he C P P introduces potential reliability concerns that are more impactful than prior environmental compliance programs due to the extensive impact to fossil

- fired generation. Additionally, the re is potential for an accelerated decision

- making period for the impl ementation of the CPP’s Building Blocks. It is also important to consider the ongoing transformation to the resource mix and corresponding impacts on ERSs required to maintain a reliable BPS . S tate

- specific carbon intensity targets create potential reliabi lity concerns in two major areas: (1) d irect i mpacts to r esource a dequacy and e lectric i nfrastructure , and (2) i mpacts r esulting from the c hanging r esource m ix that occur as a result of replacing retiring generation, accommodating operating characteristics of new generation, integrating new technologies, and imposing greater uncertainty in demand forecasts.

Figure 4

. Summarized Reliabil ity Challenges Most importantly, generation (along with other system resources) and transmission must provide specific capabilities to ensure the BPS can operate securely under a myriad of potential operating conditions and contingencies , in compliance wit h a wide range of NERC planning and operating Reliability Standards. The above challenges warrant further consideration by policy makers. The following sections discuss these key reliability challenges in detail.



### Direct Impacts to Resource Adequacy and Electric Infrastructure Fossil
- Fired Retirements Result in Accelerated Declines of Reserve Margins In recent long

- term assessments, NERC has highlighted resource adequacy concerns, particularly in ERCOT, NPCC

- New York, and MISO, as projections continue to reflect declining reserve margins that fall below each area’s Reference Margin Level over the next five years , despite low demand growth rate ( Figure 5 )

. As most LTRA a ssessment a reas attribute stagnant demand growth to the ongoing projected economic indic ators (typically based on either employment levels or GDP) in the Impacts Resulting from the Changing Resource Mix As a result of generation retirement, replacement resources must replenish reliability needs including capacity, energy, and ERS s. Accomodating resources with different operating characteristics requires enhancements to BPS planning and operations. Fuel availability and energy limitations must be considered in reliability planning.

Increased reliance on natural

gas

- fired generation Operating reserves and ramping capability Voltage and frequency support Emerging resources

– DR and DERs Direct Impacts to Resource Adequacy and Electric Infrastructure Planning Reserve Margins quantify what is needed to deliver and meet expected demand with a target reserve margin that consid ers both planned and unplanned availability of resources and deviations from a normal demand forecast. Due to long lead times for resources and infrastructure, long

- term planning is required

— transmission is also considered.

Amount of installed and future planned generation Adequate planning reserve margins

– primary metric used for resource adequacy assessment Conventional generation retirement Transmission planningReliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 18 residential, commercial, and industrial sectors, total capacity additions have paralleled the ongoing declines in load growth

. T he trend of declining margins in a number of NERC a ssessment a reas is rooted primarily from a general reduction in 10

- year capacity additions observed over the past several years. Total capacity additions continue to fall behind the ongoing decline s in load growth rates ( Figure 6 )

. 37

* Due to changes to the WECC subregional boundaries, resulting in four subregions instead of nine, the 2014 Anticipated Reserve Margins are not shown for WECC

- BASN and WECC

- ROCK for this comparison. Figure 5

. Short

- Term (Year 2 Forecast) Anticipated Reserve Ma rgins Show Declining Trends for Some Assessment Areas

Figure 6

. NERC

- Wide 10

- Year Projected Capacity Additions Declining Since 2011

The EPA ’s supporting documents estimate that up to 19 percent of the nation ’ s coal plants will become “ uneconomical ” as a result of the proposed CPP . Although the CPP may not become enforceable until 2020, its effect may overshadow and change large retrofit capital decisions needed to comply with earlier EPA regulations

— primarily MATS. According to the EPA, the state implementation would result in a reduction in coal to 193 GW by 2025

. The EPA finalized MATS, which is factored into 2014 LTRA and identifies capacity retirements through 2016. In its Technical Support Document

– Resource Adequacy and Reliability Analysis, the EPA us ed the Integrated Planning Model (IPM) to project likely future electricity market conditions with and without the proposed CPP . The IPM assumed that adequate transmission capacity exists to deliver any resources located in, or transferred to, the individual regions. Additionally, since most regions currently have capacity above their target reserve margins, the EPA assumed most of the retirements are absorbed by a reduction in excess reserves over time. However, uncertainty remains for a large amount of existing conventional generation that may be vulnerable to retirement resulting from additional pending EPA regulations. These retirements reduce reserve margins over the course of the CPP implementation. 38

37 2011, 2012, and 2013LTRA data includes Future

- Planned capacity additions http://www.nerc.com /pa/RAPA/ra/Pages/default.aspx

. 38 EPA Technical Support Document

– Resource Adequacy and Reliability Analysis http://www2.epa.gov/site s/production/files/2014

- 06/documents/20140602tsd

- resource

- adequacy

- reliability.pdf

. 0% 5% 10% 15% 20% 25% 30% 35% 40%

11 12 13 14 11 12 13 14 11 12 13 14 11 12 13 14 11 12 13 14 11 12 13 14 11 12 13 14 11 12 13 14 11 12 13 14

MISO MAPP NPCC-New England NPCC-New

York NPCC-Ontario SERC-E SERC-N WECC-BASN* WECC-ROCK*

LTRA Year by Assessment Area

60 65 70 75 80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 2014LTRA 2013LTRA 2012LTRA 2011LTRA

Gigawatts On-Peak NameplateReliability Impa cts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 19 The EPA’s analysis assumes the electric system will maintain resource adequacy, even with the ongoing retirements from existing regulations, including MATS . In addition, because the proposed CPP will require the development of significant amounts of new generation in a short period , additional time for infrastructure development will be needed to support these

new resources. The EPA’s modeling of a potential implementation scenario predicts an additional 40

– 48 GW of fossil

- f ired EGU retirements, and the addition of 21 GW of new NGCC resources. With existing environmental regulations, the EPA’s base case projections indicate that total coal

- fired capacity will decline rapidly from 309.6 GW in 2013 to just 245 GW by 2016 , and 243 GW by 2025. The EPA’s base case

— without implem entation of the proposed CPP

— assumes a significant reduction in coal

- fired capacity by 2016 : 2 7

. 2 GW beyond what is currently projected in the 2014LTRA r eference c ase

. According to the 2014LTRA reference case, an additional 44.2 GW of fossil

- fired and nuclear capacity is projected to retire between 2014 and 2024. 39 These projections are based on the assumption that current environmental reg ulations will remain and do not account for potential imp acts from the proposed CPP ( Figure 7 )

.

Figure 7

. Cumulative Fossil

- Fuel and Nuclear Retirements between 2011 and 2024 Total 83 GW According to the EPA, the state implementation of Option 1 would result in a reduction in coal to 193 GW by 2025. Option 1 and the 2014LTRA r eference case are shown in Figure 8 and Table 2

. 40

Figure 8

. 2014LTRA Reference Case & EPA Power Plan Assumptions : Coal

- Fired Capacity

39 While the assessment period for the 2014LTRA is 2015

– 2024, projected retirements for 2014 are included in NERC’s 2014LTRA analysis.
40 Regulatory Impacts Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants (June 2014) and supporting IPM Model documentation and data. 0 10 20 30 40 50 60 70 80 90

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Actual 2014 LTRA Reference Case Gigawatts

Coal Natural Gas Nuclear Petroleum

190 200 210 220 230 240 250 260 270 280 290 300 310 320

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Gigawatts

2014LTRA Reference Case* EPA Base Case Option 1 (State Implementation)Reliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 20 Table 2

. 2014LTRA Reference Case & EPA Power Plan Assumptions NERC 2014LTRA Reference Case

- Total On

- Peak Capacity (GW) 2016 2018 2020 2025* Total Coal (Existing

- Certain and Tier 1 Capacity Additions) 271.8 266.4 264.9 261.3 EPA Analysis of the Proposed Clean Power Plan

- Total Coal Generating Capacity (GW) 2016 2018 2020 2025 Base Case 244.6 243.3 243.6 243.3 Option 1 (State Implementation) 219.7 210.4 195.1 193.1 EPA Assumed Coal Reduction Beyond NERC 2014LTRA Reference Case (GW) 2016 2018 2020 2025 Base Case 27.2 23.1 21.3 18.0 Option 1 (State Implementation) 52.1 56.0 69.8 68.2

Transmission Planning and Timing Constraints Long lead times for transmission development and construction require long

- term system planning

— typically a 10

– 15

- year outlook. In addition to designing, engineering, and contracting transmission lines, siting , permitting, and various federal, state, provincial, and municipal approvals often take much longer than five years to complete. The CPP analysis assumes that adequate transmission capacity is available to deliver any resources located in, or transferred to, the region. 41 Given the significant changes and locations anticipated to occur in the resource mi x, it is likely that additional new transmission, or transmission enhancements , will be necessary in some areas. New transmission lines will be required to transport the amount of renewable generation coming online, particularly in remote areas, and that c reate s additional timing considerations. Further , as replacement generation is constructed, new transmission may be needed to interconnect new generation. Mitigating transmission constraints identified from the proposed EPA regulations in a timely way , con sistent with CPP targets , present s a potential reliability concern

. Construction of new interstate high

- voltage lines would require transmission owners to confer to state and federal laws with respect to environment impacts, siting , and permitting. A const ruction timeline for a new high

- voltage line can range from 5 to 15 years depending on the voltage class, location , and availability of highly skilled construction crew s . The construction of transmission assets is a very lengthy process starting from plann ing to the actual physical construction. It is recommended that any policies that could potentially impact the reliable operation of the transmission system also consider the associated timeline for implementing plan s

. T he location of additional transmission resources will be informed by the outcome of the transmission planning studies. T he transmission planning process will not be able to fully incorporate the impacts of potential retirements until those resource additio n requirements are made known to the system operator . F or ISO/ RTOs , this will likely not happen until the final s tate plans are developed. To support variable generating capacity increases, the power industry would need to invest heavily to expand transmi ssion capacity to access more remote areas with high

- quality wind resources . D eveloping a resource mix that has sufficient ERSs to support integration and reliable BPS operation is also a consideration . Given the natural wind variability in these locations , incremental wind project resources would have rela tively low capacity factors (20

– 35 percent) that would require complex financial decisions to support transmission capacity.

41 Regulatory Impacts Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants (June 2014) and supporting IPM Model documentation and data. Transmission Considerations with Additional VERs The projected 30.8 GW of addition al wind and solar resources will require additional transmission to reliably integrate these resources. VERs are often built in parts of North America that are distant from the point of interconnection to the transmission system. In many cases, the location of these variable resources only meets the minimum voltage support requirements. According to the 2014LTRA Reference Case, 16 percent of new transmission projects (under construction, planned, or conceptual) identify variable resource integration as a prim ary driver.

New Transmission Project Drivers

Other Drivers 84% Variable Integration 16%Reliability Impacts Potentially Resulting from t he CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 21 NERC anticipates that after the CPP guidelines are finalized in 2015, and SIPs are developed and approved by the EPA in 2016/2017, entities will work with their state utility commissions or other appropriate governing entities to assess resource and system options. Extensive transmission reliability screening assessments will be perf ormed to support these decisions and will include comprehensive local and regional reliability analyses , which must be coordinated with states and neighboring entities. A s resource decisions are made, reliability screening will transition into the establis hed NERC reliability assessment
processes

. C onsistent with the NERC Reliability Standards, transmission enhancements to address reliability constraints will be identified, incorporated into transmission expansion plans, and coordinated with other projects locally and regionally. Because committed transmission projects typically require three to five years to be completed, and often longer for major projects with significant right

- of

- way needs, NERC is concerned that reliability

- related enhancements may not be able to be completed for a 2020 implementation.
Initial Regional Reliability Assessment of the Proposed CPP Some regions started an initial reliability assessment of the proposed CPP focused on their respective footprint s to better understand the plan ’s potential i mpacts . The initial analyses are slightly different in focus and are in varying stages of development. The key findings from recent MISO and SPP studies are provided below.

MISO MISO focused primarily on generation capacity impacts. MISO , which is based on a 14.8 percent reserve margin requirement determined by the 1

- day

- in

- 10

- year loss

- of

- load event, projects that in in 2016 it will operate at the reliability level of approximately 2

- days

- in

- 10

- year loss

- of

- load event, increasing the like lihood that resources will not be sufficient to serve peak demand. The number of expected days per year of a loss

- of

- load event is projected to increase throughout the assessment period. The proposed CPP could further exacerbate resource adequacy concerns in the MISO footprint unless additional replacement capacity is built in a timely fashion. 42 Additionally, the analysis showed that the EPA ’ s carbon proposal could put an additional 14,000 MW of coal capacity at risk of retirement. This amount is beyond the 12,600 MW within MISO ’ s footprint that is slated to retire by the end of 2016 to comply with MATS

. 43 The contributing factors driving the projected deficit include:

 Increased retirements and suspensions (temporary mothballing) due to EPA regulations and market forces and low natural gas prices

 Exclusion of low

- certainty resources that were identified in the r esource a dequacy survey

 Exclusion of surplus of capacity in MISO South above the 1,000 MW transfer from the Planning Reserve Margin requirement (PRMR ) 44

 Increased exports to PJM and the removal of non

- Firm imports 45

 Inadequate Tier 1 capacity additions 46

42 Anticipated Reserve Margin includes operable capacity expected to be available to serve load during the peak hours with firm transmission. Prospective Reserve Margin oper able capacity that could be available to serve load during the peak hour, but lacks Firm transmission and could be unavailable for a number of reasons.
43 MISO GHG Regulation Impact Analysis

– Initial Study Results

. 44 For this assessment, 1,000 MW of capacity is transferred from the MISO South to the MISO North/Central Region pending the out come of regulatory issues currently under FERC review.

45 Capacity sales (imports and exports) i n MISO depend on decisions of the respective resource owners, assuming that the tariff requirements are met (including planning of necessary transmission of both the buying and selling areas). Regarding the removal of non

- Firm imports, the MISO market moni tor double

- counted non

- Firm imports in the 2013LTRA reference case. These imports are accounted for in the Reference Margin Level (PRMR).
46 In the MISO footprint, 91 percent of the load is served by utilities with an obligation to serve customers reliably and at a reasonable cost. Resource planning and investment in resources are part of state and locally jurisdictional integrated resource plans that only become certain upon the receipt of a Certificate of Public Convenience and Necessity (CPCN).Reliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 22 SPP SPP looked at both generation capacity and transmission reliability impacts of the proposed CPP

. 47 The initial study indicated that compliance with the carbon regulations, if implemented as modeled by the EPA , will not be possible without significant investment in new generation and associated major improvements to both the electric transmission and natural gas infrastructure to accommodate new g eneration. The results indicate that by 2020, SPP’s anticipa ted reserve margin would be 5 percent , representing a capacity margin defici t of approximately 4,500 MW

. By 2024, 10,000 MW beyond current plans would be needed to maintain their reserve margin. G iven the 8

- to 10

- year timeline needed to plan for and construct these additional resources, SPP has concluded that there is not sufficient time to achieve compliance with the EPA’s interim goals, and that widespread reliability impacts are likely.

The rel iability issues identified in the initial studies will require significant upgrades to the transmission infrastructure to maintain system reliability, accommodate new generation or , when new generation is not warranted, to support the dispatch of the syste m in a manner significantly different from historical operations. Other ISO/RTOs, states, and Regions should
prepare for the potential impacts to grid reliability , especially related to the time required to plan and build transmission infrastructure. Reliability Assurance NERC Reliability Standards and Regional Entity criteria must be met at all times to ensure reliable operation and planning of the BPS

. Therefore, NERC supports policies developed by the EPA, FERC, the DOE, and state utility regulators that include a “reliability assurance mechanism,” such as a reliability back

- stop , to preserve BPS reliability and manage emerging and impending risks to the BPS.
Many utilities and ISO/ RTOs have discussed a possible reliability safety valve similar to th e one

- year compliance extension that has been used to avoid retirement

- related reliability impacts from the MATS compliance deadline. A reliability safety valve will be of limited utility if the EPA’s proposal is implemented as currently designed, and it a ppears the EPA has far more flexibility under Section 111(d) tha n was available under the Section 112 program. Accordingly, a set of reliability assurance provisions that may include a reliability backstop , as well as other measures, would be recommended t o maintain BPS reliability.

S takeholder s expressed to NERC staff their concerns regarding t he need for additional time to mitigate the impacts of the carbon regulation . The proposed timeline does not provide enough time to develop sufficient resources to ensure continued reliable operation of the electric grid by 2020. To attempt to do so would increase the use of controlled load shedding and potential for wide

- scale , uncontrolled outages . Additionally, policy changes may be required to ensure the Plann ing Coordinators and Transmission Planners perform the necessary studies and exercise the authority to implement transmission and related infrastructure solutions and assure that ERSs are provided in a timely manner.

47 SPP Reli ability Assessment of EPA 111(d) Clean Power Plan Rule http://www.spp.org/publications/SPC%20Materials%20081914.pdf

.Reliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 23 Direct Impacts to Resource Adequacy and Electric Infrastructure

Summary and Recommendations
Fossil

- Fired Retirements and Accelerated Declines in Reserve Margins: Despite low demand growth, NERC has highlighted resource adequacy concerns as projections continue to reflect declining reserve margins that fall below the Reference Margin Level in three a ssessment a reas within the next five years.

 The Regions, ISO/RTOs, and states should perform further analysis to examine the potential resource adequacy

concerns. Transmission Planning and Timing Constraints: The proposed CPP implementation is currently scheduled to begin in mid

- 2016. Some reliability impacts could be mi tigated by the construction of new (or enhancement of existing) transmission facilities; however, long lead times (e.g., 10 years) are required for transmission planning and construction.

 The EPA and states, along with industry, should consider the time r equired to integrate potential transmission enhancements and additions necessary to address impacts of the proposed CPP. Regional Reliability Assessment of the Proposed CPP: T o better understand its potential impacts , s ome Regions have started an initial reliability assessment of the proposed CPP focused on their respective footprints. The initial analyses are slightly different in focus and are in varying stages of development.

 Other ISO/RTOs, states, and Regions should prepare for the potential impacts to grid reliability, especially related to the time required to plan and build transmission infrastructure. Reliability Assurance: NERC Reliability Standards and Regional Entity criteria must be met at all times to ensure reliable operation and planning of the BPS.

 The EPA, FERC, the DOE, and state utility regulators should employ the array of tools at their disposal and their regulatory authority to develop reliability assurance mechanisms such as a reliability back

- stop. These mechanisms include timing ad justments and granting extensions where there is a demonstrated reliability need.Reliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 24 

### Impacts Resulting from the Changing Resource Mix Coal Retirements Increase Reliance on Natural Gas for Electric Power The electricity sector’s growing reliance on natural gas raises concerns regarding the electricity infrastructure’s ability to maintain system reliability when facing a constrained natural gas capacity for delivering natural gas to electric power generators. These concerns are already being articulated in l ight of gas

- electric dependency studies and analyses, and include ISO/RTOs, electricity market participants, industrial consumers, national and regional regulatory bodies, and other government officials. 48 The extent of these concerns var ies from region to region; however, concerns are most acute in areas where power generators rely on interruptible pipeline transportation as the natural gas use for generation rapidly grows.
Under the CPP , an accelerated shift in the power generation mix fro m coal to natural gas is expected to ensue. The EPA’s state limitation calculations assume a 440 TWh/year shift to existing NGCC generation from coal (376 TWh/year) and older oil

- gas steam (64 TWh /year ) generators due to re dispatched NGCC units up to a 70 percent capacity factor. I n its Regulatory Impact Assessment , the EPA projects that the natural gas market portion of total U

. S

. power generation will grow from 29 percent energy in 2013 to 33

– 34 percent from 2020 to 2030. In an analysis of the CPP prepare d by Energy Ventures Analysis (EVA), natural gas generation is found to increase by an additional 400

– 450 TWh/year and increase the gas generation energy market share to reach 35 percent in 2020, 39 percent in 2030 , and 49 percent in 2040. 49

As rel iance inc reases more on natural gas for both baseload and on

- peak capacity, it is important to also examine potential risks associated with reduced diversity and increased dependence on a single fuel type. Currently, natural

- gas

- fired resources account for large portions of both the total and on

- peak resource mix in several a ssessment a reas when considering both existing capacity and planned additions (Table 3)

. Table 3 . Assessment Areas with Natural

- Gas

- Fired Capacity Account ing for Over One

- Third of Existing Nameplate Capacity 50 Nameplate Capacity (GW) On

- Peak Capacity (GW) 10

- Year Nameplate Capacity Additions (GW) Assessment Area Gas

- Fired Portion of Total Gas

- Fired Portion of Total Tier 1 Tier 2 Tier 3 FRCC 40.2 64% 33.9 63% 10.1 0.0 0.0 MISO 69.0 39% 58.7 41% 2.8 0.0 10.0 NPCC

- New England 18.6 54% 13.3 43% 1.1 3.3 0.0 NPCC

- New York 21.0 55% 14.2 40% 0.0 3.5 0.0 PJM 80.0 43% 56.5 32% 10.0 47.5 0.0 SERC

- SE 31.2 47% 28.4 46% 0.0 0.0 2.6 SPP 32.3 40% 30.2 47% 1.1 0.7 5.7 TRE

- ERCOT 48.4 54% 45.2 63% 4.9 21.5 0.0 WECC

- CA/MX 47.7 61% 43.9 70% 5.5 6.2 0.9 WECC

- RMRG 7.2 36% 6.2 41% 1.2 0.0 0.0 WECC

- SRSG 19.5 47% 16.3 50% 0.6 1.0 3.0 With this shift toward more natural gas consumption in the power sector, the power industry will become increasingly vulnerable to natural gas supply and transportation risks. Extreme conditions, although rare, must be studied and integrated in planning to ensure a suitable generating fleet is available to support BPS reliability. While the re are several plants with dual

- fuel capability, the capability to switch to a secondary fuel can be limited during certain operating conditions. Overdependence on a single fuel type increases the risk of common

- mode or area

- wide conditions and disruptions, especially during extreme weather events. Disruptions in natural gas transportation to power generators have prompted the gas and electric industr ies to seek an und erstanding of the reliability implications associated with increasing gas

- fired generation. For example, adverse winter weather , such as that experienced during January 2014 , provided signs of natural gas supply and deliverability risks. 51 T his can be a loc al issue in areas where there is already a heavy concentration of natural gas generation.

48 See NERC’s Special Reliability Assessments on electric and gas interdependencies for more information and recommendations: Phase I and Phase II

. 49 Energy Ventures Analysis: FUELCAST

– The Long

- Term Outlook 2014, October 2014.
50 Tier 1, 2, and 3 Capacity Category Definitions are provided in the 2014 Long

- Term Reliability Assessment

. 51 NERC Polar Vortex Review Report http://www.nerc.com/pa/rrm/January%202014%20Polar%20Vortex%20Review/Polar_Vortex_Review_29_Sept_2014_Final.pdfReliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 25 While several gas pipeline construction projects are underway to increase gas deliverability, the CPP proposal accelerates th e shift toward more natural gas generation and could create additional pipeline needs. The increased demand can be addres sed with sufficient lead time (i

. e ., more than three years) , which is needed to plan, collect contracts, permit, procure , and build new pipeline. To the extent that th e CPP assumptions regarding natural

- gas

- fired capacity expansion and existing coal

- fired generation retirements are achieved , the gas and electric sectors will lean more heavily on each other

. The Availability of Essential Reliability Services Is Strained by a Changing Resource Mix The proposed CPP provides states and developers additional incentives to rapidly expand their non

- hydro renewable capacity
to displace existing coal generation. The state calculations assume that non

- hydro renewable capacity could grow rapidly by 5 percent per year, from 218 TWh /year in 2012 to reach 523 TWh /year by 2030. This incremental renewable generation represents well over twice the energy currently supplied by VERs and would be dominated mostly by new wind, and to a le sser extent, new solar capacity.

In addition , wind projects will significantly increase the demand for reactive power and ramping flexibility. Ramping flexibility will increase cycling on conventional generation and often results in either increased maint enance hours or higher forced outage rates

— in both cases, increased reserve requirements may result. While storage technologies may help support ramping needs, successful large

- scale storage solutions have not yet been commercialized. 52 S torage technologies support the reliability challenges that may be experienced when there is a large penetration of VERs , and their development should be expedited. Based on industry studies and prior NERC assessments, 53 as the penetration of variable generation increases, ma intaining voltage stability can be more challenging. Additional studies will be needed to further understand potential challenges that may indirectly result from the proposed CPP . In its role of assess ing reliability, NERC commissioned the Essential Reliab ility Services Task Force (ERSTF) with members from NERC’s Planning Committee and Operating Committee to study, identify , and analyze the planning and operational changes that may impact BPS reliability. NERC, under the ERSTF work plan and activities, has issued an initial assessment of ERS s that identif ies ERS reliability building blocks as a foundational approach for further assessment and studies. 54
Increased Penetration of Distributed Energy Resources The EPA projects that retail electricity prices will increase by $1/MWh to $18/MWh under the CPP 55 as a result of a combination of higher natural gas prices and the implementation of new carbon penalties on impacted fossil

- fired generators. 56 As retail power prices increase , some existing customers may install DERs , when economically advantageous. Depending on the price advantage, the market penetration of DERs could be substantial , creating potential reliability impacts for grid operators that lack visibility and control of these resources. Given that DERs displace grid retail sales, DERs could become a larger grid capacity planning challenge since the grid will remain responsible for being the DER site’s back

- up power supplier. Reliability issues with large onsets of non

- dispatch able resources have already created operational challenges in California, Hawaii, and Germany. Such experienced reliability challenges are:

 The loss of inertia and the loss of generating units used to control transient instability driven by the significant non

controllable generation and lack of sufficient attention to ERS s — Hawaii.

52 Pumped storage offers fast and large ramping capabilities to the BPS ; however, increases in this technology is not likely due to land restricti ons, permitting limitations, and environmental opposition. Less than 1 GW of pumped storage capacity is projected over the next 10 years. 53 NER C

- CAISO Joint Report: Maintaining Bulk Power System Reliability While Integrating Variable Energy Resources

– CAISO Approach ; other industry reports include those developed by the Integratio n of Variable Generation Task Force (IVGTF) ; Integrating Variable Renewable Energy in Electric Power Markets: Best Practices from International Experience (Appendix D)

54 NERC Essential Reliability Services Task Force

- A Concept Paper on Essential Reliability Services that Characterize Bulk Power System Reliability http://www.nerc.com/comm/Other/essntlrlbltysrvcstskfrcDL/ERSTF_Draft_Concept_Paper_Sep_2014_Final.pdf

55 Regulatory Impacts Analysis for the Proposed Carbon Pollution Guidelines for Existing Power Plants and Emission Standards for Modified and Reconstructed Power Plants (June 2014) and supporting IPM Model documentation and data.
56 According to EIA, closing coal plants will drive up natural gas prices by 150 percent over 20 12 levels by 2040, this cost rise will cause electricity prices to jump seven percent by 2025 and 22 percent by 2040. Because natural gas prices are a key determinant of wholesale el ectricity prices, which in turn are a significant component of retail elec tricity prices. Accordingly, the cases with the highest delivered natural gas prices also show the highest retail electricity prices. 2014 Annual Energy Outlook

.Reliability Impacts Potentially Resulting from the CPP

N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 26  D ERs only operate within frequency ranges that are in many cases close to nominal frequency and , therefore, frequency and voltage ride

- through capabilities are needed

— Germany.

 Increased wind and solar levels that mandate increased ramping, load

- following, and regulation capability

— this applies to both expected and unexpected net load changes. This flexibility will need to be accounted for in system planning studies to ensure sys tem reliability

— California. 

### Studies and Assessments Needed to Support Reliability
T he following assessments are needed to form a complete reliability evaluation. Table 4 provides a list of the types of studies and analysis that must be d one to demonstrate reliability, recognizing that the industry does not operate the grid without a thorough and complete analysis

.

Table 4. Study and Assessment Types Needed for a Complete Reliability Evaluation Local Reliability Assessments Area/Regional Reliability Assessme nts

 Specific generator retirement studies

 Specific generator interconnection studies

 Specific generator operating parameters

 Power flow (thermal, voltage)

 Stability and voltage security

 Offsite power for n uclear f acilities  Resource adequacy

 Power flow (regional)

 Stability and voltage security (regional)

 Gas i nterdependencies ; pipeline constraints

 Operating reserves and ramping

 System restoration/blackstart

Impacts Resulting from the Changing Resource Mix Summary and Recommendations
Coal Retirements and the Increase d Reliance on Natural Gas for Electric Power: As the industry relies more on natural

gas

- fired capacity to meet electricity needs, close examination will be necessary to ensure risks have been fully identified and evaluated. Potential issues are most acute in areas where power generators rely on interruptible natural gas pipeline transportation.

 Further coordinated planning processes between the electric and gas sectors will be needed to ensure a strong and integrated partners hip. Coordinated planning processes should include considerations for pipeline expansion to meet the increased reliance on natural gas for electric generation

— especially during the extreme weather events (e.g., polar vortex).
The Changing Resource Mix and Maintaining Essential Reliability Services : The proposed CPP provides states and developers additional incentives to rapidly expand their non

- hydro renewable capacity to displace existing coal generation. Resource adequacy assessments do not fully capture the ERSs needed to reliably operate the BPS and are generally limited to identifying supply and delivery risks.

 ISO/RTOs, utilities, and Regions, with NERC oversight, should analyze the impacts to ERSs in order to maintain reliability. Additionally, system operators and ISO/RTOs need to develop appropriate processes, tools, and operating practices to adequately address operational changes on the system.

 NERC should perform grid

- level performance expectations developed from a technology

- neutral perspective t o ensure ERS targets are met.

 The development of technologies (such as electricity storage) help support the reliability objectives of the BPS , and these technologies should be expedited to support variability and uncertainty on the BPS.
Increased Penetrat ion of Distributed Energy Resources : A potential risk in additional DERs is the temporary displacement of utility

- provided service, which could create additional planning challenges, considering utilities must act as a secondary supplier of electricity.

 ISO/RTOs and system planners and operators should consider the market penetration of DERs and potential reliability impacts due to the limited visibility and controllability of these resources.N ERC | Potential Reliability Impacts of EPA ’s Proposed Clean Power Plan | November 2014 27 

## Conclusions

This report represents NERC’s initial review of reliability concerns regarding the EPA ’ s proposed Clean Power Plan (CPP) under Section 111(d) of th e Clean Air Act . As the CPP is finalized and implemented, NERC will develop special reliability assessment s in phases

. T his initial evaluation highlights the underlying CPP assumptions and identifie s a range of potential reliability impacts of the CPP on the BPS . It is NERC ’ s intention that this document be used as a platform by industry stakeholders and policy makers to di scuss technically sound information about the potential reliability impacts of the proposed CPP.

The Building Block assumptions in the EPA’s proposed CPP are critical to NERC’s evaluation of the reliability impact s

. NERC will provide independent assessments of the BPS under a wide range of conditions that reflect the implications of the proposed policy, varied resource mix es, and impacts to transmission and will share the results with the industry and states as they d evelop their implementation plans. 

### Recommendations

1. NERC should continue to assess the reliability implications of the proposed CPP and provide independent evaluations to stakeholders and policy makers. The NERC Board of Trustees endorsed a plan for the r eview and assessment of the reliability impacts of the EPA proposal at its August 2014 Board meeting. The NERC Planning Committee should lead NERC and industry efforts in conducting the reliability assessments and scenario analyses as identified in this re port . NERC will work through its stakeholder process to solicit industry input on assessment approaches and assumptions as further special assessments and evaluations are developed

. 2. Coordinated regional and multi

- regional industry planning and analysis groups should immediately begin detailed system evaluations to identify areas of concern and work in partnership with policy makers to ensure there is clear understanding of the complex interdependencies resulting from the rule’ s implementation. Given the potential reliability concerns of the EPA’s 2020 proposed implementation date, NERC encourages the
states to begin operational and planning scenario studies, including resource adequacy, transmission adequacy, and dynamic stability, to assess economic and reliability impacts. A number of studies and analys e s must be performed to demonstrate reliability , and industry must closely coordinate with the states to ensure the SIPs are aligned with what is technically achievable within the known time constraints. A dditionally, industry should review system flexibility and reliability needs while achieving the EPA’s emission reduction goals. As a result, states that largely rely on fossil

- fuel resources might need to make significant changes to their power system s to meet the EPA’s target for carbon reductions while maintaining system reliability.

3. If the environmental goals are to be achieved, policy makers and the EPA should consider a more timely approach that addresses BPS reliability concerns and infrastructure deployments. NERC Reliability Standards and Regional Entity criteria must be met at all times to ensure reliable operation and planning of the BPS

. Based on NERC ’ s initial review , more time would be needed in ce rtain areas to ensure resource adequacy , reliability requirements , and infrastructure needs are maintained. The EPA, FERC, the DOE , and state utility regulators should consider their regulatory authority to make timing adjustments and to grant extensions t o preserve BPS reliability

. NERC support s policies that include a reliability assurance mechanism to manage emerging and impending risks to the BPS , and urges policy makers and the EPA to ensure that a flexible and effective reliability assurance mechanism is included in the rule ’ s implementation.