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**5. XX**  **Sensitivity Analysis of the**  **Social Costs of New Generating Sources.** Section 5. X explains why EPA believes that, given expected energy demand along with fuel and capital prices, new conventional coal capacity is unlikely to be constructed over the t ime horizon of interest in this analysis. As part of this explanation we provide an illustrative, but representative, comparison of the relative private costs of constructing and operating new conventional coal and natural gas combined cycle systems to pro vide the same generation services (see Figure 5.4). 1 This comparison shows that, at forecast relative fuel prices, there is a significant difference in the levelized cost of these two generating technologies. However, in the context of a social welfare an alysis, the appropriate comparison between multiple options is on the basis of benefits and costs to society as a whole , and not solely the private cost to an investor. From the perspective of society, the appropriate cost comparison should account for the pollution damages associated with the competing generation technologies in addition to private generating costs. This section further explores the social costs of this NSPS standard across a wide range of natural gas prices, a key factor in the cost of the policy. It begins by estimating illustrative environmental damages per MWh for coal relative to gas generation and then uses those estimate to conduct an illustrative breakeven analysis for the social costs of the policy. 5. XX .1 Illustrative environm ental damages per MWh As discussed in Section 5. 10 , the damages associated with emissions from new sources of electricity generation are greater for coal
- fired units than for natural gas combined cycle units (even when accounting for compliance with EPA’s recent Mercury and Air Toxics Standard). To gauge the general effect of accounting for both the private and external costs of electricity generation for new generation options we continue with the illustrative example from Section 5.10. By external cost s we mean the damages associated with pollution that are not accounted for in the private investor's decision making. 2 To illustrate the external costs associated with new generation options we combine the illustrative emission profiles for the new units, as provided in Table 5
- 4, and the illustrative damage estimates discussed in the

1 By fixing generation in this comparison, we are assuming that both technologies generate the same benefits in the form of electricity gen erating services. For a discussion of the usefulness of a levelized cost analysis, and when it provides informative results and when it does not, see for example Joskow 2010 and 201 1. 2 See Baumol and Oates, 1988.DRAFT DELIBERATIVE – INTERAGENCY REVIEW

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previous section. 3 Specifically, for each generating technology we multiply the CO 2 emissions by the estimates of the SCC and add that to the SO 2 emissions multiplied by the PM 2.5 - related SO 2 benefit per
-ton estimates 4, subsequently dividing by MWh 5 to estimate the external costs per unit of generation. Using this approach the damages associated with generation from the illustrative new coal unit are, depending on the discount rate and epidemiology study used, $1 8 to $ 99 per MWh, while damages associated with the illustrative new natural gas combined cycle unit are $3 to $29 per MWh (2007$). 6 For any specific epidemiology study and SCC estimate the pollution damages associated with new coal generation in this illustrative, but representative, example are significantly higher than those associated with new natural gas combined cycle generation. For example, considering the SO 2 per ton damages based on Pope et al. 2002 using a 7 % discount rate and the SCC estimate based on the 3% discount rate, new generation based on conventional coal in this example would result in an additional $ 24 per MWh in pollution damages compared to a new NGCC plant. Alternately, damages that reflect the SO 2 per ton damage estimate based on Laden et al. 2006 using a 3% discount rate and the SCC estimate based on a 2.5% discount rate suggest an additional $5 2 of pollution damages per MWh from a new conventional coal unit compared to a new NGCC plant. Table 5 - XX reports the additional pollution damages from the illustrative new coal plant relative to the illustrative new natural gas plant given different mortality risk studies and assumptions about the discount rate. These pollution damages should be relat ively invariant across natural gas prices and other economic factors.

3 Only the direct emissions of three pol lutants (CO2, SO2, and Nox) are considered in this illustrative exercise. Other pollutants and lifecycle emissions are not considered. 4 See footnote 2 3 in section 5.11 for a description of the benefit
- per - ton values. In this exercise they are interpreted as damage per
- ton values. 5 See footnote 19 in section 5. 10 . 6 Different discount rates are applied to SCC than to the other damage estimates because CO2 emissions are long
lived and subsequent damages occur over many years. Moreover, several rates are a pplied to SCC because the literature shows that it is sensitive to assumptions about discount rate and because no consensus exists on the appropriate rate to use in an intergenerational context. The SCC interagency group centered its attention on the 3 pe rcent discount rate but emphasized the importance of considering all four SCC estimates. See the “SCC TSD,” Interagency Working Group on Social Cost of Carbon (IWGSC). 2010. Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis U nder Executive Order 12866. Docket ID EPA
- HQ- OAR - 2009 - 0472 - 114577. http://www.epa.gov/otaq/climate/regulations/scc
- tsd.pdf, for details.DRAFT DELIBERATIVE – INTERAGENCY REVIEW

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**Table 5**  **- XX**  **. Pollution Damages ($/MWh) from Illustrative New Coal Unit**  **Relative to**  **New**

**Natural Gas Combined Cycle Unit Health Co**  **- Benefits**  SCC Discount Rate **3% Discount Rate 7% Discoun**  **t Rate** 5% $17

- $3 7 $ 16 - $3 3 3% $2 5 - $4 5 $2 4 - $4 2 2.5% $3 2 - $5 2 $3 1 - $ 49 3% (95 th percentile) $5 0 - $7 0 $49

- $6 6 Notes: The range of costs within each SCC value and discount rate for conventional pollution damages pairing reflects the use of two PM2.5 - related estimates of premature mortality, Pope et al. (2002) representing the low estimate and Laden et al. (2006) represent the high estimate. Assumed coal is high sulfur bituminous with scrubber and SCR , and also in compliance with MATS. The com binations of health studies and discount rates represent lower and higher valuations of impacts of NOx and SO2 emissions in the Eastern U.S. As with the relative investment costs of a new coal unit and a new natural gas combined cycle system, a comparison of the environmental damages associated with these two technologies depends on the location under consideration and the specific fuels that would be used. An ideal social cost comparison of these technologies would account for these local circumstances (a nd consider alternative sources of generation). 7 That said, the damages associated with CO2 emissions, which is the focus of this rule, do not depend on the location of generation. Furthermore, the damages associated with sulfur dioxide emissions from a n ew very well
- controlled coal
- fired unit firing low
- sulfur coal would still be greater than the damages from a new natural gas combined cycle unit independent of the location. Other studies of the social costs of coal and natural gas fired generation provid e similar findings (Muller et. al, 2011; NRC, 2009). 8 Overall, these environmental damages suggest that, even if it were the case that the private cost of natural gas generation began to rise relative to the private cost of coal generation, there would st ill remain a substantial difference in the overall cost to society between these two technologies. In other words, the damages from air pollution suggest that, even in cases where new coal may be marginally more economic to operate, these new units are st ill likely to impose a net cost to society relative to a new natural gas plant. This idea is discussed in more detail in the next section.

7 EPA does not assert a specific location for the illustrative coal and natural gas combined cycle units and is therefore unable to specifically determine the population that would be affected by their SO 2 and NO X emissions. Therefore, the benefits for any specific unit can be very different than the es timates shown here. 8 Muller et al. 2011 conclude that, “ ...coal
- fired power plants have air pollution damages larger than their value added”, while the same is not true for natural gas plants (see Table 5). However, these comparisons are based on typical existing coal and natural gas units, including natural gas boilers, and are not sensitive to location. The NRC 2009 study shows that only the most polluting natural gas units may cause greater damages than even the least polluting existing coal plants (co mpare Tables 2
- 9 and 2
- 15). However, the NAS comparison does not compare new units located in the same place, and so some of the natural gas units with the greatest damages may be attributable to their location, and includes natural gas steam boilers, whic h have a higher emission rates per unit of generation than natural gas combined cycle units.DRAFT DELIBERATIVE – INTERAGENCY REVIEW

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5. XX .2 Social Costs Across A Range of Gas Prices
- Breakpoint Analysis Section 5. XX .1 details illustrative enviro nmental damages associated with a model coal plant compared to a natural gas plant. The social cost of a policy should account for not only the difference in private cost between the two technologies, but also the difference in the external costs (environ mental damages) associated with the two technologies. At today’s gas prices the difference in the private levelized cost for these illustrative facilities is roughly $27 per MWh in favor of natural gas combined cycle at today’s gas prices(see Figure 5
- XX ). Because the underlying economics at current gas prices favor the construction of NGCC, the proposed NSPS standard does not impose any social costs (or generate monetized net benefits). However, the net benefits from a policy interact with the relative generating costs, which in turn vary based on the prices of fuels like natural gas and coal. Because the cost of this standard is zero under EPA’s baseline scenario, and because the social costs are expected to be especially sensitive to the relatively u ncertain parameter of natural gas prices, EPA conducted an illustrative analysis of the breakpoints where natural gas prices change the sign of the social costs of the policy (holding all other parameters constant). 9 This analysis describes the pattern in social costs as natural gas prices rise across three ranges: projected gas prices, unexpectedly high natural gas prices, and unprecedented natural gas prices. **Likely Projected Natural Gas Prices.** As described in Section 5.5.1., the base case modeling that EPA performed for this rule (as well as base case modeling that EPA has performed for other recent air rules) indicates that new fossil fuel
- fired generating capacity projected to be built through 2020 will be either natural gas
- fired combined cycle gener ation or coal
- fired generation with CCS (the latter is assumed to be built with support from federal grants). As shown in section 5.XX, in ou r illustrative analysis i t is only when gas prices reach approximately $ 9.60/mmBtu, that coal
- fired generation wit hout CCS becomes competitive in terms of dollars per megawatt hour wholesale cost of electricity generation. For context, even EIA’ s most pessimistic gas sensitivity case (“low shale gas recovery per well”) only projects an electricity s ector gas price of $5.93 in 2020 (the “low shale gas recovery per play” sc enario projects a price of $6.79/mmBtu in 202 0). In other words, even under pessimistic natural gas sensitivity cases, NGCC is likely to remain the economic choice for generation over the next two de cades even in the absence of this standard. As a result, the social costs of the standard are expected to be zero.

9 In reality this is unlikely to be the case. For example, high economic growth would increase both natural gas and coal prices at the same time
- making it har der to alter the underlying cost advantage of NGCC generation.DRAFT DELIBERATIVE – INTERAGENCY REVIEW

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**Unexpectedly High Natural Gas Prices** In this illustrative analysis, at gas prices above $ 9.60/mmBTU, coal generation without CCS becomes co mpetitive with NGCC, which may mean that some new non
- CCS coal units might be constructed in the absence of the standard provided there is sufficient demand and new coal without CCS is competitive with other generating technologies . However, these coal un its would also impose social costs in the form of global warming pollution and particulate matter (as a result of SOx and NOx emissions) and this proposed standard would avoid those social costs. For example, at gas prices of $10/MMBTU, the illustrative n on - CCS coal unit would generate power for $ **[ 3]**  /MWh less than an NGCC unit 10, but result in greater pollution damages of $16

- 7 0/MWh (see table 5
- XX). 11 Under the proposed standard, if the investor buil t the NGCC unit instead the resulting net social benefit would be $ **[1 3**  **]** to **[67 ]**  /MWh. For context, we note that these circumstances are less likely than the zero cost scenario outlined above. To put this gas price breakpoi nt into historical context, $9.6 0/MMBTU is higher than any annual gas price observed over the last 10 years, and it has on ly been reached temporarily in 9 of the last 120 months. 12 13 Looking forward, the continued development of unconventional natural gas resources in the U.S. suggests that gas prices would actually tend to be towards the lowe r end of the historical range. As discussed above, none of the EIA sensitivity cases (which represent future price trajectories for both gas and coal) show scenarios where non
- compliant coal becomes mo re economic than NGCC before 202 0. **Unprecedented Natur al Gas Prices**  **.** At extremely high gas prices, the private generating costs of non
- compliant coal are significantly lower than the cost of new natural gas and the net social cost of the standard could be positive (negative net benefits) under some assumptio ns for environmental damage costs. For example, at gas prices of $1 5 /MMBTU, the illustrative non - CCS coal unit would generate power for roughly $ [36 ]/ MWh less than an NGCC unit b ut result in social costs of $16

- 7 0/MWh (see table 5
- XX). Under the proposed standard, a generator would likely build the NGCC unit instead, resulting i n a net social benefit of $[

- 19 ] to [ 34 ]/MWh. The point at which this standard would result in net social costs depends heavily

10 Assuming an increase of $6.80/MWh in the cost of gas generation for every $1/MMBTU increase in natural gas prices. AWAITING CONFIRMATION 11 Again, assuming that coal prices do not increase alo ng with natural gas prices as they historically have. See previous footnote. 12 See: http://www.eia.gov/dnav/ng/hist/n3045us3A.htm 13 It is important to note that relatively high gases prices in a single month or year will not drive the investment decision i n the technology employed for new generating units. Instead that decision will be mo tivated by expectations of relative fuel prices over the lifetime of the unit. Therefore given the historical path of natural gas prices and the forecasts for the future, it is highly unlikely that expectations of sustained high natural gas prices, to the degree necessary to drive technology choices, will be realized.DRAFT DELIBERATIVE – INTERAGENCY REVIEW

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upon the value for damages from GHGs and SO 2 ; assumi ng an SCC using a 3% discount rate in this illustrative example would generate net social costs at average gas prices of $[ 13 ] to $ [18]/MMBTU. Annual natural gas prices delivered to the electricity sector have not exceeded $ 9 .26 /MMBTU over the last 15 years . We emphasize that differences in generating costs, plant design, local factors, and the relative differences between fuels costs can all have major impacts on the precise circumstances where this standard would be projected to have no costs, net ben efits or net costs. However, based annual gas prices over the last 15 years, we project that this standard is most likely to have no notable costs, that there is some small probability that it produces net benefits, and an exceedingly low probability that it results in net costs. The analysis above focuses on two well developed control technologies, conventional supercricitcal coal and natural gas combined cycle. Because these technologies are well developed, there is significantly more certainty about operating costs than for new, emerging technologies like coal with CCS. As a result, any analysis which examines the relative social costs of coal vs. coal with CCS is considerably more uncertain and should primarily be used as a guide to the key sensitiv ities in the relative social costs. EPA compared the costs and damages for a model pulverized coal (PC) EGU using supercritical steam conditions (like the one used in the comparisons above) to and IGCC plant with a CCS system (e.g. Selexol) [SEE TECHNICAL MEMO FOR DETAIL S] EPA anal yz ed the cost and emission impacts for two scenarios. In the first scenario, partial capture achieves the proposed emissions rate of 1,000 lb CO 2/MWh gross output. This requires that approximately 31% of the CO 2 is captured and s tored. EPA has not previously developed costs for such a unit, therefore, this analysis may not fully realize all of the cost savings possible from building a unit with significantly less than 90% capture (for instance, an IGCC could be built with a conventional gas turbine, rather than one designed for higher temperature characteristics of a higher hydrogen content fuel). A 90% capture s ys tem was also examined to analyze the cost of several proposed new coal
- fired EGUs using CCS. In the near term, any new coal
- fired EGU with CCS would mostly likel y be located in areas amenable to using the captured CO 2 in enhanced oil recovery (EOR) operations. This is because EOR provides a revenue stream that is not available for other forms of geologic storage. For exam ple, the Texas Clean Energy

project 14 is planning to capture 90% of the CO 2 and sell it for enhanced oil recovery . To evaluate the potential revenues from EOR we examined two options. We considered a case where CO 2 could be sold for $45/ton based on recent DOE studies. 15 We also
14 http://www.texascleanenergyproject.com/ 15 US DOE / NETL studies have assumed a delivered CO 2 price rangi ng from $40

- $45/tonne. “Improving Domestic Energy Security and Lowering CO 2 Emissions with “Next Generation” CO 2 - Enhanced Oil Recovery (CO 2 - EOR)”, DOE/NETL
- 2011/1504 (June 2011); and “ Storing CO 2 with Enh anced Oil Recovery, DOE/NETL
- 402/1312 ( February 2 008 ).DRAFT DELIBERATIVE – INTERAGENCY REVIEW

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considered a lower revenue sensitivity where CO 2 could be sold for $15/ton (equivalent to the cost assumed for the transport and storage of CO 2 in the anal ys is). Costs for the IGCC unit with 90% capture and the ultra
- supercritical c oal
- fired unit without CCS were derived from IPM version 4.10. 16 These cost estimates are generally consistent with the range of studies estimating the cost of CCS that are available, however there is uncertainty around any such projections of technology

co sts, particularly

for earl y movers of this technology. Costs for the IGCC unit with 30% capture were derived from the costs for the IGCC unit with 90% CCS using best engineering judgment. EPA estimated the benefits associated with avoided CO2 and SO2 emis sions in a similar fashion to the one described above [REFERENCE TECHNICALMEMO INTHE DOCKET]
**Table 5 -** **XX: Illustrative Costs and Benefits for two CCS Scenarios Compared to Conventional Coal Plant (Millions 2007$)** 

**– NOTE** 

**– WILL BE REVISED TO $/MWh**  **FOR CON SISTENCY**  USPC to IGCC with 30% capture USPS to IGCC

with 90% capture Additional Gross Annual Private Costs $80.0 $130.3 Revenue from EOR $17.4 (@$15/ton) $143. 7

(@$45/ton) Net Additional Annual Private Costs $62.6 ($13. 4) Value of Quantified Benef its SCC 3% with Pope 7% $ 58 $ 109 S CC 3% with Laden 3% $ 101 $ 151 Net Benefits SCC 3% with Pope 7% ($4.6) $122.4 S CC 3% with Laden 3% $38.4 $164.4 This analysis suggests that the relative social cost of CCS compared to conventional co al is sensitive to the achieved generating costs for CCS units, the revenue stream from EOR, and the monetary value of avoided climate and other air pollution damages. However, it also suggests that, at relatively low prices for EOR revenue ($15/MWh), CCS generation can generate net social benefits compared to conventional coal generation. EPA recognizes that this illustrative analysis is somewhat novel, and requests comment on ways to incorporate uncertainty about future economic factors (and gas prices i n particular) into the consideration of the social cost of this rule.

16 http://www.epa.gov/airmarkets/progsregs/epa
- ipm/BaseCasev410.htmlDRAFT DELIBERATIVE – INTERAGENCY REVIEW

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**References for Social Cost Section** W. J. Baumol and W. E. Oates, The Theory of Environmental Policy . 2nd Edition. Cambridge University Press New York (1988). P.L Joskow. 2010. Comparing the Cost of Intermittent and Dispatchable Electricity Generating Technologies. MIT Center for Energy and Environmental Policy Research Working Paper 10
- 013. P . L. Joskow, 2011. "Comparing the Costs of Intermittent and Dispatchable Electricity Generating Tec hnologies," American Economic Review, vol. 101 :238 - 41 . N.Z. Muller, R . Mendelsohn, and W . Nordhaus. Environmental Accounting for Pollution in the United States Economy. American Economic Review . 101: 1649 - 1675. National Research of Council (NRC). 2009. Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use. National Academies Press: Washington, D.C.