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Challenge and the
Opportunity
Fossil Based Pollution and NOx Budgets
Technical Fix and Efficiency and Renewable Energy Alternative
The Set-Aside
The Results
CHALLENGE
AND THE OPPORTUNITY
For the United
State as a whole, twenty-two (22) states have to reduce NOx
emissions from power plants and other stationary sources by
64% on average. For many states in the Southeast the reductions
are even greater. At the same time, many states are wrestling
now with whether or not to introduce system benefit funds
in order to increase investments in energy efficiency and
renewable energy generation.
The integration
of energy efficiency and renewable energy development into
the environmental plan for reducing NOx emissions can be critical
for both efforts. Efficiency and renewable projects can make
compliance with NOx budgets easier and more cost effective.
Qualifying these energy programs as part of the plan for meeting
NOx budgets can provide emission credits and revenues that
can support the development of the programs.
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FOSSIL-BASED
POLLUTION
The generation
of electricity with fossil fuels releases Sulfur Dioxide (SO2),
Nitrogen Oxide (NOx), mercury and Carbon Dioxide (CO2). The
Environmental Protection Agency (EPA) currently caps the total
emissions of SO2.
In the case of
NOx, states with very bad air pollution are allowed a limited
number of NOx emission "credits" and are required to reduce
their NOx emissions to those levels. These NOx emission credits
are allocated among regulated sources such as electric generators.
Many states are
currently developing state implementation plans (SIPS) to
demonstrate how they will live within their NOx budget. There
are basically two ways to meet a NOx budget: through technical
fixes and through increased use of efficiency and renewable
energy. The EPA is currently encouraging states to develop
NOx budgets that use efficiency and renewables as a part of
the plan because they believe this method can reduce the cost
of complying.
Illustrative
Example 
The following example is largely hypothetical and is intended
to illustrate how using energy efficiency and renewable
energy can actually reduce the cost to a state of complying
with NOx limits. Lets assume the "state" in our example
generates 100 units of electricity with a technology and
fuel type that emits 1.8 units of NOx per unit of electricity.
Total NOx emissions are 180 units. EPA regulations require
the state to reduce NOx emissions to a cap of 100 units.
There are two ways to do this.One is to introduce NOx limiting
technological fixes in which case every unit of electricity
will be required to reduce emissions to one unit of NOx
per unit of electricity. The other is to use efficiency
to reduce generation and/or renewable energy to replace
fossil generation and reduce the amount of NOx emitted.
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TECHNICAL
FIX AND EFFICIENCY AND RENEWABLE ENERGY ALTERNATIVE
Technical Fix Technical fixes are generally programs
that switch fuel, modify the technical characteristics of
generators, or switch out generators from, for example,
coal fired to natural gas. If the state chooses the technical
fix, it will:
- Generate 100
units of electricity
- Reduce NOx
emissions by 80 units
- Emit 100 units
of NOx which will be offset by the 100 units of NOx allowances
budgeted to the generating units.
The state will meet
its budget limits and be in compliance.
Efficiency and Renewable Energy Alternative
An alternative method for meeting the NOx budget limit is
to use efficiency and/or renewable energy to offset NOx
emissions. For example, if electricity efficiency and renewable
generation replaced 50% of the fossil generation, then the
total NOx emissions would drop to from 180 to 90 units and
the state would be in compliance. Of course, it is not realistic
to expect a 50% reduction but the EPA does encourage the
use of conservation and renewables to reduce NOx emissions.
The EPA urges states to "set-aside" a percent of their allowed
NOx emissions for qualified efficiency and renewable programs.
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THE SET-ASIDE
Here is how a set-aside works. A percent of the total state
NOx budget is allocated to efficiency and renewable energy.
If our state sets-aside 10% of its budget that means 10 units
of NOx credits will be available for qualified efficiency
and renewable projects.
Under the EPA cap, saving one unit of electricity will save
one unit of NOx emissions. Qualified programs can save or
replace fossil based generation, claim the credit set-aside
for them, and sell that credit back to generators who will
use it as part of their overall compliance effort.
A set-aside can provide an important stimulus to the development
of energy efficiency and renewable energy development.
NOx Compliance Using a Set-Aside
Rather than using a technical fix, our state sets-aside
10 NOx credits for efficiency and renewable generation.
For this example, lets concentrate on efficiency.For the
set-aside to work, 10 units of electricity must be saved,
those programs can then claim the NOx credits and sell them
back to electric generators. Generators will buy the credits,
but at a cost equal to or less than their cost of technically
reducing NOx emissions. In addition, the total electric
bill will be lowered. Lets see how this works.
 Under
the set-aside, our hypothetical state will look as follows:
- Fossil fueled
electric generation will drop to 90 units
- Energy efficiency
or renewable energy will supply the other 10 electrical
units to consumers
- NOx emissions,
before a technical fix, will be 162 units (90 electric
units times 1.8 NOx emissions per electric unit)
- Technical
NOx reductions required will be 62 units (tons)
- Budgeted NOx
emissions will be 90 units (tons)
- Purchased
NOx credits will be 10 units (tons)
- Emissions
will be 100 units (tons) which will match the budgeted
and purchased NOx credits
The Calculations
A set-aside will lower both the cost of complying with the
NOx budget and also lower the total electric bill for the
state. To show how this works, we make a number of assumptions
and introduce a few calculations to allow us to estimate
the cost of complying in our hypothetical state.
The EPA in a
Guidance document urged states to assume that every kWh
saved, as part of a qualified set-aside program, will reduce
NOx emissions by .0015 pounds. (Using this assumption, each
kWh generated also emits .0015 pounds of NOx.)
A NOx unit is
one ton or 2000 pounds, so under the EPA guidance recommendations
1.3 million kWh emit one ton of NOx. Under the cap, our
hypothetical electrical unit equals 1.3 million kWh.
The cost for
a technical fix is estimated at $4000 per ton. We assume
that electricity costs $.05 per kWh to generate and $.025
to save.
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THE
RESULTS
Using an efficiency
set-aside will lower the cost of compliance and even lower
the total bill for our hypothetical state. It does this by
reducing the generation of electricity from fossil fuels.
This means there is less NOx to remove which lowers the compliance
cost. Because efficiency is less costly than generation, the
total electric bill will be reduced. In our hypothetical case,
the electric bill after NOx compliance is lower than before
the NOx limits were put in place. However, the advantages
of a set-aside will only be captured if a program is developed
and put in place.
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