Mr. Kiesner

Eco-Friendly Practices

"Clear Skies" Clears Way for Energy, Environmental Goals

By Steve Kiesner, Director of National Accounts, Edison Electric Institute

Diminishing supplies are one reason behind the price increases. Another, less known factor, is the Clean Air Act. The country's current approach to air quality regulation pressures power generators to use gas instead of coal for their new power plants. This has put the power industry in competition with hotels and other consumers for gas. The added demand on top of tightening supplies has driven prices to their new heights.

There is a better way. A multi-emission approach along the lines of the President's Clear Skies plan-now before Congress (S. 485 & H.R. 999)-will minimize strains on our gas supplies, while it cuts emissions faster and with greater certainty.

Electricity and Coal

The U.S. has one of the most reliable, affordable electricity systems in the world. Coal-based electric power plants are at the heart of it. Since 1970, coal use for electricity generation has risen by 171 percent. Coal now produces over 50 percent of our nation's electricity.

But beginning in the 1990s, the percentage of electricity generated from natural gas started to rise, from 12 percent to about 17 percent today. Looking ahead, the EIA projects that natural gas' share of the electricity generation mix will increase even further, rising to 29 percent in 2025. Concerns over the impact of future air regulations undoubtedly will play a part in this growth. For hotels, this projection means even more competition with the power sector for natural gas.

The main reason for the growing use of natural gas to generate electricity? The Clean Air Act. It creates challenges for every generating fuel, but none more so than coal. Coal-based generators face numerous EPA regulatory initiatives. These address power plant emissions on different time scales, with different geographic targets, and often-different criteria. For example, sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions face more than a dozen separate regulations each.

Power companies have responded to existing air regulations with extraordinary results. For example in Denver, Xcel Energy will cut SO2 emissions by 70 percent and NOx emissions by 40 percent from uncontrolled levels through voluntary efforts to retire two small generating units at one coal-based plant, and install emission-control equipment at two other coal plants. And Southern Company, one of the nation's largest electricity producers, has cut SO2 emissions by 40 percent and NOx emissions by 31 percent since 1990. By early next decade, with current legislation or with a Clear Skies-type legislation, Southern Company is looking at combined SO2 and NOx emissions to be down nearly 80 percent compared to 1990 levels. But even with efforts such as these, EPA air regulations have combined to favor using natural gas over coal for new power plants.

Gas Supplies Pushed to Limit

The natural gas supply industry has found meeting this growing demand by power generators and others a challenge. More than twice as many new wells were drilled between mid-2000 and mid-2001 than just two years prior, with almost every available rig in North America actively deployed in the field. Even with this massive increase in development activities, natural gas production never rose by more than 1.4 billion cubic feet (bcf) per day-an increase of about 2.7 percent.

There is mounting evidence that, after 20-30 years of intensive development, some of the largest gas fields in the United States and Canada are becoming depleted. Environmental restrictions and moratoria on gas drilling activity, which are increasing rather than decreasing, will further limit U.S. production levels in the near term.

Given this demand-supply imbalance, higher prices have been the inevitable result. According to recent testimony by Fed Chairman Alan Greenspan, the price of gas for delivery in July closed at $6.31 per million Btu (MMBtu). That contract sold for as low as $2.55 per MMBtu in July 2000 and for $3.65 per MMBtu a year ago. Futures markets project further price increases through the summer cooling season to the peak of the heating season next January. Indeed, according to Greenspan, market expectations reflected in option prices imply a 25 percent probability that the peak price will exceed $7.50 per MMBtu. For the past 15 years, gas prices have mostly stayed below $2.50 per MMBtu.

Clear Skies Initiative

In contrast to the cumbersome Clean Air Act, a multi-emission approach such as the President's Clear Skies proposal will cut power plant emissions-without causing power generators to switch to natural gas. The Clear Skies Act would replace the multiple, overlapping regulations of the Clean Air Act with simple, national emission limits, or caps, for SO2, NOx, and mercury. The current levels of each of these pollutants would be cut by 70 percent by 2018. The emission reductions would be firm-enforced by monitoring and large penalties for non-compliance.

Power plants would be able to buy and sell pollution credits to meet these reduction goals. This is a proven, market-based system. For many power companies, including small public power systems, meeting these emission reduction goals would be very difficult. But by relying on mandatory caps, Clear Skies would ensure that total power plant emissions would not increase over time. As a result, the Clear Skies Act would deliver air quality results that are cleaner, cheaper, and sooner than the Clean Air Act.

America's electric power companies have long encouraged the lodging industry to use its natural gas and electricity wisely. We now also encourage you to tell Congress to endorse the Clear Skies initiative. Both actions can improve our air quality and our energy prices. For more information on Clear Skies, please visit www.eei.org.

Steve Kiesner is Director of the Edison Electric Institute’s National Accounts Program. Based in Washington, D.C., Edison Electric Institute (EEI) is the association of United States shareholder-owned electric companies, international affiliates and industry associates worldwide. Our U.S. members serve approximately 90 percent of the ultimate customers in the shareholder-owned segment of the industry, and nearly 70 percent of all electric utility ultimate customers in the nation. They generated almost 70 percent of the electricity generated by U.S. electric utilities. Mr. Kiesner can be contacted at 202-508-5000 or skiesner@eei.org Extended Bio...

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