Photo Courtesy of Xcel Energy
PUC's new cost guidelines could make coal-fired power less viable.

A late-December regulatory decision will increase the weight Minnesota utilities give in their integrated resource planning to the social and environmental costs of carbon-dioxide emissions, reducing the competitive advantage enjoyed by fossil-fueled powerplants over renewable-energy power generation.

The decision's immediate impact will be felt only in Minnesota, but it comes at a time of growing national concern over climate change caused by CO2 emissions from power generation, and it could foreshadow similar action by regulators in other states.

On Dec. 19, the Minnesota Public Utilities Commission (MPUC) agreed to update the values used to calculate the external costs of fossil-fueled power generation mandated by a 1993 state statute.

Externalities are "costs associated with the environmental and health effects of producing electricity that are not part of the cost of the product," says Jim Alders, energy strategy consultant at Xcel Energy, Minneapolis.

Examples are climate change driven by CO2 emissions and asthma caused by small- particulate emissions: Both represent costs that must be paid, but society must pay them if the emitting powerplant's owner does not. Externalities "are used to evaluate generation alternatives in resource planning," says Alders. "In theory, if given a great deal of weight, externalities could affect the powerplant added to the system, resulting in a plant more expensive than alternatives with greater emissions."

Environmental groups have targeted two 750-MW coal-fired units of Xcel's Sherburne County Generating Station, Becker, Minn., for retirement, and their economic viability could be reduced when the externality values are updated. The statutory values set in the mid-1990s have been adjusted for inflation through 2012, but the proposed update the environmental groups are recommending, based on the federal social cost of carbon, would increase the value for CO2 emissions by 1,500%, if the proposal of $36 per ton is adopted. Xcel must submit its next resource plan to MPUC in July, but the update may take 18 months.

Utilities use technological solutions for externalities, such as emissions of sulfur dioxide, nitrogen oxides and particulate matter, without unduly raising rates. No postcombustion technology that can remove CO2 from emissions is commercially available, but "technologies that improve coal-plant heat rates may be employed," says Bruce Braine, American Electric Power Co. vice president, strategic policy analysis. "U.S. EPA is expected to issue a proposal for greenhouse-gas emissions from existing powerplants in June. It is not possible to say, at this point, what may be required to mitigate CO2 emissions."

The calculation of externality costs is hotly debated. "AEP does incorporate a market price on CO2, beginning in 2022, that we use to simulate the market impacts of the future Environmental Protection Agency regulations. We do not believe that the use of a social cost of carbon is at all appropriate for resource planning," Braine says. "Use of a carbon price also could influence future investment and retirement decisions for coal units."

Several regional carbon-trading systems exist, allowing utilities to include the cost of CO2 emissions in their long-term resource planning, and PUCs in many Western states require utilities to assume future CO2 regulation in their resource plans, says Sheryl Carter, Natural Resources Defense Council.