Minutes of the<MeetNo1> 3rd Meeting

of the 2014 Interim


<MeetMDY1> August 15, 2014


Call to Order and Roll Call

The<MeetNo2> 3rd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> August 15, 2014, at<MeetTime> 10:00 AM, in<Room> Room 171 of the Capitol Annex. Senator Jared Carpenter, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Jared Carpenter, Co-Chair; Senators Joe Bowen, Ernie Harris, Ray S. Jones II, Bob Leeper, and Brandon Smith; Representatives Rocky Adkins, Dwight D. Butler, Hubert Collins, Leslie Combs, Tim Couch, Jim Gooch Jr., Keith Hall, Martha Jane King, Tanya Pullin, Tom Riner, John Short, Kevin Sinnette, John Will Stacy, Fitz Steele, and Brent Yonts.


Guests: Dr. Len Peters, Secretary, Energy and Environment Cabinet and Mr. John
Lyons, Assistant Secretary for Climate Policy, Energy and Environment Cabinet.


LRC Staff: Janine Coy-Geeslin, Stefan Kasacavage, and Kelly Blevins.


The July 18, 2014 minutes were approved by voice vote, without objection, upon motion of Representative Hubert Collins and seconded by Representative Keith Hall.


Kentucky’s Energy and Environment Landscape

Dr. Len Peters, Secretary, Energy and Environment Cabinet, presented a brief history of Kentucky’s coal markets and greenhouse gas (GHG) regulation. Secretary Peters stated that he was hoping that the US Environmental Protection Agency (EPA) would provide flexibility on compliance options and timeframes for GHG rules. The proposed existing source rule appears to give Kentucky some flexibility. However, an adequate compliance plan will still be a challenge for Kentucky.


After an in-depth study with input from utilities and utility experts, Dr. Peters said the cabinet found boiler efficiency gains on individual coal units would not likely be a significant compliance option for GHG rules. Carbon capture and storage research and development were funded by the General Assembly a few years ago, and that work is continuing. Recently, there was a ribbon cutting ceremony for a carbon capture pilot project at the E.W. Brown Generating Station of LGE/KU.


Dr. Peters talked about the legislative and legal history of GHG policies. Kentucky’s electric generating portfolio is already changing, even without new regulations. He discussed how to moderate electricity price increases because of the impact on Kentucky manufacturing.


Since the late 1990s, there have been dozens of GHG-related bills introduced in Congress. The most noteworthy were the McCain-Lieberman Stewardship Act (2003); the Lieberman-Warner Climate Security Act (2008); and the Waxman-Markey American Clean Energy and Security Act (2009). Only the Waxman-Markey bill passed one house. EPA’s proposed rule for existing electric generating units and the proposed rule for new construction power plants represent the most significant energy and environmental policy in the past 40 years. Dr. Peters emphasized that it is a very profound change in the direction of energy and environment policy and is only rivaled by the Clean Air Acts in the late 1960s and early 1970s. Regardless of the outcomes of any legal challenges to EPA proposed rules 111(b) and 111 (d), many utilities are making plans as though carbon constraints are inevitable.


CAA section 111(b) is the rule for new emission sources, and section 111(d) is for existing power plants. Both rules 111(b) and 111(d) must be considered together. Rule 111(b) sets limits for natural gas-fired power plants at 1,000 pounds of CO2 per mega watt per hour (lbsCO2/MWh) and for coal-fired power plants at 1,100 lbsCO2/MWh. Today, coal-fired power plants with existing controls operate between 2,000 and 2,100 lbsCO2/MWh, and natural gas-fired power plants operate around 800 lbsCO2/MWh. EPA retains more authority with Rule 111(b). The states just adopt the rule. The Kentucky Energy and Environment Cabinet (EEC) has submitted comments on Rule 111(b).


The proposed rule 111(d) for existing sources was issued June 2, 2014, and establishes state-specific CO2 intensities. Every state is treated a little differently under the proposal and provides multiple pathways for compliance. States will establish implementation plans by working with stakeholders and legislatures to get those plans in place. Ultimately, EPA will have to approve any plans submitted for compliance with rule 111(d).


Court actions regarding GHG emissions control started in 2007 with a U.S. Supreme Court ruling in Massachusetts v. EPA. There was an “endangerment” finding relative to CO2, a GHG light duty vehicle ruling, and a GHG tailoring ruling. In 2012, a U.S. Court of Appeals upheld EPA’s actions with respect to all three rulings. On June 23, 2014, the U.S. Supreme Court upheld EPA’s authority to regulate GHGs under the Clean Air Act.


Dr. Peters stated that this is a global issue and that the impact on all 50 states is not equal. There may be some disagreement among scientists on certain details. However, none of them disagree that CO2 is a GHG, and the higher the concentration in the atmosphere, the more radiated heat from Earth is trapped. Some refer to this as the greenhouse effect. Nationally and internationally, public opinion polls are showing support for actions to limit GHG emissions. Polls show citizens expect some action with regard to GHG. Dr. Peters wanted to make clear that talking about climate change should neither be equated with accepting certain proposed solutions nor be perceived as being anti-coal. The cabinet is looking for the best solution for Kentucky.


Dr. Peters talked about the history of GHGs, going back to 1859 when British scientist, John Tyndall considered CO2 a heat-trapping gas. In the late 1890s, a Swedish Nobel-prize winning physicist in Chemistry, Svante Arrhenius did some very detailed calculations and predicted that if the heat-trapping CO2 were to double, then the Earth’s mean temperature would rise about 5 degrees Celsius. He estimated that this rise would take 2,000 to 3,000 years. About a decade later, he revised the time period to one or two centuries. In the 1950s, Charles Keeling, an American scientist, started gathering CO2 data on Mauna Loa, Hawaii. Some scientists consider this the best CO2 data available.


Dr. Peters reported that when he began teaching atmospheric pollution/pollution control in the early 1970s, the concentration of CO2 was 330 parts per million, and when he stopped teaching in 2000, the concentration of CO2 had increased to 370 parts per million. In 1987, EPA created a scientific panel of individuals from major universities and other federal agencies. Dr. Peters and numerous others were asked to meet and discuss these issues, including what they needed to do in terms of assembling data.


Climate change indicators come from a variety of sources. Examples are arctic sea ice, global surface temperature, and sea level. Dr. Peters said all of the indicators do present evidence of climate change. How much of the change is man-made is a contentious subject. Dr. Peters stated that he saw a report from some Australian scientists which concluded that 2/3 of glacier melting is due to man-made activities.


May 9, 2014, was the deadline for comments on the proposed rule for new sources, CAA Section 111(b). In June, EPA issued a proposed rule for existing sources, and the deadline for comments is October 16, 2014. Dr. Peters said the cabinet is working hard to put together meaningful and relevant comments that will address concerns as well as points of agreement. The final rule for new sources should be issued shortly before the rule for existing sources. Dr. Peters thinks that the final rule for existing sources will be issued about June 3, 2015, so that states can begin working on an implementation plan for the next year. This is a difficult timeline for states. Dr. Peters said that states had more flexibility and more time to implement plans dealing with sulfur dioxide and nitrogen dioxide which are far less complicated issues.


Dr. Peters said that the cabinet's comments on Section 111(b) new sources stressed that carbon capture and storage (CCS) is not commercially ready. The technology for extracting CO2 out of the flue gas stream is feasible but is not an economically viable option. The cabinet is still working on issues of appropriate storage. The cabinet contends that CCS cannot be used as a system for emission reduction because it is not yet commercially available. The second issue that appears in the cabinet's comments is that the rule inappropriately sets energy policy and constitutes a significant energy action. EEC’s argument is that EPA does not have authority to set energy policy. EEC recommended an alternative standard of 1700 lbsCO2/MWh because super-critical and ultra-supercritical coal combustion can get to that number. EEC also has some concerns about properly considering costs and benefits.


Dr. Peters discussed the proposed rule for Section 111(d). Emission targets vary among the states. Forty nine of the 50 states have different targets or regulations. Vermont has no carbon emitting power plants. Kentucky’s proposed statewide fleet standard between 2020 and 2029 is 1844 lbsCO2/MWh. Currently, Kentucky is at 2100 lbsCO2/MWh. The final goal to be achieved by 2030 is 1763 lbsCO2/MWh. Kentucky received the second lowest standard in terms of carbon intensity and some contend that the state should be happy with that standard. Dr. Peters stated that EEC is not happy because it is not Kentucky has the flexibility needed. The rule allows a range of options for compliance including multi-state approaches and energy efficiency gains. It provides for fuel switching to natural gas, nuclear, or renewables. EEC argued strongly that energy efficiency should be included in the range of options for compliance. EEC believes that the rule, as currently stated, would not strand recently installed environmental controls.


Prior to the GHG regulations, a mercury and air toxic (MATS) regulation was beginning to be implemented. By 2020, EEC believes average fleet emissions will be approximately 1,890 lbsCO2/MWh which is only two and one-half percent higher than the proposed average of 1,844 lbsCO2/MWh. The reduction will occur as a result of the MATS regulation not because of the GHG regulations. Dr. Peters stated that EEC wants to make sure Kentucky gets credit for those reductions. In 2020, it is estimated that 78 percent of Kentucky’s projected electricity generation will come from coal, 19 percent from natural gas, two and one-half percent from hydro, and one-half percent from biomass.


Dr. Peters reported that Kentucky is seeing older coal power plants being closed. The average age of coal-fired plants in Kentucky is 43 years. In the United States, the average age of coal plants before retirement is 60 to 65 years. Kentucky has an aging coal fleet, so section 111(b) for new sources is of great concern for Kentucky.


Concerns about section 111(d) rule raise many difficult questions. EPA estimates that plants can get up to six percent boiler efficiency by fine tuning with fans and turbine blades. These estimates are based on a report from Sargent and Lundy study that some people have said was inaccurate. Sargent and Lundy does a lot of work with electric utilities. Dr. Peters stated that over twenty stakeholder meetings have been held and more are scheduled. Meeting participants have been included utilities, environmental groups, the Kentucky Association of Manufacturing, and the Kentucky Chamber of Commerce. Utilities believe that the best possible efficiency improvement at the source is three percent. They believe that six percent is not feasible.


Engineers are concerned with the transition from rate-based to mass emissions-based compliance. There are complex multi-state issues including issues surrounding the role of independent system operators (ISOs) and regional transmission operators (RTOs). Kentucky has four RTO organizations which differ significantly: PJM Interconnection LLC, Midcontinent Independent System Operators, Tennessee Valley Authority, and LGE-KU. This presents complexities which do not arise in states that have only one type. The proposed regulation is unclear on which utility should get credit for renewable energy if it is sold out of state. Section 111(d) involves power where it is generated and not where it is consumed.


Dr. Peters said it is critical for Kentucky to improve energy efficiency because this reduces the amount and impact of CO2. All of Kentucky’s energy efficiency programs are partnerships. Kentucky Home Performance is EEC’s partnership with Kentucky Housing Corporation. How$mart On-Bill Financing is a method for financing home energy improvements. It is a partnership with the Mountain Association for Community Economic Development. EE Modular Buildings is a modular efficiency program in which EEC partners with Southern Tier and Kentucky Highlands Investment Corporation. EEC is also working with the University of Kentucky on its Energy Efficiency Awareness and Action Program.


Dr. Peters informed the committee that EEC is educating Kentucky citizens in many ways. In the commercial area, EEC has a Local Government Energy Retrofit Program working with the Department for Local Government. EEC is working with the Kentucky School Boards Association on the Kentucky School Energy Managers Program. When Governor Beshear took office, the program had twelve schools that were Energy Star. Today, Kentucky has 256 Energy Star schools. EEC is also working with the Governor’s Office of Agricultural Policy in the On-Farm Efficiency and Production program. EEC has an Integrated Live Energy Management program in partnership with Fayette County public schools. Low cost loans for state affiliated buildings are offered through the Kentucky Green Bank program. The Kentucky Finance and Administration Cabinet administers this program and the Commonwealth Energy Management and System Control System.


On the industrial side of energy efficiency initiatives, EEC recently started a combined heat and power program with the Kentucky Association of Manufacturers, universities, utilities, and environmental groups. There are also programs with individual corporations. Through TVA settlement funds, EEC has funded a major mechanical system upgrade at the LORD Corporation in Bowling Green, Kentucky. EEC offers the Industrial Energy Efficiency Services program in partnership with the University of Louisville.


Dr. Peters finished up with a picture of where Kentucky is currently with respect to the proposed GHG rules and what happens next. The Section 111(d) proposal needs considerable clarification. EEC is asking questions of EPA and talking to Kentucky stakeholders about their interpretation of certain parts of the rule. EPA is the only entity that can provide the clarification needed. By 2030, 25 percent of existing coal-burning facilities will be retired. By 2040, between 55 percent and 60 percent of those facilities will be retired. Reducing the impact on rates will require that utilities have options and the ability to diversify their energy portfolios. Kentucky’s economy could be severely compromised if ways to moderate price increases cannot be found.


Representative Couch questioned the importance of climate change to American citizens and the polls mentioned by Dr. Peters at the beginning of the meeting. Dr. Peters agreed that there are very few polls that rank GHG control high among respondents' concerns and stated that it will always be jobs and the economy at the top. Dr. Peters said that the polls show many people believe that there should be some GHG emission control. Representative Couch stated that he had not seen polls with that type of question but would like to see them, and Dr. Peters said he would provide them.


Dr. Peters further stated that there are multiple factors affecting the coal industry in the United States. Kentucky cannot ignore the impact of natural gas prices, the new and existing environmental regulations, and the cost of coal.


In response to Representative Riner’s statement that the economic and national security of the United States could be compromised by retiring coal fired plants, Dr. Peters said Kentucky’s economy is probably impacted more than any other state because of its large manufacturing base. For that reason, the national economy could be compromised as well. However, some states see benefits from the pressure on utilities to diversify their fuel sources. Iowa is the central point for a major wind turbine industry. Kentucky’s largest concern is how rising rates will impact manufacturing industries and the 220,000 jobs there. Dr. Peters said he is not sure where China and Germany are going in terms of energy sources. In response to Representative Riner’s question about national security implications of the proposed GHG regulations, Dr. Peters said military leaders are saying that having appropriate control of GHGs could be necessary to mitigate environmental impacts in developing countries. However, Dr. Peters stated that he was not a national security expert.


Senator Smith asked Dr. Peters if the Special Subcommittee on Energy or the General Assembly would get an opportunity to review EEC’s comments and response to EPA. Dr. Peters said the Governor will be reviewing the comments, and draft comments will be shared with many stakeholders. Draft comments will not be available until mid September. EEC will make an effort to share the comments or an outline of the comments with the Committee, but there is limited time to respond.


Representative Steele asked Dr. Peters where the United States ranked in GHG emissions compared to the rest of the world. Dr. Peters said that, until recently, the United States was the highest because per capita energy use was the highest. In the last few years, China has become the leader in GHG emissions because of its population.


Representative Adkins stated that the impact of regulations on Kentucky has meant direct and indirect job losses in Appalachia and will mean higher electricity prices. Representative Adkins stated that reliability of the electric grid is the real issue for energy and wants to know if it will be part of EEC’s comments to EPA. Dr. Peters responded that Kentucky’s energy policy should be an all-of-the-above strategy for base load electricity which would include coal, natural gas, and nuclear. He stated that eliminating one of those from the energy portfolio is not good national policy and creates national security and national reliability problems. Dr. Peters stated the Science Advisory Board for EPA is setting up a group of economists to consider cost/benefit analysis of the proposed regulations. Talina Matthews will be a Kentucky voice on that board. Dr. Peters agrees that reliability is the biggest energy concern and will be part of the comments to EPA.


Representative Gooch expressed concern that the federal government is making decisions without regard to the rest of the world. Representative Gooch also mentioned the language of HB 338 (2014 regular session) on primacy. Dr. Peters stated that putting together a plan that has minimal impact on electricity rates within the new regulatory constraints will be a challenge. Dr. Peters further stated that it is important to put together a plan that EPA will approve because EPA will implement its own plan if the state plan is not approved.


There being no further business, the meeting was adjourned.