Energy Hedging, Part IV

Combustion is the rapid combination of fuel with oxygen (slow combination with oxygen is known as oxidation, like rust forming on your car).  As a hydrocarbon’s carbon and hydrogen atoms rearrange themselves into carbon dioxide and water, the formation of new chemical bonds releases energy, which we can harness as heat or force to do work. If we could combust natural gas with pure oxygen, the process would indeed produce just carbon dioxide, clean water, and energy.  However, we burn natural gas in ambient air, which contains only about 20% oxygen, a lot of nitrogen, and a host of trace elements.   The high temperature of combustion causes the nitrogen and other elements in the air to reformulate into unsavory substances.  In addition, natural gas is not really pure methane, but usually contains other trace elements, such as sulfur.  As a result, burning natural gas produces a number of air contaminants in addition to carbon dioxide.

The situation is worse with coal and oil, which are far more complex hydrocarbons than natural gas.  Burning coal and oil produces substantially more carbon dioxide and nitrogen and sulfur compounds than natural gas, plus a host of carcinogenic and neurotoxic heavy metal particulates.

In 1970, Congress passed the landmark Clean Air Act (CAA) – a first step towards addressing rampant air pollution from power plants, cars and factories.  The law was then updated in 1977, 1990 and 1997.  The Clean Air Act essentially requires power plants to apply for a pollution permit.  Each plant is then granted an amount of allowable emissions; if it chooses to
exceed that amount, the company must purchase additional emission “allowances” (or “credits”) on the market.  Though the CAAis theoretically enforced by the Environmental Protection Agency, in reality it is not often enforced at the federal level, and individual states are left to fine and sue non-compliers.

One crucial gap in the Clean Air Act is the treatment of coal plants.  For the most part, existing coal plants were exempted from CAArules from the outset, because regulators believed that old coal plants would gradually be replaced by newer, cleaner plants anyway.  However, those expectations were wrong – hundreds of dirty, 50-year-old coal plants continue to operate around the country.  Pursuant to 1990 CAAamendments, these grandfathered plants would nonetheless become subject to CAAemissions standards if they were upgraded or expanded by their owners.  However, this “new source review”
provision was weakly enforced, and effectively eliminated by the White House in 2003.  In March 2005, the EPAissued the Clean Air Interstate Rule (CAIR), which mandates steep reductions in state-level SO2 and NOx emissions in the eastern half of the US, to be phased in through 2015; with this rule, it is up to the individual states to determine how to meet the
emissions limits, whether by choosing to clamp down on their old coal plants, or by other measures.

Let’s take a look at each of the major sources of air pollution created by the energy sector:

Nitrogen oxides

Nitric oxide (NO) and nitrogen dioxide (NO2) are gases formed during combustion when high temperatures cause oxygen and nitrogen in ambient air to reformulate.  About 55% of manmade NOx (pronounced “nox”) emissions come from cars and vehicles, and another 30% come from power plants.  (Don’t confuse NOx with nitrous oxide (N2O, a.k.a. “laughing gas”),

which is a greenhouse gas by-product of automobile catalytic converters.) 

Nitrogen oxides are harmful in two primary ways: they react with sunlight to form ground-level ozone (O3, a.k.a. photochemical smog, or brown smog); and they react with water in the air to make nitric acid (HNO3), or acid rain. Man-made ozone triggers 6 million asthma attacks each year, along with long-term lung tissue damage leading to increased frequency of bronchitis and pneumonia.  NOx emissions create acid rain hundreds of miles away from their source, acidifying some rivers in the Northeast to the point where all fish life is destroyed, as well as killing trees and corroding buildings.

Power plants can control NOx emissions with selective catalytic reduction (SCR) systems, which use ammonia to transform nitrogen oxides back into harmless nitrogen and oxygen.  Cars use catalytic converters for the same purpose.  Power plants can also use low NOx burners, which burn fuel in stages and at lower temperatures to prevent NOx formation in the first place. In 1990, the EPAinstituted a novel “cap and trade” system for nitrogen oxide emissions from power plants.  Each plant can decide whether to invest in emissions reduction technology to meet emissions guidelines, or to purchase emissions allowances in an open market.  Plants that have access to capital or the technological capability to cheaply reduce emissions below their allowed level can actually make money by selling their unused allowances to other power plants – overall, the total amount of emissions in the system is capped, and the cost of meeting that cap is minimized.  NOx credits trade for around $2500 per ton, and a typical new natural gas plant with SCR might spend a couple hundred thousand dollars per year on purchased credits.  Anew coal plant, in contrast, would likely pay a couple million dollars per year (due to its higher emissions rate) if all of its emissions were subject to regulation.

Sulfur dioxide

Sulfur dioxide (SO2) is a gas formed during combustion of sulfur-containing fuels.  The vast majority of SO2 emissions come from coal- and oil-burning power plants and petroleum refineries.  Sulfur dioxide is harmful in two primary ways: it reacts with the atmosphere to form soot, or gray smog; and it reacts with water in the air to make sulfuric acid (H2SO4), or acid rain. Gray smog causes lung disease, and has been a high-profile killer in urban areas ever since industrialization:  for example, in 1952, one of London’s infamous pea soup smogs killed 4,000 people in one week; in 1948, half the residents of one town in Pennsylvania died or were hospitalized when coal smog turned the midday sky black. 

Power plants primarily mitigate SO2 emissions by adding a flue gas desulphurization mechanism (FGD, or “scrubber”), which traps sulfur compounds in the emissions stream before they enter the atmosphere.  Newer coal plants sometimes use fluidized bed combustion (which employs limestone dust to absorb sulfur) or coal gasification (where coal is converted
into methane by the addition of hydrogen, decreasing the ratio of carbon and sulfur to energy output).

As with NOX, SO2 is also regulated by a cap and trade program.  SO2 allowances sell for about $700 per ton.  Due to their extremely low sulfur emissions, new gas plants only spend a couple thousand dollars per year on credits; the newest clean coal plants, in contrast, pay a few hundred thousand. Old coal plants would owe tens of millions per year — if they were not
exempted from SO2 emissions regulations.

Mercury

Mercury is one of the more recently understood pollutants.  Though children at one time used to play with the liquid metal, mercury is in fact highly toxic to the nervous system, causing mental deficiencies and birth defects.  It tends to bioaccumulate in fish, from which we then ingest it in concentrated doses. Estimates differ on what percent of environmental mercury emissions come from coal power plants (up to about 40%), versus from medical waste and car incineration or from consumer products.

Power plants can mitigate mercury emissions by injecting absorbent activated carbon into flue gases.  However, the specific profile of the best mercury mitigation technology can differ from plant to plant, based on particular characteristics of the flue gas temperature, pressure, and composition.  In March 2005, the EPAissued the first-ever mercury emissions regulation,
which will ultimately reduce total mercury emissions from coal-fired power plants by 70% across the country.  As of this writing, debate is still ongoing as to the details of an enforcement mechanism, and state governments are beginning their analyses of whether to simply enforce the EPAregulation as is or issue a more stringent one.

Particulates

Particulate emissions are a mixture of microscopic solids (metals, soil, dust, allergens) and liquid droplets (water, acids, organic chemicals) suspended in air.  About one third of man-made particulates are produced by vehicles (primarily diesel ones), another third by power plants (primarily coal ones), and another third from routine household activities and road dust.

While particulates many not be the fanciest pollutant in terms of chemistry, they have gradually become recognized as one of the most serious.  Fine particles of soot in the air cause asthma, heart arrhythmias, heart attacks, and lung cancer.  Particulates are now known to be directly responsible for approximately 64,000 premature deaths per year, or double the number of

deaths from car accidents.

Diesel cars and trucks use an oxidation catalyst or simple fabric filter to remove particulate matter from their emissions streams.  Similarly, coal power plants use baghouses (large fabric filters) or electrostatic precipitators, which pull particles out of flue gases using an electric charge.  In 1997, the EPAtightened its regulations on particulate matter to cover suspended solids as small as 2.5 microns in diameter (compared to the previous 10 micron limit).

Carbon monoxide

Carbon monoxide (CO) forms when inadequate oxygen is available in combustion to form carbon dioxide.  This problem of incomplete combustion occurs primarily in cars and household appliances.  Carbon monoxide is well-known as a suicide aid, but in lower doses in the atmosphere, it causes fatigue and contributes to heart problems over time. Catalytic converters help prevent CO formation, in addition to their primary function of nitrogen oxide reformulation.  In addition, gas stations in many
states now sell oxyfuel – gasoline enriched with extra oxygen — to ensure sufficient supply for complete combustion.

Carbon dioxide

Carbon dioxide (CO2) is a large volume product of hydrocarbon combustion. About 40% of human CO2 emissions in the U.S. come from power plants, and another 25% from cars.  Carbon dioxide is a greenhouse gas that contributes significantly to ongoing anthropogenic climate change.  While companies are experimenting with carbon sequestration techniques to remove it from exhaust streams, the only current commercially viable mitigation options are to (1) increase combustion efficiency and thus use less fuel per unit of energy output, or (2) not use fossil fuels.  The U.S. presently has no regulations in place for carbon dioxide emissions from any source.  However, recent adoption of the Kyoto Protocol in most major industrial countries may increase voluntary compliance in the U.S. and put pressure on it to eventually implement emissions restrictions.

Proposals for the updating of air pollution regulations abound in Congress,the White House, industry lobbies, consumer groups, and environmental advocacy organizations.  The most anti-environmental positions favor creating new standards for all plants that would be weaker than current CAA standards, across the board.  More pro-environment groups have proposed
simply enforcing the existing CAA, which would result in a significant incremental reduction in emissions. 

The debate is contentious, with utilities lobbying in earnest to play for time. As a result, industry observers generally expect to see tighter national-level air emissions controls materializing in the 2012 timeframe or later.  In the meantime, many individual states have taken matters into their own hands, and gone forward in implementing stricter emissions rules to protect their citizens’health.  The New England states, in particular, have implemented very strict sulfur dioxide and nitrogen oxide regulations, and are in the process of working on carbon dioxide standards.