Judge Posner on Incentives and the Clean Air Act

Michael Giberson

What makes an old power plant new again? It is a complicated question, possibly deeply philosophic and suggestive of a zen koan. Perhaps the answer is that there is no answer. Unfortunately, that answer isn’t good enough for public policy.

The Clean Air Act requires new generators to get permits, and even old generators need permits if they are expanded. For existing generators the distinction between old and new comes down to the dividing line between “routine maintenance” and “major modifications.” For years old power plants have been kept in service through generous helpings of what utilities have described as “routine maintenance,” perhaps at the expense of replacing the old generators with new, less polluting units. The Environmental Protection Agency has been arguing with utilities in the Courts about the dividing line; one such case is heading to the Supreme Court. Tracey Davis, on the Energy Legal Blog, notes that a similar case was the subject of Judge Richard Posner’s decision in August:

The Seventh Circuit in Cinergy sided with the EPA, reasoning that Cinergy’s interpretation of the NSR provisions would give utilities an “artificial incentive” to renovate a power plant and continue using it beyond its expected lifespan, rather than replacing it with a more environmentally friendly plant. According to Judge Posner, that incentive conflicted with the intent of the Clean Air Act.


4 thoughts on “Judge Posner on Incentives and the Clean Air Act

  1. For years old power plants have been kept in service through generous helpings of what utilities have described as “routine maintenance,” perhaps at the expense of replacing the old generators with new, less polluting units.

    Indeed, the vagaries of New Source Review give ridiculously strong incentives for energy companies to keep old generators alive rather than replacing them with newer, less polluting units. A 20-year-old plant can be kept in operation, but it’s illegal to replace it with 10-year-old technology which would pollute less, because the 10-year-old technology wouldn’t be as clean as modern technology. Even though the 10 year would at least be an improvement on what is allowed.

  2. John,

    It’s worse than that. Owners are encouraged to do no more than maintain and repair old units; and, threatened with NSR suits if they improve efficiency or reduce emissions by installing improved boilers, turbine blades, etc. This despite the fact that the improved components might actually reduce the “potential to emit”.

  3. A 20-year-old power plant is not an old plant. In fact, a 20-year-old coal unit is likely to be 800MW or greater. Many (most?) of those were built to then-current NSP standards (low-sulfur “NSPS” coal), even though most were originally planned for the late 70s or early 80s. Even though they were not scrubbed, they are not the major polluters on a per-unit basis. The fossil-fired units that are really candidates for shutdown are the 150-300MW class from the 1950s and 60s. These units don’t have much book value if any, and they are very expensive to bring up to new-source standards. [Nevertheless, a scrubber-installation vendor told me a few weeks ago that a number of utilities are apparently planning scrubbers for this class of unit.]

    I mention book value because it is important for regulated utilities. Depreciation for major coal plants is probably at a 30-35-year rate, so not all of the original investment in 20-year-old plants has been recovered, not to mention investments in these plants during the past 20 years. Though the amounts on the books may be small relative to new investments, utilities will need to recover those remaining costs if/when units are taken out of service. In other words, for consumers these costs aren’t sunk yet. So, the decision to simply replace existing capacity is one that utilities and regulators need to agree upon in order to protect investors and consumers alike. They are complex decisions, but the public has a tendency to over-simplify them, even deamonizing those who have to make economic decisions that happen not to be emotionally pleasing.

  4. A 20-year-old power plant is not an old plant. In fact, a 20-year-old coal unit is likely to be 800MW or greater. Many (most?) of those were built to then-current NSP standards (low-sulfur “NSPS” coal), even though most were originally planned for the late 70s or early 80s. Even though they were not scrubbed, they are not the major polluters on a per-unit basis. The fossil-fired units that are really candidates for shutdown are the 150-300MW class from the 1950s and 60s. These units don’t have much book value if any, and they are very expensive to bring up to new-source standards. [Nevertheless, a scrubber-installation vendor told me a few weeks ago that a number of utilities are apparently planning scrubbers for this class of unit.]

    I mention book value because it is important for regulated utilities. Depreciation for major coal plants is probably at a 30-35-year rate, so not all of the original investment in 20-year-old plants has been recovered, not to mention investments in these plants during the past 20 years. Though the amounts on the books may be small relative to new investments, utilities will need to recover those remaining costs if/when units are taken out of service. In other words, for consumers these costs aren’t sunk yet. So, the decision to simply replace existing capacity is one that utilities and regulators need to agree upon in order to protect investors and consumers alike. They are complex decisions, but the public has a tendency to over-simplify them, even deamonizing those who have to make economic decisions that happen not to be emotionally pleasing.

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