Under both Trump and Obama, power plant owners get little certainty on greenhouse gas rules

Key Points
  • Utilities were in limbo while President Barack Obama's effort to regulate greenhouse gas emissions got stuck in a court battle.
  • The Trump EPA is proposing a more favorable framework for coal plants, but analysts say the agency is in no rush to apply rules.
  • The regulatory uncertainty makes it more difficult to fully assess the wisdom of power plant investments.
A truck delivers coal to Pacificorp's 1440 megawatt coal fired power plant on October 9, 2017 in Castle Dale, Utah.
Getty Images

The Trump and Obama administrations have at least one thing in common when it comes to energy policy: Both have kept power plant owners in the dark about greenhouse gas rules.

The Environmental Protection Agency this week proposed repealing the Clean Power Plan, President Barack Obama's signature effort to reduce greenhouse gas emissions from American power plants. The agency said it would begin a new rule-making process, but some analysts say electric utilities are unlikely to get any clarity in the coming years.

The drastic swing — from prioritizing the fight against climate change under Obama to protecting the coal industry under President Donald Trump — marks a break from the past, when power plants could typically expect more moderate policy shifts between administrations.

To the extent government is not giving those clear signals, I consider that a substantial regulatory failure.
David Littell
Regulatory Assistance Project principal

Democrats and Republicans "both seemed to have decided that their regulatory agenda is more important than certainty for businesses," said James Coleman, professor of energy law at Southern Methodist University Law School.

"What certainty means is that you don't have drastic changes between administrations," he told CNBC. "I don't think either administration has really prioritized that."

Power plant owners know that some sort of regulation is coming. A Supreme Court ruling that carbon dioxide and several other greenhouse gases qualify as pollutants, followed by EPA's finding that those gases are a public health concern, means the agency is required to regulate them.

Harder to make investments without rules

Under Obama's plan, the EPA set emissions targets for states but left them to figure out how to achieve them. The Supreme Court put the rule on hold in 2016 after 27 states and other stakeholders sued. The D.C. Circuit Court has kept it in limbo while the new administration plotted a new course.

Current EPA Administrator Scott Pruitt, a climate-change skeptic, asserts that Obama's plan will force power plant owners to shut coal-fired facilities and invest in natural gas and renewable power. He argues that exceeds EPA's authority and has floated a regulatory framework more accommodating to coal plant owners.

Trump EPA will start rolling back Clean Power Plan

However, EPA's repeal process will likely last throughout much of Trump's first term, and it's likely to face legal challenges from environmentalists and attorneys general in liberal-leaning states. It could also be overturned if a Democrat wins the presidency in 2021.

That means utilities must continue to make investments in the facilities that generate America's power with little certainty on future regulations.

"With uncertainty, the investors and the markets ... can't fully assess the wisdom of certain planning decisions and certain investment decisions. It increases investor uncertainty," said David Littell, principal at the Regulatory Assistance Project, a nonprofit that promotes clean and efficient energy.

Littell, a former commissioner for the Maine Public Utilities Commission, says a big part of his role as a state regulator was creating clear rules so businesses can do their job.

"To the extent government is not giving those clear signals, I consider that a substantial regulatory failure," he said.

Despite legal efforts to salvage the Clean Power Plan, utilities can safely assume it will not survive as a whole, said Philip Wallach, a senior fellow at the liberal-leaning Brookings Institution. Wallach, who correctly predicted the DC Circuit Court would not issue an opinion on the Clean Power Plan, said the courts are not likely to push forward an Obama-era policy opposed by the current administration.

Little certainty coming from Trump

However, Wallach said he thinks the Trump administration is no rush to deliver certainty to the market.

"It seems pretty clear that barring some pretty radical change, that the Trump administration is just going to try to downplay the emissions control as much as it thinks it can get away with," he said. "It seems like they are just inclined to make climate just disappear from the discussion as much as is possible."

That view is echoed by Craig Moyer, chair of the land, environment and natural resources group at law firm Manatt, Phelps & Phillips.

"I think the delay accomplishes the goals of this administration. It can stamp its legacy on the future without ever having to create its own program," he told CNBC in an email.

The Trump EPA's repeal doesn't inject much fresh uncertainty into the market because the industry has been dealing with lack of direction since the Supreme Court stayed implementation of the Clean Power Plan. In his view, utilities and states have not made expensive structural decisions based on its guidelines. Further, a new rule will come with new, extended deadlines for compliance, he added.

David Cherney, energy and utility consultant at PA Consulting Group, said many power generators baked a repeal by Trump into their strategic planning. However, that will not necessarily stop progress toward cleaner-burning fuels.

"We are likely to see (and have seen) the banner of climate leadership taken up by the clean energy inclined states — we are likely to continue to see more movement there," Cherney told CNBC in an email.

The regions forging ahead most stridently are the Northeast, the Mid-Atlantic and the Western states, said Littell.

In the absence of regulatory certainty, analysts say, power companies are likely to follow the only signal available to them: the market. That will likely mean continuing to retire coal-fired plants and investing in cheap natural gas and solar and wind farms, where costs are falling fast.

"Withdrawing the Clean Power Plan won't clear the deck for new coal generation. The economics of natural gas and renewables are more favorable, now and in our future scenarios," Steph Munro, Bloomberg new energy finance policy editor, said in a statement.