DRAFT
MEMORANDUM
To:
Paul
Augustine,
EPA/
CAMD
From:
Barry
Galef
and
Jason
Lee,
ICF
Consulting
Subject:
Impacts
of
the
CAIR
SO2
Allowance
Allocation
Scheme
Date:
March
14,
2006
One
of
the
commenters
to
CAIR
is
concerned
that
the
current
SO2
allocation
scheme
unfairly
burdens
units
that
already
have
FGD
controls.
To
illustrate
his
point,
he
provides
three
example
units
along
with
their
estimated
allowance
costs
in
phases
1
and
2
under
the
CAIR
program.
Though
the
calculation
on
the
cost
impact
of
allowances
is
correct,
the
impact
excludes
the
cost
of
installing
and
operating
FGD
controls
and
the
cost
of
fuel
switching.
We
believe
the
cost
impact
needs
to
include
the
FGD
related
costs
because
these
are
directly
related
to
the
CAIR
program.
In
addition,
the
cost
impact
should
include
the
costs
borne
from
fuel
switching
since
a
unit
with
newly
installed
FGD
control
would
more
likely
to
use
inexpensive
high
sulfur
coal.
In
this
memo,
we
calculate
the
net
impacts
of
the
CAIR
program
compared
to
the
Title
IV
by
combining
the
changes
in
allowance
costs,
FGD
control
costs,
and
fuel
costs
to
find
more
complete
costs
of
compliance.
When
the
complete
costs
of
compliance,
in
terms
of
$/
MWh,
are
compared
among
the
three
example
units,
the
units
that
already
have
FGD
controls
have
the
least
burden
to
comply
with
the
CAIR
program.

ALLOWANCE
COSTS
OF
THREE
EXAMPLE
UNITS
Exhibit
1
summarizes
the
characteristics
of
the
three
example
units
along
with
their
allowance
costs
in
phases
1
and
2.
Example
1
is
a
scrubbed
unit
while
Example
2
is
an
unscrubbed
unit
that
plans
to
install
a
FGD
control
by
2010.
Example
3
is
a
recently
built
unit
that
already
has
an
FGD.
Comparing
the
allowance
costs
to
comply
with
the
CAIR
program
in
Phase
1
and
Phase
2,
the
units
that
already
have
FGD
controls
in
operation
(
example
units
1
and
3)
have
significantly
larger
burdens
than
the
old
unit
with
no
FGD
(
example
unit
2).

EXHIBIT
1.
Three
Example
Plant
Configuration
under
CAIR
Example
1
Example
2
Example
3
Scrubbed
Before
CAIR?
Yes
No
No
New
After
Title
IV?
No
Yes
Yes
Capacity
(
MW)
500
500
600
Capacity
Factor
(%)
70%
70%
70%
Heat
Rate
(
MMBtu/
MWh)
10
10
1
9.8
Generation
(
MWh/
Year)
3,066,000
3,066,000
3,679,200
Rate
for
Determining
Title
IV
Allowances
(
lbs
of
SO2/
MMBtu)
0.35
1.2
0.15
Title
IV
Allowances
6,439
18,396
0
1
There
may
be
some
heat
rate
penalty
associated
with
installation
of
FGD
control.
DRAFT
CAIR
Allowance
Allocation
CAIR
Phase
1
Allowances
(
equivalent
in
terms
of
tons)
3,219
9,198
0
CAIR
Phase
2
Allowances
(
equivalent
in
terms
of
tons)
2,254
6,439
0
Annual
Emissions,
with
FGD
(
tons)
5,366
5,366
2,704
Allowance
Costs
Phase
1
(
5
year
total
$)
$
8,996,820
­
$
16,059,912
$
11,332,464
Allowance
Costs
Phase
2
(
5
year
total
$)
$
18,024,430
­
$
6,211,427
$
15,658,864
Allowance
Costs
Phase
1
($/
MWh)
$
0.59
­
$
1.05
$
0.62
Allowance
Costs
Phase
2
($/
MWh)
$
1.18
­
$
0.41
$
0.85
Only
example
unit
2
enjoys
healthy
gain
of
$
16
million
and
$
6
million
in
the
phase
1
and
2
respectively,
while
units
1
and
3
lose
about
$
10
million
in
phase
1
and
about
$
16
to
$
18
million
in
the
phase
2.
The
bottom
two
rows
of
Exhibit
1
show
the
allowance
cost
of
phase
1
and
2
in
terms
of
$/
MWh.
Since
each
phase
lasts
5
years,
we
calculated
the
annual
costs
in
each
phase
and
then
divided
them
by
the
generation
values
to
get
the
costs
in
$/
MWh.

Using
the
number
of
allowances
given
to
the
units
under
the
Title
IV
in
Exhibit
1
and
the
Title
IV
allowance
prices
forecast
by
IPM,
we
have
calculated
the
allowance
costs
to
each
units
under
the
Title
IV.
The
IPM
summary
report2
for
the
Title
IV
suggests
that
the
prices
range
from
$
245
to
$
388
during
the
years
2010
and
2020.3
Exhibit
2
shows
how
the
allowance
costs
under
the
Title
IV
would
affect
each
example
units
during
the
phase
1
and
2
years.
Example
units
1
and
2
would
gain
(
with
the
unit
2
having
a
larger
gain)
while
example
3
would
suffer
a
loss.

EXHIBIT
2.
Allowance
Costs
on
Three
Example
Plants
under
Title
IV
Example
1
Example
2
Example
3
Allowance
Costs
Phase
14
(
5
year
total
$)
­
$
1,468,389
­
$
17,838,070
$
3,701,776
Allowance
Costs
Phase
2
(
5
year
total
$)
­
$
1,852,380
­
$
22,502,810
$
4,669,808
Allowance
Costs
Phase
1
($/
MWh)
­
$
0.10
­
$
1.16
$
0.20
Allowance
Costs
Phase
2
($/
MWh)
­
$
0.12
­
$
1.47
$
0.25
Calculating
FGD
COSTS
We
calculate
the
cost
of
FGD
control
only
for
unit
2,
because
it
is
the
only
one
to
install
the
FGD
control
specifically
for
CAIR
program
compliance.
Units
1
and
3
already
have
the
FGD
controls
so
the
costs
would
be
borne
under
the
Title
IV
as
well
as
the
CAIR
program;
thus,
the
net
impact
of
CAIR
on
their
FGD
costs
would
be
zero.

To
calculate
the
cost
of
FGD
control,
we
import
the
capital
and
O&
M
costs
of
FGD
used
in
IPM.
We
assumed
the
capital
cost
to
be
$
200.47/
kW
and
the
fixed
O&
M
to
be
$
9.04/
kW­
Year.
Both
2
The
Title
IV
prices
are
based
on
the
IPM
run
219b_
BC_
16b.
3
From
the
IPM
summary
report,
allowance
prices
2008­
2012:
$
245;
2013­
2017:
$
317;
2018­
2022:
$
388.
4
For
the
purpose
of
comparison
to
the
CAIR
program,
we
kept
the
terminology
of
phase
1
and
2
for
the
relevant
years
under
the
Title
IV
program.
DRAFT
CAIR
Allowance
Allocation
the
costs
vary
with
an
economies
of
scale
factor5
of
0.58.
The
variable
O&
M
cost
is
assumed
at
$
1.7/
MWh.
Applying
these
assumptions,
Exhibit
3
shows
the
annualized
capital
and
O&
M
costs
and
the
costs
in
terms
of
$/
MWh
for
unit
2
EXHIBIT
3.
Capital
and
O&
M
Cost
of
FGD
Controls
Example
2
Annual
Capital
Cost
$
12,028,200
Annual
Fixed
O&
M
Cost
$
4,520,000
Annual
Variable
O&
M
Cost
$
5,212,200
FGD
Costs
in
Phase
1
($/
MWh)
7.10
FGD
Costs
in
Phase
2
($/
MWh)
7.10
Fuel
Costs
under
the
Title
IV
and
the
CAIR
We
assume
that
example
units
1
and
3
would
consume
the
same
type
of
coal
under
the
Title
IV
as
well
as
under
the
CAIR
program
because
they
already
have
FGD
installed.
Unit
2,
however,
would
switch
to
inexpensive
high­
sulfur
coal
because
the
newly
installed
FGD
would
remove
most
of
the
sulfur.
To
calculate
the
difference
in
fuel
cost
between
the
Title
IV
and
the
CAIR
program,
we
assumed
that
the
unit
would
use
either
a
BA
or
BB
type
coal
under
the
Title
IV
and
would
use
a
BG
type
coal
under
the
CAIR
program.
6
Exhibit
4
shows
IPM's
projected
prices
for
BA/
BB
and
BG
bituminous
coal
from
2008
to
2022.
Applying
these
prices
and
heat
rate
of
10
MMBtu/
MWh,
the
fuel
costs
for
unit
2
are
in
the
range
of
$
10.76/
MWh
­
$
13.26/
MWh
and
$
10.24/
MWh
­
$
12.90/
MWh
in
Phase
1
and
2
under
the
Title
IV
and
$
8.70/
MWh
and
$
8.28/
MWh
in
Phase
1
and
2
under
the
CAIR
program.

EXHIBIT
4.
Price
of
Bituminous
Coal7
2008­
2012
2013­
2017
2018­
2022
BA
Bituminous
Price
under
Title
IV
($/
MMBtu)
$
1.34
$
1.29
$
1.29
BB
Bituminous
Price
under
Title
IV
($/
MMBtu)
$
1.10
$
1.04
$
1.00
BG
Bituminous
Price
under
CAIR
($/
MMBtu)
$
0.89
$
0.84
$
0.81
The
Net
Impact
of
the
Total
Costs
Exhibit
5
shows
the
net
impact
of
CAIR
compliance
on
total
costs
by
combining
allowance
costs,
the
cost
of
installing
and
operating
FGD
controls,
and
the
savings
of
switching
fuel.
The
net
cost
impacts
on
unit
2
are
greater
than
for
other
two
units.
Thus,
in
terms
of
net
impacts
5
The
capital
cost
of
$
200.47/
kW
is
for
a
unit
sized
500
MW.
For
any
other
sized
units,
we
apply
the
economies
of
scale
factor
with
following
equation:
capital
cost
*
(
500/
MW)^
Economies
of
Scale
Factor
6
The
BA
or
BB
type
coal
is
a
typical
low
sulfur
bituminous
coal
and
the
BG
type
coal
is
high
sulfur
bituminous
coal.
We
have
calculated
the
costs
based
on
both
the
BA
and
BB
type
coals
because
the
price
difference
between
the
two
types
are
not
small.
7
The
Title
IV
prices
are
based
on
IPM
run
219b_
BC_
16b
and
the
CAIR
prices
are
based
on
IPM
run
219b_
CAIR_
16b.
DRAFT
CAIR
Allowance
Allocation
between
the
CAIR
program
and
the
Title
IV,
an
unscrubbed
unit
that
has
been
emitting
higher
SO2
would
have
a
bigger
burden
compared
to
units
that
have
already
reduced
SO2
emissions
under
the
Title
IV
program.
This
higher
burden
is
directly
related
to
the
fact
that
CAIR
would
require
the
incremental
expenses
of
installing
and
operating
an
FGD,
while
the
costs
of
an
FGD
are
already
being
borne
by
the
other
units
in
the
baseline
even
in
the
absence
of
CAIR.
This
analysis
shows
that
focusing
only
on
allowance
costs
gives
a
misleading
picture
of
the
true
impacts
of
CAIR
on
different
facilities.

EXHIBIT
5.
Net
Impact
of
the
Combined
Costs
Example
1
Example
2
Example
3
Net
Impact
of
the
Combined
Costs
Phase
1
($/
MWh)
$
0.68
$
1.18
­
$
3.68
$
0.41
Net
Impact
of
the
Combined
Costs
Phase
2
($/
MWh)
$
1.30
$
2.07
­
$
4.73
$
0.60
