What Are the Environmental Regulations Affecting the Energy Market?

May 29, 2023

Smoke billows from the stacks of cooling towers at a coal power plant.

What Are the Environmental Regulations Affecting the Energy Market?

Make Sure Your Business is Prepared to Handle Market Fluctuations Due to Federal Regulations 

Are you aware of the impact federal environmental regulations have on the energy market?

These regulations play a significant role in shaping the energy market in the United States. 

The Environmental Protection Agency in particular has a wide range of guidelines that affect energy production and price by proxy. These regulations help protect the environment and public health by limiting pollution and promoting sustainable practices in the energy sector. It’s important for businesses to be aware of them to better understand and anticipate changes in the energy market that could significantly affect their bottom line. 

In some cases, even seemingly tangential legislation will impact the energy market. One example is the recent Inflation Reduction Act, which, along with incentives to lower energy costs, included some stipulations that inadvertently increased prices across the market. The Uyghur Labor Prevention Act (ULPA) had the biggest impact when it came to renewable energy. The ULPA aims to prevent forced labor by prohibiting imports of products made in the Xinjiang region of China, where there are concerns about human rights abuses. While there is no denying the human rights imperative to eliminate forced labor, the move created severe disruptions in the creation of solar panels and, in turn, raised the cost of solar power. 

In this blog though, we want to focus on some of the recent and pending environmental regulations that may impact electricity markets. We outline some of the EPA’s top initiatives, take a quick look at the status of the Clean Air Act, and explain how we help you navigate these energy markets

SEE MORE: What Does the Inflation Reduction Act Do?

Methane Emissions 

One of the top EPA priorities is reducing methane emissions. Methane is a potent greenhouse gas with a significant environmental impact despite making up only 12% of greenhouse gas emissions. The EPA estimates methane’s impact over a 100-year period is 28 times greater than CO2. It believes the latest regulations could result in total emission reductions of about 36 million tons of methane, 9.7 million tons of VOC (volatile organic compound), and 0.39 million tons of HAP (hazardous air pollutants) over the 2023–2035 period. 

Natural Gas is composed nearly entirely of methane. Therefore, any methane regulations are likely to increase the cost of natural gas. The proposed regulations will require installing leak detection and repair equipment, applying best practices to minimize emissions during well completion and production, and lowering emissions from pneumatic pumps and controllers. They also require monitoring and reporting of emissions to ensure compliance with the updated regulations. 

How do these regulations affect energy markets? Firstly, compliance costs related to monitoring and reducing methane emissions will potentially lead to higher energy prices—both for natural gas and for the electricity produced by natural gas. Secondly, these regulations may influence production and exploration decisions, impacting the supply and availability of natural gas overall. As supplies fall, prices can also be expected to rise. 

Good Neighbor Rule

The Good Neighbor Rule requires the reduction of air pollution emissions contributing to ozone and particulate matter pollution in downwind states. First introduced in 2015, this rule was expanded in March 2023 to include reductions to ozone-forming nitrogen oxide emissions caused by power plants and industrial facilities. 

The Cross-State Air Pollution Rule mandates 22 Eastern US states to cut nitrogen oxide emissions during a specific period and establishes emission budgets and trading programs for compliance. Additionally, each state must create a State Implementation Plan (SIP) to demonstrate emission reduction strategies in power plants, industrial facilities, and transportation sources. Failure to develop SIPs requires states to adhere to Transport Rule Federal Implementation Plans (FIPs) to fulfill Clean Air Act obligations.

The Good Neighbor Plan impacts the country’s energy market in several ways. The biggest way is in shifting the mix in the economy by promoting the reduction of fossil fuels and encouraging a shift to cleaner energy. Of course, that is more of a long-term impact. In the immediate term, stricter emission reduction requirements may cause short-term supply disruptions and increased costs as facilities undergo modifications. Prices and availability of energy sources may be affected, creating a more volatile market. 

Mercury and the Mercury Air Toxics Standards (MATS)

Another EPA environmental regulation focuses on reducing mercury and other harmful air pollutants caused by fossil-fuel generation. Though the Trump administration had loosened rules on these types of emissions, the Biden administration reinstated them through the Mercury Air Toxics Standards (MATS). The value of the air quality improvements for people’s health alone totals $37 billion to $90 billion each year. That means that for every dollar spent to reduce this pollution, Americans get $3-9 in health benefits. 

Under the latest MATS regulations, power plants must meet specific emission limits, install control technologies to reduce emissions, and set up reporting and record-keeping requirements. The EPA conducts inspections to ensure compliance and can impose penalties, fines, or other enforcement actions if unmet. 

The MATS rule should lead to a cleaner energy market with a greater emphasis on low-emission and renewable energy sources. However, it may also result in higher electricity prices, and with the coal and oil industries facing reduced demand and revenues, the changing energy mix could affect grid reliability. Overall, these changes necessitate a balanced procurement approach to ensure a stable and reliable energy supply. 

The Clean Air Act and the Energy Market 

The Clean Air Act (CAA) regulates air pollution and grants the EPA the authority to draft emission standards to promote cleaner energy sources and improve overall air quality. The CAA should play a vital role in shaping the energy market by encouraging sustainable practices, reducing pollution, and protecting public well-being. In May 2023, the EPA released new rules for power plants under the CAA. Public comment is currently open. This is the third attempt the EPA is making to regulate emissions from power plants under the CAA, with the previous two – one proposed under Obama, one proposed under Trump – being struck down by courts for various reasons. This new rule attempts to solve both of the problems shown by the previous two plans, and it looks to be as solid as possible. Still, it may face challenges in court when the rule is finalized due to the impact it may have on vested interests (i.e. existing fossil fuel plants). 

Environmental Regulations & Higher Prices

The recent EPA regulations do indeed restrict our ability to produce electricity from fossil fuels. In all, this is expected to create a short-term increase in prices, since we’re restricting our ability to solve the needs of our power grid. However, it’s important to note that society as a whole will benefit from improved health, and each of the regulations will provide total net benefits, even if power bills increase. And, it’s important to note that power bills are not guaranteed to increase – there is more renewable generation capacity in the queue waiting to be built than there is total US capacity. And on average, across the US, it’s cheaper to build new renewables than it is to operate existing fossil fuel plants. And so, adding more renewable electricity to the grid may be the rare case where we can have our cake and eat it too – it looks like we’ll be able to get cleaner and cheaper electricity in the long-run. 

Why Is it Important to Have a Professional Procurement Strategy?

These are just some of the regulations impacting the energy market. The key takeaway we want our clients to have is that the energy market is affected by a lot of moving parts. That’s why it’s important to work with a professional that is not only aware of regulations already in place but also hyper-vigilant of ones that could come along in the future. 

Our energy consulting company is here to help. We specialize in customized solutions to help businesses comply with regulations, procure cleaner renewable energy sources, reduce their environmental impact, and ultimately improve their bottom line. We’ll work with you to ensure your business meets all compliance requirements while maintaining a robust and reliable energy procurement policy that can handle price adjustments based on changing supply and demand. 

With our expertise in energy procurement and compliance, we help you identify the most effective strategies for achieving your environmental and financial goals. Contact us today to learn how we can help your business thrive in the ever-changing energy landscape.