Morningstar Magazine - June/July 2017 - 77

EXHIBIT 4

Decarbonization Carbon emissions from power generators are down 26% since
their 2007 peak and will continue to decline even if Trump kills or postpones Obama's
Clean Power Plan.
Carbon Dioxide Emissions, Electric Power
Morningstar Forecast
Paris Agreement target range (2025)
Clean Power Plan goal (2030)

Carbon Emissions
2,500M
mT
2,250
2,000
1,750

Estimated emissions increase

1,500
1,250
1,000

1975

1985

1995

2005

2015

2025E

Sources: Morningstar, Energy Information Administration.

2024. We probability-adjust that and assume about
100 GW actually goes into service by 2024.
The report forecasts 78 GW of new wind generation
and 45 GW of new solar generation in the next
eight years, in line with our forecast after adjusting
for proposed projects that might not get built.

With no marginal costs, renewable energy will
push the entire generation supply curve
to the right. New natural gas generation will
continue creeping down the dispatch
curve, resulting in lower capacity factors for coal
generation based on current forward coal,
gas, and power prices.
Forecast 3: Carbon Emissions Keep Falling
Emissions policies are important to watch because
they can have a huge impact on utilities'
investment growth opportunities and regulatory
risk. Utilities' emissions-related investments have
contributed to reducing sulfur dioxide (the
culprit for acid rain) by 86% and nitrogen oxides
(precursor to ground-level smog) by 79% since 1990,
according to the Edison Electric Institute. The EPA
currently expects the Mercury and Air Toxics
Standards rule, finalized in 2011, will lower mercury
emissions by 90% from 2005 levels.

Carbon emissions from power generators are
down 26% since their 2007 peak. We expect
decarbonization to continue at least the next four
years even if the Trump administration kills
or postpones the Obama administration's Clean
Power Plan, or CPP. We think utilities can
achieve at least a 28% drop in carbon emissions
from 2005 levels by 2020, primarily based on our
RPS forecast and current under-construction
gas generation. This would put the United States
ahead of schedule to meet the CPP's target
2% reduction from 2005 levels by 2030 ( EXHIB IT 4 ).
However, EXHIB IT 4 also shows what could happen
beyond 2020 if gas prices increase sharply,
coal prices drop, and the CPP never goes into
effect. In this case, we estimate carbon emissions
could rise some 100 million tons in 2021-24 if
electricity demand growth meets our forecast, coal
generation steals back share from gas generation,
and developers cancel proposed new gas
generation projects. This is about a 6% increase
from our 2020 forecast. RPS-based renewable
energy growth slows beyond 2021 in our forecast,
so that offers little incremental relief. Our
forecast in this scenario shows the United States
would need new regulations limiting carbon

emissions or encouraging more renewable energy
to achieve the carbon emissions reductions in
the Clean Power Plan.
We think the Trump administration will be able
to delay implementation of the CPP at least
until the next election cycle. The fate of
the plan will probably be determined during the
next presidential cycle.
In August 2015, the EPA released the final version
of the CPP to reduce carbon dioxide emissions
from existing power plants 32% from 2005 levels by
2030, with interim reductions required as
early as 2022. At the end of 2016, utilities had
already achieved a 26% drop in carbon emissions
since 2005 in part thanks to weaker demand,
renewable energy growth, and improving
economics of natural gas generation relative to
coal generation. We expect these trends to
continue in the near term based on RPS-driven
renewable energy growth, new natural gas
generation, and tepid demand.
The EPA is proposing that states meet the CPP
targets by using a "best system of emission
reduction," or BSER. The BSER has three building
blocks, each representing a different way to
reduce carbon emissions: increase fossil fuel plant
efficiency, increase generation from natural
gas combined-cycle plants, and build and retain
low- and zero-emission power plants.
In October 2015, 24 states led by West Virginia filed
a lawsuit with the U.S. Court of Appeals for
the D.C. Circuit requesting a stay of the plan. Three
states filed separate appeals against the CPP.
In November 2015, 18 states filed a motion
supporting the CPP. The remaining five states
haven't taken a formal stance. In January 2016, the
D.C. Circuit Court unanimously denied the stay
request, leading the states to file a stay
request with the Supreme Court. In February 2016,
the Supreme Court stayed the implementation
of the CPP while the Circuit Court reviewed it. We
expect that the matter will eventually end up
back at the Supreme Court regardless of the Trump
administration's response. As the Republicancontrolled Senate has approved a conservative
Supreme Court justice, we think the Supreme
Court would probably invalidate the CPP. No matter

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