Tenaska Deal Signals Sea-Change in Climate Change Regulation, but Itself May be Too Good to be True

Victor Flatt

April 23, 2010

On Monday, the Environmental Defense Fund announced that it had reached a settlement with Tenaska Inc. to withdraw opposition to that company’s proposed “Trailblazer Energy Center,” a 600 megawatt coal fired power plant in West Texas. In return for dropping its objections, the EDF signed an agreement with Tenaska that the company will sequester 85% of the CO2 it produces, selling much of the gas to companies who will use it for enhanced oil recovery (EOR) in the West Texas Permian Basin oil field.

The agreement is stunning on many levels. Trailblazer is the first large-scale proposal (and presumably will be the first operational coal fired power plant) to sequester significant amounts of the CO2 it produces. It is also the first large-scale use of enhanced oil recovery as a market for captured CO2. Last, it firmly and finally illustrates the reality of the fate of new coal fired power in the United States today. Sequester or give it up. Given the EPA’s endangerment finding on CO2, no new air permits can be granted by the EPA or delegated states without “considering” the impact of CO2. So even in a fossil fuel friendly state like Texas (one of the few who were even entertaining the idea of new coal fired power), the reality is that new coal without emissions capture is on the way out (and this is without a comprehensive climate change bill).

Despite the important reality this deal represents, as an individual deal, it may leave something to be desired. The agreement is not public yet, and it is unclear what penalties or breach of contract remedies will be available if Tenaska abandons the deal in the face of say a depressed oil market. Will the sequestration continue for the life of the coal plant? What if the Permian Basin is spent in ten years? And without access to studies of the specific area where the EOR will occur, it is also not clear what level of sequestration permanence we are talking about. Last, by engaging in this capture before the imposition of a mandatory cap and trade system, Tenaska might even be able to profit by selling its sequestration as an “offset” in the voluntary or unregulated market.

Still, the longer term implication is very important.

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