Minnesota and North Dakota may need to make nice over energy policy.

The two states have been fighting in federal court for two years over Minnesota’s cross-border restrictions on coal-based electricity. Now, the federal government’s even-more-sweeping regulations to cut coal power plant greenhouse gas emissions are pushing states to work together.

“Pretty clearly there are benefits to consumers and power companies for states working together and collaborating in some way that allows power companies to access the cheapest, most cost-efficient compliance options,” said Gabe Pacyniak, an adjunct professor at Georgetown Law School who manages the mitigation program at the Georgetown Climate Center.

The benefits of cooperation include carbon emissions trading, which could help utilities in states with difficult compliance targets, like North Dakota. For such trading to work, states need to apply similar regulatory strategies, however.

North Dakota has 14 coal-burning power generators and gets 78 percent of its electricity from them. Most burn lower-energy, higher-emission lignite coal mined in that state.

“I don’t see how you can reach those reduction target levels, even if emissions credits are available, without some chunk of those facilities having to shut down,” said Mac McLennan, CEO of Minnkota Power Cooperative, which operates the Milton R. Young plant in Center, N.D., that burns coal to supply 128,000 customers in that state and Minnesota.

Under the federal Clean Power Plan, the U.S. electric industry must begin to cut greenhouse gas emissions in 2022, and hit final targets that vary by state in 2030. North Dakota’s coal-fired generators need to cut carbon dioxide emissions by 40 percent from projected 2020 levels. Minnesota has a more stringent target, but the state already has a cleaner energy mix that makes compliance less onerous — a 27 percent drop from 2020 projected levels.

States get wide leeway in how to meet those targets, and regulators in both states say they’ve made no decisions yet. One critical choice is whether to regulate the total tons of carbon emissions from power plant smokestacks. The other option is to order utilities to reduce their emissions rate — tons of carbon per electricity produced. Both approaches have pluses and minuses.

Ties that bind

Minnesota utilities are tightly tied to North Dakota.

The four largest power companies in Minnesota all have assets or customers — or both — in North Dakota.

“If I were a utility operating in two adjoining states, I would be advocating for those states to develop a joint plan,” said Rebecca Stanfield, deputy director for policy for the Natural Resources Defense Council in Chicago. “I am sure that they can comply if that doesn’t happen, but it would sure give that utility more options and probably a more cost-effective way forward.”

State regulators have until September 2018 to submit compliance plans to the U.S. Environmental Protection Agency. States that don’t develop a plan will get one imposed by the EPA. Meanwhile, interest groups in the coal and utility industries and states, possibly even North Dakota, are expected to challenge the Clean Power Plan in federal court, hoping to kill, delay or change it.

“At the end of the day, if we are unable to make this work, and we are going to be shutting down coal plants, I am not sure we wouldn’t just turn to EPA and say, ‘It’s all yours, you have blood on your hands,’ ” said Dave Glatt, North Dakota’s chief of environmental health.

Glatt said he hopes “it doesn’t get into pitting state against state.”

Battles past and present

North Dakota, a land of coal mines and oil fields, and Minnesota, a land of no fossil fuels to extract, are two states with basic differences over energy policy.

In a case still in the courts, North Dakota’s attorney general joined coal industry and utility interests in 2013 to challenge a Minnesota law that bans imports of new coal-based electricity, arguing it violated interstate commerce rights. A federal judge in St. Paul agreed, and struck down the law last year. But Minnesota appealed, and the two states are preparing to face off later this year before a panel of the Eighth U.S. Circuit Court of Appeals.

Scott Strand, an attorney who has followed the two states’ energy conflicts, said North Dakota interests also have lobbied the Minnesota Legislature, trying unsuccessfully to repeal the state’s renewable energy requirements for utilities.

“The political part of it — in terms of cooperation — is going to be a challenge,” said Strand, executive director of the Minnesota Center for Environmental Advocacy, a St. Paul nonprofit law firm.

But Frank Kohlasch, manager of the air assessment section of the Minnesota Pollution Control Agency, said regulators will try. “It would be very helpful if we are able to improve relations with North Dakota to be able to come up with state plans that are as complementary and cooperative as possible,” he said.

Under the rule, states can develop regional plans, blending their compliance targets, said Pacyniak of Georgetown. That would allow utilities to pick the best ways to reduce emissions over a broad area. The options include investing in energy-efficiency programs, adding renewable energy like wind farms or solar parks and shifting to natural gas as the preferred fuel for new power plants.

Short of full, regional enforcement efforts, states can take smaller cooperative steps such as choosing the same regulatory approach. If one state chooses tonnage-based carbon regulation and another picks the rate-based method, utilities emissions allowances probably couldn’t be traded between those states, experts said.

A study by the Union of Concerned Scientists concluded that Minnesota likely will be one of 16 states to surpass 2030 targets. Utilities that do so potentially will profit by selling their extra “allowances” to utilities struggling to comply. Whether any Minnesota utility will be in a position to sell emission allowances — and at what price — remains unknown.

Options for Minn. utilities

Although utilities are still studying the complex rules, Minnesota’s three largest power companies, Xcel Energy, Great River Energy and Minnesota Power, say they appear to be on track to comply.

Xcel, the nation’s leading wind power utility and the largest power company in Minnesota, North Dakota and South Dakota serving nearly 1.8 million customers, plans to add wind, solar and natural gas generation under a long-range plan under review by state utility regulators.

“If there is a role that Xcel can play in a regional solution, that is something we will be doing,” said Laura McCarten, a regional vice president for the Minneapolis-based utility.

The state’s No. 3 electric utility, Duluth-based Minnesota Power, serving the Iron Range and central parts of the state, calls its approach “Energy Forward.” It is retiring coal plants, has built large wind farms in North Dakota and plans to buy Canadian hydropower and build a natural gas generator.

Both Minnesota Power and Xcel plan to keep some big coal burners, as does Great River Energy, the state’s second-largest power company serving 650,000 customers in 28 Minnesota electric co-ops.

Great River Energy, based in Maple Grove, recently spent $83 million extracting itself from a long-term deal to buy coal-based power from a Wisconsin utility. But Eric Olsen, the utility’s general counsel, said Great River intends to keep running its three North Dakota coal power plants, including one it built in 2012.

“We think we’ve got the most efficient power plants and we think we will do well in a trading environment,” Olsen said. “And North Dakota has some of the best wind resources, so we think we have a lot of options there.”

Removing uncertainty

For Otter Tail Power Co. in Fergus Falls, the state’s fourth largest power company the final rule ends uncertainty about the Big Stone power plant it co-owns in South Dakota. That coal generator now appears unlikely to be forced to close under EPA carbon rules — a costly prospect because the plant’s owners just completed a $385 million pollution control upgrade.

One unexpected outcome of the final rule for Otter Tail and Minnkota is that it has generated concern about investing in new wind generation to replace coal. That’s because wind generation gets counted differently depending on how states implement the Clean Power Plan.

“This creates a lot of uncertainty about where exactly you would want that wind [generation] resource to be located,” said Brad Tollerson, Otter Tail vice president of planning and strategy.

At Minnkota, CEO MacLennan said he has decided not to sign an immediate deal for an additional wind farm, because he doesn’t know how it would get counted under state plans. He said utilities face a disincentive to make such investments right now because of uncertainty.

“Your incentive is to wait to find out if that is the most valuable option,” he said.