On June 2, 2014, the Environmental Protection Agency ("EPA") issued its long-awaited proposal for rules addressing carbon dioxide ("CO2") emissions from existing power plants ("Proposed Rule"). Fossil fuel-fired electric generating units ("EGUs") account for about a third of greenhouse gas emissions in the United States, and this Proposed Rule is one of the key elements of the Obama administration's Climate Action Plan to curtail climate change. EPA estimates that by 2030, the Proposed Rule would reduce power sector CO2 emission levels to approximately 30% below 2005 levels.
The Proposed Rule has far-reaching implications not just for fossil fuel-fired EGUs, but also for the development and deployment of renewable energy and energy efficiency technologies in all sectors of the economy. And although EPA engaged in an extensive process of engagement with the public and stakeholder groups before issuing the Proposed Rule, it is likely to be one of the most controversial rules ever issued by EPA. EPA is anticipating extensive public comment on the Proposed Rule, which will almost certainly be challenged in court once EPA issues a final rule.
Background
Emissions of other non-GHG pollutants from power plants are extensively regulated under the Clean Air Act. However, the Supreme Court affirmed EPA's authority to regulate greenhouse gas emissions seven (7) years ago in Massachusetts v. EPA and again three (3) years ago in American Electric Power Company v. Connecticut. Until relatively recently, though, no federal program existed to control carbon emissions from stationary sources.
In 2010, EPA issued a "Greenhouse Gas Tailoring Rule" that imposed permitting and control requirements on stationary sources emitting greenhouse gases above certain threshold amounts. That rule is subject to a pending challenge in the U.S. Supreme Court, which is expected to issue an opinion this summer.
In January 2014, EPA proposed a rule setting CO2 emissions standards for new coal- and gas-fired plants under Clean Air Act Section 111(b). The new Proposed Rule for existing sources, issued pursuant to EPA's little-used authority under Section 111(d) of the Clean Air Act, takes a different approach to reducing carbon emissions from EGUs: it sets state-specific carbon emission reduction targets, and requires the states to submit plans for achieving those reductions via controls on EGUs and other measures.
EPA's Proposed Framework
When promulgating a standard under Section 111 of the Clean Air Act, EPA must determine "the best system of emission reductions" ("BSER"). In the Proposed Rule, EPA determined that BSER for carbon emissions at affected EGUs is a combination of emission rate improvements and limitations on overall emissions that can be achieved through one or more of the following "building blocks": (1) reducing emissions through heat rate improvements; (2) substituting higher carbon-intensive generation (i.e., coal-fired) with less carbon-intensive generation (i.e., gas-fired); (3) substituting fossil-fuel generation with generation from low or zero-carbon generation; and (4) increasing demand-side efficiency.
Based on this BSER framework, EPA has developed state-specific rate-based emission goals (expressed in lb CO2/MWh). EPA began its analysis with 2012 baseline emissions data from affected EGUs in each state, then calculated the goal for each state by applying each of the four building blocks. For example, in step 1, EPA reduced emission for coal-fired units by 6%, reflecting the agency's assumption that such reductions could be achieved through heat rate improvements. In step 2, EPA substituted gas generation for coal generation when utilization rates for gas-fired units were below 70%. In step 3, EPA estimated contributions that could be made by renewable and nuclear generation. And finally, in step 4, EPA assumed that demand-side efficiency program would produce a 1.5% annual reduction in electricity usage.
After applying these assumptions to the 2012 baseline data from each state, EPA calculated the interim goal for the ten-year period of 2020-2029, and a final goal for 2030 and thereafter. The states would be required to submit plans with specific action items to achieve the standards. Although EPA developed the standards by focusing on the four "building blocks," the states will have the flexibility to develop alternative approaches to achieve the targets, including conversion of the rate-based standard to a mass-based standard that would be conducive to a cap-and-trade program.
Implications for the Industry
EPA's proposal would have a transformative impact on power generation. It explicitly encourages the states to establish renewable energy requirements, to support the development of new nuclear units and discourage retirement of old nuclear units, to foster demand-response energy efficiency policies, and to substitute carbon-intensive EGUs with low- or zero-carbon generating capacity. The net effect of the Proposed Rule is to encourage renewable energy technologies, gas-fired power plants, nuclear projects, and energy efficiency initiatives. EPA is expressly interested in upgrading the existing infrastructure with 21st century technologies and to spur investments in renewable and low-emitting power sources.
States will have the choice between reducing CO2 emissions from EGUs and reducing utilization of fossil fuel-fired EGUs. The latter will include reliance on renewable portfolio standards, energy efficiency resource standards, and other initiatives. Some states that already implemented emission-reduction measures will be able to rely on those measures in meeting BSER. Additionally, EPA suggested that states may be able to participate in multi-state programs, which would lead to the creation and further expansion of regional initiatives.
As coal-fired power plants become more expensive to operate, the coal industry may shift towards further developing clean coal and coal-to-liquids technologies, including carbon capture and sequestration, enhanced oil recovery, and chemical production technologies, among other uses.
Additionally, the Proposed Rule may spur energy storage, smart metering, demand-side initiatives, energy diversification in renewables, and other technological innovation. EPA's guidelines are also likely to encourage cost-conscious energy procurement strategies.
Comment Period, Timelines, and Next Steps
EPA has provided an unusually long comment period for the Proposed Rule, soliciting comment until 120 days after the rule is published in the Federal Register. EPA will also hold four public hearings during the week of July 28 in Denver, Atlanta, Washington, DC, and Pittsburgh. Based on the input EPA will receive through comments and public hearings, EPA expects to finalize this rulemaking by June 2015. All states must submit initial or complete plans by June 30, 2016, with the option to use a two-step process to submit final plans, if more time is needed.
The Proposed Rule may be accessed here:
http://www2.epa.gov/sites/production/files/2014-05/documents/20140602proposal-cleanpowerplan.pdf
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