On Aug. 3, 2015, President Obama announced the Environmental Protection Agency's (EPA) final Clean Power Plan rule, which will sharply cut emissions of greenhouse gases (GHGs) from existing power plants in the U.S. The final rule will reduce nationwide GHG emissions from power plants to 32% below 2005 levels by 2030, though targets will vary by state. This mandate represents the most significant climate change regulation to date in the U.S. and is likely to have a major impact on broad swaths of the economy, with potential for dramatic effects on energy-related investments.
The rule requires the states to develop individual plans implementing the "best system of emission reduction" available for their power plants. The EPA anticipates that states will rely on the following implementation tools: (i) increasing natural gas-fired electric generation; (ii) increasing renewable (i.e., wind and solar) generation; (iii) improving efficiency at coal-fired plants; and (iv) improving efficiency in transmission and consumption. The rule also permits states to form multistate emissions trading mechanisms in which states that are able to surpass their targets can sell emissions "credits" to states that cannot meet their targets, and it is likely that at least some regional emissions trading markets will be established. States must submit and finalize their plans by 2018, and implement them between 2022 and 2029.
The direct effect of the rule will be to increase the use of natural gas in power plants and the construction of renewable generation facilities, and to further restrict the use of coal in power plants. The impact of the rule will be felt throughout the economy, from coal and natural gas producers and traditional electric generation to renewable energy producers and users, large industrial and commercial consumers of electricity, and a host of energy infrastructure-related industries involved in the construction of new generation facilities and transmission systems. While it is impossible to predict whether electricity rates will rise or fall in the long term, fluctuations will have the potential to affect all sectors of the economy — but especially energy-intensive sectors.
More certain, however, is that investments in the technologies and resources favored by the rule — wind and solar technologies, natural gas, and associated power generation — will thrive, while those linked to coal production and utilities heavily reliant on coal-fired generation will continue to suffer. The announcement of the final plan should alleviate the uncertainty created in the solar industry by the looming reduction to a federal tax credit at the end of 2016, as the demand for added generation assets now seems likely to grow significantly. New geographic markets will also be opened up to renewable operations, as states that have been relatively slow in diversifying their energy supplies will now be required to do so — either through direct, local investments or indirectly through the purchase of credits from other states.
The rule, which was promulgated under Section 111 of the Clean Air Act, is subject to significant legal and political opposition, including the potential refusal of many states to prepare the required implementation plans. The EPA has already been sued by a group of states and power producers seeking both an injunction on implementation and invalidation of the rule; the case is likely to be decided by the Supreme Court. The phased-in timeline means that the results of the 2016 presidential election could also affect the rule's implementation.
These legal and political barriers create substantial uncertainty regarding to what extent and when the plan will ultimately come into effect. Furthermore, the flexibility the states have in designing their implementation plans (which will allow states to determine the most cost-effective route to compliance) means that many national industries may face substantially different impacts in different states, and that it will be some time before the allocation of costs and benefits among stakeholders is understood. As state environmental and energy agencies explore compliance options, regulated entities and associated industries will need to prepare for a wide range — and, in many cases, a national patchwork — of economic and operational impacts. While litigation, political challenges or innovative compliance mechanisms may minimize these impacts, all sectors of the economy will be adjusting their medium- and long-range planning to take into account a potentially transformative shift in the nation's energy supply.
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